UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EAGLE WIRELESS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation or organization)
3663
(Primary Standard Industrial Classification Code Number)
76-0494995
(I.R.S. Employer Identification Number)
101 COURAGEOUS DRIVE, LEAGUE CITY, TEXAS 77573-3925
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Dr. H. Dean Cubley
President
101 Courageous Drive
League City, Texas 77573-3925
(281) 538-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
Richard O. Weed, Esq.
Weed & Co. L.P.
4695 MacArthur Ct., Suite 1450
Newport Beach, CA 92660
Telephone 949.475.9086
Facsimile 949.475.9087
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement is effective
and all other conditions of the transaction described in the proxy
statement/prospectus included in this registration statement have been satisfied
or waived.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
GENERAL INSTRUCTION G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to RULE 462(B) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______________
If this Form is a post-effective amendment filed pursuant to RULE 462(D)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
=========================================================================================
Title of each Proposed maximum Proposed maximum Amount of
class of securities Amount to be offering price aggregate offering registration
to be registered registered per unit price fee
=========================================================================================
$.001 par value
common stock 29,450,740(1) 3.1875(2) $93,874,233.75 $24,782.80
=========================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) of the Securities Act, based upon the average of the
high and low prices of common stock of Eagle Wireless International, Inc. on
November 3, 2000 of $3.1875.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said section
8(a), may determine.
The information in this joint proxy statement-prospectus is not complete and may
be changed. Eagle may not issue the common stock to be issued in connection with
the transactions described in this joint proxy statement-prospectus until the
registration statement filed with the Securities and Exchange Commission is
effective. This joint proxy statement-prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted. Any representation to the
contrary is a criminal offense.
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SUBJECT TO COMPLETION NOVEMBER 9, 2000.
TO THE STOCKHOLDERS OF EAGLE WIRELESS INTERNATIONAL, INC.
AND CLEARWORKS.NET, INC.:
Eagle Wireless International, Inc. and ClearWorks.net, Inc. have entered into an
Agreement and Plan of Reorganization dated September 15, 2000. Eagle will issue
0.8 shares of Eagle common stock for each share of ClearWorks. Further, Eagle
will assume all outstanding ClearWorks stock options and warrants based upon the
same 0.8 exchange ratio.
Eagle's common stock is traded on the American Stock Exchange under the symbol
"EAG." ClearWorks' shares are currently listed and traded on the American Stock
Exchange under the symbol "CLW." On November 3, 2000 the last reported sale
price for Eagle common stock was $3.187 per share. On November 3, 2000 the last
reported sale price for ClearWorks common stock was $2.375 per share. Following
the merger, Eagle's common stock will continue to be listed on the American
Stock Exchange under the symbol "EAG."
The merger is subject to Eagle's stockholders' approval of the proposed share
issuance in connection with the merger, and ClearWork's stockholders' approval
of the Merger Agreement. The board of directors of Eagle has approved the merger
and unanimously recommends that Eagle's stockholders vote in favor of the
merger. Likewise, the board of directors of ClearWorks has approved the merger
and unanimously recommends that ClearWorks' stockholders vote in favor of the
merger. THE BOARDS OF DIRECTORS OF BOTH EAGLE AND CLEARWORKS URGE YOU TO READ
THIS DOCUMENT, INCLUDING THE SECTION DESCRIBING THE RISK FACTORS THAT BEGINS ON
PAGE 11.
The date, times and places of the two special meetings are as follows:
For Eagle stockholders: For ClearWorks stockholders:
2:00 p.m. 10:00 a.m.
December 29, 2000 December 29, 2000
2500 South Shore Blvd. 2900 Briarpark Ave
League City, Texas 77573 Houston, Texas 77042
Your vote is very important, regardless of the number of shares you own. Whether
or not you plan to attend either special meeting, please vote as soon as
possible to make sure that your shares are represented at the meeting. The date
of this joint proxy statement/prospectus is ___________ __, 2000 and was first
mailed to Eagle and Clearworks stockholders on ________ ___, 2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER OR OF THE SECURITIES TO BE
ISSUED IN THE MERGER, OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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EAGLE WIRELESS INTERNATIONAL INC.
Notice of Special Meeting of Stockholders
To be Held December 29, 2000
To the stockholders:
We invite you to attend a special meeting of the stockholders of Eagle Wireless
International, Inc., which will be held at 2:00 p.m., Texas time on December 29,
2000 at 2500 South Shore Blvd., League City, Texas 77573.
At this meeting, you will be asked to consider and vote upon the following
proposals:
1. To authorize the proposed issuance of shares of Eagle common stock and
the assumption of stock options and warrants in connection with the Agreement
and Plan of Reorganization (the "Merger Agreement") between Eagle and
ClearWorks.net, Inc., a Delaware corporation.
2. To act upon such other matters as may properly come before the
meeting.
Only stockholders of record as of the date of this notice are entitled to
vote at this meeting and any adjournments thereof. You may revoke this proxy at
any time before the vote is taken by delivering to Eagle either a written
revocation or a later-dated proxy. You may also revoke your proxy orally at the
special meeting.
By order of the Board of Directors,
/s/ DR. H. DEAN CUBLEY
Dr. H Dean Cubley
THE ACCOMPANYING JOINT PROXY STATEMENT-PROSPECTUS INCLUDES A SUMMARY OF TERMS OF
THE MERGER AGREEMENT AND CERTAIN RELATED INFORMATION. WE ENCOURAGE YOU TO READ
THIS DOCUMENT CAREFULLY.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT, AND HAS DETERMINED THAT IT IS IN THE BEST
INTEREST OF EAGLE AND ITS STOCKHOLDERS FOR EAGLE TO ACQUIRE CLEARWORKS PURSUANT
TO THE TERMS OF THE MERGER AGREEMENT. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT, AND RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
If you have any questions in regard to the proposed transaction, please contact
Clareen O'Quinn, Investor Relations, Eagle Wireless International, Inc., 101
Courageous Drive, League City, Texas 77573.
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CLEARWORKS.NET, INC.
Notice of Special Meeting of Stockholders
To be Held December 29, 2000
To the stockholders:
We invite you to attend a special meeting of the stockholders of ClearWorks.net,
Inc., which will be held at 10:00 a.m., Texas time on December 29, 2000 at 2900
Briarpark Ave., Houston, Texas 77042.
At this meeting, you will be asked to consider and vote upon the following
proposals:
1. To approve the Agreement and Plan of Reorganization (the "Merger
Agreement") between Eagle Wireless International, Inc., a Texas corporation, and
ClearWorks.
2. To act upon such other matters as may properly come before the
meeting.
Only stockholders of record as of the date of this notice are entitled to vote
at this meeting and any adjournments thereof. You may revoke this proxy at any
time before the vote is taken by delivering to ClearWorks either a written
revocation or a later-dated proxy. You may also revoke your proxy orally at the
special meeting.
By order of the Board of Directors,
/s/ MICHAEL T. MCCLERE
Michael T. McClere
THE ACCOMPANYING JOINT PROXY STATEMENT-PROSPECTUS INCLUDES A SUMMARY OF TERMS OF
THE MERGER AGREEMENT AND CERTAIN RELATED INFORMATION. WE ENCOURAGE YOU TO READ
THIS DOCUMENT CAREFULLY.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT, AND HAS DETERMINED THAT IT IS IN THE BEST
INTEREST OF CLEARWORKS AND ITS STOCKHOLDERS TO APPROVE THE MERGER AGREEMENT.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, AND
RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
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Eagle Wireless International, Inc.
Shares of Common Stock
-----------------------
Joint Proxy Statement
For
Eagle Wireless International, Inc.
Special Meeting of Stockholders
To be held on December 29, 2000
And
ClearWorks.net, Inc.
Special Meeting of Stockholders
To be held on December 29, 2000
This joint proxy statement/prospectus relates to a proposed merger pursuant to
the terms of an Agreement and Plan of Reorganization dated September 15, 2000
between Eagle, Eagle Acquisition Corporation and ClearWorks. Under the Merger
Agreement, Eagle acquires 100% of the outstanding common stock of ClearWorks and
merges Eagle Acquisition Corporation, a wholly-owned subsidiary of Eagle, with
ClearWorks. Eagle will issue 0.8 shares of Eagle common stock for each share of
ClearWorks. Further, Eagle will assume all outstanding ClearWorks stock options
and warrants based upon the same 0.8 exchange ratio.
Eagle will pay the costs of registering the shares under this prospectus,
including legal fees.
An investment in Eagle common stock involves risks. See Risk Factors beginning
on page 11.
ADDITIONAL INFORMATION
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT EAGLE THAT IS NOT INCLUDED IN OR DELIVERED WITH THE
DOCUMENT; AND THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO SECURITY HOLDERS
UPON WRITTEN OR ORAL REQUEST. YOU MAY OBTAIN THIS INFORMATION BY WRITING TO
EAGLE WIRELESS INTERNATIONAL, INC., ATTENTION: INVESTOR RELATIONS, 101
COURAGEOUS DRIVE, LEAGUE CITY, TEXAS 77573 OR TELEPHONING EAGLE AT (281)
538-6000. TO OBTAIN TIMELY DELIVERY, SECURITY HOLDERS MUST REQUEST THE
INFORMATION NO LATER THAN DECEMBER 22, 2000.
The date of this joint proxy statement/prospectus is _____________ , 2000.
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NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY EAGLE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE HEREIN AT ITS DATE IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.......................................................... 8
The Companies............................................................. 8
The Merger Agreement...................................................... 8
Questions and Answers about the Merger.................................... 9
Risk Factors.............................................................. 11
Risk Factors Related to The Merger Agreement............................ 11
Risk Factors Relating to the Business of Eagle.......................... 12
Selected Historical Consolidated and Unaudited
Pro Forma Combined Financial Information................................ 17
Comparative Per Share Data................................................ 20
Comparative Market Price Information...................................... 21
Directors, Executive Officers and Their Affiliates........................ 23
Other Matters............................................................. 23
TERMS OF THE MERGER......................................................... 23
The Merger Agreement...................................................... 23
Differences in the Rights of Stockholders................................. 24
Federal Tax Consequences.................................................. 26
PRO FORMA FINANCIAL INFORMATION............................................. 26
MATERIAL CONTRACTS WITH CLEARWORKS.......................................... 32
INTERESTS OF NAMED EXPERTS AND COUNSEL...................................... 33
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES............................................ 33
INFORMATION ABOUT THE REGISTRANT............................................ 34
Eagle Wireless International, Inc......................................... 34
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 45
Description of Property................................................... 47
Legal Proceedings......................................................... 47
Market Price of and Dividends on Common Equity
and Related Stockholder Matters......................................... 48
INFORMATION ABOUT THE COMPANY BEING ACQUIRED................................ 49
ClearWorks.net, Inc....................................................... 49
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 60
Description of Property................................................... 67
Legal Proceedings......................................................... 68
Market Price of and Dividends on Common Equity
and Related Stockholder Matters......................................... 73
VOTING AND MANAGEMENT INFORMATION........................................... 74
Eagle Wireless International, Inc......................................... 74
ClearWorks.net............................................................ 79
INDEX TO FINANCIAL STATEMENTS............................................... F-1
Until ____, 2000 (25 days after the commencement of this offering), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
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PROSPECTUS SUMMARY
THE COMPANIES
EAGLE WIRELESS INTERNATIONAL, INC.
Eagle Wireless International, Inc. was incorporated in the state of Texas on May
24, 1993 and commenced business in April of 1996. Eagle and its subsidiaries,
BroadbandMagic.com, Atlanticpacific Communications, Inc., and etoolz, Inc. are
leading suppliers of cabling, multi-media set top devices, telecommunications
equipment and related software used by service providers in the messaging and
other wireless personal communications markets. Eagle designs, manufactures,
markets and services its products under the Eagle, BroadbandMagic.com, etoolz
and Atlanticpacific Communications, Inc. names. These products include cabling,
multi-media set top devices, transmitters, communication systems, including
messaging, voice messaging and mobile data systems, and radio telephone systems.
Eagle formed Eagle Acquisition Corporation to complete the merger with
ClearWorks.
Eagle is located at 101 Courageous Drive, League City, Texas 77573 and its phone
number is (281) 538-6000.
CLEARWORKS.NET, INC.
ClearWorks.net, Inc., a Delaware corporation, provides voice, data and video
transmission services to residential and commercial customers located primarily
in the Houston, Texas area. Its services consist of installing and maintaining
fiber optic cable and copper wire. ClearWorks then sells Internet access,
telephone service, and television programming over those lines. ClearWorks is
located at 2450 Fondren, Suite 200, Houston, Texas 77063 and its telephone
number is (713) 334-2595.
THE MERGER AGREEMENT
Eagle seeks to register 29,450,740 shares of Eagle common stock, $.001 par
value, in connection with an Agreement and Plan of Reorganization dated
September 15, 2000. As a result of the merger, stockholders of ClearWorks will
hold in the aggregate approximately 53% of the outstanding common stock of Eagle
following completion of the merger. In addition to the share issuance, Eagle
will assume all outstanding ClearWorks stock options and warrants based upon the
same 0.8 exchange ratio. As of November 1, 2000, ClearWorks had warrants to
purchase approximately 3,709,584 shares of ClearWorks common stock outstanding,
which would become options to purchase approximately 2,967,668 shares of Eagle
common stock after the merger.
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Registrar & Transfer Company will act as the exchange agent for the merger.
Terms of the Merger Agreement provide that ClearWorks will merge with Eagle
Acquisition Corporation, a Delaware corporation, and that all of ClearWorks'
public stockholders at the effective time of the merger will become public
stockholders of Eagle. It is anticipated that ClearWorks will continue to
function in most respects and perform the same services as is currently the
case. Eagle will pay all of its legal and accounting costs and the legal,
accounting and auditing cost necessary to prepare for the closing of the Merger
Agreement and this registration statement. ClearWorks will pay all of its
professional fees necessary to complete this transaction, including legal and
accounting fees incurred by ClearWorks in connection with the merger.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: As a Eagle stockholder, why am I being asked to approve the merger?
A: The Merger Agreement requires Eagle to issue approximately 29,450,740
additional shares of its common stock. The issuance of new shares will result in
a 53% increase in the number of outstanding shares of Eagle. Under the listing
standards, policies and requirements of the American Stock Exchange, Eagle
agreed to seek approval of its stockholders where the issuance of common stock
could result in an increase in Eagle's outstanding common shares of 20% or more.
Q: As a ClearWorks stockholder, why am I being asked to approve the merger?
A: Under the Merger Agreement, all shares of ClearWorks will be cancelled in
exchange for newly issued shares of Eagle. Delaware law requires the affirmative
vote of holders of a majority of the outstanding shares in order to approve the
merger.
Q: As a ClearWorks stockholder, what will I receive in the merger?
A: You will receive 0.8 of a share of Eagle common stock in exchange for each
share of common stock of ClearWorks that you hold. No fractional shares will be
issued. For example, if you own 100 shares of common stock of ClearWorks, you
will receive 80 shares of Eagle common stock on the date the merger becomes
effective in exchange for your shares of common stock of ClearWorks.
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Q: What will happen to the outstanding options to purchase shares of ClearWorks
common stock as a result of the merger?
A: Each outstanding option to purchase shares of ClearWorks common stock will
be assumed by Eagle. The number of shares of Eagle common stock issuable upon
the exercise of an assumed option will be equal to the number of shares of
ClearWorks common stock subject to the option multiplied by 0.8. The per share
exercise price of an assumed option will be determined by dividing the exercise
price of the option in effect immediately prior to the merger by 0.8. The
resulting exercise price will then be rounded up to the nearest whole cent. For
example, an option to purchase 100 shares of ClearWorks common stock at an
exercise price of $50.00 per share will become after the merger an option to
purchase 80 shares of Eagle common stock at an exercise price of $62.50 per
share.
Q: What are the tax consequences to me of the merger?
A: Eagle and ClearWorks have structured the merger so that for federal income
tax purposes, the ClearWorks stockholders will generally not recognize a gain or
a loss upon the receipt of the Eagle common stock in the merger, except with
respect to cash received in lieu of fractional shares. Please read carefully the
discussion of "Federal Income Tax Consequences" beginning on page 26 below.
Eagle and ClearWorks have conditioned the completion of the merger on receipt of
legal opinions regarding the tax consequences of the merger.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
document, please fill out, date and sign your proxy card. Then mail your signed
proxy card in the enclosed postage-prepaid return envelope as soon as possible
so that your shares may be represented at the special meeting.
