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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 2001 Commission File No. 33-90344
Clariti Telecommunications International, Ltd.
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(Exact name of Registrant as specified in its charter)
DELAWARE 23-2498715
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1341 N. DELAWARE AVENUE, SUITE 300
PHILADELPHIA, PENNSYLVANIA 19125
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(Address of principal executive offices) (Zip Code)
185 COMMERCE DRIVE, FORT WASHINGTON, PA 19034
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(Former name or former address, if changed since last report)
Registrant's telephone number, including area code: (215) 291-1700
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant's common stock, as of September 10, 2001 was approximately
$1,651,000 (based on the average closing bid and asked prices of the
registrant's common stock in the over-the-counter market).
The number of shares outstanding of the registrant's common stock, as of
September 10, 2001 was 38,529,565.
DOCUMENTS INCORPORATED BY REFERENCE
See Item 14, Exhibits and Reports on Form 8-K
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Clariti Telecommunications International, Ltd. is a non-operating U.S.
parent company with subsidiaries operating in the U.S. and Italy. In this Form
10-K, the terms "Clariti" and "the Company" are used interchangeably in
reference to the parent company and/or any of its subsidiaries. Clariti is an
international wireless communications technology company with proprietary
technology for digital transmissions of data (including digital voice messages)
utilizing radio frequencies transmitted by FM radio stations. 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 receiver.
The Company was originally formed in February 1988 as the successor to a
music and recording studio business owned and operated by Peter Pelullo, the
Company's current CEO and President. The Company became publicly held upon its
merger in January 1991 with an inactive public company incorporated in Nevada.
The surviving corporation changed its name to "Sigma Alpha Entertainment Group,
Ltd." and was subsequently reincorporated in Delaware. In March 1998 the
Company changed its name to Clariti Telecommunications International, Ltd.
Beginning in 1995, the Company began shifting its focus to development and
commercialization of its wireless technology and as a result, no longer has a
significant interest in the music and recording business.
Wireless Datacasting
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The Company is presently developing wireless applications of its
proprietary technology for communications products and services that utilize
radio frequencies transmitted by FM radio stations. Management believes that a
need exists worldwide for communications products and services that communicate
information in an economically feasible manner without the need for intensive
capital investment for infrastructure and frequency licenses. The Company has
developed a technology that utilizes existing FM radio frequencies to provide a
wireless data transmission network without the significant investment capital
requirements of traditional telecommunication and cellular infrastructure. The
Company has trademarked the name of its technology as ClariCAST(TM).
ClariCAST(TM) Technology
The ClariCAST(TM) technology utilizes the FM-SCA channels available on FM
radio stations throughout the world. FM-SCA (Subsidiary Communication
Authorization) channels, also known as FM "subcarrier" channels, are the
"sideband" of an FM radio station's broadcasting frequency. Each FM radio
station has two FM-SCA channels and an RDS signal. Similar to the SAP
(Secondary Audio Programming) channel in television broadcasting, the FM-SCA
spectrum is licensed to the FM radio station and can be used for broadcasting
alternate information and services.
The ClariCAST(TM) protocol is an advanced digital wireless communications
protocol derived from various technologies, including some of which were
previously used in high-end military communication systems. This proprietary
protocol is highly robust, employing state-of-the-art digital technologies,
coding and interleaving schemes, and error correction algorithms. At its core,
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the ClariCAST(TM) protocol is a relatively high-speed digital wireless
architecture that has been optimized for the transmission of large digital
files, like digitized voicemail or graphic files, to low power, small, mobile
receivers. The ClariCAST(TM) technology sends digital information over FM-SCA
frequencies.
FM-SCA Broadcasting
Two significant advantages of the ClariCAST(TM) technology are (1) FM-SCA
channels do not require new radio frequency spectrum allocation and (2) the
transmission infrastructure for FM-SCA already exists in the form of the FM
radio station equipment. As a result, the Company's wireless datacasting system
will require significantly less investment to establish a network and acquire
the necessary hardware than other wireless networks. In addition, the existence
of the FM radio station's transmission infrastructure and the simplicity of the
ClariCAST(TM) technology will allow for more rapid installation of the system.
The Company expects to be able to install a city-wide wireless datacasting
system in several days rather than the many months required for paging and
cellular systems.
FM radio stations are typically assigned a frequency bandwidth of 100 kHz.
A typical station will use 53 kHz for their commercial (main channel) stereo
programming. The remaining 47 kHz, which is almost half of the available FM
channel spectrum resource, is not required for broadcasting the main channel
programming.
FM-SCA has been used in the United States for applications such as
background music without commercial interruption, reading services for the
blind, stock market quotes, sports scores, weather reports, educational
services, and religious broadcasts. As a result, the FM-SCA channels in the
U.S. may in some instances be limited due to these other uses. However, in most
international markets, especially emerging growth nations, there appears to be
little or no use of the FM-SCA band. International FM radio stations have been
pursuing the use of this FM-SCA bandwidth to generate additional revenues from
operations.
ClariCAST(TM) Applications
The first significant application of the ClariCAST(TM) technology is a
wireless voicemail system, which is discussed in further detail below. At its
core, however, the ClariCAST(TM) system is a digital wireless data broadcasting
technology. The ClariCAST(TM) network has been designed from the outset to
support applications beyond wireless voicemail and unified messaging. Clariti
is in the process of developing several proof-of-concept application devices,
which the Company plans to market and license to original equipment
manufacturers and service providers already doing business in the appropriate
market segments with existing subscriber bases. These future applications
include:
PDA Wireless Modem - Clariti is developing protocol and network application
software to support voicemail, email, graphics (maps, etc.), faxes, and data
such as contact list and schedule updates to a personal digital assistant
("PDA") such as a Palm(TM) or Handspring(TM) handheld organizer or Windows
CE(TM) pocket PC. Clariti is developing a self-contained "clamshell" for the
Palm V and Palm OS(TM) application software for soft-button control of this
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Palm accessory and information/data display. The ClariCAST(TM) clamshell will
be a self-contained, battery-operated unit with wireless voicemail capabilities
as well. There are two distinct advantages to this: (1) unlike other Palm
accessories, the ClariCAST(TM) wireless modem will not be a drain on the Palm's
internal batteries; and (2) the ClariCAST(TM) wireless modem will operate and
receive messages and data even when not connected to the Palm.
Intelligent Signage - A trend in advertising, especially outdoor and mobile
advertising, is interactive, changeable billboards and signs. Signs that
display real-time information such as weather, traffic conditions, lottery
numbers, sale prices, etc., would also come under this category. With
ClariCAST(TM), Clariti offers an economical way of transmitting information
wirelessly to signs or billboards, especially if they are dispersed over a
large geographic or remote area, or in a mobile environment (e.g. buses,
trucks, taxi cabs). Clariti is developing the necessary tools and software to
demonstrate information transmission to a multi-colored electronic sign.
Automobile Data Services - Because the ClariCAST(TM) protocol is optimized for
mobile receivers, a natural application is information, messaging, and data
services to the automobile. Automobile navigation systems are becoming more
and more popular, even to the point of being standard equipment in high-end
vehicles. ClariCAST(TM) offers an economical way of periodically updating
these systems wirelessly with the latest road, waypoint, address, and phone
number changes to their databases. A U.S. federal government initiative is the
Intelligent Transportation System, or ITS. Part of this initiative calls for
traffic information and alerts to the car. ClariCAST(TM), because of its low-
cost of delivery, large geographic coverage, and point-to-multipoint
broadcasting (data-casting) capabilities, represents a very practical and
viable way to accomplish this. Also, the PC in the automobile (AutoPC) is
expected to be commercialized within the next few years. ClariCAST(TM), with
its one-way data, information, and messaging flow to the car with voice
annunciation will be a safe, practical and economical means of implementing
data flow to AutoPCs. Clariti is developing a vehicular ClariCAST(TM) module
that will plug into the car and use its radio antenna and vehicular power. It
will be capable of receiving the various types of data, messaging, and
information as described above and be capable of outputting this data over a
USB port. This USB port output gives it the capability of interfaces with
built-in AutoPCs, after-market AutoPCs, laptops, and other types of personal
communication devices.
Wireless Web Services - Clariti is developing a wireless modem for portable PCs
where real-time information can be gathered from the Internet by a
ClariCAST(TM) server and broadcast out to the PC at scheduled times.
While the above application device development will demonstrate the broader
capabilities of ClariCAST(TM), Clariti also intends to market its wireless data
service to a number of very different vertical markets. Other potential future
applications include the following:
E-Books, E-newspapers: Information could be updated continuously during the day
over Clariti's wireless network
Interactive Toys: Major toy makers like Mattel and Hasbro are creating
interactive toys that teach and entertain children. With an embedded
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ClariCAST(TM) receiver, these toys could constantly be sent new content,
including personalized messages.
Interactive Games: Companies like Sony and Sega could use ClariCAST(TM) to
continually distribute, update and keep fresh their most popular computer and
video game software.
Microcontroller Software Updating: By adding a ClariCAST(TM) receiving module
to their micro-controllers, manufacturers of consumer durables as diverse as
automobiles, refrigerators and lawnmowers would have a way of maintaining and
updating their products remotely.
The ClariCAST(TM) architecture is uniquely designed to allow Clariti to provide
cost-effective solutions for these and other applications. ClariCAST(TM) will
allow these future applications to share the same wireless highway covering a
given geographic area with no need to develop a new network.
