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, 2002
Commission File Number 0-31729
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2498715
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1341 N. Delaware Avenue, Suite 300, Philadelphia, PA 19125
----------------------------------------------------------
(Address of principal executive offices)
Telephone: (215) 425-9635
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 15, 2002, there were 38,529,565 shares outstanding of the
Registrant's $.001 par value common stock.
1
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX TO FORM 10-Q
PAGE(S)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets at
March 31, 2002 (unaudited) and
June 30, 2001 (audited) 3
Consolidated Statements of Operations
for the three months and nine months ended
March 31, 2002 and 2001 (unaudited) 4-5
Consolidated Statement of Stockholders'
Equity (Deficit) for the nine months ended
March 31, 2002 (unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended March 31, 2002
and 2001 (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 19-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24-25
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of
Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
2
PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars and Shares in Thousands)
Mar. 31, June 30,
2002 2001
----------- ---------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 2 $ 124
Inventory 107 107
Prepaid expenses and other current assets - 105
--------- ---------
109 336
PROPERTY AND EQUIPMENT, NET 609 814
INTANGIBLE ASSETS, NET 92 148
OTHER NON-CURRENT ASSETS 8 -
--------- ---------
TOTAL ASSETS $ 818 $ 1,298
========= =========
CURRENT LIABILITIES
Accounts payable - trade $ 791 $ 1,828
Accrued expenses and other current liabilities 3,475 637
Short-term borrowings from related party 854 762
Convertible short-term borrowings 316 63
--------- ---------
5,436 3,290
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 38,530 shares at
March 31, 2002 and 35,380 shares at
June 30, 2001 38 35
WARRANTS OUTSTANDING 6,309 9,865
ADDITIONAL PAID-IN-CAPITAL 270,607 266,626
ACCUMULATED DEFICIT (281,572) (278,518)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT ( 4,618) ( 1,992)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 818 $ 1,298
========= =========
See accompanying notes
3
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2001 2001
2002 (Note 5) 2002 (Note 5)
--------- --------- --------- ---------
REVENUE $ - $ - $ - $ -
COST OF REVENUE - - - -
-------- -------- -------- --------
GROSS PROFIT - - - -
Depreciation and amortization 149 22 238 66
General and administrative expenses 846 1,928 4,209 6,234
-------- -------- -------- --------
LOSS FROM OPERATIONS ( 995) ( 1,950) ( 4,447) ( 6,300)
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest income - 33 - 336
Interest expense (20) - (75) -
-------- -------- -------- --------
(20) 33 (75) 336
-------- -------- -------- --------
NET LOSS FROM CONTINUING OPERATIONS ( 1,015) ( 1,917) ( 4,522) ( 5,964)
DISCONTINUED OPERATIONS
Net loss from operations - ( 3,765) - (11,982)
Loss on disposal - ( 2,520) ( 100) ( 3,035)
-------- -------- -------- --------
NET LOSS BEFORE EXTRAORDINARY
GAIN ( 1,015) ( 8,202) ( 4,622) (20,981)
EXTRAORDINARY GAIN ON DISCHARGE
OF INDEBTEDNESS 1,568 - 1,568 -
-------- -------- -------- --------
NET INCOME (LOSS) $ 553 $( 8,202) $( 3,054) $(20,981)
======== ======== ======== ========
4
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 38,530 35,764 38,004 35,820
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net loss from continuing
operations $( 0.03) $( 0.05) $( 0.12) $( 0.17)
Discontinued operations:
Net gain (loss) from operations - ( 0.11) - ( 0.33)
Loss on disposal - ( 0.07) - ( 0.09)
-------- -------- -------- --------
Net loss before extraordinary
gain ( 0.03) ( 0.23) ( 0.12) ( 0.59)
Extraordinary gain on discharge
of indebtedness 0.04 - 0.04 -
-------- -------- -------- --------
Net income (loss) per common
Share $ 0.01 $( 0.23) $( 0.08) $( 0.59)
======== ======== ======== ========
See accompanying notes
5
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED MARCH 31, 2002
(Dollars and Shares in Thousands)
COMMON STOCK COMMON
--------------- STOCK
NUMBER WARRANTS ADD'L.
OF OUTSTAN- PAID-IN ACCUMULATED
SHARES AMOUNT DING,NET CAPITAL DEFICIT
------ ------ --------- --------- -----------
BALANCES, JUNE 30, 2001 35,380 $ 35 $ 9,865 $ 266,626 $( 278,518)
Nine months ended
March 31, 2002
(unaudited):
Common stock issued for
cash 3,000 3 - 147 -
Commission on issuance
of common stock - - - ( 15) -
Common stock issued for
expenses 150 - - 10 -
Common stock warrants
issued, net of change
in unearned consulting
fees of $(235) - - 283 - -
Common stock warrants
expired - - ( 3,839) 3,839 -
Net loss - - - - ( 3,054)
------ ---- -------- --------- ----------
BALANCES, MARCH 31,
2002 (unaudited) 38,530 $ 38 $ 6,309 $ 270,607 $( 281,572)
====== ==== ======== ========= ==========
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
2002 (Note 5)
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $( 3,054) $(20,981)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Extraordinary gain on discharge of indebtedness ( 1,568) -
Loss from discontinued operations 100 15,017
Depreciation and amortization 238 66
Issuance of common stock and common
stock warrants for expenses 80 1,329
Other ( 70) ( 60)
Change in current assets and liabilities
which increase cash
Inventory - -
Prepaid expenses and other current assets 105 207
Accounts payable - trade 66 355
Accrued expenses and other current
liabilities 3,555 77
-------- --------
Net cash used in operating activities ( 548) ( 3,990)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 19 -
Investment in discontinued operations - ( 9,003)
Investment in long-lived assets - ( 14)
-------- --------
Net cash provided by (used) in investing activities 19 ( 9,017)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock for cash 150 -
Commission on sale of common stock ( 15) -
Short-term borrowings 272 -
-------- --------
Net cash received from financing activities 407 -
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS ( 122) ( 13,007)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 124 13,652
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 2 $ 645
======== ========
7
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
NINE MONTHS ENDED
MARCH 31,
--------------------
2001
2002 (Note 5)
--------- ---------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period:
Interest $ - $ -
Income taxes $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
None
See accompanying notes
8
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 1 - BASIS OF INTERIM PRESENTATION
The accompanying interim period financial statements of Clariti
Telecommunications International, Ltd. ("Clariti" or the "Company") are
unaudited, pursuant to certain rules and regulations of the Securities and
Exchange Commission, and include, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) necessary for a fair statement
of the results for the periods indicated, which, however, are not necessarily
indicative of results that may be expected for the full year. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. The financial statements should be read in conjunction with the
financial statements and the notes thereto included in Clariti's June 30, 2001
Form 10-K, Clariti's September 30, 2001 Form 10-Q, Clariti's December 31, 2001
Form 10-Q and other information included in Clariti's Forms 8-K and amendments
thereto as filed with the Securities and Exchange Commission.