Q: If my shares are held in "STREET NAME" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you instruct your broker on how to
vote. You should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes, you may revoke this proxy at any time before the vote is taken by
delivering to your respective company either a written revocation or a
later-dated proxy. You may also revoke your proxy orally at the special meeting.
Q: Should I send in my ClearWorks stock certificates now?
A: No. Eagle will send you written instructions on how to exchange your stock
certificates after the merger is completed.
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Q: If I hold ClearWorks stock options, do I have to do anything with my
options?
A: No. Options will be assumed as noted above and in accordance with the terms
of Merger Agreement.
Q: When do you expect the merger to be completed?
A: Assuming that Eagle and ClearWorks satisfy or waive all of the other
conditions to closing contained in the Merger Agreement, the merger will occur
as soon as practicable after receiving the required vote of the stockholders of
Eagle and ClearWorks.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. EAGLE'S BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED BY
ANY OF THE FOLLOWING RISKS. FURTHER, THERE MAY BE ADDITIONAL RISKS NOT KNOWN TO
EAGLE AT THIS TIME. THE TRADING PRICE OF SHARES OF EAGLE COMMON STOCK COULD
DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT. THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. EAGLE'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING THE RISKS FACED BY EAGLE DESCRIBED BELOW OR RISKS NOT
KNOWN TO IT AT THIS TIME.
RISK FACTORS RELATED TO MERGER AGREEMENT
FAILURE TO COMPLETE THE MERGER AGREEMENT COULD NEGATIVELY IMPACT EAGLE'S STOCK
PRICE AND FUTURE BUSINESS AND OPERATIONS. If the merger agreement is not
completed for any reason, Eagle may be subject to a number of material risks.
For example, the price of Eagle common stock may decline to the extent, if any,
that the current market price of Eagle common stock reflects an assumption by
investors that the merger agreement will be completed. Also, the costs incurred
by Eagle related to the merger agreement, including legal and accounting fees,
and a portion of financial advisor fees, must be paid even if the merger
agreement is not completed.
THERE MAY NOT BE A MARKET FOR EAGLE COMMON STOCK FOLLOWING THE COMPLETION OF
THIS MERGER AGREEMENT. Upon effectiveness of this registration statement, Eagle
shares will be registered under the Securities Act. However, there can be no
assurance as to the liquidity of any market for the Eagle shares that may
develop, your ability to sell the Eagle shares or the price at which you will be
able to sell your shares.
IF EAGLE CANNOT SUCCESSFULLY INTEGRATE CLEARWORKS AND ITSELF, THE ANTICIPATED
ADVANTAGES OF THE BUSINESS COMBINATION BETWEEN EAGLE AND CLEARWORKS MAY NOT BE
REALIZED, IN FULL, IF AT ALL. The integration of ClearWorks and its subsidiaries
into Eagle will require the dedication of Eagle management resources. This may
distract management's attention from management of the day to day business of
Eagle. Retention of key employees by Eagle and the combined company of
ClearWorks and its subsidiaries and Eagle has been, and will remain critical to
ensure continued advancement, development and support of the companies'
technologies, and ongoing sales and market efforts. The inability to retain key
technical, sales or marketing personnel after the merger would adversely effect
the combined company's business.
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UNCERTAINTIES ASSOCIATED WITH THE MERGER AGREEMENT MAY CAUSE EAGLE AND
CLEARWORKS TO LOSE KEY PERSONNEL. Current and prospective Eagle and ClearWorks
employees may experience uncertainty about their future roles with Eagle or the
combined company. This uncertainty may adversely affect Eagle and ClearWorks'
ability to attract and retain key management, sales, marketing and technical
personnel.
CUSTOMERS OF EAGLE AND CLEARWORKS MAY DELAY OR CANCEL ORDERS AS A RESULT OF
CONCERNS OVER THE MERGER AGREEMENT. The announcement and closing of the merger
agreement could cause customers and potential customers of Eagle and ClearWorks
to delay and cancel orders for products or services as a result of customer
concerns and uncertainty over the evolution, integration and support of Eagle's
or ClearWorks' products and services. A delay or cancellation of orders could
have a material adverse effect on the business of Eagle and ClearWorks.
RISK FACTORS RELATED TO THE BUSINESS OF EAGLE
EAGLE HAS A LIMITED OPERATING HISTORY AND EXPECTS TO ENCOUNTER RISKS FREQUENTLY
FACED BY SUCH COMPANIES. Eagle has a limited operating history and, accordingly,
is subject to all of the substantial risks inherent in the commencement of a new
business enterprise. Additionally, Eagle has a limited business history that
investors can analyze to aid them in making an informed judgment as to the
merits of an investment in Eagle. Any investment in Eagle should be considered a
high risk investment because it is a start-up company with unforeseen costs,
expenses, competition and other problems to which start-up ventures are often
subject. Eagle's prospects must be considered in light of the risks, expenses
and difficulties encountered in establishing a new business in a highly
competitive industry characterized by rapid technological development.
ALTHOUGH EAGLE HAS HAD A HISTORY OF EARNINGS, EAGLE HAS HAD A DECREASE IN
EARNINGS AND REVENUES IN FISCAL 1999 AND FOR THE FIRST NINE MONTHS OF FISCAL
2000. THEREFORE, EAGLE MAY INCUR LOSSES IN THE FUTURE AND THERE CAN BE NO
ASSURANCE WHEN OR IF IT WILL SUSTAIN LONG-TERM PROFITABILITY. Eagle had net
sales of $4,827,434 and net earnings of $770,968 for the year ended August 31,
1998 and net sales of $2,217,275 and net earnings of $168,271 for the year ended
August 31, 1999. The decreases in Eagle's earnings and revenues are primarily
attributed to completion of contracts for its messaging and personal
communication systems and increases in research and development expenses for its
convergent set-top device. However, net sales of $2,053,000 and net earnings of
$164,000 for the nine months ended May 31, 1999 compared to net sales of
$3,173,000 and net earnings of $444,000 for the nine month period ended May 31,
2000 show slight increases. Eagle may incur losses in the future, and there can
be no assurance when or if it will sustain long-term profitability.
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EAGLE'S PRODUCTS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND AN INABILITY ON
ITS PART TO ADAPT OR ADJUST ITS TECHNOLOGY TO THESE DEVELOPMENTS MAY HAVE A
MATERIAL ADVERSE EFFECT ON ITS BUSINESS. The design, development, and
manufacturing of personal communication systems, specialized mobile radio
products and multimedia entertainment products are highly competitive and
characterized by rapid technology changes. Eagle will compete with other
existing products and may compete against other development technology.
Development by others of new or improved products or technologies may make
Eagle's products obsolete or less competitive. While management believes that
Eagle's products are based on established state-of-the-art technology, there can
be no assurance that they will not be obsolete in the near future or that Eagle
will be able to develop a commercial market for its products in response to
future technology advances and developments.
EAGLE'S CONVERGENT SET-TOP BOXES ARE IN THE INITIAL STAGES OF DEVELOPMENT, AND
EAGLE MAY NOT BE ABLE TO EFFECTIVELY MASS PRODUCE OR MASS MARKET THESE NEW
PRODUCTS. Eagle has developed several models of its convergent set-top box
product line, and is currently in negotiations to obtain the necessary
additional financing to mass produce and market these devices. Eagle may not be
able to obtain such financing, and even if it does may not be able to continue
to effectively mass produce or mass market these products.
EAGLE IS DEPENDENT ON ITS KEY PERSONNEL AND LOSS OF THESE PERSONNEL MAY HAVE AN
ADVERSE EFFECT ON ITS BUSINESS. The success of Eagle is dependent upon, among
other things, the services of Dr. H. Dean Cubley, president and chief executive
officer and James Futer, executive vice-president and chief operating officer.
The loss of the services of Dr. Cubley or Mr. Futer, for any reason, could have
a material adverse effect on the prospects of Eagle. Eagle has not entered into
employment agreements with Dr. Cubley and Mr. Futer but does maintain $ 5
million of key-man life insurance on Dr. Cubley. Eagle has enlisted experienced
personnel in several key positions; however, there can be no assurance that
Eagle will be able to continue to attract and retain qualified employees to
implement its business plan.
EAGLE'S SUCCESS DEPENDS UPON ITS ABILITY TO PROTECT ITS PROPRIETARY
TECHNOLOGIES. Eagle relies on non-disclosure agreements with employees, and
common law remedies with respect to its proprietary technology and the filing of
patents on its key technology. There can be no assurance that others will not
misappropriate Eagle's proprietary technologies or develop competitive
technologies or products that could adversely affect Eagle. In addition,
although Eagle is not aware of any infringement claims against it or any
circumstances that could lead to such claims, there can be no assurance that
these claims could not be made which could adversely affect its business.
Eagle's efforts to protect its intellectual property may cause it to become
involved in costly and lengthy litigation, which could seriously harm its
business. In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Although it has
not become involved in intellectual property litigation, it may become involved
in litigation in the future to protect its intellectual property or defend
allegations of infringement asserted by others. Legal proceedings could subject
it to significant liability for damages or invalidate Eagle's proprietary
rights. Any litigation, regardless of its outcome, would likely be
13
<PAGE>
time consuming and expensive to resolve and would divert management's time and
attention. Any potential intellectual property litigation also could force Eagle
to take specific actions, including:
o Cease selling its products that use the challenged intellectual property;
o Obtain from the owner of the infringed intellectual property a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o Redesign those products that use infringing intellectual property.
THE MESSAGING AND PERSONAL COMMUNICATIONS INDUSTRY IS HEAVILY REGULATED AND
COMPLIANCE WITH FEDERAL LAWS MAY BE OVERLY BURDENSOME AND COSTLY FOR EAGLE. The
messaging and personal communications industry is heavily regulated. Although
compliance with these laws and regulations historically has not had a material
adverse effect on Eagle's competitive position, operations or financial
condition or required material capital expenditures, there is no assurance that
the implementation of new or amended laws or regulations in the future would not
have this effect or require these expenditures.
EAGLE FACES SUBSTANTIAL COMPETITION FROM COMPETITORS WITH SIGNIFICANTLY GREATER
RESOURCES. The wireless personal communications industry includes equipment
manufacturers that serve many of the same customers served by Eagle.
Substantially all of Eagle's competitors have significantly greater resources,
including financial, technical and marketing, than Eagle, and there can be no
assurance that Eagle will be able to compete successfully in the future.
Eagle faces competition from many entities with significantly greater financial
resources, well-established brand names and larger customer bases. The numerous
companies that may seek to enter its industry may expose Eagle to severe price
competition for its products and services. Eagle expects competition to
intensify in the future and expects significant competition from traditional and
new telecommunications companies including, local, long distance, cable modem,
Internet, digital subscriber line, microwave, mobile and satellite data
providers.
A SYSTEM FAILURE COULD DELAY OR INTERRUPT EAGLE'S ABILITY TO PROVIDE PRODUCTS OR
SERVICES AND HAVE A MATERIALLY ADVERSE EFFECT ON EAGLE'S BUSINESS. Eagle's
operations are dependant upon its ability to support its highly complex network
infrastructure. Many of its customers are particularly dependent on an
uninterrupted supply of services. Any damage or failure that causes
interruptions in its operations could result in loss of these customers and
condition. Because of the nature of the services Eagle supplies and the
complexity of Eagle's network, it is not feasible to maintain backup systems,
and the occurrence of a natural disaster, operational disruption or other
unanticipated problem could cause interruptions in the services it provides.
Additionally, the failure of a major supplier to provide the components and
parts necessary for its products and services, or of a major customer to
continue buying its goods and services, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in the
service Eagle provides and adversely affect its business prospects, financial
condition and results of operations.
14
<PAGE>
STOCKHOLDERS FACE POSSIBLE VOLATILITY OF STOCK PRICE FOR EAGLE STOCK. The market
price of the common stock may experience fluctuations that are unrelated to the
operating performance of Eagle. Eagle recently experienced a decrease in the
market price of its common stock and the market price of its common stock has
been quite volatile in the last 12 months. Eagle can provide no assurance that
the current price will be maintained.
As of November 1, 2000, a total of 26,524,163 shares of common stock were
outstanding. The resale of the shares of common stock offered hereby, along with
the resale of the shares of common stock issuable upon the exercise of the stock
options may have a negative impact on Eagle's stock price.
THE BOARD OF DIRECTORS HAVE UNLIMITED DISCRETION TO ISSUE EAGLE PREFERRED STOCK
THAT COULD DELAY OR PREVENT AN ACQUISITION AND COULD ADVERSELY AFFECT THE PRICE
OF ITS COMMON STOCK. The Board of Directors of Eagle has the authority to issue
up to 5,000,000 shares of preferred stock with designations, rights and
preferences as they may determined. Accordingly, the Board of Directors is
empowered, without further shareholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of Eagle common stock.
Companies have used the issuance of preferred stock as an anti-takeover device
and the Board of Directors could, without further shareholder approval, issue
preferred stock with rights that could discourage an attempt to obtain control
of Eagle in a transaction not approved by the Board of Directors.
CONTINUED GROWTH OF EAGLE'S BUSINESS DEPENDS ON ITS ABILITY TO MANAGE EXPANSION
AND DEVELOPMENT EFFECTIVELY. Eagle's ability to manage expansion effectively
will require it to continue to implement and improve its operating, financial
and accounting systems and to hire train and manage new employees. Among other
things, the continued expansion and development of Eagle's business will also
depend on its ability to continue to grow as a supplier of telecommunications
equipment and related software used by service providers in the messaging and
other wireless personal communications market. In addition, it must perform
these tasks in a timely manner, at a reasonable cost and on satisfactory terms
and conditions. Failure to effectively manage Eagle's planned expansion could
have a material adverse effect on its business, growth, financial condition,
results of operations and the market price of Eagle common stock. Eagle's
expansion may involve acquiring other companies and assets. These acquisitions
could divert its resources and management attention and require integration with
its existing operations. Eagle cannot assure you that these acquisitions will be
successful. Eagle further cannot assure you that it will be successful or timely
in developing and marketing service enhancements or new services that respond to
technological change, changes in customer requirements and emerging industry
standards. Even if Eagle is successful, it cannot assure you that its lack of
significant experience with respect to a new service or market will not hinder
its ability to successfully capitalize on any such opportunity.
15
<PAGE>
FAILURE TO EXPAND EAGLE'S DISTRIBUTION CHANNELS AND MANAGE EAGLE'S DISTRIBUTION
RELATIONSHIPS MAY ADVERSELY EFFECT ITS OPERATIONS. The future growth of Eagle's
business will depend in part on its ability to expand its existing relationships
with distributors and resellers, develop additional channels for the
distribution and sale of Eagle products and manage these relationships. As part
of Eagle's growth strategy, Eagle intends to expand its relationships with
distributors and resellers. The inability to successfully execute this strategy
could impede its future growth.
THE LOSS OF EAGLE'S CONTRACT SUPPLIERS, OR FAILURE TO FORECAST DEMAND ACCURATELY
FOR ITS PRODUCTS OR TO MANAGE ITS RELATIONSHIP WITH ITS CONTRACT SUPPLIERS
SUCCESSFULLY, WOULD NEGATIVELY IMPACT EAGLE'S ABILITY TO MANUFACTURE AND SELL
ITS PRODUCTS. To date Eagle relies on third party suppliers for component and
assemblies used in Eagle's products. If its relationship with these suppliers
was harmed for any reason or its demand for products was higher than these
suppliers could produce, Eagle may have to locate alternative suppliers.
Although Eagle believes that other suppliers of the components and assemblies it
requires exist, it may be difficult to contract with these suppliers in time to
avoid a negative impact on its operations. Further, there can be no assurance
that these contracts, if Eagle were able to enter into these contracts, would be
favorable to it.
FORWARD-LOOKING STATEMENTS
Except for historical information contained in this prospectus, the matters
discussed in this prospectus are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth in the forward looking statements. These risks and
uncertainties include Eagle's dependence on the timely development, introduction
and customer acceptance of products, the impact of competition and downward
pricing pressures, the ability of Eagle to generate revenues and raise any
needed capital, the effect of changing economic conditions, and risks in
technology development.
16
<PAGE>
SELECTED HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The following selected historical annual financial data of Eagle and ClearWorks
has been derived from their respective historical financial statements and
should be read in conjunction with those financial statements and the notes
related to those financial statements. The financial statements of Eagle for the
fiscal year ended August 31, 1999 and August 31, 1998 are found on pages F-1
through F-23. The financial statements for ClearWorks for the fiscal years ended
December 31, 1999 and December 31, 1998 are found on pages F-37 through F-60.