Furthermore, Clariti believes that the ClariCAST(TM) architecture is better
suited (more robust, more cost-effective) for these types of applications than
any other wireless technology in the market. The future applications examples
described above all require the ability to broadcast large data files to
multiple devices at the same time ("point-to-multipoint"). Cellular technology
is geared for one-to-one ("point-to-point") communication, which requires
greater bandwidth usage and higher costs. The ClariCAST(TM) technology is a
cost-effective method to broadcast large data files to multiple wireless
receivers.
Wireless Voicemail System
One application of the ClariCAST(TM) technology is a Wireless Voicemail
System, which transmits a message to the owner of a handheld voicemail player,
known as a Voca(TM), in the actual voice of the person generating the message.
The Wireless Voicemail System is designed so that a subscriber must first buy a
Voca(TM) and then pay a monthly subscription fee for the wireless voicemail
service. Once a subscriber's account has been established, callers can leave
voice messages for the subscriber by calling the system's central ClariCAST(TM)
server or server farm, or the system may forward office voicemail messages. The
calling party's message is then digitized, compressed and transmitted by a
radio station's FM transmitter to the specific individual or group account of a
subscriber's Voca(TM). The ClariCAST(TM) technology transmits messages that
coexist with, but do not interfere with an FM radio station's existing
commercial broadcast.
Wireless Voicemail System Design
The Wireless Voicemail System is comprised of 4 major components:
- FM radio station's transmission facility (utilized by the Company
for its wireless infrastructure)
- ClariCAST(TM) Server
- SCA Generator
- Voca(TM) Wireless Voicemail Player
The FM radio station's transmission facility includes the antenna tower
and all the other equipment used by the FM radio station for its main channel
programming. This facility is already in place and owned by the FM radio
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station. The system operator would lease one or both of the SCA channels from
the FM radio station. The Voca(TM) must be within receiving distance of the FM
radio station's signal in order to receive the message unless a roaming plan is
utilized.
The ClariCAST(TM) server incorporates a full-featured voicemail system. It
automatically answers incoming telephone calls with a customized greeting from
the subscriber, prompts the caller to leave a message, and records the message
in the caller's voice. After the caller has hung up, the voice message is
digitally compressed into a compact digital packet and the appropriate Voca(TM)
address is added. These packets are then forwarded to the SCA Generator for
modulation and mixing with the FM station's main channel programming. This
combined signal is then sent through the FM radio station's transmitter.
The Voca(TM) receives the signal from the FM radio station, extracts the
messages that are addressed to it, and decodes the message. An audible or
vibrating signal alerts the user that a message has been received. Upon
playback the user listens to the message in the caller's actual voice. The user
can play, fast forward, rewind, save, and delete messages, similar to using
voicemail or a home answering machine.
Status of Wireless Voicemail System Development
During the last fiscal year, the Company implemented a limited scope test
launch of its Wireless Voicemail System in Jacksonville, Florida. The test
launch consisted of the sale of approximately 50 Vocas(TM) to third party
consumers who used the service in their daily lives. The Company has been
evaluating and utilizing the information obtained in the limited scope test in
the technology development process and discontinued the limited scope test.
During the second quarter of calendar 2001, the Company was faced with an
extremely difficult financial situation. The Company had exhausted most of its
cash reserves and had been unable to raise sufficient additional capital to
fund continued development of the Wireless Voicemail System. As a result, the
Wireless group terminated most of its R&D operations in Boynton Beach, Florida
and relocated those efforts to Philadelphia, laid off substantially all of the
engineering staff in Florida, and also laid off most of the network
engineering, marketing and administrative staff and relocated its group
headquarters from Fort Washington, Pennsylvania to Philadelphia.
The Company plans to improve the performance of the Voca(TM) using one or
more third party development firms and launch a commercial Wireless Voicemail
System in Milan, Italy under the Company's joint venture with the Pasubio
Group, RadioNet Italia, Srl (see "Marketing the Wireless Voicemail System").
New product development efforts are subject to all of the risks inherent in the
development of new technology and products, including unanticipated delays,
expenses, market acceptance, and technical problems. There can be no assurance
as to when, or whether, the Wireless Voicemail System or other applications of
the ClariCAST(TM) technology will be successfully completed. No assurance can
be given that products or services can be developed within a reasonable
development schedule, if at all, or that they can be produced or provided at a
reasonable cost. There can be no assurance that the Company will have
sufficient economic or human resources to complete such development in a timely
manner, or at all.
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Commercialization of the Wireless Voicemail System
To commercialize its Wireless Voicemail System, the Company or a licensee
of the ClariCAST(TM) technology will be required to secure the use of FM radio
subcarrier frequencies in the markets it intends to enter. Based on the
experience of its management, the Company does not expect difficulty in
accessing such frequencies. The Company has already secured the use of several
FM radio subcarrier frequencies in multiple U.S. cities. In addition, RadioNet
Italia Srl, the Company's 60%-owned joint venture with the Pasubio Group in
Italy, has entered a contract with Centro di Produzione SpA (also known as
"Radio Radicale") whose FM radio station network covers approximately 95% of
Italy, to use their FM-SCA channels in exchange for a percentage of RadioNet
Italia's revenues. However, there can be no assurance that FM radio station
owners in other targeted market areas will make their subcarrier frequencies
available for use by the Company, which would have a material adverse effect on
the Company's business.
Marketing the Wireless Voicemail System
With its large installed base of voicemail users, plus users of messaging
products with voicemail boxes, the U.S. represents a significant business
opportunity. However, the opportunities may even be greater in many
international markets, especially large emerging markets such as China and
Brazil. According to Strategis Group, there are approximately 190 million
paging subscribers worldwide, with the vast majority of those outside the U.S.,
Western Europe, and Japan. In these emerging markets, there appears to be
significant pent-up demand for communications capabilities, yet only a small
percentage of users can afford cellular phones. The Company believes the
Wireless Voicemail System's combination of wireless capabilities, digital voice
communications, and affordability, will appeal to a large number of potential
users in these markets. In addition, the Company's FM-SCA technology makes it
possible to rapidly deploy systems in just about any country with FM radio
stations.
The Company plans to develop partnerships with companies inside and
outside the U.S. to help market the wireless information services. The Company
expects to seek out partners who are experienced with marketing and
distribution of telecommunications products in their respective geographic
areas. The Company believes this approach will provide it with the ability to
address multiple markets simultaneously.
The marketing strategy in each location will vary, depending on the local
market environment. However, several elements of the strategy are likely to be
similar. First, the Company and its local partner(s) expect to position the
product and service relative to other popular telecommunications products and
services. Since the Company's technology, products and services share common
attributes with pagers, voicemail, and cellular phones, it is possible that the
Company's wireless information services will be positioned differently in
different locations. Second, the Company and its local partner(s) will
determine the best mix of customers and distribution. In most locations, the
Company anticipates its customers will use a variety of distribution channels,
including selling directly to corporate accounts, through retail electronic
outlets, or through wireless dealers.
7
During Fiscal 2001, the Company entered into a joint venture agreement
with the Pasubio Group, an Italian telecommunications holding company
controlled by Marco Podini, the Italian entrepreneur. The name of the joint
venture is RadioNet Italia Srl and it is owned 60% by Clariti and 40% by
Pasubio. The purpose of the joint venture is to market the ClariCAST(TM)
technology and related products and services in Italy. RadioNet Italia will
operate all of the Company's business interests in Italy. This includes the
March 2000 Memorandum of Understanding ("MOU") the Company signed with Albacom
SpA, the Italian telecommunications provider for businesses, to explore the
potential for integrating Clariti's wireless technology and products into
Albacom's services portfolio in Italy and other European countries. In
September 2000, the Company also signed a MOU with Broadnet, a European
subsidiary of Comcast Corporation that provides Internet, communication and
applications services, to explore integrating Clariti's wireless technology
into Broadnet's portfolio of services for small and medium sized businesses in
Portugal and the Czech Republic. The Company expects to enter discussions with
other parties regarding partnership opportunities in other regions. There can
be no assurance however that RadioNet Italia will be successful or that the
Company will be successful in its efforts to execute the terms of these MOU's,
nor can there be any assurance that the Company will be successful in its
efforts to enlist strong partners in every market it plans to enter.
Competition
The Company expects its wireless datacasting products and services to
compete with those of numerous well-established companies that design,
manufacture or market pagers, cellular phones, wireless communications systems,
and paging and cellular services. Most of these companies have substantially
greater financial, technical, personnel and other resources than the Company,
and have established reputations for success in the development, licensing, and
sale of their products and services. Certain of these competitors may also have
the financial resources necessary to enable them to withstand substantial price
competition or downturns in the market for pagers, cellular phones, and related
products.
In order for a wireless technology to be commercially successful, the
Company believes it must meet user requirements for cost, device size,
performance, functionality, and in the case of a voice-based product, audio
quality. While some competing voice messaging technologies match the Company's
ClariCAST(TM) technology on one or more of these parameters, the Company is not
aware of any competing technology that can match ClariCAST(TM) technology in
all of these critical areas.
Production and Manufacturing Plans
The Company does not presently intend to establish its own manufacturing
facilities to produce the Voca(TM), the ClariCAST(TM) Server, or the SCA
Generator. Instead, the Company plans to license other companies to
manufacture such items. As such, the Company will be dependent upon the
ability of licensed manufacturers to manufacture and assemble products in
accordance with specifications provided by the Company. If such contractors are
unable to meet these specifications or experience delays in delivering
products, the Company's business would be adversely affected.