NOTE 2 - DESCRIPTION OF THE BUSINESS
Clariti Telecommunications International, Ltd. ("Clariti" or the "Company") is
an international wireless communications technology company with proprietary
technology for transmitting digital data utilizing radio frequencies
transmitted by FM radio stations.
During the period from December 1998 to May 2001, the Company was also a
significant provider of wire-line telecommunication services through its
interest in several businesses with operations in the United States, United
Kingdom, Europe and Australia. During the year ended June 30, 2001, the
Company discontinued its wire-line telecommunication operations (see Note 5).
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, 2002 and 2001 are referred to as Fiscal
3Q02 and Fiscal 3Q01, respectively, and the nine-month periods ended March 31,
2002 and 2001 are referred to as Fiscal Nine Months 2002 and Fiscal Nine Months
2001, respectively.
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries where management control is not deemed to be
temporary. All significant intercompany transactions have been eliminated in
consolidation.
9
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
------------
There is no income tax benefit for operating losses for the nine-month period
ended March 31, 2002 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Deferred tax benefit - the deferred tax assets were offset by a valuation
allowance required by FASB Statement 109,
"Accounting for Income Taxes." The valuation
allowance is necessary because, according to
criteria established by FASB Statement 109, it is
more likely than not that the deferred tax asset
will not be realized through future taxable income.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist primarily of cash and equivalents,
accounts payable, accrued expenses, and short-term borrowings. These balances,
as presented in the balance sheet as of March 31, 2002 and June 30, 2001
approximate their fair value because of their short maturities.
Net Income (Loss) Per Common Share
----------------------------------
Net income (loss) per common share is based upon the weighted average number of
common shares outstanding during the period. The treasury stock method is used
to calculate dilutive shares. Such method reduces the number of dilutive
shares by the number of shares purchasable from the proceeds of the options and
warrants assumed to be exercised. Basic and diluted weighted average shares
outstanding for Fiscal 3Q02, Fiscal 3Q01, Fiscal Nine Months 2002 and Fiscal
Nine Months 2001 were the same because the effect of using the treasury stock
method would be antidilutive.
Recent Accounting Pronouncements
--------------------------------
In August 2001, FASB Statement 142, "Goodwill and Other Intangible Assets" was
issued, which is effective for fiscal years beginning after December 15, 2001.
Statement 142 addresses how intangible assets that are acquired individually or
with a group of assets should be accounted for upon their acquisition and also
addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. Also,
for previously recognized non-goodwill intangible assets, the useful lives must
be reassessed with remaining amortization periods adjusted accordingly, and
reflected as a change in accounting principle. Based on the Company's policy
for accounting for intangible assets, management does not anticipate the
adoption of this standard will result in any significant impact on earnings or
financial position of the Company.
10
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 4 - MANAGEMENT'S PLANS
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
The Company has historically relied on equity and debt financing to meet its
cash requirements. However, adverse market conditions for telecommunications
companies during the last 24 months have made it extremely difficult for the
Company to obtain additional financing. The Company has substantially
exhausted its cash reserves and has no firm commitments for near-term funding.
Therefore, On April 18, 2002, the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Eastern District of Pennsylvania. The
Company will continue to manage its properties and operate the business as
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code. During the
Chapter 11 process, the Company is being funded for limited expenses by Ansteed
Investment, Ltd., a secured creditor and largest shareholder. The Company
intends to submit a Plan of Reorganization to the Court in the near future.
These matters raise substantial doubt about the Company's ability to continue
as a going concern.
The Company will continue to focus its future efforts on development and
commercialization of its patented ClariCAST(TM) wireless datacasting
technology. Because the Company's technology is still under development, the
Company expects no revenues or operating cash flows in the near term. Due to
its severe cash shortage, the Company has temporarily suspended its wireless
technology development activities; however, the Company plans to restart such
activities as the Company comes out of the Chapter 11 process.
The Company is also actively pursuing opportunities to secure additional
financing in order to meet operating cash requirements through the remainder of
the current fiscal year. The Company also plans to search for strategic
alternatives in order to advance the business, create synergies and/or secure
financing. There can be no assurances that funding will be generated or
available, or if available, on terms acceptable to the Company. Failure to
secure additional financing will have a material adverse impact on the Company.
The consolidated financial statements do not include any adjustments relating
to the recoverability of recorded asset amounts or the amounts of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
11
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 5 - DISCONTINUED OPERATIONS
During the period from December 1998 to May 2001, the Company was a significant
provider of wire-line telecommunication services through its interest in
several businesses with operations in the United States, United Kingdom, Europe
and Australia. The Company previously referred to these operations as the
Telephony/Internet Services business segment. As further described below, the
Company has divested substantially all of its interests in the Telephony/
Internet Services business segment, representing the disposal of a business
segment under Accounting Principals Board Opinion No. 30. Accordingly, the
accompanying statement of operations and statement of cash flows for Fiscal
3Q01 and Fiscal Nine Months 2001 have been restated to conform to discontinued
operations treatment. These divestments consist of the following:
- In October 1999, the Company's wire-line operations in the United
Kingdom and Europe (the "UK Telecommunications Group") filed for
voluntary liquidation and ceased operation of its businesses. Through
such liquidation proceedings, the Company received certain operating
assets of the UK Telecommunications Group consisting principally of
telephone switching equipment in the United Kingdom. In March 2001, the
Company sold such operating assets in the United Kingdom.