The unaudited selected historical financial information as of May 31, 2000 of
Eagle and the unaudited selected historical financial information as of June 30,
2000 of ClearWorks are derived from their respective unaudited financial
statements and should be read in conjunction with those statements and the notes
related to those financial statements which are included. In the opinion of
Eagle and ClearWorks' respective management, the financial statements reflect
all normal and recurring adjustments necessary for the fair presentation of the
unaudited interim financial information. The results of operations for those
interim periods are not necessarily indicative of the results to be expected for
the entire year.
The business combination will be accounted for under the purchase method of
accounting. Accordingly, the unaudited pro forma combined condensed balance
sheet at June 30, 2000 includes the accounts of Eagle on a historical cost basis
and the assets and liabilities of ClearWorks at acquisition cost, allocated by
relative estimated fair value as of the date of the acquisition. The estimated
purchase price allocations have been made on a preliminary basis and may change
as additional information becomes known. The unaudited pro forma combined
statements of operations data have been presented as if the business
combinations took place at the beginning of the periods presented. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the if the business combination had been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operations or financial period.
17
<PAGE>
Eagle Historical Condensed Financial Data
<TABLE>
<CAPTION>
AT AND FOR YEAR ENDED
AUGUST 31,
------------------------------------------------------------------------------------
9m ended May
1995 1996 1997 1998 1999 31, 2000
(audited) (audited) (audited) (audited) (audited) (unaudited)
------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA
------------------ --------- --------- --------- --------- ---------- ----------
Total Revenue 0 1,028,942 4,300,129 5,254,578 3,016,373 4,083,286
------------------ --------- --------- --------- --------- ---------- ----------
Total Costs and 0 991,055 3,231,913 4,106,126 2,757,242 3,424,286
Operating Expenses
------------------ --------- --------- --------- --------- ---------- ----------
Income (Loss) 0 37,887 1,068,216 1,148,452 259,131 659,000
From Operations
------------------ --------- --------- --------- --------- ---------- ----------
Net Income (Loss) 0 32,204 728,494 770,968 168,271 444,000
------------------ --------- --------- --------- --------- ---------- ----------
CONSOLIDATED
BALANCE SHEET DATA
------------------ --------- --------- --------- --------- ---------- ----------
Working Capital 0 1,657,320 6,090,971 6,812,622 1,658,303 31,749,000
(deficit)
------------------ --------- --------- --------- --------- ---------- ----------
Total Assets 1,000 3,446,992 7,379,898 8,550,443 10,320,282 47,802,000
------------------ --------- --------- --------- --------- ---------- ----------
Long Term Debt 0 16,704 2,791 8,621 3,939 27,000
------------------ --------- --------- --------- --------- ---------- ----------
Stockholder's 1,000 2,077,006 6,592,388 7,516,168 8,894,317 44,914,000
Equity (Deficit)
------------------ --------- --------- --------- --------- ---------- ----------
Cash Dividends 0.00 0.00 0.00 0.00 0.00 0.00
Declared Per
Common Share
------------------ --------- --------- --------- --------- ---------- ----------
</TABLE>
18
<PAGE>
ClearWorks Historical Condensed Financial Data
<TABLE>
<CAPTION>
AT AND FOR YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 For the Six
Months Ended
June 30, 2000
(unaudited)
------------------ --------- --------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA
------------------ --------- --------- --------- --------- ---------- ----------
Total Revenue n/a n/a 114,000 1,090,000 3,032,000 12,977,000
------------------ --------- --------- --------- --------- ---------- ----------
Total Costs and n/a n/a 105,000 1,332,000 7,430,000 16,105,000
Operating Expenses
------------------ --------- --------- --------- --------- ---------- ----------
Income (Loss) n/a n/a 9,000 (242,000) (4,398,000) (3,128,000)
From Operations
------------------ --------- --------- --------- --------- ---------- ----------
Net Income (Loss) n/a n/a 8,000 (252,000) (5,159,000) (7,487,000)
------------------ --------- --------- --------- --------- ---------- ----------
CONSOLIDATED
BALANCE SHEET DATA
------------------ --------- --------- --------- --------- ---------- ----------
Working Capital n/a n/a 4,000 91,000 978,000 (803,000)
(Deficit)
------------------ --------- --------- --------- --------- ---------- ----------
Total Assets n/a n/a 72,000 1,190,000 13,758,000 16,926,000
------------------ --------- --------- --------- --------- ---------- ----------
Long Term Debt n/a n/a 46,000 70,000 3,320,000 3,078,000
------------------ --------- --------- --------- --------- ---------- ----------
Stockholder's n/a n/a 9,000 884,000 5,770,000 6,675,000
Equity (Deficit)
------------------ --------- --------- --------- --------- ---------- ----------
Cash Dividends n/a n/a 0.00 0.00 0.00 0.00
Declared Per
Common Share
------------------ --------- --------- --------- --------- ---------- ----------
</TABLE>
19
<PAGE>
Unaudited Eagle and ClearWorks Pro Forma Combined Condensed
Historical Financial Data
(In Thousands, Except Per Share Data)
Year Ended
-----------------------------------------------------
PRO FORMA COMBINED CONDENSED June 30, 2000
STATEMENT OF INCOME DATA
-------------------------------------- -------------
Total Revenue ........................ $ 18,321
-------------------------------------- -------------
Total Costs and Operating Expenses ... 26,096
-------------------------------------- -------------
Income (Loss) From Operations ........ (7,775)
-------------------------------------- -------------
Net Income (Loss) .................... $(12,679)
-------------------------------------- -------------
As of June 30, 2000
-----------------------------------------------------
PRO FORMA CONSOLIDATED BALANCE
SHEET DATA
-------------------------------------- -------------
Cash and Cash Equivalents ............ $ 26,744
-------------------------------------- -------------
Working Capital ...................... $ 41,723
-------------------------------------- -------------
Total assets ......................... $149,348
-------------------------------------- -------------
Long Term Debt ....................... $ 3,113
-------------------------------------- -------------
Stockholder's Equity ................. $136,204
-------------------------------------- -------------
COMPARATIVE PER SHARE DATA
The following table summarizes the unaudited historical per share information of
Eagle and ClearWorks and the combined per share data on an unaudited pro forma
basis. The information presented in the following table is derived from and
should be read in conjunction with the selected consolidated financial data and
the unaudited pro forma combined financial data included elsewhere in this
prospectus. The pro forma combined financial data is not necessarily indicative
of the operating results of future operations or the actual results that would
have occurred if the acquisition of ClearWorks had been consummated as of the
beginning of the period presented, nor is it necessarily indicative of the
future operating results or financial positions of the combined companies.
Year Ended June 30, 2000
EAGLE
HISTORICAL:
--------------------------------------- -------
Net Income Per Share-Basic $ .03
And Diluted
--------------------------------------- -------
Book Value Per Share (1) $3.60
--------------------------------------- -------
PRO FORMA COMBINED:
--------------------------------------- -------
Net Income (Loss) Per Share- Basic $(.36)
And Diluted
--------------------------------------- -------
Book Value Per Share (2) $2.51
--------------------------------------- -------
20
<PAGE>
CLEARWORKS
HISTORICAL
--------------------------------------- -------
Net Income (Loss) Per Share-Basic $(.47)
And Diluted(4)
--------------------------------------- -------
Book Value Per Share (1)(4) $1.08
--------------------------------------- -------
EQUIVALENT PRO FORMA COMBINED (3):
--------------------------------------- -------
Net Income (Loss) Per Share- Basic $(.28)
And Diluted
--------------------------------------- -------
Book Value Per Share (1) $2.88
--------------------------------------- -------
(1) Book Value is computed by dividing total stockholders' equity by the number
of common shares outstanding and does not reflect the possible exercise of stock
options and warrants.
(2) Eagle's pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of Eagle's common
stock which would have been outstanding had the merger been consummated as of
each balance sheet date.
(3) Clearworks' equivalent pro forma combined book value per share is calculated
by multiplying Eagle's pro forma combined per share amounts and book value by
the expected exchange ratio of approximately .8 shares of Eagle common stock.
(4) Clearworks' historical book value and loss per share have been adjusted for
the acquisitions of Link Two Communications, Inc. and LD Connect, Inc. from the
beginning of the proforma period. These acquisitions occurred after the
acquisition date.
COMPARATIVE MARKET PRICE INFORMATION
Shares of Eagle common stock are listed on the American Stock Exchange under the
symbol "EAG." ClearWorks common stock is traded on the under the symbol "CLW."
On September 15, 2000, the last full trading day prior to the public
announcement of the proposed Merger Agreement, Eagle's common stock closed at
$5.63 per share, and ClearWorks' common stock closed at $4.94 per share. On
November 3, 2000 Eagle's common stock closed at $3.1875 per share and
ClearWorks' common stock closed at $2.375 per share.
21
<PAGE>
The table below sets forth, for the periods indicated, the reported high and low
sale prices per share of Eagle common stock on the American Stock Exchange.
EAGLE COMMON STOCK
--------------------
High Low
------------------------------------------- --------- ---------
FISCAL 1998
------------------------------------------- --------- ---------
Quarter ended November 30, 1997 ..... $ 4.75 $ 2.75
------------------------------------------- --------- ---------
Quarter ended February 28, 1998 ..... $ 3.56 $ 0.88
------------------------------------------- --------- ---------
Quarter ended May 31, 1998 .......... $ 1.69 $ 1.12
------------------------------------------- --------- ---------
Quarter ended August 31, 1998 ....... $ 2.16 $ 0.88
------------------------------------------- --------- ---------
FISCAL 1999
------------------------------------------- --------- ---------
Quarter ended November 30, 1998 .... $ 2.00 $ 1.09
------------------------------------------- --------- ---------
Quarter ended February 28, 1999 .... $ 3.06 $ 1.53
------------------------------------------- --------- ---------
Quarter ended May 31, 1999 ......... $ 2.81 $ 1.66
------------------------------------------- --------- ---------
Quarter ended August 31, 1999 ...... $ 2.75 $ 1.03
------------------------------------------- --------- ---------
FISCAL 2000
------------------------------------------- --------- ---------
Quarter ended November 30, 1999 ... $ 2.00 $ 1.00
------------------------------------------- --------- ---------
Quarter ended February 29, 2000 ... $19.00 $ 1.13
------------------------------------------- --------- ---------
Quarter ended May 31, 2000 ....... $19.50 $ 5.62
------------------------------------------- --------- ---------
The tables below set forth, for the periods indicated, the reported high and low
sale prices per share of ClearWorks common stock on the OTC Bulletin Board until
and including the quarter ended March 31, 2000 and on the American Stock
Exchange for the quarter ended June 30, 2000.
CLEARWORKS COMMON STOCK
-------------------------
High Low
------------------------------------------- ----------- -----------
FISCAL 1998
------------------------------------------- ----------- -----------
Quarter ended March 31, 1998 ........ $ 0.5625 $ 0.3750
------------------------------------------- ----------- -----------
Quarter ended June 30, 1998 ......... $ 3.6250 $ 0.5625
------------------------------------------- ----------- -----------
Quarter ended September 30, 1998 .... $ 3.3125 $ 1.0313
------------------------------------------- ----------- -----------
Quarter ended December 31, 1998 ..... $ 2.1563 $ 0.3125
------------------------------------------- ----------- -----------
FISCAL 1999
------------------------------------------- ----------- -----------
Quarter ended March 31, 1999 ....... $ 1.2500 $ 0.4375
------------------------------------------- ----------- -----------
Quarter ended June 30, 1999 ........ $ 3.8750 $ 1.05
------------------------------------------- ----------- -----------
Quarter ended September 30, 1999 ... $ 8.56 $ 1.81
------------------------------------------- ----------- -----------
Quarter ended December 31, 1999 .... $ 4.25 $ 2.00
------------------------------------------- ----------- -----------
FISCAL 2000
------------------------------------------- ----------- -----------
Quarter ended March 31, 2000 ...... $ 14.50 $ 2.56
------------------------------------------- ----------- -----------
Quarter ended June 30, 2000 ....... $ 10.63 $ 3.37
------------------------------------------- ----------- -----------
22
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES
As reported on Eagle's 1999 10-KSB, Eagle's officers, directors, executive
officers and their affiliates own 3% of outstanding shares of Eagle. Eagle's
directors have unanimously approved this transaction. Under Texas law and the
requirements of the American Stock Exchange, a vote of a majority of the
stockholders entitled to vote at the meeting is required to approve the issuance
of additional shares in connection with this transaction. Eagle's directors,
executive officers and their affiliates have indicated that they intend to vote
in favor of this transaction and have executed voting agreements to that effect.
As reported on ClearWorks' 1999 10-KSB, ClearWorks' directors, executive
officers and their affiliates own 38.6% outstanding shares of ClearWorks.
ClearWorks' directors have unanimously approved this transaction and have
executed voting agreements to that effect. Under Delaware law, a vote of a
majority of the outstanding stock entitled to vote is required for this
transaction.
OTHER MATTERS
Except for the requirements of applicable federal and state securities laws,
there are no federal or state regulatory requirements to be complied with or
obtained by Eagle in connection with the merger. Dissenters' rights of appraisal
do not exist as to ClearWorks' stockholders as ClearWorks' stock is quoted on
the American Stock Exchange. Eagle's stockholders do not have the right to
dissent as Eagle is not exchanging substantially all of its stock or assets, but
are voting to approve the issuance of additional shares in connection with this
transaction. Note: There are FCC requirements on the transfer of the Link Two
licenses as well as the state Public Utility Commission transfer requirements on
the Texas, Nevada, and Arizona competitive local exchange carrier, or CLEC
licenses.
TERMS OF THE MERGER
THE MERGER AGREEMENT
Under the Merger Agreement, Eagle will acquire 100% of the outstanding common
stock of ClearWorks and merge Eagle Acquisition Corporation, a wholly-owned
subsidiary of Eagle, with ClearWorks. Eagle will issue 0.8 shares of Eagle
common stock for each share of ClearWorks at the closing (which would represent
approximately 29,450,740 of Eagle common stock as of November 1, 2000). As a
result of the merger, stockholders of ClearWorks will hold in the aggregate
approximately 53% of the outstanding common stock of Eagle following completion
of the merger. In addition to the share issuance, Eagle will assume all
outstanding ClearWorks stock options and warrants based upon the same 0.8
exchange ratio. As of November 1, 2000, ClearWorks had outstanding warrants to
purchase approximately 3,709,584 shares of ClearWorks common stock outstanding,
which would become options to purchase approximately 2,967,668 shares of Eagle
common stock after the merger.
The business purpose of the merger between Eagle and ClearWorks is to create a
company with unique product and service offerings. This merger is, in effect,
creating a new company that will
23
<PAGE>
have the ability to provide a full complement of broadband products and services
to a wide range of customers and applications in a manner that currently is not
being provided by any other competitor. Each Bundled Digital Service or
(BDS(sm)) subscriber gives the new company an opportunity to create a long-term
recurring revenue stream and to generate up-front product revenue by adding a
number of current and future hardware and software and service products, such as
the convergence set-top-box to the existing ClearWorks contracts. This balance
of near-term and long-term recurring revenue is a combination that in the
opinion of management is highly desirable. Hardware, installation and home
wiring for the current BDS(sm) contracts alone have the potential to generate
substantial near-term revenue for the new company in the next 24 months. And,
since these same contracts are expected to generate large amounts of recurring
revenue over the next twenty-five years, the new company is looking forward to
establishing this revenue stream as soon as possible. The new company is also
looking forward to applying the BDSsm concept to some of the current Eagle
contract applications in the near future. The combination of Eagle's convergent
hardware products, network services, wireless products, wireless network and
spectrum services, and strong manufacturing and R&D capabilities and ClearWorks,
BDS(sm), "last mile" cable and fiber installation, and ClearWorks CLEC status
should provide a well-balanced revenue mix as the combined company provides a
full complement of broadband products and services to its customers.
The merger is subject to the approval by the stockholders of Eagle of the
proposed share issuance in connection with the merger, the approval by the
stockholders of ClearWorks of the Merger Agreement, and other customary closing
conditions. Following the merger, Eagle's common stock will continue to be
listed on the American Stock Exchange under the symbol "EAG."
The board of directors of Eagle has approved the proposed issuance of shares of
Eagle common stock and the assumption of stock options and warrants in
connection with the merger and unanimously recommends that Eagle's stockholders
vote in favor of the proposed share issuance to complete the merger. Likewise,
the board of directors of ClearWorks has approved the Merger Agreement and
unanimously recommends that ClearWorks' stockholders vote in favor of the Merger
Agreement. The Merger Agreement is attached to this registration statement as
Exhibit 10.1 and incorporated by reference in this prospectus.