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Periodically, worldwide demand for and production of wireless devices may
be greater than manufacturers and component suppliers had anticipated and/or
manufacturers may discontinue manufacturing certain components or operations.
As a result, there have been shortages of certain types of components used in
manufacturing wireless devices, including some of those used in the Voca(TM).
If such component suppliers are unable to meet industry demand for certain
components and thus experience delays in delivering components or discontinue
operations or the manufacturing of certain components, the Company's business
would be adversely affected.
The Company may in the future seek to establish its own manufacturing
facilities and/or form joint ventures with manufacturers abroad in order to
manufacture and assemble the Company's products. In such event, the Company
would need further financing to implement such manufacturing plans. There can
be no assurance that financing will be available to the Company at such time,
or if available, on terms acceptable to the Company.
Patents and Trade Secrets
In March 1999, the U.S. Patent and Trademark Office issued to the Company
a patent, originally filed in January 1996, dealing with FM Subcarrier Digital
Voice Messaging. In July of 2000, the U.S. Patent and Trademark Office issued
the Company a second patent on the invention with improved claim coverage. This
invention had previously been approved by government authorities in South
Africa and Taiwan, and is still pending in three additional countries. In April
2000 the U.S. Patent and Trademark Office issued to the Company a patent,
originally filed in March 1999, on the overall design of its Wireless Voicemail
Player, the Voca(TM). The Company's current patents expire between 2014 and
2016.
During the past fiscal year, the Company has filed patent applications in
the United States and multiple foreign countries on a number of additional
patents. The Company has two pending patent applications for the protection of
its proprietary wireless protocol and pending patent applications for a unique
interference-reduction technique, an improved message quality estimator, the
Voca(TM) antenna shield, and other Voca(TM) performance-enhancing features.
There can be no assurance as to the ultimate success of the Wireless
Voicemail System patent applications in the United States or any foreign
country. Furthermore, even if patents are issued to the Company, there can be
no assurance that such patents will not be circumvented and/or invalidated by
competitors of the Company. Further, the enforcement of patent rights often
requires the institution of litigation against infringers, which litigation is
often costly and time consuming. The Company also intends to rely on trade
secrets, know how and continuing technological advancement to establish a
competitive position in the marketplace. There can be no assurance that the
Company will be able to adequately protect its technology from competitors in
the future.
Research and Development
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The Company's research and development costs relate exclusively to
development of its Wireless Voicemail System and ClariCAST(TM) technology.
Research and development costs incurred by the Company during the years ended
June 30, 2001, 2000 and 1999 were $4,711,000, $4,161,000 and $2,465,000,
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respectively. The Company has incurred cumulative research and development
costs of $12,846,000 on its ClariCAST(TM) technology and Wireless Voicemail
System through June 30, 2001. As further described above, the Company has been
experiencing a severe cash shortage, which has resulted in a significant
reduction of R&D expenditures since the second quarter of calendar 2001.
Management expects a significantly reduced level of R&D expenditures for the
remainder of Fiscal 2002, even if additional funds are raised by the Company.
Management believes its ClariCAST(TM) technology has the capability to
fill a need that exists worldwide for a wireless telecommunications network
that can communicate information in an economically feasible manner without the
need for significant investment capital requirements of traditional
telecommunication and cellular infrastructure. Utilization of the existing
telecommunications infrastructure and that of FM radio towers located around
the world has the capability to provide such a network to the vast majority of
the world's population. The Company plans to continue research and development
into applications of its technology that have the potential to fill such a
need.
Employees
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As of June 30, 2001, the Company had a total of 15 employees. All of the
Company's employees work on a full time basis and none of the Company's
employees belong to a labor union. All of the Company's employees work in the
United States.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is located at 1341 N. Delaware Avenue, Suite 300,
Philadelphia, Pennsylvania 19125, which the Company leases pursuant to a
written lease agreement that expires in 2006.
ITEM 3. LEGAL PROCEEDINGS
France Telecom SA v. Clariti Telecommunications International, Ltd. This
matter was initiated in a complaint filed by Plaintiff, France Telecom SA, on
May 12, 2000 before the Tribunal de Commerce de Paris (Paris Commercial Court)
in Paris, France. Plaintiff's claim relates to a debt Plaintiff claims it is
owed by Global First Communications SA, a French subsidiary of Global First
Holdings Limited, for long-distance telephone services. Plaintiff claims that
Clariti entered into negotiations with Plaintiff to resolve such debt in bad
faith. Plaintiff seeks payment from Clariti of 20,000,000 French Francs
(approximately $2,600,000). Plaintiff further claims unspecified damages
corresponding to the loss of revenue resulting from the ceasing of commercial
relations with Global First Communications SA. The Company intends to
vigorously defend the claims asserted by Plaintiff. Clariti believes (i) that
it did not negotiate with Plaintiff in bad faith, (ii) that it did not verbally
or in writing make a promise to pay any obligations of Global First
Communications SA, and (iii) that Clariti caused no damages to Plaintiff
because commercial relations with Global First Communications SA had ceased
before Clariti held any negotiations with Plaintiff. A first hearing on this
complaint was held on September 13, 2000. Clariti plans to file its defense
against France Telecom's claims at a hearing scheduled for October 10, 2001.
10
IDT Corporation v. Clariti Carrier Services, Ltd. and Clariti
Telecommunications International, Ltd. This matter was initiated by a Complaint
filed by Plaintiff, IDT Corporation on November 30, 1999 in the Court of Common
Pleas of Philadelphia, PA. Plaintiff seeks payment for long-distance telephone
services and claims, in part, that a contract, including all obligations
arising thereunder, between the Plaintiff and Global First Communications, Ltd.
("Global First Com") was assigned to the Company. In the alternative,
Plaintiff claims that the Company is the "alter ego" of Global First Com and is
responsible for the debts of Global First Com. The Plaintiff has alleged
damages in an amount of $690,163 plus interest, costs and attorneys fees. The
Company advises that it did not receive an assignment of the contract, did not
receive such telephone services, and is not the "alter ego" of Global First
Com. Preliminary objections were filed by the Company seeking dismissal of the
Complaint on a number of grounds including, without limitation, jurisdictional
issues. On March 20, 2000, the Court of Common Pleas, Philadelphia County,
Pennsylvania ("Court"), sustained the Company's preliminary objections
concerning the Court's jurisdiction over this matter. By sustaining this
preliminary objection (i.e., stating that it did not have jurisdiction over
this matter), it was unnecessary for the Court to decide upon the other
preliminary objections. The Court's Order dismissed the Complaint on the basis
of jurisdiction, provided that jurisdiction lies in England. If Clariti
objects to jurisdiction in England, it is conceivable that the Court may then
decide to hear the case subject to its decision on the Company's other
preliminary objections. 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.
Michael P. McAndrews v. Clariti, et al. On or about September 28, 2000,
Michael P. McAndrews filed a Demand for Arbitration with the American
Arbitration Association against Clariti and its wholly-owned subsidiary,
Clariti Wireless Messaging, Inc. ("Clariti Wireless"), concerning obligations
arising under Mr. McAndrews' Employment Agreement. Mr. McAndrews is claiming
damages against both Clariti Wireless as well as against the Company, alleging
that the Company had guaranteed and assumed the obligation due Mr. McAndrews
pursuant to an Assignment and Guaranty Agreement. Mr. McAndrews claims 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 requests reasonable attorney fees and other costs and fees, together
with interest thereon. Clariti Wireless and the Company dispute Mr. McAndrews'
allegations and assert that Mr. McAndrews is not entitled to any payments
and/or damages under the Employment Agreement. Further, the Company and
Clariti Wireless request that it be reimbursed its reasonable attorney fees and
other costs and fees, together with such other relief as the Arbitrators may
deem just and proper. The Arbitrators held a hearing on June 14 and 15, 2001
regarding matter. On or about September 19, 2001, the parties submitted post-
hearing briefs. A decision by the Arbitrators is pending.
M&T Bank Successor By Merger to Keystone Financial Bank, N.A. v. Clariti
Telecommunications International, Ltd. This matter was initiated by a Complaint
filed by Plaintiff on June 12, 2001 in the Court of Common Pleas of Montgomery
County, Pennsylvania. Plaintiff seeks to hold Clariti responsible under the
terms of a guaranty agreement pursuant to which Clariti allegedly guaranteed
11
certain obligations of its former subsidiary, Clariti Telecom, Inc. Plaintiff
seeks damages in the amount of $368,000. This case is in the early stages of
discovery with no case management scheduled or trial date set.
As further described in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Company has been
experiencing a severe cash shortage. As a result, the Company has been unable
to pay its vendors on a timely basis. Some vendors have chosen to use the
legal process to attempt to collect their debts, including obtaining judgments
against the Company. If the Company is able to raise significant additional
funding, the Company expects to attempt to work out settlements with respect to
these judgments.
The Company is, from time to time, during the normal course of its
business operations, subject to various other litigation claims and legal
disputes. The Company expects none to have a material adverse impact on its
operations; however, no assurance can be given that an adverse determination of
any claim or dispute would not have an adverse impact on its operations during
any given period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is currently quoted on the National Association
of Securities Dealers, Inc., over-the-counter market on the OTC Bulletin Board
under the symbol "CLRI."
Market Information
------------------
The following table sets forth the high and low bid prices per share of
Common Stock as quoted by National Quotation Bureau, Inc. The following table
presents data for the years ended June 30, 2001 and 2000. All amounts have
been retroactively adjusted to reflect the Reverse Stock Split.