- In January and March of 2001, the Company sold a total of 91% of its
interest in NKA Communications Pty Ltd. ("NKA"), an Australian provider
of telephony to corporate clients. The estimated net realizable value
of the remaining 9% of NKA still held by the Company is -0-.
- In May 2001, the Company sold all of the common stock of Tekbilt World
Communications, Inc. ("TWC") a/k/a Clariti Telecom, Inc. for an
unsecured note for $250,000 (the "TWC Note") and in a separate
transaction, the Company also sold all of the common stock of MegaHertz-
NKO, Inc. ("M-NKO") for an unsecured note for $250,000 (the "M-NKO
Note"). The TWC Note carries a fixed interest rate of 6% and is payable
on May 9, 2003. The M-NKO Note carries a fixed interest rate of 6% and
is payable on May 23, 2003. The estimated net realizable value of both
notes is -0-.
12
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 5 - DISCONTINUED OPERATIONS (continued)
The operating results from these discontinued operations are as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues $ - $ 4,008 $ - $ 11,004
Expenses - ( 7,773) - (22,986)
-------- -------- -------- --------
Net gain (loss) from
discontinued operations $ - $( 3,765) $ - $(11,982)
======== ======== ======== ========
Loss on disposal of discontinued operations consists of the following
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Sale of TWC $ - $( 1,007) $ ( 100) $( 1,007)
Sale of UK operating assets - ( 844) - ( 844)
Sale of 91% of NKA - ( 669) - ( 1,184)
-------- -------- -------- --------
Net (loss) from
discontinued operations $ - $( 2,520) $ ( 100) $( 3,035)
======== ======== ======== ========
During Fiscal Nine Months 2002, the Company recognized an additional loss of
$100,000 on the disposal of TWC. The Company recognized losses on the disposal
of discontinued operations of TWC, UK and NKA in Fiscal 3Q01 and Fiscal Nine
Months 2001.
NOTE 6 - SHORT-TERM BORROWINGS FROM RELATED PARTY
On May 3, 2001, the Company borrowed $750,000 from Ansteed Investment, Ltd.
("Ansteed"), a greater than 5% shareholder, for a period of 61 days. The note
carries interest at the rate of 10% per annum and is secured by substantially
all of the Company's assets. The amount shown on the Company's consolidated
balance sheet as of March 31, 2002 includes $70,000 of accrued interest. In
connection with this loan, the Company granted to Ansteed warrants to purchase
400,000 shares of the Company's common stock at an exercise price of $0.95 per
share. Such warrants expire on May 3, 2003.
13
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 6 - SHORT-TERM BORROWINGS FROM RELATED PARTY (continued)
On November 30, 2001, the Company and Ansteed Investment, Ltd. executed a
Forbearance and Amendment Agreement whereby extending the terms of the
repayment of the $750,000 loan amount to March 31, 2002. In addition, the
Forbearance and Amendment Agreement allowed for Ansteed to advance an
additional $20,500 to the Company for legal fees associated with the agreement.
The additional $20,500 also carries interest at the rate of 10% annum and is
due by March 31, 2002. On March 3, 2002, the Company borrowed an additional
$13,519 from Ansteed Investment, Ltd. for certain expenses, carrying the same
terms as the original note. Also, In April 2002, the Company borrowed an
additional $5,000 from Ansteed Investment, Ltd. for certain expenses, also
carrying the same terms as the original note. The Company is in default of
this loan.
NOTE 7 - CONVERTIBLE SHORT-TERM BORROWINGS
On June 28, 2001, the Company borrowed $62,500 from a third party. The
unsecured note was due on November 1, 2001 and carries interest at the rate of
8% per annum. The note is convertible into shares of the Company's common stock
at the option of the lender at a conversion price of $0.075 per share. The
amount shown on the Company's consolidated balance sheet as of March 31, 2002
includes $3,750 of accrued interest. In connection with this loan, the Company
granted to the third party warrants to purchase a total of 125,000 shares of
the Company's common stock, 62,500 of which are exercisable at $0.25 per share
and 62,500 of which are exercisable at $0.50 per share. Such warrants expire
on June 28, 2002. The Company was unable to repay the loan by the November 1,
2001 due date, and is therefore in default of the loan agreement.
On July 2, 2001, the Company entered into a Funding Agreement with a third
party pursuant to which Clariti borrowed $250,000 (the "Outstanding Balance").
The Outstanding Balance is secured by a second position security interest in
substantially the same assets as those securing the $750,000 loan from Ansteed
(see Note 6). The Outstanding Balance must be repaid on or before July 2,
2002, and no interest accrues on the Outstanding Balance. The third party may
convert the Outstanding Balance into shares of the Company's common stock at a
conversion price of $0.50 per share. In connection with this Funding
Agreement, the Company granted to the third party warrants to purchase a total
of 1,000,000 shares of the Company's common stock exercisable at $0.50 per
share. Such warrants expire on July 2, 2002.
NOTE 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 former French subsidiary of the UK
Telecommunications Group, for long-distance telephone services. France Telecom
seeks payment from Clariti of 20,000,000 French Francs (approximately
14
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
$2,700,000). 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 has vigorously defended the claims
asserted by France Telecom. Clariti believes that it did not verbally or
in writing make a promise to pay any obligations of GlobalFirst Communications
SA, and that it caused no damages to France Telecom because commercial
relations with GlobalFirst Communications SA had ceased before Clariti held any
negotiations with France Telecom. On April 10, 2002, The Tribunal de Commerce
de Paris made a decision on the case and France Telecom was not awarded any
damages. The Company does not know if France Telecom will appeal the decision.