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS
Eagle is a Texas corporation subject to the provisions of the Texas Business
Corporation Act. ClearWorks is a Delaware corporation subject to the provisions
of Delaware Corporation Law. Upon consummation of the Merger, stockholders of
ClearWorks, whose rights are governed by ClearWorks Certificate of Incorporation
and By-Laws and by Delaware Corporation Law, will become stockholders of Eagle,
and their rights will be governed by Eagle's Articles of Incorporation and
By-Laws and by the Texas Business Corporation Act. The following is a summary of
material differences between the rights of the stockholders of Eagle and
ClearWorks. This summary does not purport to be a complete discussion of, and is
qualified in its entirety by reference to, the governing law and the certificate
or articles of incorporation and the bylaws of each corporation.
24
<PAGE>
Authorized Common Stock
Eagle is authorized to issue 100,000,000 shares of common stock, of which
26,524,163 shares were issued and outstanding at November 1, 2000. ClearWorks is
authorized to issue 50,000,000 shares of common stock, of which 28,783,264
shares were issued and outstanding at October 31, 2000.
Amendment of Articles
An amendment to Eagle's Certificate of Incorporation may be effected by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
entitled to vote at the meeting. An amendment to ClearWorks' Certificate of
Incorporation requires a majority vote of the outstanding stock of ClearWorks
entitled to vote at the meeting.
Shareholder Consent
Under Texas law, any action required or permitted to be taken at a meeting of
the stockholders of Eagle may be taken without a meeting if written consents are
obtained from all stockholders who would be able to vote at the meeting. Under
Delaware law, any action required or permitted to be taken at a meeting of the
stockholders of ClearWorks may be taken without a meeting if written consents
are obtained from stockholders who would have been entitled to cast the minimum
number of votes necessary to authorize or take such action at a meeting at which
all shares entitled to vote were present and voting.
Dividends
The board of directors of Eagle may authorize and make distributions to its
stockholders unless after giving effect to the distribution, the corporation
would be insolvent, the distribution exceeds the surplus of the corporation, or
the net assets of a corporation are less than the amount of the proposed
distribution. The board of directors of ClearWorks may authorize and make
distributions to its stockholders unless after giving effect to the
distribution, the distribution exceeds the surplus of the corporation.
Business Combinations
Under Texas law, the vote of stockholders required for approval of a plan of
merger or exchange is the affirmative vote of at least two-thirds of the
outstanding shares of Eagle entitled to vote. Under Delaware law, the vote of
stockholders required for approval of a plan of merger or exchange is a majority
vote of the outstanding stock of ClearWorks entitled to vote. Under this joint
proxy, Eagle stockholders are not being asked to approve a merger, but are
voting on the proposal to issue additional shares because of American Stock
Exchange listing criteria.
25
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
It is intended that this merger, when consummated in accordance with the Merger
Agreement will constitute a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended, and that the exchange of
ClearWorks common stock for Eagle common stock will not give rise to the
recognition of gain a or loss for federal income tax purposes to ClearWorks
stockholders. Gain or loss, if any, generally will be recognized by a holder of
ClearWorks common stock with respect to the receipt of cash in lieu of any
fractional share of Eagle common stock. Such gain or loss will be measured by
the difference between the amount of cash received and the portion of the basis
of the shares of ClearWorks common stock allocable to such fractional share
interest. This gain or loss should be long-term capital gain or loss if such
shares of ClearWorks are held as capital assets and have been held for more than
one year at the effective date of the Merger.
Tax matters are very complicated, and the tax consequences of the merger to
ClearWorks stockholders will depend upon their particular situation. Because of
the complexities of the federal income tax laws and because the tax consequences
may vary depending on a holder's individual circumstances or tax status, each
stockholder of ClearWorks should consult his or her tax advisor concerning the
federal, and any applicable state, local, foreign or other tax consequences of
the merger.
PRO FORMA FINANCIAL INFORMATION
Eagle Wireless International, Inc. and Clearworks.net, Inc.
Combined ProForma Statement of Operations
For The Year Ended June 30, 2000
(Unaudited)(In Millions)
Combined
Totals
------------
Revenues ...................................... $ 18,321
Cost of goods sold:
Material and supplies ....................... 15,241
Direct labor and related costs .............. 357
Other operating costs ....................... 33
Depreciation ................................ 1,471
------------
17,102
------------
Gross profit ................................ 1,219
Selling, general and administrative:
Salaries and related expenses ............... 8,540
Advertising and promotion ................... 13
Other support costs ......................... 408
Amortization ................................ 33
------------
8,994
------------
Loss from operations before other
income(expense) ............................... (7,775)
Other income(expense) ......................... --
Interest income ............................. 1,201
Interest expense ............................ (6,105)
------------
(4,904)
------------
Income(loss) before income taxes .............. (12,679)
Income taxes ..................................
------------
Net income(loss) .............................. $(12,679)
============
Earnings(loss)per share:
Primary ....................................... (.34)
Diluted ....................................... (.34)
Shares:
Primary Proforma .............................. 37,902
Diluted Proforma .............................. 37,738
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Eagle Wireless International, Inc.
Consolidated Proforma Balance Sheet
June 30, 2000
Merged
-------------
Assets Total
-------------
Current assets ................................ $ 51,753,757
Property and equipment,net .................... 8,299,861
Other ......................................... 720,288
Goodwill, net ................................. 3,823,000
Deferred charges .............................. 2,117,895
Licenses ...................................... 20,000,000
Customer contracts ............................ 62,633,403
-------------
$ 149,348,204
=============
Liabilities and Stockholders' Equity
Current liabilities ........................... $ 10,031,038
Long-term debt ................................ 3,112,719
Stockholders' equity:
Common stock .................................. 52,120
Paid in capital ............................... 134,008,327
Retained earnings ............................. 2,144,000
-------------
136,204,447
-------------
$ 149,348,204
=============
BACKGROUND OF THE MERGER
Dr. H. Dean Cubley, Chief Executive Officer, President, and Chairman of Eagle,
and Mr. Michael T. McClere, Chief Executive Officer and Chairman of ClearWorks,
met twice in the summer of 2000 to discuss potential business development
activities between the two companies.
During these meetings, Dr. Cubley and Mr. McClere discussed potential business
development opportunities between Eagle's set-top boxes and ClearWorks' BDS(sm)
contracts and subscribers.
In early July 2000, Dr. Cubley phoned Mr. McClere and indicated that Eagle would
be interested in pursuing a business combination with ClearWorks. During July
2000, the parties engaged in preliminary discussions regarding the proposed
business combination.
In late July 2000, Dr. Cubley and Mr. McClere received approval from their
respective boards to move forward with negotiations regarding a possible
business combination of Eagle and ClearWorks.
On August 1, 2000, Dr. Cubley sent Mr. McClere a letter of intent setting forth
the basic terms of the merger. On August 11, 2000, after receiving approval from
the ClearWorks' board, Mr. McClere signed the letter of intent.
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In August 2000, legal representatives of Eagle, and ClearWorks' general counsel,
participated in several conference calls regarding the logistics of conducting
the due diligence process. Representatives of both parties conducted their
business, legal, accounting and financial due diligence between August 11, 2000
and September 15, 2000. During this period, senior management of both companies
held numerous discussions regarding various business, financial, operational,
and technical issues.
On September 8, 2000, legal representatives of Eagle distributed a draft of the
merger agreement and related agreements.
From September 8, 2000 until September 15, 2000, representatives of Eagle and
ClearWorks participated in a series of negotiations on the terms of the merger
agreement and related agreements.
On September 15, 2000, the Eagle board met to further discuss the merger and the
due diligence regarding the merger. Management of Eagle presented the results of
their due diligence and discussed the status of negotiations regarding the
merger agreement.
On September 15, 2000, the ClearWorks board held a meeting to review drafts of
the merger agreement and related agreements. The ClearWorks board reviewed the
status of the negotiations and directed management to continue negotiations with
Eagle.
The parties signed the merger agreement and related documents on September 16,
2000. On September 18, 2000, before the open of the market, Eagle and ClearWorks
issued a joint press release announcing the transaction.
Recommendation of Eagle's board of directors and Eagle's reasons for the merger
At a meeting held on September 15, 2000, the board of directors of Eagle
concluded that the merger was in the best interests of Eagle and its
stockholders and determined to recommend that the Eagle stockholders approve the
issuance of the shares of Eagle common stock in the merger. The summary set
forth below briefly describes certain of the reasons, factors, and information
taken into account by the Eagle board in reaching its conclusion. The Eagle
board did not assign any relative or specific weights to the factors considered
in reaching such determination, and individual directors may have given
differing weights to different factors.
In reaching its determination, the Eagle board consulted with Eagle's management
and legal and financial advisors, and carefully considered a number of factors,
including:
o The potential strategic benefits of the merger;
o Historical information concerning Eagle's and ClearWorks' respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position, including public reports
concerning results of operations for each company filed with the SEC;
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o Eagle management's view of the financial condition, results of operations
and businesses of Eagle and ClearWorks before and after giving effect to
the merger;
o Current financial market conditions and historical market prices,
volatility and trading information with respect to Eagle's common stock and
ClearWorks' common stock;
o The benefits to be received by Eagle and the dilution to Eagle's
stockholders in the merger and the relationship between the current and
historical market values of Eagle's common stock and ClearWorks' common
stock and a comparison of comparable merger transactions;
o The belief that the terms of the merger agreement, including the parties'
respective representations, warranties, and covenants, and the conditions
to their respective obligations, are reasonable;
o The prospects of Eagle independent of ClearWorks;
o The potential for other parties to enter into strategic relationships with
or to acquire Eagle or ClearWorks;
o The expectation that the merger will be treated as a tax-free
reorganization for federal income tax purposes;
o The impact of the merger on Eagle's customers and employees; and
o Reports from management as to the results of the due diligence
investigation of ClearWorks.
In its decision to recommend and approve the merger and the share issuance, the
most important benefits identified by the board of directors of Eagle were the
following:
o Eagle management believes that, given the complementary nature of the
business strategies of Eagle and ClearWorks, the merger will enhance the
opportunity for the potential realization of Eagle's strategic objectives;
o Eagle's stockholders would have the opportunity to participate in the
potential for growth of the combined company after the merger;
o The combination of ClearWorks' BDS infrastructure with Eagle's products
will allow the combined company to offer an end-to-end integrated solution
to customers;
o The broader customer base of the combined company will allow it to mitigate
the risk of customer concentration to which Eagle is currently exposed;
o The ability of Eagle's board, in exercise of its fiduciary duties in
accordance with the Merger Agreement, to authorize Eagle to provide
information to, engage in negotiations with and, subject to the payment of
a termination fee, enter into a transaction with another party as described
under the Merger Agreement; and
o The depth of experience provided by the combined management team.
Potential risks or other negative factors identified by the Eagle board of
directors include the following:
o The risk that the potential benefits of the merger may not be realized;
o The challenges of integrating the management teams, strategies, cultures
and organizations of the two companies;
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o The risk of disruption of sales momentum as a result of uncertainties
created by the announcement of the merger;
o The risk that the merger might not be consummated despite the parties'
efforts;
o The substantial charges to be incurred in connection with the merger,
including costs of integrating the businesses and transaction expenses
arising from the merger; and
o The effect of public announcement of the merger and the possibility that
the merger might not be consummated on Eagle's sales and operating results
and Eagle's ability to attract and retain key personnel.
The foregoing discussion of the information and factors considered by the Eagle
board of directors is not intended to be exhaustive, but includes material
factors considered by the Eagle board of directors. In view of the complexity
and wide variety of information and factors, both positive and negative,
considered by the Eagle board of directors, it did not find it practical to
quantify, rank or otherwise assign relative or specific weights to the factors
considered. In addition, the Eagle board did not reach any specific conclusion
with respect to each of the factors considered, or any aspect of any particular
factor. Instead, the Eagle board of directors conducted an overall analysis of
the factors described above, including discussions with Eagle's management and
accounting advisors. In considering the factors described above, individual
members of the Eagle board of directors may have given different weight to
different factors.
The Eagle board considered all these factors as a whole and believed the factors
supported its determination to approve the merger.
After taking into consideration all of the factors set forth above, Eagle's
board of directors unanimously concluded that the merger was in the best
interests of, Eagle and its stockholders and that Eagle should proceed with the
merger.
Recommendation of ClearWorks' board of directors and ClearWorks' reasons for the
merger
The board of directors of ClearWorks unanimously concluded that the merger
agreement and the merger are in the best interests of ClearWorks and its
stockholders. The ClearWorks board determined to recommend that the stockholders
approve the merger and adopt the merger agreement. This decision was based upon
several potential benefits of the merger that ClearWorks' board believes will
contribute to the success of the combined company compared to ClearWorks
continuing to operate as an independent business. The ClearWorks board believes
that reasons the merger will be beneficial to ClearWorks and its stockholders
include the following:
o The ability of the two companies to combine their products and services to
create a leading provider of end-to-end integrated applications;
o The increased customer base of the combined company;
o The potential revenue synergies including cross-selling opportunities for
the products and services of both companies;
o ClearWorks' stockholders would have the opportunity to participate in the
future growth potential for the combined company following the merger;
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o ClearWorks management believes that, given the complementary nature of the
technologies and business strategies of ClearWorks and Eagle, the merger
will enhance the opportunity for the potential realization of ClearWorks'
strategic objectives;
o The strong financial position of the combined company; and
o The premium over the market price for their ClearWorks common stock
immediately prior to the announcement of the merger that ClearWorks
stockholders would have an opportunity to receive.
ClearWorks' board reviewed a number of factors in evaluating the merger,
including, but not limited to, the following:
o Information concerning Eagle's business, financial performance and
condition, operations and management;
o Information concerning the financial condition, results of operations and
businesses of Eagle and ClearWorks before and after giving effect to the
merger;
o Current financial market conditions and historical market prices,
volatility and trading information with respect to Eagle common stock and
ClearWorks common stock;
o The consideration Eagle will issue in the merger in light of comparable
merger transactions;
o The belief that the terms of the merger agreement and related agreements
are reasonable;
o The ability of ClearWorks' board, in exercise of its fiduciary duties in
accordance with the Merger Agreement, to authorize ClearWorks to provide
information to, engage in negotiations with and, subject to the payment of
a termination fee, enter into a transaction with another party as described
under the Merger Agreement;
o The impact of the merger on the customers and employees of ClearWorks and
the combined company; and
o Results of the due diligence investigation conducted by ClearWorks'
management, financial advisors, and legal counsel.
The ClearWorks board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger including the
following:
o The risk that the potential benefits of the merger may not be realized;
o The risk that the merger may not be consummated, notwithstanding the voting
agreements obtained from holders of ClearWorks capital stock and holders of
Eagle common stock;
o The risk of management and employee disruption associated with the merger,
including that despite the efforts of the combined company, key technical,
sales and management personnel might not remain employed by the combined
company.
The foregoing discussion of the information and factors considered by the
ClearWorks board of directors is not intended to be exhaustive but includes
material factors considered by the ClearWorks board of directors. In view of the
complexity and wide variety of information and factors, both positive and
negative, considered by the ClearWorks board of directors, it did not find it
practical to quantify, rank or otherwise assign relative or specific weights to
the factors
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considered. In addition, the ClearWorks board did not reach any specific
conclusion with respect to each of the factors considered, or any aspect of any
particular factor. Instead, the ClearWorks board of directors conducted an
overall analysis of the factors described above, including discussions with
ClearWorks' management and legal, financial, and accounting advisors. In
considering the factors described above, individual members of the ClearWorks
board of directors may have given different weight to different factors.
The ClearWorks board considered all these factors as a whole and believed the
factors supported its determination to approve the merger.
After taking into consideration all of the factors set forth above, ClearWorks'
board of directors unanimously concluded that the merger was in the best
interests of, ClearWorks and its stockholders and that ClearWorks should proceed
with the merger.
MATERIAL CONTRACTS WITH CLEARWORKS
Prior to the Merger Agreement, ClearWorks agreed to purchase a controlling
interest in Link Two Communications, Inc. Link Two has been a major customer of
Eagle and accounted for a majority of Eagle's revenue for the years ended August
31, 1999 and 1998. Moreover, Eagle made its sales to Link Two for cash and
credit. On October 1, 1999, Link Two refinanced its existing account payable to
Eagle of $6,733,571 through the issuance of a $733,571 note at ten percent
annual interest secured by all lease station licenses and a $6,000,000 ten
percent note secured by all assets, excluding the licenses. In connection with
the purchase of Link Two by ClearWorks, Eagle will receive 2,855,643 shares of
ClearWorks common stock in satisfaction of the two notes.