Year Ended June 30, 2001
------------------------ High Bid Low Bid
-------- -------
Quarter ended:
September 30, 2000 $ 5.88 $ 4.31
December 31, 2000 $ 4.50 $ 2.88
March 31, 2001 $ 5.25 $ 0.94
June 30, 2001 $ 1.12 $ 0.15
Year Ended June 30, 2000
------------------------ High Bid Low Bid
-------- -------
Quarter ended:
September 30, 1999 $13.25 $ 9.75
December 31, 1999 $12.38 $ 7.75
March 31, 2000 $15.25 $ 6.13
June 30, 2000 $11.88 $ 5.50
The above prices presented are bid prices, which represent prices between
broker dealers and do not include retail mark-ups, mark-downs or commissions to
the dealer. The prices also may not necessarily reflect actual transactions. On
September 10, 2001 the closing price for the Company's common stock was $0.08
per share.
Holders
-------
As of September 10, 2001 the Company had 253 shareholders of record of its
common stock. Such number of record holders was derived from the stockholder
list maintained by the Company's transfer agent, American Stock Transfer &
Trust Co., and does not include the list of beneficial owners of the Company
whose shares are held in the names of various dealers and clearing agencies.
Dividends
---------
To date, the Company has not declared or paid any cash dividends and does
not intend to do so for the foreseeable future. The Company intends to retain
all earnings, if any, to finance the continued development of its business.
Any future payment of dividends will be determined solely in the discretion of
the Company's Board of Directors.
13
Changes in Securities and Use of Proceeds
-----------------------------------------
The following information sets forth all shares of the Company's $.001 par
value common stock issued by the Company during the period covered by this Form
10-K that were not registered under the Securities Act of 1933, as amended (the
"Act") at the time of issuance and were not previously reported in a Quarterly
Report on Form 10-Q.
Number of Total
Date Name Shares Consideration
------------- ------------------------------ ------------ -------------
December 2000 Carl A. Saling III 222,223 None(a)
(a) Effective on December 31, 2000, the Company issued 222,223 shares of its
common stock to Carl A. Saling III pursuant to the terms of the Company's
December 1999 acquisition of Tekbilt World Communications, Inc. Mr. Saling
paid no additional consideration to the Company for these shares.
The securities issuances set forth above were exempt from registration under
the Act pursuant to Regulation S under the Act as transactions with non-U.S.
persons or Section 4(2) of the Act as transactions by an issuer not involving
any public offering in that said transactions involved the issuance by the
Company of shares of its common stock to financially sophisticated individuals
who were fully aware of the Company's activities, as well as its business and
financial condition, and acquired said securities for investment purposes.
The Company has placed a restrictive legend on all of the stock certificates
representing the shares issued above and will give appropriate "stop transfer"
instructions to its transfer agent, until such time as those shares are
registered pursuant to the Act, or a valid exemption from registration exists
under the Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data relating to the Company and
its subsidiaries have been taken or derived from the financial statements and
other records of the Company. Such selected consolidated financial data are
qualified in their entirety by, and should be read in conjunction with, the
consolidated financial statements of the Company. During Fiscal 2001, the
Company 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 selected
financial data have been restated to conform to discontinued operations
treatment for all periods presented. In 1998, the Company changed
its fiscal year end from July 31 to June 30. Therefore, Fiscal 1998 consists
of the 11 months ended June 30, 1998 and all other fiscal years consist of 12
months.
14
Fiscal Fiscal Fiscal Fiscal Fiscal
2001 2000 1999 1998 1997
-------- -------- --------- ------- -------
(dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
---------------------
Revenue $ - $ - $ - $ - $ 348
======== ======== ========= ======= =======
Gross profit $ - $ - $ - $ - $ 34
Operating expenses (15,605) (16,794) ( 9,374) (4,223) (7,411)
Other income (expense) 350 430 396 ( 25) 80
-------- -------- --------- ------- -------
Net loss from continuing
operations (15,255) (16,364) ( 8,978) (4,248) (7,297)
Discontinued operations:
Income (loss) from dis-
continued operations ( 6,519) 12,254 (211,434) - -
Gain (loss) on disposal 193 ( 762) - - -
-------- -------- --------- ------- -------
Net income (loss) $(21,581) $( 4,872) $(220,412) $(4,248) $(7,297)
======== ======== ========= ======= =======
PER SHARE DATA, BASIC AND DILUTED
---------------------------------
Net loss from continuing
operations $( 0.43) $( 0.49) $( 0.48) $ (0.81) $ (1.67)
Income (loss) from dis-
continued operations ( 0.18) 0.37 ( 11.38) - -
Gain (loss) on disposal 0.01 ( 0.02) - - -
-------- -------- -------- ------- -------
Net income (loss) $( 0.60) $( 0.14) $( 11.86) $ (0.81) $ (1.67)
======== ======== ======== ======= =======
Cash dividends None None None None None
======== ========= ======== ======= =======
As of As of As of As of As of
June 30, June 30, June 30, July 31, July 31,
2001 2000 1999 1998 1997
-------- --------- -------- ------- -------
BALANCE SHEET DATA
------------------
Total assets $ 1,298 $ 22,627 $ 19,930 $ 2,240 $ 1,898
Long-term obligations $ - $ - $ - $ - $ -
Stockholders' equity
(deficit) $( 1,992) $ 21,859 $(19,660) $ 1,580 $ 1,524
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain information included in this Annual Report may be deemed to
include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that involve risk and uncertainty, such as information
relating to expected research and development expenditures and expected trends
in operating losses and cash flows, as well as our ability to successfully do
any or all of the following:
- 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 the Company's wireless
products and services
- Select partners who will be used to help market, sell and distribute the
Company's wireless products and services
- Develop a marketing strategy of the Company's wireless products and
services
- Make the Company's wireless products and services affordable and
appealing to its target markets
- Address multiple markets simultaneously to market the Company's wireless
products and services
- Develop manufacturing and distribution channels of the Company's
wireless products and services
- Manage the progress and costs of additional research and development of
the Company's wireless products and services and the ClariCAST(TM)
technology
- Manage the risks, restrictions and barriers of conducting business
internationally
- Manage the expenditure of earnings and future payment of dividends, if
any
- Reduce future operating losses and negative cash flow
- Manage our growth and its effects, including the ability to attract
additional personnel
- Obtain financing for operations and expansion
- Compete effectively in the markets we choose to enter
- Develop new products and services and enhance current products and
services
- Stimulate demand for the Company's wireless products and services
In addition, certain statements may involve risk and uncertainty if they
are preceded by, followed by, or that include the words "intends," "estimates,"
"believes," "expects," "anticipates," "should," "could," or similar
expressions, and other statements contained herein regarding matters that are
not historical facts. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation, risks related to our
ability to obtain funding, risks relating to our significant capital
requirements, risks associated with our operating losses, risks relating to our
development and expansion and possible inability to manage growth, risks
relating to competition and regulatory developments, as well as the other risks
16
identified below under "Risk Factors" and those 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 events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RISK FACTORS
We Need to Obtain Financing in Order to Continue Our Operations
To date, we have funded our operations principally through private equity
funding. More recently, we have obtained limited short-term debt financing in
order to continue operating, including a $750,000 secured loan from a related
party. The $750,000 loan is secured by substantially all of our assets. The
due date for repayment of the loan has already passed and the lender has
notified us that we are in default of the loan agreement. If we were unable to
repay the loan on demand by the lender, the lender could foreclose on the
collateral described above. The lender has not yet made demand for immediate
payment.
Due to operating losses, we remain undercapitalized. We have
substantially exhausted our cash reserves, we have no credit lines and we have
no firm commitments for near-term funding. These matters raise substantial
doubt about our ability to continue as a going concern.
On a prospective basis, we will require both short-term financing for
operations and debt repayment and longer-term capital to fund our expected
growth. We have no existing bank lines of credit and have not established any
sources for additional financing. Our ability to grow will be dependent upon
our ability to raise longer-term capital or otherwise finance our plans. We are
actively pursuing opportunities to secure additional financing which, if
obtained, is expected to be sufficient to repay short-term borrowings and meet
operating cash requirements through most of the next fiscal year. However,
additional financing may not be available to us, or if available, may not be
available upon terms and conditions acceptable to us. Inability to raise
sufficient funds for operations will have an adverse impact on our business.
The Market Price of Our Stock Has Fallen Precipitously, Making It More
Difficult For Us to Obtain Financing
The market price of our common stock has fallen from over $5.00 per share in
January 2001 to less than $0.10 per share currently. As a result, our common
stock is no longer eligible for listing on the Nasdaq SmallCap Stock Market.
In addition, we will have to substantially dilute the stock held by existing
shareholders in order to raise sufficient capital to meet our funding
requirements, if we can obtain the necessary funding.
We Have a Limited Operating History Upon Which to Base an Evaluation of Our
Performance
We were formed in February 1988 as the successor to a music and recording
studio business. In January 1991, we became a publicly held company upon a
17
merger with an inactive public company incorporated in Nevada. In early 1995,
we were introduced to the concept of voice paging using FM radio frequencies,
which we have now developed into our ClariCAST(TM) wireless messaging
technology. As an early stage company in the new and rapidly evolving wireless
technology industry, we face numerous risks and uncertainties. In addition, we
have had only a limited operating history upon which investors may base an
evaluation of our performance.