On November 30, 1999, IDT Corporation ("IDT") filed a complaint in the Court of
Common Pleas in Philadelphia, Pennsylvania against the Company and Clariti
Carrier Services Limited, an inactive United Kingdom subsidiary of the Company,
seeking payment for long-distance telephone services pursuant to a contract
between IDT and GlobalFirst Communications Limited, a former subsidiary of the
UK Telecommunications Group. The complaint seeks damages in the amount of
$690,163 plus interest, costs and attorneys fees. On March 20, 2000, the Court
of Common Pleas dismissed the complaint on the basis of jurisdiction, provided
that proper jurisdiction lies in England. On or about April 15, 2000, IDT
filed an appeal with the Superior Court of Pennsylvania appealing the decision
of the Court of Common Pleas. On or about April 19, 2001, the Superior Court
sustained the decision of the Court of Common Pleas regarding jurisdiction. To
date, the Company is not aware of any further action taken by IDT in this
matter. The Company believes that neither the Company nor Clariti Carrie
Services Limited has any liability with respect to IDT's claim.
On or about September 28, 2000, Michael P. McAndrews filed a Demand for
Arbitration with the American Arbitration Association against the Company and
Clariti Wireless concerning obligations arising under Mr. McAndrews' Employment
Agreement. Mr. McAndrews has alleged that the Company had guaranteed and
assumed the obligation due Mr. McAndrews pursuant to an Assignment and Guaranty
Agreement. Mr. McAndrews claimed that as a result of a material change in his
duties, he resigned from employment for "good reason" (as defined in the
Employment Agreement), therefore entitling him to a severance package in an
amount in excess of $294,000. Additionally, Mr. McAndrews requested reasonable
attorney fees and other costs and fees, together with interest thereon.
Clariti Wireless and the Company disputed Mr. McAndrews' allegations, asserting
that Mr. McAndrews was not entitled to any payments and/or damages under the
Employment Agreement. The Arbitrators held a hearing on June 14 and 15, 2001
regarding the matter. On October 18, 2001, the Arbitrators ruled that the
Company and Clariti Wireless are jointly and severally liable to pay Mr.
McAndrews $290,500, plus reasonable attorney's fees and costs. On December 17,
2001, the Arbitrators awarded Mr. McAndrews $83,219 for attorney's fees and
costs, bringing the total award for Mr. McAndrews to $373,219. The Company
continues to believe that Mr. McAndrews was not entitled to any payments and/or
damages under the Employment Agreement and is considering its options in
response to this ruling. On or about November 19, 2001, Clariti
Telecommunications International and Michael P. McAndrews executed a Settlement
Agreement and General Release whereby the Company shall pay Mr. McAndrews a
15
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
settlement amount of $90,000 in order to settle the above claim. The
settlement amount was to be paid by January 19, 2002. Subsequently, on January
21, 2002, the Company and Mr. McAndrews amended the Settlement Agreement and
General Release whereby increasing the settlement amount to $100,000 plus $750
per day for each day increasing the settlement amount to $100,000 plus $750 per
day for each day after January 21, 2002 and extended the settlement payment
date to February 28, 2002. This settlement payment was not made and therefore,
the Company's liability remains $373,219.
On June 12, 2001, M&T Bank filed an action against Clariti Telecommunications
International, Ltd. in the Court of Common Pleas of Montgomery County,
Pennsylvania. M&T Bank seeks to hold Clariti responsible under the terms of a
guaranty agreement pursuant to which Clariti allegedly guaranteed certain
obligations of its former subsidiary, Clariti Telecom, Inc. M&T Bank seeks
damages in the amount of $368,000. This case is in the early stages of
discovery with no case management scheduled or trial date set.
On October 17, 2001, Nine Penn Center Associates filed a complaint against the
Company in the Court of Common Pleas of Montgomery County, Pennsylvania. Nine
Penn Center Associates is the landlord and owner of real property known as the
Mellon Bank Center, 1735 Market Street, Philadelphia, PA 19103, a former
address of the Company's headquarters. Nine Penn Center Associates is seeking
damages associated with the remainder of the lease agreement. On April 2,
2002, the Court entered a judgment by default in favor of Nine Penn Center
Associates in the amount of $1,203,493. This amount has been accrued and
recorded in general and administrative expenses.
As further described in Note 4, the Company has been experiencing a severe cash
shortage. As a result, on April 18, 2002, the Company filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Eastern District of
Pennsylvania. The Company will continue to manage its properties and operate
the business as "debtor-in-possession" under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code.
During the Chapter 11 process, the Company is being funded by Ansteed
Investment, Ltd., a secured creditor and largest shareholder. The Company
intends to submit a Plan of Reorganization to the Court in the near future.
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.
16
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 9 - COMMON STOCK
During Fiscal Nine Months 2002 the Company sold 3,000,000 shares of its common
stock to a third party investor for proceeds, net of commissions, of $135,000.
In addition, the Company issued 150,000 shares of its common stock to a third
party for consulting services valued at $10,500.
NOTE 10 - STOCK OPTIONS
During Fiscal Nine Months 2002, 1,777,000 stock options with exercise prices
between $.24 and $12.38 per share (weighted average price of $5.07 per share)
expired without being exercised. There were no new stock options issued during
Fiscal Nine Months 2002.
NOTE 11 - WARRANTS
From time to time, the Company may issue warrants to purchase its common stock
to parties other than employees and directors. Warrants may be issued as a
unit with shares of common stock, in connection with borrowings, as an
incentive to help the Company achieve its goals, or in consideration for cash
or services rendered to the Company, or a combination of the above. Cost
associated with warrants issued to other than employees is valued based on the
fair value of the warrants as estimated using the Black-Scholes model with the
following assumptions: no dividend yield, expected volatility of 80%, and a
risk-free interest rate of 5.0%.