Some of the principal stockholders, directors, and officers of Eagle, including
James Futer and A.L. Clifford are also principal stockholders of Link Two. These
persons and other persons representing approximately 60% of the outstanding
capital stock of Link Two entered into an Exchange Agreement with ClearWorks
that closed October 4, 2000. Under the Exchange Agreement, ClearWorks issued
5,037,852 shares of ClearWorks common stock in exchange for 6,297,315 shares of
Link Two common stock. The Exchange Agreement contains a right of rescission if
the Merger Agreement is not closed according to its terms. If the Merger
Agreement is not approved by the stockholders of ClearWorks, or the Eagle
stockholders do not approve the issuance of additional shares in connection with
the Merger Agreement, or if other closing conditions are not waived, then
ClearWorks and the Link Two stockholders have the option to unwind the Exchange
Agreement.
In October 2000, Eagle loaned ClearWorks $1,000,000, accruing interest at the
prime rate, to meet its immediate cash flow needs. Repayment of the loan is
secured by all of the assets of ClearWorks. ClearWorks issued Eagle 750,000
shares of common stock as additional consideration for the loan. Moreover, it is
likely that Eagle will loan additional funds to ClearWorks prior to the Special
Meeting of Stockholders to approve the Merger Agreement. Any additional loans
are likely to involve the issuance of additional shares of ClearWorks common
stock.
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On September 15, 2000, ClearWorks purchased the assets of LDConnect.com, which
is engaged in the business of providing flat fee telephone long distance service
and debit calling cards for the United States and Canada. At the time of the
acquisition, LDConnect.com was a Texas corporation. ClearWorks paid 1,000,000
shares of common stock for the purchase of LDConnect.com.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Richard O. Weed, counsel to Eagle in this transaction, owns 25,000 shares of
Eagle common stock and an option to purchase up to 125,000 shares of common
stock at exercise prices between $1.55 and $9.56 per share.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Under Texas law, a corporation may indemnify its officers, directors, employees
and agents under certain circumstances, including indemnification of such person
against liability under the Securities Act. True and correct copies of Articles
2.02 and 2.02.1 of the Texas Business Corporations Act that address
indemnification of officers, directors, employees and agents is attached hereto
as Exhibit 99.1.
In addition, Article 2.02-1(B) of the Texas Business Corporation Act, Eagle's
Articles of Incorporation and Bylaws provide that a director of Eagle shall not
be personally liable to the corporation or its stockholders for monetary damages
due to breach of fiduciary duty as a director except for liability in
circumstances which (1) the person is found liable on the basis that personal
benefit was improperly received by him, whether or not the benefit resulted from
an action taken in the person's official capacity; or (2) the person is found
liable to the corporation.
The effect of these provisions may be to eliminate the rights of Eagle and its
stockholders (through stockholders' derivative suit on behalf of Eagle) to
recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (1) - (2) of the
preceding paragraph.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
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indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
INFORMATION ABOUT THE REGISTRANT
EAGLE WIRELESS INTERNATIONAL, INC.
Eagle is a worldwide supplier of telecommunications equipment and related
software used by service providers in the messaging and other wireless personal
communications market. Eagle designs, manufactures, markets, and services its
products under the Eagle name. These products include transmitters, receivers,
controllers, software and other equipment used in personal communications
systems and radio and telephone systems. Most of Eagle's broad line of products,
covering the messaging spectrum as well as specific personal communication
systems, and specialized mobile radio products, have been tested and approved by
the Federal Communications Commission. Eagle provides service and support for
its products, as well as consulting and research development on a contract
basis. In addition, Eagle has recently introduced a completely new line of
multi-media and Internet products to the telecommunications industry, including
a family of Convergence Set-Top-Box Products and markets these products under
the name of BroadbandMagic.com. BroadbandMagic.com is a wholly owned subsidiary
of Eagle.
Eagle was incorporated in May 1993, but did not conduct any substantive business
operations until April 1996. During April 1996, Eagle commenced operations by
the issuance of stock for cash, inventories, test equipment, other assets, and
the assumption of liabilities to its principal shareholder. Concurrent with this
transaction, Eagle entered into an asset purchase agreement with a company to
acquire other production equipment, inventories and furniture and equipment. In
August 1997, Eagle amended its articles of incorporation and changed its name to
its current name. Unless otherwise indicated, all information in this Form S-4
has been adjusted to reflect the amended articles of incorporation. Eagle's
principal place of business is located at 101 Courageous Drive, League City,
Texas 77573 and its telephone number is (281) 538-6000.
PRODUCT CATEGORIES
WIRELESS MESSAGING PRODUCTS
For the fiscal years ended August 31, 1998 and 1999, infrastructure equipment,
which includes License Starter, transmitters, base stations, power amplifiers,
link products, multi-terminal arbitrator, Extend-a-Page, Hot Switch Panel, and
consulting services, accounted for substantially all of Eagle's net sales.
Messaging is a method of wireless telecommunication, which uses an assigned
radio frequency to contact a messaging subscriber anywhere within a service
area. A messaging system is generally operated by a service provider that incurs
the cost of building and operating the system. Each service provider in the
United States licenses spectrum from the FCC and elsewhere from the authorized
government body to operate a messaging frequency within either a local,
regional,
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or national geographical area. Each messaging subscriber is assigned a distinct
telephone number that a caller dials to activate the subscriber's pager, a
pocket-sized radio receiver carried by the subscriber. A messaging switch
receives telephone calls by the subscriber. A network of transmitters, that
broadcast a signal over a specific geographical area, then receives the
information from the messaging switch through the controller, and a radio signal
is sent by the transmitters via antennae to the subscriber's pager. The
transmitters manufactured by Eagle are specifically designed to simulcast, which
is the transmission of the same signal over two or more transmitters on the same
channel at the same time in an overlap area, resulting in superior voice and
data quality and coverage area. The radio signal causes the pager to emit a beep
or to vibrate, and to provide the subscriber with information from the caller in
the form of a voice, tone, numeric or alphanumeric message.
A pager has an advantage over a landline telephone in that the pager's reception
is not restricted to a single location, and has an advantage over a cellular
portable telephone in that a pager is smaller, has a much longer battery life,
has excellent coverage, and is less expensive to use. Historically, the
principal disadvantage of traditional messaging service in comparison to
landline telephones or cellular portable telephones has been that messaging
provided only one-way communication capabilities.
However, this limitation may have been overcome in the United States as a result
of the auction in 1994 by the FCC of nationwide and regional licenses for
designated narrowband personal communication services, radio frequencies or
spectrum to service providers. Many of the nationwide license holders and many
of the regional license holders are current Eagle customers, directly or
indirectly. The cost of the licenses to the narrowband personal communication
services auction winners in 1994 was approximately $1 billion. The FCC
anticipates that these narrowband personal communication services licenses will
be used to provide such new services as pager location, two-way acknowledgment
messaging, advanced voice messaging and data services.
The narrowband personal communication services radio frequencies or spectrum are
located at three separate points within the total radio spectrum, at 902-928
MHz, 930-931 MHz and 940-941 MHz. Initially, the radio frequencies located at
930-931 MHz and 940-941 MHz have been designated for outbound message
transmission, to the pager, and the 902-928 MHz have been designated response
channels, from the pager. This application is similar to traditional messaging
except that these license holders have been granted wider frequency bandwidth
permitting the user to transmit substantially more information. In addition,
Eagle manufactures other messaging infrastructure products that cater to the VHF
and UHF messaging frequencies in the United States and other areas of the world
as well as supporting most international messaging brands.
The narrowband personal communication services nationwide licenses cover all
fifty states, the District of Columbia, American Samoa, Guam, the Northern
Marianas Islands, Puerto Rico and the United States Virgin Islands. These
licenses are divided into 50 kHz paired and unpaired channel categories. Paired
channels permit both outbound and inbound signals while unpaired channels are
limited to only outbound signals. The FCC has imposed infrastructure
construction
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or build-out requirements on all narrowband personal communication services
license holders. Each narrowband personal communication services license holder
must establish a minimum service availability for at least 37.5% of the
population in its geographic region within five years after receiving the
license. After ten years, each narrowband personal communication services
license holder must make the service available to at least 75% of the area's
population. If a narrowband personal communication services license holder fails
to achieve these build-out requirements, it risks cancellation by the FCC of its
narrowband personal communication services license and a forfeiture of any
auction monies paid.
Eagle manufactures products that will enable messaging license holders to
legally put their systems into operation at a low cost, a strategy adopted by
Eagle to create a "captive" customer in terms of future build-out.
Eagle offers its customers an end-to-end solution for narrowband personal
communication services applications. Eagle has developed new technology based
products with enhanced architecture and technology from its existing messaging
systems to accommodate the advanced services available through messaging and
PCS. This system approach includes full product lines of radio frequency network
controllers, transmitters, receivers, and a special satellite receiver system,
to receive the response message from the end-user. Eagle is currently shipping
its narrowband personal communication services products to various beta test
sites, based on product development schedules and the build-out requirements of
the narrowband personal communication services license holders.
The design of a messaging system is customer specific and depends on:
o The number of messaging subscribers the service provider desires to
accommodate,
o The operating radio frequency,
o The geography of the service area, o The expected system growth, and
o Specific features desired by the customer.
Messaging equipment hardware and software developed by Eagle may be used with
all types of messaging service, including voice, tone numeric (telephone number
display) or alphanumeric messaging (words and numbers display).
SWITCHES
Eagle is involved at an early stage in the development of industry wide
technology standards and is familiar with developments in messaging protocol
standards throughout the world. Eagle works closely with its customers in the
design of large, complex messaging networks. Eagle believes that its customers'
purchasing decisions are based, in large part, on the quality and technological
capabilities of such networks. Eagle believes that the advanced hardware and
software features of its switches ensure high reliability and high volume call
processing.
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RADIO FREQUENCY EQUIPMENT, TRANSMITTERS AND RECEIVERS
Transmitters are available in frequency ranges of 70 MHz to 960 MHz and in power
levels of 2 watts to 500 watts. Radio link receivers are available in frequency
ranges of 70 MHz to 960 MHz. Satellite link receivers are available for
integration directly with the transmitters at both Ku- and C- band frequencies.
Eagle's range of receivers detects the responses back from the two-way
narrowband personal communication services subscriber devices. The receivers
take advantage of Digital Sound Processing demodulation techniques that maximize
receiver performance. Depending upon frequency, antenna height, topography and
power, Eagle transmitter systems are designed to cover broadcast cells with a
diameter from 3 to 100 miles. Typical simulcast systems have broadcast cells
that vary from 3 to 15 miles in diameter. Eagle transmitters are designed
specifically for the high performance and reliability required for high speed
simulcast networks.
MULTIMEDIA DEVICES
Eagle recently developed WebFlyer, an Internet Set-Top-Box designed to access
the Internet and e-mail through a television set for individual or commercial
use. The WebFlyer is the latest product to be introduced into the multimedia
home entertainment arena. It uses a standard TV set as a monitor, allowing the
user to connect to their chosen ISP on the Internet. The multimedia
entertainment device can at a minimum:
o Receive, write and send e-mail;
o Write a letter, work on a spreadsheet;
o Play games, use learning tools;
o Watch movies from CDs, DVDs, or even downloaded from the Internet; and
o Record on the hard drive direct from the TV, providing better quality
picture than through a VCR.
CONTROLLERS
Eagle currently offers products for transmitter control known as Eagle's L20X
transmitter control system, which is a medium-feature transmitter control system
used in domestic and international markets.
CURRENT PRODUCTS AND SERVICES
The principal products and enhancements currently being manufactured and sold by
Eagle relate to its wireless messaging products and include the following:
LICENSE STARTER
This product provides new messaging license holders a method to install a system
that will keep them in compliance with FCC regulations. The product is
expandable, giving the license holder the ability to fund the expansion from
revenues. Installation of this product requires 110-Volt AC power and a standard
telephone line.
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BASE STATIONS AND TRANSMITTERS
Transmitters and full-featured transmitters called Base Stations are used by
messaging carriers to broadcast radio-frequency messages to subscribers carrying
mobile receivers commonly known as pagers. Eagle offers a slimline Stealth and a
larger Quantum transmitter that is available in the 72MHz, VHF, UHF, and 900MHz
broadcast frequency ranges. Each unit can be equipped to provide an output power
ranging from 15 Watts up to 500 Watts on almost any domestic or international
messaging frequency.
RADIO FREQUENCY POWER AMPLIFIERS
Radio-frequency power amplifiers are a sub-component of both messaging and SMR
transmitters and base stations. The high, medium and low power base station and
link transmitter power amplifiers are designed to operate with any FCC type
accepted exciter or may be combined with an Eagle optional plug-in base station
in the same space as the power amplifier. All Eagle power amplifiers above 100
watts are equipped with Eagle "Heat Trap"(TM) design to provide the user with
long life and high reliability performance.
EXTEND-A-PAGE
Extend-a-Page is a compact lower-power transmitter and receiver set designed to
provide fill-in coverage in fringe locations where normal messaging service from
a wide-area messaging system is not adequate. The Extend-a-Page receives the
messaging data on either a radio frequency control link or wireline link and
converts this information into low power simulcast compatible messaging
transmissions on any of the common messaging frequencies. The Extend-a-Page
transmits the messaging information at a one to two Watt level directly into
hard to reach locations such as hospitals, underground structures, large
industrial plants, and many locations near the outer coverage contour of
messaging systems.
LINK PRODUCTS
Radio frequency and wireline communication links are needed to connect multiple
transmitters within a messaging network. Eagle provides both Link equipment (the
Link 20TX, 20RX, 20GX and 20PX) and the Link 20 software to facilitate this
interconnection. Major competitors have licensed the Eagle Link 20 software and
have incorporated it as an industry standard into their radio-messaging
terminals. Customers may also purchase the same software directly from Eagle as
part of an Eagle system at a lesser cost. Management believes that its software
allows the user to mix and match the products of different vendors on a common
radio-messaging system.
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MICROBEEP
The MicroBeep messaging terminal is a small messaging terminal that can be
plugged into the expansion slot of an IBM compatible computer. This
fully-contained messaging terminal includes a low-power transmitter and
subscriber software. This system is used for local messaging applications within
factories, offices, restaurants and campuses.
MULTI-TERMINAL ARBITRATOR
The Multi-Terminal Arbitrator is a programmable communications switch that
facilitates the sharing of a single radio-frequency transmitter by a maximum of
eight different messaging terminals. A target market for this product is in
private carrier messaging where multiple companies share the same radio
frequency and are required to coordinate the sharing activities.
TWO-WAY MESSAGING DEVICES
Eagle is a licensed distributor of spread-spectrum wireless messaging receivers
that, when used in conjunction with Eagle's one-way messaging transmitters,
provide a two-way messaging system for both consumer and industrial
applications. In addition to the receivers, Eagle currently sells and
distributes a wireless water meter, a wireless power meter, a wireless home
security alarm, a wireless vehicle tracking system and a multi-purpose wireless
module that can be combined with a wide variety of switch-type applications.
CONSULTING SERVICES
Eagle routinely provides consulting services on a contract basis to support the
sale of its main product lines. Examples of these consulting services include
the design and installation of radio messaging systems. Eagle also performs
research and development on a contract basis.
NEW BROADBAND MULTIMEDIA AND INTERNET PRODUCTS
Eagle developed a complete new line of broadband multimedia set-top-box products
during 1999 and has been test marketing and initially distributing these
products under the name of BroadbandMagic.com. BroadbandMagic.com is a wholly
owned subsidiary of Eagle. These new products are multimedia-based products that
provide a user with the ability to interface their Internet connection, their
broadcast video source, their cable or DSL source, or their satellite video
source directly to their television receiver. Eagle markets the new multimedia
and Internet products as convergence set-top-box products. One version of the
convergence set-top-box includes a DVD player and full high performance computer
functionality as well as all of the other convergence set-top-box capabilities.
The marketing plan of Eagle through BroadbandMagic.com has been to initially
focus on the large internet service providers or ISP's and OEM customers who
typically bundle Set-Top-Boxes with their service as their own marketing
strategy. In addition, the convergence set-top-box will be marketed to large
retail distributors, through the company representative network, as well as
through e-commerce web sites and other e-commerce sites. Eagle is currently
negotiating to obtain the necessary additional large scale financing to mass
produce and market these devices.