We Have a History of Losses and Expect that Losses Will Continue in the Future
Since our inception, we have incurred significant losses from continuing
operations of $15,255,000, $16,364,000 and $8,978,000 for Fiscal 2001, Fiscal
2000 and Fiscal 1999, respectively, including $4,711,000, $4,161,000 and
$2,465,000, respectively, on research and development of our ClariCAST(TM)
technology and the Wireless Voicemail system. In order to achieve profitability
in the future, we will need to generate significant revenue. We cannot assure
you that we will generate sufficient revenue to achieve profitability. We
currently project that we will continue to generate operating losses and
negative cash flow from operations at least through Fiscal 2002. We cannot
assure you that we will ever achieve, or if achieved, maintain, profitability.
If revenue grows more slowly than we anticipate or if research and development,
marketing and operating expenses exceed our expectations or cannot be adjusted
accordingly, our business, results of operation and financial condition will be
materially adversely affected.
We Are in Competition With Companies That Are Larger, More Established and
Better Capitalized Than We Are
The wireless telecommunications industry is highly competitive, rapidly
evolving and subject to constant technological change. We expect that our
wireless voicemail products and services will compete with those of numerous
well-established companies, including Motorola, AT&T, Sprint PCS and many
paging companies, which design, manufacture or market pagers, cellular phones,
wireless communications systems and cellular service. Many of our competitors
have greater financial, technical, engineering, personnel and marketing
resources; longer operating histories; greater name recognition; and larger
consumer bases than us. These advantages afford our competitors pricing
flexibility.
Our Success Is Largely Dependent Upon Our Key Executive Officers and Other Key
Personnel
Our success is largely dependent upon our key executive officers, the loss
of one or more of whom could have a material adverse effect on us. We believe
that our continued success will depend to a significant extent upon the efforts
and abilities of our executive officers and our ability to (i) retain them and
(ii) attract new, highly qualified executives. Although we believe that we
would be able to locate suitable replacements for our executives if their
services were lost, there can be no assurance we would be able to do so.
In addition, our future operating results will substantially depend upon
our ability to attract and retain highly qualified management, financial,
technical and administrative personnel. Competition for highly trained
technical personnel is intense. We cannot assure you that we will be able to
attract and retain the personnel necessary for the development of our business.
18
Rapid Technological Change Makes Our Success Unpredictable
The wireless telecommunications industry is characterized by rapid
technological change, new product introduction and evolving industry standards.
Our success will depend, in significant part, on our ability to make timely and
cost-effective enhancements and additions to our technology and introduce new
services that meet consumer demands. We expect new products and services, and
enhancements to existing products and services, will be developed and
introduced in order to compete with our services. We are in the process of
completing the development of technology that will permit us to market and
deliver our Wireless Voicemail System. The proliferation of new
telecommunications technologies may reduce demand for wireless voice messaging
products. There can be no assurance that we will have the financial resources
to or will be successful in developing and marketing new services or
enhancements to services that respond to these or other technological changes
or evolving industry standards. In addition, we may experience difficulties
that could delay or prevent the successful development, introduction and
marketing of our existing services, or our new services or enhancements may not
adequately meet the requirements of the marketplace and achieve market
acceptance. Delay in the introduction of new services or enhancements, our
inability to develop new services or enhancements or the failure of such
services or enhancements to achieve market acceptance could have a material
adverse effect on our business, financial condition and results of operations.
We Are Subject to Uncertain Government Regulation
We are subject to varying degrees of foreign, federal, state and local
rules and regulations. The rules and regulations could change at any time in
an unpredictable manner, which could have a material impact on our activities
and our operating results. Our wireless voice messaging technology utilizes
FM-SCA channels available on nearly all FM radio stations worldwide. In the
United States, the FCC considers FM-SCA channels to be part of the total FM
frequency allocated to a radio station and therefore regulates only the FM
licensee, and does not require a separate license for the contractual use of
FM-SCA channels. There can be no assurance that Congress, the FCC, state
regulatory agencies, foreign governments or supranational bodies will not in
the future require us to obtain a license to operate our business or impose
other requirements on radio stations that may limit our ability to operate.
Regulators in most of the foreign markets we plan to enter may take a similar
position in their countries to that of the FCC regarding the licensing and
regulation of FM-SCA channels. There can be no assurance that foreign
regulatory agencies will allow us to operate our services.
Legal Disputes May Affect Our Financial Position and the Price of Our Common
Stock
As further described above under Item 3 "Legal Proceedings," we are involved in
several significant legal disputes any one of which, if resolved unfavorably to
us, would have a negative effect on our financial position.
Operating Internationally May Expose Us to Additional and Unpredictable Risks
We have established a joint venture in Italy to market our technology, and
we intend to enter other international markets as well. International
operations are subject to inherent risks, including:
19
- potentially weaker intellectual property rights;
- difficulties in obtaining foreign licenses;
- changes in regulatory requirements;
- political instability;
- unexpected changes in regulations and tariffs;
- fluctuations in exchange rates;
- varying tax consequences; and
- uncertain market acceptance and difficulties in marketing efforts due to
language and cultural differences.
Our Common Stock Is Illiquid
Our common stock is currently traded on the OTC Bulletin Board and, as
such, our common stock is relatively illiquid. There can be no assurance that
an active public trading market for our common stock will be sustained.
Possible Depressive Effect of Future Sales of Common Stock Subject to Rule 144
As of September 10, 2001, we had 38,529,565 shares of common stock
outstanding. Approximately 87% of our common stock is freely tradable without
restriction under the Securities Act of 1933, as amended, subject to the lock-
up restrictions on transfer referred to below. The remaining 13% of our common
stock was issued by us in private transactions. Such shares are treated as
"restricted securities" as defined under the Securities Act. Restricted
securities may be sold in compliance with Rule 144 under the Securities Act or
pursuant to a registration statement filed under the Securities Act. Rule 144
generally provides that a person holding restricted securities for a period of
one year may sell every three months in brokerage transactions or market-maker
transactions an amount equal to the greater of (1) one percent (1%) of our
issued and outstanding common stock or (2) the average weekly trading volume of
the common stock during the four calendar weeks prior to such sale. Rule 144
also permits, under certain circumstances, the sale of shares without any
quantity limitation by a person who is not an affiliate of Clariti and who has
satisfied a two-year holding period. The sale of substantial numbers of such
shares, whether pursuant to Rule 144 or pursuant to a registration statement,
may have a depressive effect on the market price of our common stock.
As of September 10, 2001, 15,553,584 shares, or 40% of our common stock,
were subject to lock-up agreements. The parties to the lock-up agreements are
not permitted to sell their shares until the expiration of the lock-up period
without our prior consent. Current lock-up agreements have expiration dates
in December 2001 and March 2002. The expiration of a particular lock-up period
could have a depressive effect on the market price of our common stock.
Future Issuances of Preferred Stock May Dilute the Rights of Common
Stockholders
Our Board of Directors has the authority to issue up to two million shares
of a new series of preferred stock and to determine the price, privileges and
other terms of such shares. The Board may exercise this authority without the
approval of the stockholders. The rights of the holders of common stock may be
adversely affected by the rights of the holders of any preferred stock that may
be issued in the future. In addition, the issuance of preferred stock may make
it more difficult for a third party to acquire control of Clariti.
20
SPECIFIC RISKS ASSOCIATED WITH OUR WIRELESS PRODUCTS AND SERVICES
Consumers May Not Accept our Wireless Voicemail System
The acceptance of our Wireless Voicemail system is a key element to
our success and profitability. As with all new products, there is a risk that
consumers may not accept our product. We may not be able to demonstrate the
benefits of our product to consumers to sufficiently convince them to purchase
our system. The development of new voicemail services is evolving and
highly competitive. Other companies may develop products in response to
technological changes that make our system noncompetitive, especially if the
development, introduction and marketing of our product is delayed.
We May Not Be Able to Complete Development of Our Wireless Voicemail System or
Other Wireless Products and Services
Although we have tested a prototype of our digital Wireless Voicemail
System in selected areas, we may not be able to successfully develop a
commercially viable production model. During the last fiscal year, we
implemented a limited scope test launch of our Wireless Voicemail service in
Jacksonville, Florida. The test launch consisted of the sale of approximately
50 Vocas(TM) to third party consumers who used the service in their daily
lives. The Company has been evaluating and utilizing the information obtained
in the limited scope test in the technology development process. New product
development efforts are subject to many inherent risks, including unanticipated
delays, expenses, market acceptance, technical problems or difficulties, as
well as possible insufficiency of funding to complete development. We cannot
be certain when our Wireless Voicemail System will be completed, that our
products can be developed within a reasonable development schedule, if at all,
or that they can be produced at a reasonable cost.
We Will Be Dependent Upon Other Companies to Manufacture Our Wireless Products
and Services
We plan to license other companies to manufacture our products, including
Vocas(TM), SCA generators and related components. We will depend on the
ability of other companies to engineer, develop, manufacture and assemble
certain components of our system in accordance with our specifications. These
companies may be unable to meet our specifications or may experience delays in
delivering our products to us.
Such manufacturers must acquire the component parts of our products from
other companies. Periodically, worldwide demand for and production of wireless
devices were greater than manufacturers and component suppliers had
anticipated. As a result, there have been shortages of certain types of
components used in manufacturing wireless devices, including some of those used
in our Voca(TM) and SCA generator. If such component suppliers are unable to
meet industry demand for certain components and thus experience delays in
delivering components and/or manufacturers of components parts may discontinue
operations or manufacturing, our business would be adversely affected.