During Fiscal Nine Months 2002 the Company issued warrants to purchase a total
of 1,062,500 shares of the Company's common stock at prices ranging from $0.25
per share to $0.50 per share (weighted average price of $0.49 per share). The
warrants were issued for services rendered and expire 1 year from the date of
grant. The Black-Scholes model valued these warrants at a total of $12,145.
During Fiscal Nine Months 2002 the Company also amended the terms of certain
outstanding warrants. The expiration date of 31,250 warrants was extended for
one additional year and the exercise price of such warrants was reduced from
$7.00 per share to $3.56 per share. In addition, the exercise price of a total
of 347,500 warrants was reduced from between $1.00 per share and $6.00 per
share to $0.07 per share. Finally, the expiration date of 75,000 warrants was
extended for three additional years and the exercise price of such warrants was
reduced from $8.00 per share to $0.05 per share.
Also during Fiscal Nine Months 2002, 787,500 warrants with exercise prices
between $4.40 and $9.52 per share expired without being exercised. The book
value of such expired warrants (approximately $3,839,000) was reclassified from
warrants outstanding to additional paid-in capital.
17
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
NOTE 12 - SEGMENT INFORMATION
The Company has determined that segment information is not required to be
presented because the Company's former segment known as Telephony/Internet
Services was discontinued during Fiscal 2001 (see Note 5).
NOTE 13 - EXTRAORDINARY GAIN ON DISCHARGE OF INDEBTEDNESS
On October 24, 2001, the Company's wholly-owned subsidiary, Clariti Wireless
Messaging, Inc. ("Clariti Wireless"), filed a voluntary petition for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. The bankruptcy proceedings have
since been declared closed by the bankruptcy judge. As a result, all of
Clariti Wireless' debts have been discharged, resulting in an extraordinary
gain on discharge of indebtedness of $1,568,000 for Fiscal 3Q02.
NOTE 14 - SUBSEQUENT EVENTS
On May 3, 2002, RadioNet International, Inc. ("RadioNet"), a wholly owned
subsidiary of the Company, filed a voluntary petition for bankruptcy under
Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Eastern District of Pennsylvania. The operations of RadioNet
have ceased. There are no significant assets of RadioNet.
On April 18, 2002, the Parent Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Eastern District of Pennsylvania. The
Company continues to manage its properties and operate the business as "debtor-
in-possession" under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code. During the Chapter 11
process, the Company is being funded for limited expenses by Ansteed
Investment, Ltd., a secured creditor and largest shareholder. The Company
intends to submit a Plan of Reorganization to the Court in the near future.
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 our ability
to successfully do any or all of the following:
- Obtain financing for operations and expansion
- Achieve our goal of launching a commercial wireless voicemail system or
other applications in Italy during calendar 2002
- Lease SCA channels from FM radio stations
- Develop commercially viable applications for the ClariCAST(TM)
technology in addition to the Wireless Voicemail System
- Develop partnerships with local companies domestically or in foreign
markets to help market, sell and distribute our wireless products and
services
- Select partners who will be used to help market, sell and distribute our
wireless products and services
- Develop a marketing strategy of our wireless products and services
- Make our wireless products and services affordable and appealing to our
target markets
- Address multiple markets simultaneously to market our wireless
products and services
- Develop manufacturing and distribution channels of our wireless
products and services
- Manage the progress and costs of additional research and development of
our wireless products and services and the ClariCAST(TM) technology
- Manage the risks, restrictions and barriers of conducting business
internationally
- Reduce future operating losses and negative cash flow
- Compete effectively in the markets we choose to enter
- Develop new products and services and enhance current products and
services
- Stimulate demand for our wireless products and services
- Obtain approval for the Plan of Reorganization from the United States
Bankruptcy Court
In addition, certain statements may involve risk and uncertainty if they are
preceded by, followed by, or that include the words "intends," "estimates,"
"believes," "expects," "anticipates," "should," "could," or similar
expressions, and other statements contained herein regarding matters that are
not historical facts. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation, risks related to our
ability to obtain funding, risks relating to our significant capital
requirements, risks relating to the bankruptcy of the Parent Company, Clariti
Telecommunications International, Ltd., risks associated with our operating
losses, risks relating to our development, risks relating to competition and
regulatory developments, as well as the other risks referenced from time to
time in our filings with the Securities and Exchange Commission. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. We do not undertake any obligation to
release publicly any revisions to such forward-looking statements to reflect
19
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The following discussion should be read in conjunction
with our consolidated financial statements appearing elsewhere in this report.
General Operations
------------------
The current focus of our business is the development and commercialization
of ClariCAST(TM), our proprietary wireless technology that will support voice
messaging (including wireless voicemail and text-to-speech), data and
information services to a high-speed digital wireless device.
Recent Events
-------------
On May 3, 2002, RadioNet International, Inc. ("RadioNet"), a wholly owned
subsidiary of the Company, filed a voluntary petition for bankruptcy under
Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Eastern District of Pennsylvania. The operations of RadioNet
have ceased. There are no significant assets of RadioNet.
On April 18, 2002, the Parent Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Eastern District of Pennsylvania. The
Company continues to manage its properties and operate the business as "debtor-
in-possession" under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code. During the Chapter 11
process, the Company is being funded for limited expenses by Ansteed
Investment, Ltd., a secured creditor and largest shareholder. The Company
intends to submit a Plan of Reorganization to the Court in the near future.