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SERVICE AND SUPPORT
Eagle provides service to customers on a regular basis including installation,
project management of turnkey systems, training, service or extended warranty
contracts with Eagle. Eagle believes that it is essential to provide reliable
service to customers in order to solidify customer relationships and to be the
vendor of choice when a customer seeks new services or system expansions. This
relationship is further developed as customers come to depend upon Eagle for
installation, system optimization, warranty and post-warranty services.
Eagle has a warranty and maintenance program for both its hardware and software
products and maintains a customer service network in its operating locations.
Eagle's standard warranty provides its customers with repair or replacement of
any defective Eagle manufactured equipment. The warranty is valid on all
products for the period of one year from the later of the date of shipment or
the installation by an Eagle qualified technician.
CUSTOMERS
Eagle sells to a broad range of customers worldwide. In the United States,
customers include the regional Bell operating companies, medical messaging
operators, and public and private radio common carriers. Internationally,
customers include public telephone and telegraph companies, as well as private
telecommunication service providers. Eagle's customers include Motorola,
Pac-Tel, Scientific Atlanta, Bell Atlantic, Metrocall, ProNet, Pacific Bell,
SkyTel, Link-Two Communications and the U.S. Department of Defense.
Eagle's largest customer for 1999, Link Two, accounted for approximately 43% of
Eagle's sales for the fiscal year ended August 31, 1999. Link Two is a common
carrier of exclusively wholesale one-way messaging and two-way messaging network
services. Its customers purchase messaging network services as an aggregator and
resell Link Two's network services to individual subscribers and other
communications providers. Link Two has been classified as an incumbent carrier
by the FCC and has secured the rights to use or options to purchase spectrum in
all of the major metropolitan U.S. cities on five PCP frequencies. Link Two has
also secured several exclusive RCC frequencies providing regional coverage in
two of the top ten markets. More recently, Link Two has secured an exclusive
block of FCC spectrum covering a majority of the population centers in the
southern and western United States in a successful bidding at the FCC auction.
In addition, Link Two has also recently purchased a large block of exclusive
spectrum from another carrier. Link Two is currently operational in Houston and
Dallas, Texas as well as over much of the remaining population base of Texas.
See also "Material Contracts with ClearWorks" on page 32.
MARKETING AND SALES
Eagle markets its products and services in the United States through
representative organizations and internationally through agents. As Eagle's
business is highly technical, a majority of sales are complete systems with
technical support. A large percentage of Eagle's marketing comes from direct
sales by the employees. Eagle also utilizes distributors and agents to sell its
products in certain countries and geographic regions to market outside of
Eagle's core markets.
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Eagle currently has non-exclusive arrangements with eight distributors and
agents to service selected regions within the United States. A non-exclusive
arrangement is also in effect with one distributor on a worldwide basis and
Eagle has one exclusive arrangement with a distributor to service Australia.
Terms of these arrangements provide for payments to the distributors on either a
fixed percentage commission or discount from list price basis. Eagle has an
agreement with Motorola whereby certain products offered by Eagle are listed in
Motorola's product catalog under the Eagle name. In addition, Eagle has been
granted the status of a Value Added Reseller or VAR by Lucent Technologies, Inc.
for all of Lucent's wireless networking or Internet product lines. Eagle has
recently developed a manufacturer's representative for the new multimedia and
Internet product lines. Currently this program consists of fourteen
manufacturers representatives on a worldwide basis.
Eagle maintains and Internet websites at http://www.eglw.com.
www.broadbandmagic.com, www.atlanticpacific.net, and www.etoolz.com where
information can be found on Eagle's and its subsidiaries products and services.
The website provides customers with a mechanism to request additional
information on products and allows the customer to quickly identify and obtain
contact information for their regional sales representative. Information on the
web site of Eagle or any of its subsidiaries is not part of this joint proxy
statement / prospectus and you should not rely on that information in deciding
whether to approve this merger.
INTERNATIONAL BUSINESS RISK
Eagle generated net sales in markets outside the United States, which amount to
less than 2% of total Eagle net sales in the last two years. Sales are subject
to the customary risks associated with international transactions, including
political risks, local laws and taxes, the potential imposition of trade or
currency exchange restrictions, tariff increases, transportation delays,
difficulties or delays in collecting accounts receivable, and, to a lesser
extent, exchange rate fluctuations. Pre-payments and letters of credit drawn on
American or limited foreign corresponding banks are required from international
customers to reduce the risk of non-payment.
RESEARCH AND DEVELOPMENT
Eagle believes that a strong commitment to research and development is essential
to the continued growth of its business. One of the key components of Eagle's
development strategy is the promotion of a close relationship between its
development staff, internally with Eagle manufacturing and marketing personnel,
and externally with Eagle customers. This strategy has allowed Eagle to develop
and bring to market customer-driven products.
Eagle has focused a large portion of its new development resources during 1999
and 2000 on the development of the new broadband multimedia and Internet product
line. In addition, Eagle has formed a number of strategic relationships with
other large suppliers and manufacturers that will allow the latest in technology
and techniques to be utilized in the convergence set-top-box product line. Eagle
will continue to incur research and development expenses with respect to the
convergence set-top-box product line during the current fiscal year.
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Eagle has extensive expertise in the technologies required to develop wireless
communications systems and products including high power, high frequency RF
design digital signal processing, real-time software, high-speed digital logic,
wireless DSL products, radio frequency and data network design. Eagle believes
that by having a research and development staff with expertise in these key
areas, it is well positioned to develop enhancements for its existing products
as well as the next generation of personal communication products. Investment in
advanced computer-aided design tools for simulation and analysis has allowed
Eagle to reduce the time for bringing new products to market. Research and
development expenditures incurred by Eagle for the fiscal years ended August 31,
1999, and August 31, 1998 were $438,693, and $236,869 respectively.
MANUFACTURING
Eagle currently manufactures its wireless products at its facilities in League
City, Texas. Some subassemblies are manufactured for Eagle by subcontractors at
various locations throughout the world. Eagle's manufacturing expertise resides
in assembling subassemblies and final systems that are configured to its
customers' specifications. The components and assemblies used in Eagle's
products include electronic components such as resistors, capacitors,
transistors, and semiconductors such as field programmable gate arrays, digital
signal processors and microprocessors, and mechanical materials such as cabinets
in which the systems are built. Substantially all of the components and parts
used in Eagle's products are available from multiple sources. In those instances
where components are purchased from a single source, the supplier is reviewed
frequently for stability and performance. Additionally, as necessary, Eagle
purchases sufficient quantities of components that have long-lead requirements
in the world market. Eagle ensures that all products are tested, tuned and
verified prior to shipment to the customer.
Eagle has determined that the most cost effective manufacturing method for its
high volume multimedia and internet product line will be to utilize offshore
contract production facilities supplemented with high volume U.S. based contract
facilities. The high volume requirements of convergence set-top-box product line
are well beyond the capabilities of the current facilities and would be cost
prohibitive to construct. However, in the selection of a high volume
international manufacturer, Eagle has selected SCI, an U.S. owned company with
manufacturing facilities in over twenty countries around the world. The initial
manufacturing location for the convergence set-top-box is the SCI facility in
Singapore.
COMPETITION
Eagle supplies transmitters, receivers, controllers and software used in
messaging, voice messaging and message management systems. While the services
from the foregoing products represent a significant portion of the wireless
personal communications industry today, the industry is expanding to include new
services and new markets. The wireless personal communications industry includes
equipment manufacturers that serve many of the same PCS markets served by Eagle.
Many Eagle competitors, and all competitors that have publicly tradable
securities, have significantly greater resources than Eagle, and there can be no
assurance that Eagle will be able to compete successfully in the future. In
addition, manufacturers of wireless telecommunications equipment, including
those in the cellular telephone industry, some of which are larger and have
significantly greater resources than Eagle, could elect to enter into Eagle's
markets and compete with Eagle's products. There can be no assurance that Eagle
will be able to increase its market share in the future.
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Eagle competes with many established companies in the Set-Top-Box business
including Scientific Atlanta, General Instrument, and many smaller companies.
Most of these companies have greater resources available than Eagle does. The
markets that are currently developing for multimedia and other Internet related
products are extremely large and growing daily. Eagle has conducted extensive
study of these markets and is of the belief based on this research that it can
effectively compete in these markets with its new convergence set-top-box
product line. However, there can be no assurance that these conclusions are
correct and that the multimedia and Internet markets will continue to expand at
their current rates and that Eagle can gain significant market share in the
future.
PROPRIETARY INFORMATION
Eagle attempts to protect its proprietary technology through a combination of
trade secrets, non-disclosure agreements, patent applications, copyright
filings, technical measures, and common law remedies with respect to its
proprietary technology. This protection may not preclude competitors from
developing products with features similar to Eagle's products. The laws of some
foreign countries in which Eagle sells or may sell its products do not protect
Eagle's proprietary rights in the products to the same extent as do the laws of
the United States. Although Eagle believes that its products and technology do
not infringe on the proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims against Eagle in the future.
If litigation resulted in Eagle's inability to use technology, Eagle might be
required to expend substantial resources to develop alternative technology.
There can be no assurance that Eagle could successfully develop alternative
technology on commercially reasonable terms. More recently, Eagle has registered
and trademarked the name of BroadbandMagic.com for its new wholly owned
subsidiary. This name is thought by Eagle to be a valuable addition to the
intellectual property rights of Eagle.
REGULATION
Many of Eagle's products operate on radio frequencies. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States and internationally. Regulatory approvals
generally must be obtained by Eagle in connection with the manufacture and sale
of its products, and by customers to operate Eagle's products. There can be no
assurance that appropriate regulatory approvals will continue to be obtained, or
that approvals required with respect to products being developed for the
personal communications services market will be obtained. The enactment by
federal, state, local or international governments of new laws or regulations or
a change in the interpretation of existing regulations could affect the market
for Eagle's products. Although recent deregulation of international
telecommunications industries along with recent radio frequency spectrum
allocations made by the FCC have increased the demand for Eagle's products by
providing users of those products with opportunities to establish new messaging
and other wireless personal communications services, there can be no assurance
that the trend toward deregulation and current regulatory developments favorable
to the promotion of new and expanded personal communications services will
continue or that future regulatory changes will have a positive impact on Eagle.
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EMPLOYEES
At September 1, 2000, Eagle employed approximately 125 persons and retained
three independent contractors. Eagle believes its employee relations to be good.
Eagle enters into independent contractual relationships with various
individuals, from time to time, as needed.
Eagle intends to hire new personnel to support the growth of Eagle. The key
positions that will emerge from this growth include all areas of management from
administration through marketing, sales, financial controller, and personnel
director to quality director.
AVAILABLE INFORMATION
Eagle files annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document Eagle files with the Commission at the Commission's Public
Reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for further information on the public reference
room. Eagle's Commission filings are also available to the public at the
Commission's web site at http://www.sec.gov.
You may request a copy of these filings, at no cost, by writing or telephoning
as follows:
Eagle International, Inc.
Attention: Investor Relations
101 Courageous Drive
League City, TX 77573
Telephone (281) 538-6000
This prospectus is part of a registration statement on Form S-4 Eagle filed with
the SEC under the Securities Act. You should rely only on the information or
representations provided in this prospectus. Eagle has authorized no one to
provide you with different information. Eagle is not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of the document.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with Eagle's financial
statements and accompanying notes to the financial statements.
During the year ended August 31, 1999, the majority of Eagle's revenues
originated from shipments for a two- way messaging system that Eagle was
installed for Link-Two Communications in the Houston and Dallas metroplexes and
from contract research and development services. Other sales during this period
were to Eagle's broader customer base and were comprised principally of
messaging infrastructure products. This sales mix is consistent with the pattern
of sales Eagle realized during the year ended August 31, 1998. The expansion of
Eagle's manufacturers' representative organization during the year did not
significantly contribute to an increase in the sales of its messaging
infrastructure products. A major restructuring within the messaging equipment
industry by both Motorola and Glenayre Electronics and the implementation of
cost reduction campaigns by messaging carriers have created uncertainty in the
messaging equipment industry that has caused many customers to delay messaging
infrastructure equipment purchases.
During the nine months ended May 31, 2000, Eagle's primary operations were
concentrated in the on-going development, marketing and beta testing of
multi-media set top devices and the acquisitions of two companies in the
structured wiring industries and one R&D company. The new products are currently
being tested by multinational distribution companies, Internet service
providers, national retail distribution companies and multiple international
hotel companies. Eagle expects to commence selling these products in the fourth
quarter ending August 31, 2000. Additionally, Eagle commenced the sale of fiber
optic cabling and other custom wiring products and services on a national basis
through its new subsidiary Atlanticpacific Communications. Eagle intends to
continue to expand its operations into the cabling industries through additional
acquisitions of companies located throughout the United States.
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 1999 COMPARED TO THE YEAR ENDED AUGUST 31, 1998
NET SALES. For the year ended August 31, 1999, net sales on products sold
decreased to $2,217,275 from $4,827,434 during the year ended August 31, 1998.
The decrease of $2,610,159, or 54%, was attributable to the shifting focus to
the research, development and sale of the convergence set-top-box devices, and
away from Eagle's traditional products.
COST OF GOODS SOLD. For the year ended August 31, 1999, cost of goods sold on
Eagle's product sales decreased to $1,336,502 from $1,964,954 during the year
ended August 31, 1998. The decrease of $628,452, or 32%, was primarily
attributable to fewer products sold and costs associated with production. The
decrease in cost of sales reduced Eagle's gross profit percentage for products
sold and increased costs associated with production.
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OPERATING EXPENSES. For the year ended August 31, 1999, operating expenses
decreased to $1,318,981 from $2,107,058 during the year ended August 31, 1998, a
decrease of $788,077 or 37%. The primary portions of the decrease are discussed
below:
o A $677,854 decrease in salaries, or 92%.
o A $117,356 decrease in advertising and promotion, or 61%.
o A $130,789 decrease in other support costs, or 16%.
However, Eagle's research and development costs increased approximately $202,000
due to existing officers and employees being utilized in the development of the
convergence set-top-box.
NET EARNINGS. For the year ended August 31, 1999, Eagle's net earnings decreased
to $168,271 from $770,968 during the year ended August 31, 1998.
CHANGES IN CASH FLOW. Eagle's operating activities used net cash of $405,953 in
fiscal 1999 and $1,498,393 in fiscal 1998. The decrease in net cash used by
operating activities in fiscal 1999 was primarily attributable to a change in
Eagle's business activities. Eagle's investing activities used net cash of
$1,528,262 in fiscal 1999 and $344,519 in fiscal 1998. Such increase was due
primarily to an increase in its investment in Link-Two Communications in 1999.
Eagle's financing activities provided cash of $1,024,935, in fiscal 1999 and
$45,596 in fiscal 1998, and such increase was primarily the result of financing
activities consisted primarily of the sale of common stock, which was partially
offset by the repayment of shareholder advances.
NINE MONTH PERIOD ENDED MAY 31, 2000 COMPARED TO THE NINE MONTH PERIOD ENDED
MAY 31, 1999
During the nine months ended May 31, 2000, Eagle acquired two companies in the
fiber optics industry and one R&D company, completed the majority of the field
testing of the set top boxes for commercial and residential distribution, and
developed new products for wireless DSL and advanced television interface
applications. Additionally, Eagle has filed patents for the Java Acceleration
Card and the Bluetooth Set Top Box integration technology. Concurrent with these
activities, Eagle has been marketing the company's products at numerous domestic
and international shows, which target both commercial and residential electronic
distribution companies.
Revenues for the nine months ended May 31, 2000 and 1999 totaled $1,903,000 and
$1,658,000, respectively. The increase in revenues is principally due to an
increase in sales to commercial customers which require structured wiring for
computers and infrastructure communications equipment. During this third
quarter, the Eagle's marketing resources were directed to identifying product
demand for the convergence set-top-box devices, world-wide sales shows, and
development new wireless application customers. Eagle anticipates that these
sales efforts will provide new customers in the wireless, Internet and
convergence set-top-box device markets and constitute the majority of sales in
the ensuing fiscal year. Concurrent with this marketing effort, Eagle has
engaged international manufacturers to produce the convergence set-top-box.
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Operating expenses for the nine months ended May 31, 2000 and 1999 totaled
$2,267,000 and $1,308,000, respectively. These expenses increased as a result of
the employment of new sales and engineering personnel to support the marketing
of multi-media set top devices, development of the advanced television
entertainment interface, wireless products for expanding DSL services and
completion of the java accelerator card. Additionally, the company continues to
incur certain costs in identifying potential cable and fiber industries for
acquisition. The Companies research and development costs will continue to
increase as new multi-media software and hardware products are developed which
integrate with current and evolving television technology.