We May Be Dependent Upon Third Parties to Market and Distribute Our Wireless
Products and Services
We intend to enter agreements with third parties to market and distribute
our wireless products. The success of our wireless products and services will
21
depend upon our ability to seek out partners who are experienced with marketing
and distributing wireless products in their respective geographic areas. We
have executed a Memorandum of Understanding with Albacom SpA, the Italian
telecommunications provider for businesses, to explore the potential for
integrating Clariti's wireless technology and products into Albacom's services
portfolio in Italy and other European countries. We will need additional
arrangements to distribute our wireless voicemail system. We may not be able
to maintain our arrangement with Albacom or enter into additional distribution
arrangements. In addition, we have little control over the resources that our
partners will devote to marketing our system.
We May Be Dependent Upon Third Parties To Provide FM-SCA Channels in Areas in
Which We Intend to Operate Our Wireless Services
In markets where we intend to distribute and operate our wireless
services, we will be required to enter into contractual arrangements
with FM radio stations in order to secure the use of FM radio subcarrier
frequencies to operate our wireless system. RadioNet Italia, our joint venture
with the Pasubio Group in Italy, has entered a contract with Centro di
Produzione SpA (also known as "Radio Radicale"), whose FM radio station network
covers approximately 95% of Italy, to use their FM-SCA channels in exchange for
a percentage of RadioNet Italia's revenues. We will need additional
arrangements in other countries to operate our wireless systems. We may not be
able to enter into these arrangements or we may not be able to obtain
sufficient radio frequency coverage in our target market. In addition, FM
radio station owners may develop other uses for their subcarrier frequencies
which would limit our ability to enter into these arrangements. If we are
unable to enter into arrangements with a significant number of FM radio
stations, or to do so on economically advantageous terms, our ability to
commercialize our wireless products and services and our profitability, if any,
will be limited.
We Have Limited Protection of Proprietary Rights and Technology
Our intellectual property rights include patents, copyrights, trade
secrets, trademarks and exclusive and non-exclusive licenses. We have been
granted a U.S. patent dealing with FM Subcarrier Digital Voice Paging. Patents
on this invention have also been granted in South Africa and Taiwan and are
pending in 10 additional countries. We have also filed for patent protection in
the United States and multiple foreign countries on a number of additional
inventions. During the past fiscal year, the Company has filed patent
applications in the United States and multiple foreign countries on a number of
additional patents. The Company has two pending patent applications for the
protection of its proprietary wireless protocol and pending patent applications
for a unique interference-reduction technique, an improved message quality
estimator, the Voca(TM) antenna shield, and other Voca(TM) performance-
enhancing features.
- aspects of our proprietary wireless protocol ClariCast(TM);
- a unique interference-reduction technique;
- the overall design of our wireless voicemail player;
- the Voca(TM) antenna shield; and
- other Voca(TM) performance-enhancing features.
22
We cannot be certain that any patent applications will result in the
issuance of a patent or that our patents will withstand any challenges by third
parties.
We Face Risks of Infringement Claims
We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others, even though we take steps to
assure that neither our employees nor our contractors knowingly incorporate
unlicensed copyrights or trade secrets into our products. It is possible that
third parties may claim that our current or future products may infringe upon
their patent, copyright, trademark or trade secret rights. Any such claims,
regardless of their merit, could be time consuming, expensive, cause delays in
introducing new or improved products or services, require us to enter into
royalty or licensing agreements or require us to stop using the challenged
intellectual property. Successful infringement claims against us may
materially disrupt the conduct of our business or affect profitability. There
are currently no legal proceedings or claims for infringement of intellectual
property rights pending against us.
Unauthorized Use of Our Intellectual Property and Trade Secrets May Affect our
Market Share and Profitability
We rely on our patents, copyrights, trademarks, trade secrets, know how
and continuing technological advancement to establish a competitive position in
the marketplace. We attempt to protect our proprietary technology through an
employee handbook and agreements with our employees. Other companies may
independently develop or otherwise acquire similar technology or gain access to
our proprietary technology. Despite our precautions, there can be no assurance
that we will be able to adequately protect our technology from competitors in
the future. The enforcement of patent rights often requires the institution of
litigation against infringers. This litigation is often costly and time
consuming.
ANALYSIS OF THE BUSINESS
------------------------
The following discussion should be read in conjunction with the
Company's 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 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. Further description of the
Wireless Datacasting business and its operations is included above under Item
1, Business.
23
Results of Operations
---------------------
During the period from December 1998 to May 2001, several of our former
subsidiaries were providers of wire-line telecommunication services through
their interests in several businesses with operations in the United States,
United Kingdom, Europe and Australia. We previously referred to these
operations as our Telephony/Internet Services business segment. We have
divested substantially all of our interests in the Telephony/Internet Services
business segment, representing the disposal of a business segment under
Accounting Principals Board Opinion No. 30. Accordingly, our financial
statements have been restated to conform to discontinued operations treatment
for all periods presented.
Year Ended June 30, 2001 (Fiscal 2001)
vs. Year Ended June 30, 2000 (Fiscal 2000)
------------------------------------------
For Fiscal 2001, we incurred a net loss of $21,581,000 ($0.60 per share)
on no revenue compared to a net loss of $4,872,000 ($0.14 per share)
on no revenue for Fiscal 2000. Excluding discontinued operations, we incurred a
net loss of $15,255,000 ($0.43 per share) in Fiscal 2001 compared to a net loss
of $16,364,000 ($0.49 per share) for Fiscal 2000. The $1,109,000 reduction in
loss from continuing operations was primarily due to lower general and
administrative expenses partially offset by higher marketing and research and
development expenses.
General and administrative expenses were $9,471,000 in Fiscal 2001 as
compared to $12,146,000 in Fiscal, 2000, a decrease of $2,675,000. This
decrease resulted from a $3,919,000 reduction in the fair market value of
common stock warrants issued as compensation to various consultants for
assisting us in our efforts to raise additional capital to fund our operations.
Partially offsetting this decrease were higher staff levels and associated
costs for back office operations and systems development incurred in our
Wireless headquarters to support the launch of our Wireless Voicemail System in
Jacksonville, Florida and in the future, Milan, Italy. By the end of Fiscal
2001, our severe cash shortage forced us to lay off most of our Wireless
network engineering, marketing and administrative staff and relocate its group
headquarters from Fort Washington, Pennsylvania to Philadelphia.
Marketing expenses increased from $247,000 in Fiscal 2000 to $1,044,000 in
Fiscal 2001 as we expanded our marketing staff and activities for the launch of
our Wireless Voicemail service in Jacksonville, Florida and in the future,
Milan, Italy. Research and development expenses increased $550,000, from
$4,161,000 in Fiscal 2000 to $4,711,000 in Fiscal 2001 primarily due to due to
continued acceleration of development work on our Wireless Voicemail System and
additional applications of our ClariCAST(TM) technology. Included in the
Fiscal 2000 R&D expense amount is $950,000 for the purchase from a third party
engineering contractor of all the technology and related designs, schematics
and know-how for one of the key components of our ClariCAST(TM) technology. By
the end of Fiscal 2001, we reduced both marketing and R&D expenditure rates to
minimal levels as a result of our severe cash shortage. See Capital Resources
and Liquidity.
Our results of operations for all fiscal years presented reflect our
former business segment, Telephony/Internet Services, as discontinued
operations. In Fiscal 2001 when we divested a substantial portion of such
24
businesses, we recognized a loss from discontinued operations of $6,519,000 as
compared to income of $12,254,000 from discontinued operations in Fiscal 2000.
As of June 30, 1999, we had written off all assets related to certain
subsidiaries of the UK Telecommunications Group and had accrued for all of
their estimated losses from operations up to October 11, 1999, the date these
companies filed for voluntary liquidation. The liquidation proceedings
subsequently discharged all of their liabilities, and as a result we recognized
a gain of $33,502,000 on the discharge of such indebtedness in Fiscal 2000.
Partially offsetting this gain in Fiscal 2000 was a write-off of $10,441,000 of
goodwill related to the acquisition of MegaHertz-NKO, Inc. Excluding these
unusual items, results of discontinued operations in Fiscal 2000 reflected a
loss of $10,807,000 as compared to a loss of $6,519,000 in Fiscal 2001. The
$4,288,000 decline in the amount of such operating losses principally results
from 12 months of operations in Fiscal 2000 as compared to 10 months or less of
operations in Fiscal 2001. In Fiscal 2001, results of disposal of discontinued
operations reflected an adjustment to goodwill of $2,909,000 because 245,000
shares of our common stock previously considered issued and outstanding were
retired as a result of the divestment of MegaHertz-NKO, Inc. This adjustment
was partially offset by losses of $1,054,000 and 1,185,000 on the divestments
of certain of our UK operating net assets and a 91% interest in NKA
Communications Pty. Ltd., respectively. In Fiscal 2000, we incurred a $762,000
loss on the sale of certain assets of the UK operations remaining after the
liquidation proceedings described above.
Year Ended June 30, 2000 (Fiscal 2000)
vs. Year Ended June 30, 1999 (Fiscal 1999)
------------------------------------------
For Fiscal 2000, we incurred a net loss of $4,872,000 ($0.14 per share) on
no revenue compared to a net loss of $220,412,000 ($11.86 per share) on no
revenue for Fiscal 1999. Excluding discontinued operations, we incurred a net
loss of $16,364,000 ($0.49 per share) in Fiscal 2000 compared to a net loss of
$8,978,000 ($0.48 per share) for Fiscal 1999. The $7,386,000 increase in loss
from continuing operations was primarily due to higher general and
administrative expenses and higher research and development expenses.