On April 15, 2002, Peter S. Pelullo resigned as President and Chief Executive
Officer as well as a member of the Board of Directors of Clariti
Telecommunications International, Ltd.("the Company"). Also, On April 15,
2002, Ernest J. Cimadamore resigned as Secretary and Senior Vice President of
the Company. Abraham Carmel was appointed as Chairman of the Board of
Directors of the Company. Mr. Carmel has been a Director of the Company since
October 1999 and will also assume the title of President, Chief Executive
Officer and Treasurer. The Company also appointed Stuart W. Settle, Esq. and
Ian Tromans to its Board of Directors. Mr. Settle also serves as Secretary of
the Company. Mr. Settle has served as legal counsel to Ansteed Investments,
Ltd., a secured creditor and largest shareholder of the Company, on certain
matters in the past. The Board of Directors now includes the following
members: Stuart W. Settle, Esq., Ian Tromans and Abraham Carmel as the
Chairman.
On March 6, 2002, the following members of the Board of Directors of Clariti
Telecommunications International, Ltd. resigned as Directors and members of any
committees of the Board of Directors: Michael Jordan, Robert Sannelli, John
D'Anastasio, Chester Hunt and Dr. H.G. Hinderling, LL.M.
On October 24, 2001, our wholly-owned subsidiary, Clariti Wireless Messaging,
Inc. ("Clariti Wireless"), filed a voluntary petition for bankruptcy
under Chapter 7 of the United States Bankruptcy Code. Clariti Wireless'
operations have ceased. The bankruptcy proceedings have since been declared
closed by the bankruptcy judge. As a result, all of Clariti Wireless' debts
have been discharged, resulting in an extraordinary gain on discharge of
indebtedness of $1,568,000 for Fiscal 3Q02.
20
Results of Operations
Three Months Ended March 31, 2002 ("Fiscal 3Q02")
vs. Three Months Ended March 31, 2001 ("Fiscal 3Q01")
--------------------------------------------------------
For Fiscal 3Q02, the Company generated net income of $553,000, or $0.01 per
share, on no revenue as compared to a net loss of $8,202,000, or $0.23 per
share, on no revenue in Fiscal 3Q01. Net loss from continuing operations was
$1,015,000, or $0.03 per share, on no revenue in Fiscal 3Q02 as compared to a
net loss from continuing operations of $1,917,000, or $0.05 per share, on no
revenue in Fiscal 3Q01.
The $902,000 decrease in the loss from continuing operations was primarily a
result of a $302,000 decrease in salary expense due to the reduction in
corporate staff as well as a decrease in consulting expense of $720,000.
General and administrative expenses decreased $1,082,000, from $1,928,000 to
$846,000 primarily due to the decrease in salary and consulting expenses as
mentioned above.
During the period from December 1998 to May 2001, we were also a
significant provider of wire-line telecommunication services through our
interest in several businesses with operations in the United States, United
Kingdom, Europe and Australia. During the year ended June 30, 2001, we
divested these business operations, which formed our former business segment,
Telephony/Internet Services. Therefore, the results of operations for Fiscal
3Q01 reflect $3,765,000 of losses from such discontinued operations and we
recognized an additional $2,520,000 loss on the disposal of three of those
businesses. Also, on October 24, 2001, our wholly-owned subsidiary, Clariti
Wireless, filed a voluntary petition for bankruptcy under Chapter 7 of the
United States Bankruptcy Code. Clariti Wireless' operations have ceased and
the bankruptcy proceedings have since been declared closed by the bankruptcy
judge. As a result, all of Clariti Wireless' debts have been discharged,
resulting in an extraordinary gain on discharge of indebtedness of $1,568,000
for Fiscal 3Q02.
Nine Months Ended March 31, 2002 ("Fiscal Nine Months 2002")
v. Nine Months Ended March 31, 2001 ("Fiscal Nine Months 2001")
----------------------------------------------------------------
For the Fiscal Nine Months 2002, the Company incurred a net loss of $3,054,000,
or $0.08 per share, on no revenue as compared to a net loss of $20,981,000, or
$0.59 per share, on no revenue for the Fiscal Nine Months 2001. Net loss from
continuing operations was $4,522,000, or $0.12 per share, on no revenue in
Fiscal Nine Months 2002 as compared to a net loss from continuing operations of
$5,964,000, or $0.17 per share, on no revenue in Fiscal Nine Months 2001.
The $1,442,000 reduction in loss from continuing operations was primarily
due to a decrease in general and administrative expenses.
General and administrative expenses decreased $2,025,000, from $6,234,000 to
$4,209,000 for the Fiscal Nine Months 2002. This decrease was a result of a
decline in consulting expense of $1,905,000, a decline in salary expense of
$464,000, a decline in professional fees of $608,000 and a decline in other
general and administrative expenses of $651,000. However, these decreases were
offset by accruals of $1,603,000 for certain leases in default and legal
21
proceedings for Fiscal Nine Months 2002. During the period from December 1998
to May 2001, the Company was also a significant provider of wire-line
telecommunication services through our interest in several businesses with
operations in the United States, United Kingdom, Europe and Australia. During
the year ended June 30, 2001, we divested these business operations, which
formed our former business segment, Telephony/Internet Services. Therefore,
the results of operations for Fiscal Nine Months 2001 reflect $11,982,000 of
losses from such discontinued operations and we recognized an additional
$3,035,000 loss on the disposal of three of those businesses. Also, on October
24, 2001, our wholly-owned subsidiary, Clariti Wireless, filed a voluntary
petition for bankruptcy under Chapter 7 of the United States Bankruptcy Code.
Clariti Wireless' operations have ceased and the bankruptcy proceedings have
since been declared closed by the bankruptcy judge. As a result, all of
Clariti Wireless' debts have been discharged, resulting in an extraordinary
gain on discharge of indebtedness of $1,568,000 for Fiscal Nine Months 2002.
Also, during Fiscal Nine Months 2002 we recognized an additional $100,000 loss
on the disposal of one of the divested businesses mentioned above.