Current assets as of May 31, 2000 and August 31, 1999 totaled $34,602,000 and
$3,072,000, respectively. The principal increase in working capital was due to
the increase in cash from the exercise of warrants. Current liabilities as of
May 31, 2000 and August 31, 1999 totaled $2,853,000 and $1,414,000,
respectively. This increase is attributable to the increase in the purchase of
set top box component and fiber wiring.
Eagle's stockholders' equity as of May 31, 2000 and August 31, 1999 totaled
$44,914,000 and $8,894,000, respectively. This increase is attributable to the
significant exercise of the various categories of warrants.
LIQUIDITY AND CAPITAL RESOURCES.
Eagle entered into a $4,500,000 convertible note credit facility, of which Eagle
has drawn down and repaid $1,500,000. The balance is available subject to
certain terms and conditions. Eagle believes that its current cash position will
provide sufficient working capital through August 2001. Additionally, Eagle is
negotiating with lenders to obtain additional acquisition and production
financing, although there is no assurance that such financing can be obtained.
DESCRIPTION OF PROPERTY
Eagle's headquarters are located in League City, Texas and include approximately
23,000 square feet of leased office and production space. The lease is at market
rate and expires in 2001. Eagle has insured its facilities in an amount that it
believes is adequate and customary in the industry. In addition, Eagle maintains
subsidiary offices in two other Houston area locations, San Antonio, Texas,
Chicago, Illinois, and Oxnard California. Eagle believes that its existing
facilities are adequate to meet its current requirements but anticipates the
need to acquire additional space within the next two years. Eagle believes that
suitable additional space in close proximity to its existing headquarters will
be available as needed to accommodate the growth of its operations through the
foreseeable future.
LEGAL PROCEEDINGS
In September 1999, Eagle was named as defendant in a lawsuit, involving its
former landlord regarding an alleged breach of the lease and a claim for
approximately $25,000 filed in the County Civil Court at Law No.1 in Harris
County, Texas. Eagle is currently in discovery and intends to vigorously defend
this lawsuit. Eagle has filed a countersuit against its former landlord claiming
breach of the lease in an attempt to recover deposits, and collect damages in
connection with the dispute regarding the former rental space.
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MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of Eagle common stock are listed on the American Stock Exchange under the
symbol "EAG." On September 15, 2000, the last full trading day prior to the
public announcement of the proposed Merger Agreement, Eagle's common stock
closed at $4.63 per share. On October 20, 2000 Eagle's common stock closed at
$3.125 per share. Eagle is authorized to issue 100,000,000 shares of common
stock, 26,524,163 of which were issued and outstanding at November 1, 2000. At
November 1, 2000, there were approximately 427 holders of record of Eagle common
stock.
The table set forth below, for the periods indicated, list the reported high and
low sale prices per share of Eagle common stock on the American Stock Exchange.
EAGLE COMMON STOCK
-----------------------
High Low
----------------------------------------------- ---------- ----------
FISCAL 1998
----------------------------------------------- ---------- ----------
Quarter ended November 30, 1997 ......... $ 4.75 $ 2.75
----------------------------------------------- ---------- ----------
Quarter ended February 28, 1998 ......... $ 3.56 $ 0.88
----------------------------------------------- ---------- ----------
Quarter ended May 31, 1998 .............. $ 1.69 $ 1.12
----------------------------------------------- ---------- ----------
Quarter ended August 31, 1998 ........... $ 2.16 $ 0.88
----------------------------------------------- ---------- ----------
FISCAL 1999
----------------------------------------------- ---------- ----------
Quarter ended November 30, 1998 ......... $ 2.00 $ 1.09
----------------------------------------------- ---------- ----------
Quarter ended February 28, 1999 ......... $ 3.06 $ 1.53
----------------------------------------------- ---------- ----------
Quarter ended May 31, 1999 .............. $ 2.81 $ 1.66
----------------------------------------------- ---------- ----------
Quarter ended August 31, 1999 ........... $ 2.75 $ 1.03
----------------------------------------------- ---------- ----------
FISCAL 2000
----------------------------------------------- ---------- ----------
Quarter ended November 30, 1999 ......... $ 2.00 $ 1.00
----------------------------------------------- ---------- ----------
Quarter ended February 29, 2000 ......... $19.00 $ 1.13
----------------------------------------------- ---------- ----------
Quarter ended May 31, 2000 .............. $19.50 $ 5.62
----------------------------------------------- ---------- ----------
The Merger Agreement requires Eagle to issue approximately 29,450,740 additional
shares of its common stock. The issuance of new shares will result in a 111%
increase in the number of outstanding shares of Eagle. As a result, the
percentage of common stock held by beneficial owners of more than five percent
of Eagle common stock will be decreased. In particular, the percentage of
beneficial ownership of Eagle's officers and directors, who at September 1, 2000
beneficially owned 672,667 shares of Eagle's common stock, will decrease from 3%
to approximately 1.2%.
Eagle has never paid any cash dividends on its common stock and does not
anticipate paying cash dividends within the next two years. Eagle anticipates
that all earnings, if any, will be retained for development of its business. Any
future dividends will be subject to the discretion of the board of directors and
will depend on, among other things, future earnings, Eagle's operating and
financial condition, Eagle's capital requirements and general business
conditions.
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INFORMATION ABOUT THE COMPANY BEING ACQUIRED
CLEARWORKS.NET, INC.
GENERAL
ClearWorks provides voice, data and video transmission services to residential
and commercial customers located primarily in the Houston, Texas area. Our
services consist of installing and maintaining fiber optic cable and copper
wire. ClearWorks then sells Internet access, telephone service, and television
programming over those lines. Our operations are primarily focused in the
Houston, Texas area and we also operate and provide service in San Antonio and
Austin, Texas, and Phoenix, Arizona. In addition, ClearWorks opened an office in
London, England and seek to offer its products there.
To provide services, ClearWorks installs and maintains fiber optic and copper
data transmission lines from our data transmission facilities to our prospective
customers' properties. After the lines have been installed, ClearWorks sells our
customers telephone service, access to the Internet, and cable and satellite
television programs, all of which are transmitted in digital format over the
same lines. ClearWorks refers to its ability to simultaneously offer telephone,
Internet and television products as "Bundled Digital Services", which ClearWorks
also refer to as "BDS(sm)", and ClearWorks have applied for and received
servicemark protection for the term BDS(sm).
STRATEGY
ClearWorks strategy is to acquire and integrate into its organization technology
and technology-based companies that are focused on the delivery of a suite of
digital services to its clients. ClearWorks is taking advantage of the
convergence of telephone, cable TV, satellite TV, Internet and
telecommunications technologies to accomplish its objectives. These efforts are
designed to take advantage of the deregulation of the telecommunications
industry based on the passage by the US Congress of the Telecommunications Act
of 1996.
ClearWorks initially began developing voice, data and video integration
capabilities to address the needs of businesses. However, during early
operations, ClearWorks recognized an opportunity to utilize its expertise to
develop and deliver Bundled Digital Services to residential customers directly.
ClearWorks then developed a proprietary solution to deliver its digital services
package directly to consumers, and ClearWorks developed technology that can
utilize a high speed Internet connection for the delivery of all services.
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COMPANY HISTORY
On September 18, 1997, Millennium Integration Technologies, L.L.C. was organized
as a Texas limited liability company. At the time, Millennium concentrated
mainly on software administration and networking integration. Shannon D.
McLeroy, ClearWorks current President, was the founder of Millennium.
Michael T. McClere, ClearWorks current Chief Executive Officer, joined the
management of Millennium in early 1998, and on April 9, 1998 the LLC reorganized
itself into Millennium Integration Technologies, Inc., a Texas corporation.
ClearWorks refers to the reorganized company as Millennium Texas.
On April 27, 1998, Southeast Tire Recycling, Inc., a publicly traded Florida
corporation with no ongoing operations that previously had been engaged in the
tire recycling business, purchased the stock of Millennium Texas. At the time of
this transaction, Southeast was an empty corporate shell. As a result,
Millennium Texas became a wholly owned subsidiary of Southeast. The exchange of
shares between Millennium Texas and Southeast recapitalized the Millennium Texas
operations into the corporate shell of Southeast.
On May 12, 1998, Southeast merged with and into ClearWorks. At the time of the
merger, ClearWorks was a Delaware corporation with no stockholders, and the
stockholders of Southeast became our stockholders. The exchange of shares with
Southeast was accounted for as a second recapitalization of the Millennium Texas
operations into our corporate shell.
On May 26, 1998, ClearWorks expanded its high tech business by acquiring
InfraResources, L.L.C. through our wholly owned subsidiary, Millennium Texas.
InfraResources is a provider of high-end consulting services with respect to
integrated solutions for client/server based computing. ClearWorks paid $40,000
cash and 80,000 shares of our common stock, which were valued at $2.06 per share
for the purposes of this transaction, in exchange for all the outstanding
interests of InfraResources. The funding for this acquisition was derived from
revenues.
On May 29, 1998, ClearWorks acquired all the outstanding shares of Team
Renaissance, Inc. in exchange for 156,250 shares of common stock, which
ClearWorks valued at $2.06 per share for the purposes of this transaction. Team
Renaissance is a provider of network computing solutions that specializes in
delivering systems integration services, design services, and structured wiring
solutions.
On November 19, 1998, ClearWorks purchased all the assets of Vidatel
Communications, a sole proprietorship owned by Juan "John" Diaz, which is
engaged in the business of laying fiber optic and copper based cable. ClearWorks
issued Mr. Diaz 98,039 shares of common stock, which ClearWorks valued at $1.53
per share for the purposes of this transaction, in exchange for the Vidatel
assets. ClearWorks did not incur liabilities in this transaction except for
assuming a note payable to Planet Ford bearing interest at 13.46%, due $513.33
monthly until September 2002, in the principal amount of $18,078.
On May 14, 1999, ClearWorks acquired all the membership interests of
Archer-Mickelson Technologies, L.L.C. and Archer became our wholly owned
subsidiary. Archer provides the
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integration services described above in the description of the business of
ClearWorks Integration Services, Inc. ClearWorks paid $50,000 and 75,000 shares
of common stock for the purchase of Archer, which ClearWorks valued at $1.00 per
share for the purposes of this transaction. In addition, ClearWorks agreed to
pay obligations of Archer in the amount of $5,547. The funding for the cash
portion of this acquisition was derived from our revenues. On June 3, 1999,
Archer reorganized itself into ClearWorks Integration Services, Inc., a Texas
corporation.
In April 1999, ClearWorks began using the name ClearWorks.net, Inc. The primary
reason for the use of this name is that ClearWorks utilize Internet protocol
technology in providing Bundled Digital Services to our customers. Our
activities also relate to the Internet because our use of high-speed fiber
optics cable is anticipated to aid in reducing Internet bottlenecks. By the time
ClearWorks started using the new name, ClearWorks had three wholly owned
subsidiaries:
o ClearWorks Integration Services, Inc. (formerly Archer-Mickelson
Technologies),
o ClearWorks Structured Wiring, Inc. (formerly Millennium Integration
Technologies, Inc.), and
o ClearWorks Communications, Inc. (which has two wholly owned
subsidiaries called Northpointe Telecom Services, L.L.C. and Stonegate
Telecom, L.L.C.).
On December 30, 1999, ClearWorks acquired all the outstanding stock of two Texas
corporations, United Computing Group, Inc. and United Consulting Group, Inc.
collectively the companies. Both companies became wholly owned subsidiaries of
ClearWorks Integration. Collectively the companies provide Internet consulting,
design, and implementation, including the sale, installation and integration of
computer hardware equipment, as well as information technology and staffing.
This type of business is typically referred to in the technology industry as an
accelerator company. ClearWorks paid 2,000,000 shares of common stock for the
purchase of these companies, which ClearWorks valued at $2.25 per share for the
purposes of this transaction. In addition, ClearWorks provided United Computing
Group a $500,000 loan, the proceeds of which were used to repay loans to United
Computing Group made by former stockholders of United Computing Group. The
funding for the cash portion of this acquisition was derived from funds raised
in the December 1999 Private Placement. On July 13, 2000, ClearWorks announced
our plan to merge United Computing Group with and into our subsidiary ClearWorks
Integrated Services and change the name of the subsidiary to "Clearworks IT
Solutions, Inc."
On March 17, 2000, ClearWorks purchased the assets of Secure All Security, a
home security company located in San Antonio, Texas. At the time of the
acquisition, Secure All was a sole proprietorship owned by Mr. Ronnie Evans.
ClearWorks paid 34,000 shares of common stock for the purchase of Secure All,
which ClearWorks valued at $9.00 per share for the purposes of this transaction,
plus an aggregate of $225,000 cash. The funding for the cash portion of this
acquisition was derived from funds raised in the December 1999 Private
Placement.
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On September 15, 2000, ClearWorks purchased the assets of LDConnect.com, which
is engaged in the business of providing flat fee telephone long distance service
and debit calling cards for the United States and Canada. At the time of the
acquisition, LDConnect.com was a Texas corporation. ClearWorks paid 1,000,000
shares of common stock for the purchase of LDConnect, which ClearWorks valued at
$4.00 per share for the purposes of this transaction.
PRINCIPAL OPERATING COMPANIES
ClearWorks have four wholly owned subsidiaries which constitute our principal
operating companies:
o ClearWorks Structured Wiring Services, Inc.,
o ClearWorks Communications, Inc.,
o ClearWorks Integration Services, Inc., and
o ClearWorks Home Systems, Inc.
ClearWorks also have a subsidiary known as ClearWorks.net UK, PLC which was
formed to market and deliver the Company's products and services in the United
Kingdom and other European countries.
ClearWorks Communications has two wholly owned subsidiaries named Northpointe
Telecom Services, L.L.C. and Stonegate Telecom, L.L.C. ClearWorks Integration
has two wholly owned subsidiaries named United Computing Group, Inc. and United
Consulting Group, Inc. both of which are Texas corporations. On July 13, 2000,
ClearWorks announced our plan to merge United Computing Group with and into our
subsidiary ClearWorks Integrated Services and change the name of the subsidiary
to "ClearWorks IT Solutions, Inc." ClearWorks believe that ClearWorks have an
advantage by operating these companies together based on delivering similar
services to both commercial and residential customers, much like the regional
Bell operating companies do today. Additionally, ClearWorks can utilize our
proprietary technology to deliver voice, data and video solutions to both sets
of customers via the Internet.
Our ClearWorks Structured Wiring Services, Inc. subsidiary focuses primarily on
developing commercial accounts for deployment of structured wiring solutions.
These customers consist of companies that seek outside expertise to deploy fiber
optic and copper-based structured wiring solutions, ClearWorks Structured Wiring
generates revenue through time and materials billings, consulting contracts,
service and support contracts. ClearWorks do not intend for ClearWorks
Structured Wiring to focus on product sales, but rather on acting as a provider
of structured wiring solutions.
Our ClearWorks Communications, Inc. subsidiary focuses primarily on the delivery
of integrated voice, data and video services to the residential marketplace. Our
proprietary technology enables this subsidiary to proceed into the voice, data
and video market for bundled consumption. ClearWorks foresee deploying dialtone,
multi-channel digital video services, dedicated Internet connectivity, on-demand
video rental, voicemail, and a community intranet as a Bundled Digital Service
over one wire into the home. The market for these customers is just beginning to
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develop and is benefitted by a strategic business alliance with other companies
in the technology market. ClearWorks Communications is providing solutions to
consumers by implementing technology both within the community and within the
home. Within the residential community, ClearWorks Communications is installing
fiber optic backbones to deliver voice, data and video solutions directly to
consumers.
Our ClearWorks Integration Services, Inc. subsidiary provides information
technology staffings, network engineering, vendor evaluation of network
hardware, implementation of network hardware, and support of private and
enterprise networks. Additional services include desktop rollouts,
multi-platform supports and Local Area Networks (known as "LAN"), as well as
Wide Area Networks (known as "WAN") analysis and server deployment. Through its
United Computing Group and United Consulting Group subsidiaries, ClearWorks
Integration is engaged in the Internet consulting, design and implementation
business. On July 13, 2000, ClearWorks announced our plan to merge United
Computing Group with and into our subsidiary ClearWorks Integrated Services and
change the name of the subsidiary to "Clearworks IT Solutions, Inc." This
business includes the sale, installation and integration of computer hardware
equipment as well as information technology and staffing.