General and administrative expenses increased $5,391,000, from $6,755,000
in Fiscal 1999 to $12,146,000 in Fiscal 2000. This increase resulted from the
recognition of $5,509,000 in the fair market value of common stock warrants
issued as compensation to various consultants for assisting us in our efforts
to raise additional capital to fund our operations. Research and development
expenses increased $1,696,000, from $2,465,000 in Fiscal 1999 to $4,161,000 in
Fiscal 2000 due to continued acceleration of development work on our Wireless
Voicemail System. Included in the Fiscal 2000 R&D expense amount is $950,000
for the purchase from a third party engineering contractor of all the
technology and related designs, schematics and know-how for one of the key
components of our ClariCAST(TM) technology.
Our results of operations for all fiscal years presented reflect our
former business segment, Telephony/Internet Services, as discontinued
operations. In Fiscal 2000 we recognized income from discontinued operations
of $12,254,000 as compared to a loss of $211,434,000 from discontinued
operations in Fiscal 1999. The Fiscal 1999 loss resulted from a $152,214,000
write-off of goodwill from the acquisitions of the UK Telecommunications Group
companies and $59,220,000 in operating losses incurred by the UK
Telecommunications Group. As of June 30, 1999, we had written off all assets
25
related to certain subsidiaries of the UK Telecommunications Group and had
accrued for all of their estimated losses from operations up to October 11,
1999, the date these companies filed for voluntary liquidation. The
liquidation proceedings subsequently discharged all of their liabilities, and
as a result we recognized a gain of $33,502,000 on the discharge of such
indebtedness in Fiscal 2000. Partially offsetting this gain in Fiscal 2000 was
a write-off of $10,441,000 of goodwill related to the acquisition of MegaHertz-
NKO, Inc. Excluding these unusual items, results of discontinued operations in
Fiscal 2000 reflected a loss of $10,807,000 from the combined operations of
MegaHertz-NKO, Inc. in Fiscal 2000 and NKA Communications Pty. Ltd. and Tekbilt
World Communications, Inc. from their respective acquisition dates in October
and December 1999. In Fiscal 2000, we also incurred a $762,000 loss on the
sale of certain assets of the UK operations remaining after the liquidation
proceedings described above.
Liquidity and Capital Resources
-------------------------------
At June 30, 2001, we had a working capital deficit of $2,954,000
(including a cash balance of $124,000) as compared to working capital of
$13,007,000 (including a cash balance of $13,752,000) at June 30, 2000. The
working capital decrease of $15,961,000 is primarily due to use of cash in
continuing operations, investments made in discontinued operations, $813,000 of
short-term borrowings made during Fiscal 2001, and a $1,491,000 million
increase in accounts payable caused by our cash shortage.
We have historically relied principally on equity financing to meet our
cash requirements. Adverse market conditions for telecommunications companies
during Fiscal 2001 have made it extremely difficult for us to raise additional
equity financing. We have substantially exhausted our cash reserves, we have
no credit lines, and we have no firm commitments for near-term funding.
Substantially all of our assets have been pledged as collateral for a short-
term loan, which is in default because we do not have the funds to repay it.
These matters raise substantial doubt about our ability to continue as a going
concern. We are considering methods to restructure and/or reorganize our
obligations.
In May and June 2001, we obtained limited short-term debt financing in
order to continue operating, including a $750,000 secured loan from a related
party. The $750,000 loan is secured by substantially all of our assets. The
due date for repayment of the loan has already passed and the lender has
notified us that we are in default of the loan agreement. If we were unable to
repay the loan on demand by the lender, the lender could foreclose on the
collateral described above. The lender has not yet made demand for immediate
payment.
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 $0.08 per share on September 10, 2001,
resulting in a reduction of our market capitalization from $187.7 million to
$3.1 million. As a result of this decline, our common stock was moved from
being listed on the Nasdaq SmallCap Stock Market to the OTC Bulletin Board
effective September 11, 2001. If we are able to obtain additional equity
investments sufficient to continue our operations through the next fiscal year
end (at least $3 million), the low level of our stock price will cause
substantial dilution of the stock held by existing shareholders.
26
We have chosen to focus our future efforts on development and
commercialization of our patented ClariCAST(TM) wireless datacasting
technology. Because our technology is still under development, we expect no
revenues or positive operating cash flow in the near term. Future cash
expenditure requirements have been significantly reduced through the
discontinuance of the Telephony/Internet Services businesses and through major
reductions in wireless technology development and corporate overhead expenses.
We are actively pursuing opportunities to secure additional financing
which, if obtained, is expected to be sufficient to repay short-term borrowings
and meet operating cash requirements through most of the next fiscal year.
There can be no assurances that such funding will be generated or available, or
if available, on terms acceptable to us. Failure to secure additional financing
will have a material adverse impact on our business.
Significant additional funding will be required beyond 2001 to launch
the Wireless Voicemail 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business does not bear significant exposures to the market
risks described in Item 305 of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1. Such consolidated financial
statements are hereby incorporated by reference into this Item 8.
27
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
------------
A. Independent Auditor's Report F-1
B. Consolidated Balance Sheets at June 30, 2001 and
2000 F-2 to F-3
C. Consolidated Statements of Operations for the
years ended June 30, 2001, 2000 and 1999 F-4
D. Consolidated Statement of Stockholders' Equity
for the years ended June 30, 2001, 2000 and 1999 F-5 to F-6
G. Consolidated Statements of Cash Flows for the
years ended June 30, 2001, 2000 and 1999 F-7 to F-8
H. Notes to Consolidated Financial Statements F-9 to F-23
28
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Clariti Telecommunications International, Ltd.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Clariti
Telecommunications International, Ltd. and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period
ended June 30, 2001. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Clariti Telecommunications International, Ltd. and subsidiaries as of June 30,
2001 and 2000, and the results of their consolidated operations and cash flows
for each of the three years in the period ended June 30, 2001, in conformity
with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 3, the
Company is currently developing technology, has not received any revenue from
operations and has a working capital deficit. These factors raise substantial
doubt about the entity's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
s/ COGEN SKLAR LLP
------------------
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
September 14, 2001
F-1
PART I. - FINANCIAL STATEMENTS.
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 and 2000
(Dollars and Shares in Thousands)
June 30
June 30 2000
2001 (Note 4)
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 124 $ 13,752
Inventory 107 -
Prepaid expenses and other current assets 105 78
--------- ---------
336 13,830
PROPERTY AND EQUIPMENT, NET 814 930
INTANGIBLE ASSETS, NET 148 222
NET ASSETS OF DISCONTINUED OPERATIONS - 7,645
--------- ---------
TOTAL ASSETS $ 1,298 $ 22,627
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 1,828 $ 337
Accrued expenses and other current liabilities 637 486
Short-term borrowings from related party 762 -
Convertible short-term borrowings 63 -
--------- ---------
3,290 823
--------- ---------
COMMITMENTS AND CONTINGENCIES
F-2
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 and 2000
(Dollars and Shares in Thousands)
June 30
June 30 2000
2001 (Note 4)
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
$.001 par value; authorized 300,000 shares;
issued and outstanding, 35,380 shares at
June 30, 2001 and 35,836 shares at June 30, 2000 35 36
WARRANTS OUTSTANDING, NET 9,865 14,062
ADDITIONAL PAID-IN-CAPITAL 266,626 264,643
ACCUMULATED DEFICIT (278,518) (256,937)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ( 1,992) 21,804
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,298 $ 22,627
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars and Shares in Thousands, Except Per Share Amounts)
Fiscal Fiscal
Fiscal 2000 1999
2001 (Note 4) (Note 4)
--------- --------- ---------
REVENUE $ - $ - $ -
COST OF REVENUE - - -
--------- --------- ---------
GROSS PROFIT - - -
Marketing expenses 1,044 247 10
Research and development expenses 4,711 4,161 2,465
Depreciation and amortization expenses 379 240 144
General and administrative expenses,
including non-cash consulting fees of
$1,590, $5,509 and $-0- in Fiscal
2001, 2000 and 1999, respectively 9,471 12,146 6,755
--------- --------- ---------
LOSS FROM OPERATIONS ( 15,605) ( 16,794) ( 9,374)
--------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income 363 475 441
Interest expense ( 13) ( 45) ( 45)
--------- --------- ---------
350 430 396
--------- --------- ---------
NET LOSS FROM CONTINUING OPERATIONS ( 15,255) ( 16,364) ( 8,978)
DISCONTINUED OPERATIONS
Net income (loss) from operations ( 6,519) 12,254 (211,434)
Gain (loss) on disposal 193 ( 762) -
--------- --------- ---------
NET LOSS $( 21,581) $( 4,872) $(220,412)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 35,740 33,599 18,580
BASIC AND DILUTED LOSS PER COMMON SHARE
Net loss from continuing operations $( 0.43) $( 0.49) $( 0.48)
Discontinued operations:
Net income (loss) from operations ( 0.18) 0.37 ( 11.38)
Gain (loss) on disposal 0.01 ( 0.02) -
--------- --------- ---------
Net loss $( 0.60) $( 0.14) $( 11.86)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(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, 1998 5,924 $ 6 $ 1,843 $ 31,384 $( 31,653)
Year ended June 30, 1999:
Common stock issued for
cash 3,492 4 - 25,096 -
Commission on issuance
of common stock - - - ( 967) -
Common stock issued for:
Acq. of GlobalFirst 19,143 19 - 117,052 -
Acq. of MegaHertz-NKO 1,125 1 - 13,299 -
Security for unconsol-
idated subsidiaries'
potential liability
to Frontier 1,250 1 - 11,249 -
Commission on sale of
common stock 52 - - - -
Expenses and accrued
liabilities 3 - - 30 -
Sale of Telnet - - - 31,050 -
Warrants issued - - 615 - -
Warrants exercised 75 - ( 136) 511 -
Net loss - - - - (220,412)
------ ---- -------- --------- ---------
BALANCES, JUNE 30, 1999 31,059 $ 31 $ 2,322 $ 228,704 $(252,065)
Year ended June 30, 2000:
Common stock issued for
cash 3,914 4 - 36,184 -
Commission on issuance
of common stock - - - ( 3,815) -
Common stock issued for:
Settlement of loan
payable 125 - - 1,000 -
Acquisition of NKA 287 - - 3,554 -
Acquisition of TWC 323 1 - 2,907 -
Settlement of MegaHertz
-NKO escrow agreement 128 - - 701 -
Common stock warrants
issued, net of unearned
consulting fees of $483 - - 11,852 ( 6,785) -
Warrants expired - - ( 112) 112 -
Capitalization of note
payable to related party - - - 2,081 -
Net loss - - - - ( 4,872)
------ ---- -------- --------- ---------
BALANCES, JUNE 30, 2000 35,836 $ 36 $ 14,062 $ 264,643 $(256,937)
F-5
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(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, 2000 35,836 $ 36 $ 14,062 $ 264,643 $(256,937)
Year ended June 30, 2001:
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 consider-
ation for sale of NKA ( 277) - - ( 1,143) -
Common stock returned to
the Company as consider-
ation for sale of UK
operating assets ( 71) - - ( 98) -
Common stock retired as
a result of the divest-
ment of MegaHertz-NKO ( 245) ( 1) - ( 2,909) -
Common stock warrants
issued, net of unearned
consulting fees of $213 - - 1,377 483 -
Common stock warrants
expired - - ( 5,574) 5,574 -
Common stock options
issued at exercise
prices below market
value - - - 99 -
Net loss - - - - ( 21,581)
------ ---- -------- --------- ----------
BALANCES, JUNE 30, 2001 35,380 $ 35 $ 9,865 $ 266,626 $( 278,518)
====== ==== ======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in Thousands)
Fiscal Fiscal
Fiscal 2000 1999
2001 (Note 4) (Note 4)
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(21,581) $( 4,872) $(220,412)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Loss (gain) from discontinued operations 6,326 (11,492) 211,434
Depreciation and amortization 379 240 144
Issuance of common stock warrants for
general and administrative expenses 1,968 6,502 -
Other 122 ( 720) 645
Change in assets and liabilities which
increase (decrease) cash:
Trade accounts receivable - - 24
Inventory ( 107) - -
Prepaid expenses and other current
assets ( 27) ( 519) 237
Accounts payable 1,491 ( 471) 346
Accrued expenses and other current
liabilities 151 ( 27) 296
--------- --------- ---------
Net cash used in operating activities (11,278) (11,359) ( 7,286)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in discontinued operations ( 2,967) ( 9,852) ( 15,145)
Cash proceeds from sale of UK
operating assets 227 - -
Investment in long-lived assets ( 423) ( 656) ( 222)
--------- --------- ---------
Net cash used in investing activities ( 3,163) (10,508) ( 15,367)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 813 - -
Sale of common stock for cash - 36,188 26,475
Commission on sale of common stock - ( 3,815) ( 967)
Principal payment on note payable - - ( 1,000)
--------- --------- ---------
Net cash received from financing
activities 813 32,373 24,508
--------- --------- ---------
NET CHANGE IN CASH AND EQUIVALENTS ( 13,628) 10,506 1,855
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 13,752 3,246 1,391
--------- --------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 124 $ 13,752 $ 3,246
========= ========= =========
F-7
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in Thousands)
Fiscal Fiscal
Fiscal 2000 1999
2001 (Note 4) (Note 4)
--------- --------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest $ - $ - $ -
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 retired as a result of
the divestment of MegaHertz-NKO $ 2,909 $ - $ -
Common stock issued as consideration
for acquisitions of NKA Communications
and Tekbilt World Communications $ - $ 6,462 $ -
Capitalization of note payable to
related party $ - $ 2,000 $ -
Issuance of common stock in settlement
of loan payable $ - $ 1,000 $ -
Issuance of common stock warrants for
unearned consulting fees $ - $ 483 $ -
Common stock issued as security for
Discontinued operations' potential
liability to Frontier Corp. $ - $ - $ 11,250
Note receivable received as payment for
the sale of Telnet $ - $ - $ 21,000
Cancellation of note receivable as
partial consideration for acquisition
of Mediatel $ - $ - $ 21,000
Note payable issued as partial
consideration for acquisition of
Mediatel $ - $ - $ 3,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
NOTE 1 - HISTORY AND NATURE OF THE BUSINESS
Clariti Telecommunications International, Ltd. ("Clariti" or the "Company") is
an international wireless communications technology company with proprietary
technology for transmitting data, including digital voice messages, utilizing
radio frequencies transmitted by FM radio stations.
The Company was originally formed in February 1988 as the successor to a music
and recording studio business owned and operated by the Company's current
CEO and President. In 1995, the Company began shifting its focus to development
and commercialization of its wireless technology and no longer has a
significant interest in the music and recording studio business.
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 Fiscal 2001, the Company discontinued
its wire-line telecommunication operations (see Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year End
---------------
The Company has a fiscal year ending on June 30. In these financial
statements, the twelve month periods ended June 30, 2001, 2000 and 1999 are
referred to as Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries not deemed to be discontinued operations (see
Note 4). All significant intercompany transactions have been eliminated in
consolidation.
Cash Equivalents
----------------
The Company considers certificates of deposit, money market funds and all other
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Concentration of Credit Risk
----------------------------
Certain financial instruments potentially subject the Company to concentrations
of credit risk. These financial instruments consist primarily of cash and
equivalents. The Company places its temporary cash investments with high
credit quality financial institutions to limit its credit exposure.
F-9
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates based on management's
knowledge and experience. Accordingly actual results may differ from those
estimates.
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 June 30, 2001 and 2000, approximate
their fair value because of their short maturities.
Inventory
---------
Inventory is stated at the lower of cost or market determined on a first-in,
first-out basis and consists of component parts for the Voca(TM), the Company's
wireless voicemail product currently in the final stages of development.
Property and Equipment
----------------------
Property and equipment are recorded at cost, and are depreciated primarily
using the declining balance and straight line methods over estimated useful
lives of 3 to 10 years.
Intangible Assets
-----------------
The Company's intangible assets consist principally of capitalized costs
related to its patents and technology. The Company has filed patent
applications for its wireless messaging technology (trademarked as
ClariCAST(TM)) in the United States and numerous foreign countries. The
capitalized patent and technology costs are amortized on a straight-line basis
over a 5-year period. Amortization recognized was $74,000, $86,000 and $67,000
in Fiscal 2001, 2000 and 1999, respectively. Accumulated amortization was
$302,000 and $222,000 at June 30, 2001 and 2000, respectively.
Research and Development Expenses
---------------------------------
Research and development expenditures, which are expensed as incurred, totaled
$4,711,000, $4,161,000 and $2,465,000 during Fiscal 2001, Fiscal 2000 and
Fiscal 1999, respectively.
F-10
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
------------
The Company has adopted FASB Statement No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for temporary differences between financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Comprehensive Income
--------------------
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. This
statement establishes rules for the reporting of comprehensive income and its
components. The Company has no components of comprehensive income.
Net Loss Per Common Share
-------------------------
The Company has adopted FASB Statement 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. Under
FASB Statement 128, net loss per common share is based upon the weighted
average number of common shares outstanding during the period. Net loss per
common share after the assumed conversion of potential common shares (warrants,
stock options and convertible debt) was not presented because the effect of
such conversions would be antidilutive.
Accounting for Stock-Based Compensation
---------------------------------------
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the stock
on the date of the grant over the amount the employee is required to pay to
acquire the stock (the intrinsic value method under APB Opinion 25). Such
amount, if any, is accrued over the related vesting period, as appropriate.
The Company has adopted FASB Statement 123, "Accounting for Stock-Based
Compensation," which encourages employers to account for stock-based
compensation awards based on their fair value on their date of grant. The fair
value method was used to value common stock warrants issued in transactions
with other than employees during the periods presented. Entities may choose
not to apply the new accounting method for options issued to employees but
instead, disclose in the notes to the financial statements the pro forma
effects on net income and earnings per share as if the new method had been
applied. The Company has adopted the disclosure-only approach to FASB
Statement 123 for options issued to employees. See Note 10.
F-11
CLARITI TELECOMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
NOTE 3 - 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 experienced recurring net losses of $21,581,000, $4,872,000 and
$220,412,000 in Fiscal 2001, 2000 and 1999, respectively, or a total of
$246,865,000 over the 3-year period. $206,314,000 of such losses were incurred
in the Telephony/Internet Services business segment, which was discontinued in
Fiscal 2001.
The Company has historically reli