Liquidity and Capital Resources
-------------------------------
At March 31, 2002, the Company had a working capital deficit of $5,327,000
(including a cash balance of $2,000) as compared to a working capital deficit
of $2,954,000 (including a cash balance of $124,000) at June 30, 2001. The
working capital decrease of $2,373,000 is primarily due to a $1,603,000
increase in accruals for leases in default and legal proceedings as well as an
increase in accrued payroll of $981,000 and an increase in accrued consulting
fees of $275,000. These working capital decreases were partially offset by
$250,000 of short-term borrowings made during Fiscal 1Q02, $135,000 proceeds
(net of commissions) from the sale of common stock during Fiscal 1Q02.
We have historically relied principally on equity financing to meet our cash
requirements. Adverse market conditions for telecommunications companies
during the last 24 months have made it extremely difficult for the Company to
raise additional equity financing. A major factor in our recent inability to
raise equity funding has been the rapid and precipitous fall in the market
price of our common stock, from $5.25 per share in January 2001 to recent
prices of approximately $0.01 per share, resulting in a reduction of our market
capitalization from $187.7 million to less than $1 million. We have
substantially exhausted our cash reserves, we have no credit lines, and we have
no firm commitments for near-term funding. Therefore, on April 18, 2002, the
Parent Company filed a voluntary petition for reorganization under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Eastern District of Pennsylvania. The Company continues to manage its
properties and operate the business as "debtor-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code. During the Chapter 11 process, the Company
is being funded for limited expenses by Ansteed Investment, Ltd., a secured
creditor and largest shareholder. The Company intends to submit a Plan of
Reorganization to the Court in the near future.
On May 3, 2001, the Company borrowed $750,000 from Ansteed Investment, Ltd.
("Ansteed"), a greater than 5% shareholder, for a period of 61 days. The note
carries interest at the rate of 10% per annum and is secured by substantially
all of the Company's assets. The amount shown on the Company's consolidated
22
balance sheet as of March 31, 2002 includes $70,000 of accrued interest.
On November 30, 2001, the Company and Ansteed Investment, Ltd. executed a
Forbearance and Amendment Agreement whereby extending the terms of the
repayment of the $750,000 loan amount to March 31, 2002. In addition, the
Forbearance and Amendment Agreement allowed for Ansteed to advance an
additional $20,500 to the Company for legal fees associated with the agreement.
The additional $20,500 also carries interest at the rate of 10% annum and is
due by March 31, 2002. On March 3, 2002, the Company borrowed an additional
$13,519 from Ansteed Investment, Ltd. for certain expenses, carrying the same
terms as the original note. Also, In April 2002, the Company borrowed an
additional $5,000 from Ansteed Investment, Ltd. for certain expenses, also
carrying the same terms as the original note. The Company is in default of
this loan.
On July 2, 2001, the Company entered into a Funding Agreement with a third
party pursuant to which Clariti borrowed $250,000 (the "Outstanding Balance").
The Outstanding Balance is secured by a second position security interest in
substantially the same assets as those securing the $750,000 loan from Ansteed
(see Note 6). The Outstanding Balance must be repaid on or before July 2,
2002, and no interest accrues on the Outstanding Balance. The third party may
convert the Outstanding Balance into shares of the Company's common stock at a
conversion price of $0.50 per share.
We have chosen to focus our future efforts on development and
commercialization of our patented ClariCAST(TM) wireless datacasting
technology. Because our technology is still under development, we expect no
revenues or positive operating cash flow in the near term. Future cash
expenditure requirements have been significantly reduced through the
discontinuance of the Telephony/Internet Services businesses and through major
reductions in wireless technology development and corporate overhead expenses.
The Company is also actively pursuing opportunities to secure additional
financing in order to meet operating cash requirements through the remainder of
the current fiscal year. The Company also plans to search for strategic
alternatives in order to advance the business, create synergies and/or secure
financing. There can be no assurances that 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 2002 to launch
the ClariCAST(TM) System in Italy and other specified target markets and
to meet expected negative operating cash flows and capital expenditure plans.
There can be no assurances that such funding will be generated or available, or
if available, on terms acceptable to us.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 3, 2002, RadioNet International, Inc. ("RadioNet"), a wholly owned
subsidiary of the Company, filed a voluntary petition for bankruptcy under
Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Eastern District of Pennsylvania. The operations of RadioNet
have ceased. There are no significant assets of RadioNet.
On April 18, 2002, the Parent Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Eastern District of Pennsylvania. The
Company continues to manage its properties and operate the business as "debtor-
in-possession" under the jurisdiction of the Bankruptcy Court and in accordance
with the applicable provisions of the Bankruptcy Code. During the Chapter 11
process, the Company is being funded by Ansteed Investment, Ltd., a secured
creditor and largest shareholder. The Company intends to submit a Plan of
Reorganization to the Court in the near future.
On October 24, 2001, Clariti Wireless Messaging, Inc., a wholly owned
subsidiary of the Company, filed a voluntary petition for bankruptcy under
Chapter 7 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Eastern District of Pennsylvania. Clariti Wireless' operations have ceased.
The case has been closed.
France Telecom SA ("France Telecom") initiated a complaint against the Company
on May 12, 2000 before the Tribunal de Commerce de Paris (Paris Commercial
Court) in Paris, France. France Telecom's claim relates to a debt it claims it
is owed by GlobalFirst Communications SA, a former French subsidiary of the UK
Telecommunications Group, for long-distance telephone services. France Telecom
seeks payment from Clariti of 20,000,000 French Francs (approximately
$2,600,000). France Telecom further claims unspecified damages corresponding
to the loss of revenue resulting from the ceasing of commercial relations with
GlobalFirst Communications SA. The Company has vigorously defended the claims
asserted by France Telecom. Clariti believes that it did not verbally or in
writing make a promise to pay any obligations of GlobalFirst Communications SA,
and that it caused no damages to France Telecom because commercial relations
with GlobalFirst Communications SA had ceased before Clariti held any
negotiations with France Telecom. On April 10, 2002, The Tribunal de Commerce
de Paris made a decision on the case and France Telecom was not awarded any
damages. The Company does not know if France Telecom will appeal the decision
On November 30, 1999, IDT Corporation ("IDT") filed a complaint in the
Court of Common Pleas in Philadelphia, Pennsylvania against the Company and
Clariti Carrier Services Limited, an inactive United Kingdom subsidiary of the
Company, seeking payment for long-distance telephone services pursuant to a
contract between IDT and GlobalFirst Communications Limited, a former
subsidiary of the UK Telecommunications Group. The complaint seeks damages in
the amount of $690,163 plus interest, costs and attorneys fees. On March 20,
2000, the Court of Common Pleas dismissed the complaint on the basis of
jurisdiction, provided that proper jurisdiction lies in England. On or about
April 15, 2000, IDT filed an appeal with the Superior Court of Pennsylvania
appealing the decision of the Court of Common Pleas. On or about April 19,
2001, the Superior Court sustained the decision of the Court of Common Pleas
regarding jurisdiction. To date, the Company is not aware of any further
action taken by IDT in this matter. The Company believes that neither the
24
Company nor Clariti Carrier Services Limited has any liability with respect to
IDT's claim.
On or about September 28, 2000, Michael P. McAndrews filed a Demand for
Arbitration with the American Arbitration Association against the Company and
Clariti Wireless concerning obligations arising under Mr. McAndrews' Employment
Agreement. Mr. McAndrews has alleged that the Company had guaranteed and
assumed the obligation due Mr. McAndrews pursuant to an Assignment and Guaranty
Agreement. Mr. McAndrews claimed that as a result of a material change in his
duties, he resigned from employment for "good reason" (as defined in the
Employment Agreement), therefore entitling him to a severance package in an
amount in excess of $294,000. Additionally, Mr. McAndrews requested reasonable
attorney fees and other costs and fees, together with interest thereon.
Clariti Wireless and the Company disputed Mr. McAndrews' allegations, asserting
that Mr. McAndrews was not entitled to any payments and/or damages under the
Employment Agreement. The Arbitrators held a hearing on June 14 and 15, 2001
regarding the matter. On October 18, 2001, the Arbitrators ruled that the
Company and Clariti Wireless are jointly and severally liable to pay Mr.
McAndrews $290,500 plus reasonable attorney's fees and costs. On December 17,
2001, the Arbitrators awarded Mr. McAndrews $83,219 for attorney's fees and
costs, bringing the total award for Mr. McAndrews to $373,219. The Company
continues to believe that Mr. McAndrews was not entitled to any payments and/or
damages under the Employment Agreement and is considering its options in
response to this ruling. On or about November 19, 2001, Clariti
Telecommunications International and Michael P. McAndrews executed a Settlement
Agreement and General Release whereby the Company shall pay Mr. McAndrews a
total of $90,000 in order to settle the above claim. The settlement amount was
to be paid by January 19, 2002. Subsequently, on January 21, 2002, the Company
and Mr. McAndrews amended the Settlement Agreement and General Release by
increasing the settlement amount to $100,000 plus $750 per day for each day
after January 21, 2002 and extended the settlement payment date to February 28,
2002. This settlement payment was not made and therefore, the Company's
liability remains $373,219.
On June 12, 2001, M&T Bank filed an action against Clariti Telecommunications
International, Ltd. in the Court of Common Pleas of Montgomery County,
Pennsylvania. M&T Bank seeks to hold Clariti responsible under the terms of a
guaranty agreement pursuant to which Clariti allegedly guaranteed certain
obligations of its former subsidiary, Clariti Telecom, Inc. M&T Bank seeks
damages in the amount of $368,000. This case is in the early stages of
discovery with no case management scheduled or trial date set.
On October 17, 2001, Nine Penn Center Associates filed a complaint against the
Company in the Court of Common Pleas of Montgomery County, Pennsylvania. Nine
Penn Center Associates is the landlord and owner of real property known as the
Mellon Bank Center, 1735 Market Street, Philadelphia, PA 19103, a former
address of the Company's headquarters. Nine Penn Center Associates is seeking
damages associated with the remainder of the lease agreement. On April 2,
2002, the Court entered a judgment by default in favor of Nine Penn Center
Associates in the amount of $1,203,493. This amount has been accrued and
recorded in general and administrative expenses.
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.
25
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:
On April 18, 2002, Clariti Telecommunications International, Ltd.("the
Company") filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Eastern District of Pennsylvania.
On April 15, 2002, Peter S. Pelullo resigned as President and Chief Executive
Officer as well as a member of the Board of Directors of Clariti
Telecommunications International, Ltd.("the Company"). Also, On April 15,
2002, Ernest J. Cimadamore resigned as Secretary and Senior Vice President of
the Company. Abraham Carmel was appointed as Chairman of the Board of
Directors of the Company. Mr. Carmel has been a Director of the Company since
October 1999 and will also assume the title of President, Chief Executive
Officer and Treasurer. The Company also appointed Stuart W. Settle, Esq. and
Ian Tromans to its Board of Directors. Mr. Settle also serves as Secretary of
the Company. Mr. Settle has served as legal counsel to Ansteed Investments,
Ltd., a secured creditor and largest shareholder of the Company, on certain
matters in the past. The Board of Directors now includes the following
members: Stuart W. Settle, Esq., Ian Tromans and Abraham Carmel as the
Chairman.
On March 6, 2002, the following members of the Board of Directors of Clariti
Telecommunications International, Ltd. resigned as Directors and members of any
committees of the Board of Directors: Michael Jordan, Robert Sannelli, John
D'Anastasio, Chester Hunt and Dr. H.G. Hinderling, LL.M.
On October 24, 2001 the Company filed a Form 8-K disclosing that Clariti
Wireless Messaging, Inc., a wholly owned subsidiary of Clariti
Telecommunications International, Ltd., filed a voluntary petition for
bankruptcy under Chapter 7 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Eastern District of Pennsylvania.
26
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 20, 2002
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
(REGISTRANT)
By: s/Michael McAnulty
--------------------
Michael McAnulty
Vice President of Finance
27