Our ClearWorks Home Systems, Inc. subsidiary focuses on installing and
maintaining in-home security systems.
To further our operations, ClearWorks have developed a Remote Response
Center which consists of three primary components:
o the Network Support Center,
o the Remote Network Management Center, and
o the Internet Support Center.
The Network Support Center is fully operational and provides existing clients
with advanced technical support and comprehensive network operational support.
The Remote Network Management Center enables the Company's Systems Engineers to
monitor and administer clients' LAN and WAN systems remotely from our
headquarters by means of an established communication link. The Internet Support
Center offers a broad range of services including Internet access, security and
publishing services. ClearWorks intend to leverage the services provided by the
Remote Response Center in order to enhance our long-term client relationships
and to expand the scope of services offered to existing and potential clients.
ClearWorks software and hardware products are designed to enhance our ability to
provide complex technology solutions for enterprise-wide networks. ClearWorks is
an authorized nonexclusive reseller of networking products, which enables us to
deliver integration services. Generally, our products are technically
sophisticated and require a high level of integration services for successful
deployment. ClearWorks has nonexclusive reseller relationships with many
industry-leading vendors of information technology products, including Compaq,
Computer Associates, Network Associates, IBM, Hewlett Packard and 3Com.
ClearWorks also purchases technology from Cisco Systems, Netscape and General
Instruments. ClearWorks is a
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value added reseller; that is, ClearWorks purchases hardware and software
directly from the manufacturer and resell these products at a higher price
(retail) directly to our customers. Our relationships with these leading
aggregators of computer hardware and software enable us to provide clients with
competitive product pricing, ready product availability and services such as
electronic product ordering, product configuration and testing, and product
warehousing and delivery. Moreover, these relationships enable us to reduce
inventory costs by not carrying inventory normally associated with the delivery
of these products.
ClearWorks also is a nonexclusive value added reseller of fiber and copper for
companies such as Seicor Corporation, Lucent Technologies, Panduit, Leviton
Telecom, AMP Incorporated, Ortonics, Siemen Corporation and Belldon Wire &
Cable. There are no binding long-term commitments with respect to any of the
business relationships referred to in this or the preceding paragraph of this
section. Each of these relationships can be terminated by either party at any
time.
REVENUES
ClearWorks derive 51% of our revenues from network cabling and wiring; 45% of
revenues from integration services; and 4% of revenues from software
administration.
MARKETS, MARKETING AND ADVERTISING
Although ClearWorks core market is the Houston, Texas area, potential markets
include most suburban and urban areas in the United States and perhaps in other
countries. Most of ClearWorks marketing comes from direct efforts by employees.
The remainder of our marketing is in the form of referrals from suppliers,
together with a limited amount of advertising in trade magazines and
newsletters.
PRINCIPAL SUPPLIERS
ClearWorks Structured Wiring Services, Inc. purchases all of its fiber, IBM Home
Director boxes, switches, connectors, interducts, and routers from several
vendors, principally from G.E. Supply, Anixter, Accu-Tech Supply, LiteComm
Supply Company, TVC Communications, and Rexel/Summers.
ClearWorks Integration Services, Inc. purchases most of its software products
from Tech Data or directly from the respective manufacturers of these products.
ClearWorks Communications, Inc. purchases most of its supplies and equipment
from TVN Entertainment Corp., B&H Commercial Services, TVC Incorporated and
Siecor Corporation. ClearWorks Communications also purchases supplies and
software from General Instruments, Cisco Systems, and Netscape, either directly
from the respective manufacturers of these products or through distributors.
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ClearWorks has not experienced shortages or other difficulties in obtaining
components, supplies or other materials. ClearWorks currently anticipate that
components, supplies and other necessary materials will remain readily
available.
CLEARWORKS WEBSITE
ClearWorks maintain an Internet website at http://www.clearworks.net where
information about our services can be found. The website provides customers with
a mechanism to request additional information on services and allows customers
to obtain contact information for particular services and support. However,
ClearWorks does not earn any revenues from the operation of the website, which
is informational only. Moreover, our website is not a part of this Registration
Statement on Form S-4.
RESEARCH AND DEVELOPMENT
ClearWorks spent approximately $175,000 on research and development during 1999
and approximately $217,000 on research and development during 1998. ClearWorks
expects to continue to commit substantial resources for R&D in order to improve
and expand the performance and capability of Bundled Digital Services.
BUSINESS DEVELOPMENTS
ClearWorks has formed a strategic business alliance with Land Tejas Development,
L.L.C., a major real estate developer in Houston, Texas. ClearWorks currently is
beginning the installation of a state-of-the-art multi-channel video, telephone
and Internet communications network, which ClearWorks refers to as Bundled
Digital Services, in each of the Land Tejas development projects in Houston,
Texas. The first development project to receive this network will be the Canyon
Gate project. The project is underway and fiber optic cable will be installed in
each of the Canyon Gate communities beginning with the Canyon Gate at
Northpointe subdivision in Houston, Texas. On March 26, 1999, ClearWorks entered
into a service agreement with Land Tejas Development at Northpointe, L.L.C. and
the Canyon Gate at Northpointe Home Owner's Association to begin installing
Bundled Digital Services in the Northpointe subdivision. Northpointe Telecom
Services, L.L.C. services the Northpointe area. It is further anticipated that
the Bundled Digital Services will provide many benefits to the homeowners in
these communities, and ClearWorks believes its efforts will receive national
attention based on the types of services delivered and the innovation associated
with its delivery.
The Bundled Digital Services installation at Canyon Gate communities is
anticipated to be completed over a span of three years ranging through mid-year
2002.
BUNDLED DIGITAL SERVICES
ClearWorks believes that there is substantial demand from customers for bundled
telecommunications services provided on a single monthly bill and with a single
point of contact for all sales and services. Through our Bundled Digital
Services business, ClearWorks can
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provide a broad array of telecommunications services aimed at addressing
customers' needs, including basic local exchange services (i.e. local telephone
services or dialtone), enhanced switch services (i.e. telephone options such as
call waiting, caller identification, voicemail, etc.), Internet services, and
video channel transmission services.
ClearWorks Bundled Digital Services customers receive video, audio and data
signals transmitted by nearby television and radio broadcast stations,
terrestrial microwave relay services and communications satellites. The signals
are then amplified and distributed by optical fiber to the premises of customers
who pay a fee for the service. In many cases, video signals also originate and
distribute local programming. ClearWorks multi-channel video systems generally
will carry up to 1,000 digital channels. Compressed digital video technology
converts on average as many as 14 analog signals (which also will be used to
transmit video and voice) into a digital format and compresses the signals
(which is accomplished primarily by eliminating the redundancies in television
imagery) into the space normally occupied by one analog signal. The digitally
compressed signal is uplinked to a satellite, which retransmits the signal to a
satellite dish or to a head-end facility at the sub-division to be distributed
via optical fiber to the customer's home. At the home, a set-top video terminal
converts the digital signal into analog channels that can be viewed on a normal
television set.
HIGH-SPEED INTERNET ACCESS
The use of computers, online services and the Internet has increased
significantly over the last few years. ClearWorks believes in the revenue
opportunities of Internet-related services and are taking advantage of these
opportunities by developing and providing high-speed Internet access via our
advanced network and point to point optical fiber. By using Bundled Digital
Services network technology that delivers multi-channel video and telephone
services, users can access the Internet at speeds up to hundreds of times faster
than existing telephone modems. In particular, ClearWorks intends to offer
residential subscribers Internet services that deliver data to homes through a
fiber optic backbone infrastructure at speeds up to hundreds of times faster
than traditional telephone dial-up alternatives.
SERVICE AND PROGRAMMING CHARGES
Subscribers to our Bundled Digital Services generally will be charged monthly
fees based on the level of service selected, either Basic Bundled Services,
Enhanced Bundled Services or Maximum Bundled Services. Monthly prices for the
various levels of services (excluding services offered on a per-channel or
per-program basis) range generally from $78 to $138 for residential customers.
Other services offered include equipment rentals, usually for an additional
monthly fee. Systems offering pay-per-view movies generally charge between $4
and $6 per movie, and systems offering pay-per-view events generally charge
between $6 and $50, depending on the event. A one-time installation fee
generally is charged for connecting subscribers to the Bundled Digital Services,
however, the installation fee has been waived for the residents at Canyon Gate
at Northpointe.
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SALES FORCE
Our sales professionals are trained to provide commercial and residential
customers with sales and customer service relating to all of our services. Once
a customer contracts with us for services, ClearWorks assigns a single account
relations representative who has the responsibility of proactively contacting
the customer to confirm satisfaction with existing products and to promote new
services and programs. Our sales staff works to gain a better understanding of
the customer's operations in order to develop innovative, application-specific
solutions to each customer's needs. Sales personnel locate potential business
customers by several methods, including customer referral, market research, cold
calling and other networking alliances.
POSSIBLE FUTURE ACQUISITIONS
ClearWorks has examined the size and highly fragmented composition of our
industry and have identified the potential to carry out a market roll-up within
the systems integration marketplace. Initially, ClearWorks intends to expand our
business through selective, strategic acquisitions of other companies with
complementary businesses, which companies' revenues range from $1 million to $15
million. ClearWorks believes that companies in this range of revenues may be
receptive to our acquisition program because often they are too small to be
identified by larger public companies as acquisition targets of or to
independently attempt their own public offering. In particular, ClearWorks
intends to focus its acquisition strategy on candidates which have a proven
record of delivering high-quality technical services and a customer base of
large and mid-sized companies and which could benefit from our anticipated
access to sources of financing as well as our long-term growth strategy.
Generally, acquisition candidates are introduced to us through mutual colleagues
or referrals from suppliers and vendors and, occasionally, companies that are
seeking to be acquired present themselves to us. ClearWorks anticipates using
our common stock as the primary source of funding future acquisitions.
ClearWorks typically conducts acquisitions by entering into stock-for-stock
transactions or asset purchase agreements.
In connection with this strategy ClearWorks identified an acquisition candidate:
o On August 3, 2000 ClearWorks entered into a letter of intent to
acquire Link Two Communications, a nationwide provider of high speed
wireless broadband access. The acquisition of Link Two Communications
is anticipated to provide us with a strategic arm in which to address
the large retrofit market in wireless Bundled Digital Services. See
"Material Contracts with ClearWorks".
REGULATION AND LEGISLATION
ClearWorks business is subject to regulation by governmental authorities.
Following is an overview of some of the laws and regulations which affect our
operations.
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FEDERAL LAWS. The Cable Communications Policy Act of 1984 referred to as the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecommunications Act are the
principal federal statutes governing the cable television industry. These
statutes regulate, among other things, the following:
o Cable system rates for both basic and non-basic services; programming
access and exclusivity arrangements;
o Access to cable channels for public, educational and governmental
programming;
o Leased access terms and conditions;
o Horizontal and vertical ownership of cable systems;
o Consumer protection and customer service requirements;
o Franchise renewals;
o Television broadcast signal carriage requirements and retransmission
consent;
o Technical standards; and
o Privacy of customer information.
FEDERAL REGULATIONS. The FCC is the principal federal regulatory agency with
jurisdiction over cable television. The FCC has promulgated regulations
implementing federal laws which cover our operations. Nearly all cable
television systems are subject to local rate regulation of basic service
pursuant to a formula established by the FCC and enforced by local franchising
authorities. In response to complaints filed by franchising authorities, federal
legislation requires the FCC to review rates for non basic service tiers, known
as "cable programming service tiers" or "CPST", except for per-channel or
per-program services. Federal legislation also:
o prohibits cable television systems from requiring subscribers to
purchase service tiers above basic service in order to purchase
premium service if the system is technically capable of doing so;
o requires the FCC to adopt regulations to establish, on the basis of
actual costs, the price for installation of cable service and rental
of cable equipment; and
o and allows the FCC to impose restrictions on the retiering and
rearrangement of basic and CPST services under limited circumstances.
Under the 1996 Telecommunications Act, regulation of CPST rates terminated on
March 31, 1999. Regulation of both basic and CPST rates also ceases for any
cable system subject to "effective competition." The 1996 Telecommunications Act
expanded the definition of
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"effective competition" to cover situations where a local telephone company or
its affiliate, or any multi channel video provider using telephone company
facilities, offers comparable video service by any means except DTH.
Under federal regulations, cable television operators have the opportunity to
make cost-of-service showings which, in some cases, may justify rates above the
applicable benchmarks. The regulations also provide that future rate increases
may not exceed an inflation-indexed amount, plus increases in costs beyond the
cable operator's control such as taxes, franchise fees and programming costs.
Cost-based adjustments to these capped rates can also be made in the event a
cable operator adds or deletes channels or significantly upgrades its system. In
addition, new product tiers consisting of services new to the cable system can
be created free of rate regulation as long as conditions are met. For example,
services may not be moved from existing tiers to the new product tier. The rules
also require that charges for cable-related equipment (for example, converter
boxes and remote control devices) and installation be itemized separately from
the provision of cable television service and the charges must be based upon
actual costs plus a reasonable profit. Also, local franchising authorities and
the FCC are empowered to order a reduction of existing rates which exceed the
maximum permitted level for either basic and CPST services and associated
equipment, and refunds can be required.
COMPETITIVE LOCAL EXCHANGE CARRIER
On August 26, 1999, the Public Utility Commission of Texas approved our
application for a service provider certificate of operating authority or a
"SPCOA", and ClearWorks became a Competitive Local Exchange Carrier, which also
is referred to as a CLEC. On February 15, 2000, our application for an SPCOA was
approved by the Nevada Public Utility Commission, and ClearWorks now qualifies
as a CLEC in Nevada and may offer telecom services in Nevada.
ClearWorks pursued the SPCOA applications because the Telecommunications Act of
1966 mandated that the monopoly in local exchange service be opened to
competition. Thus, incumbent providers must allow other companies to
interconnect with existing phone networks and buy facilities from the owners of
these networks. These steps are critical for competitors to solicit customers
with the assurance that they will receive quality service. Becoming a CLEC gave
us access to Southwestern Bell's dial tone, thus saving potentially tens or
hundreds of millions of dollars on infrastructure investments.
EMPLOYEES
ClearWorks had a total of 115 employees at September 1, 2000 in addition to
independent contractors. ClearWorks currently outsource human resources
functions for employment administration services, benefits management services,
and for billing our BDS products. None of our employees is represented by a
labor union with respect to his or her employment by us. ClearWorks have not
experienced any organized work stoppages and believe that our relationship with
employees is good.
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OUTSTANDING LOANS
On August 4, 1999 ClearWorks borrowed $801,512 from KMA Investments at an
interest rate of 12% per year. This loan is due on or before July 9, 2000 and is
evidenced by a promissory note. If the note and all accrued interest is not paid
when due, the delinquent amount automatically converts into shares of our common
stock at the rate of one share for each $1.375 of principal and/or interest.
ClearWorks may prepay principal and interest only after giving the holder 30
days prior notice to effect conversion. ClearWorks intend to rely upon future
debt and equity offerings to finance our operations. On April 17, 2000,
ClearWorks elected to convert this outstanding loan into shares of common stock,
and the loan was converted into a total of 588,747 shares of common stock.
On October 14, 1999, ClearWorks borrowed $500,000 from NTL Securities. This loan
is evidenced by a promissory note and accrues interest at the rate of 12% per
year. All accrued and unpaid principal and interest are due on May 1, 2001.
On October __, 2000, ClearWorks borrowed $1,000,000 from Eagle. See "Material
Contracts with ClearWorks".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and comparison of the financial condition and
results of ClearWorks operations for the six month periods ended June 30, 2000
and June 30, 1999. Also included is a similar discussion and comparison as of
and for the years ended December 31, 1999 and 1998. These discussions should be
read in conjunction with the financial statements, the notes related to the
financial statements, and the other financial data included in this prospectus.
RESULTS OF OPERATIONS
THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED
JUNE 30, 1999.
The following table includes significant information regarding our operations
during the six month periods ended June 30, 2000 and 1999:
JUNE 30, JUNE 30,
2000 1999
----------- -----------
Revenues ............................... $12,977,066 $1,025,000
Cost and expenses ...................... $16,105,101 $2,008,000
Loss from operations ................... $(3,128,035) $ (983,000)
Net loss ............................... $(7,487,158) $ (996,000)
Basic and diluted loss per share ....... $ (.34) $ (.07)
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The following summary table presents on comparative cash flows for the six month
period ended June 30, 2000 and June 30, 1999:
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Net cash used by operating activities ........ $(3,254,478) $ (534,000)
Net cash used by investing activities ........ $(1,803,323) $(1,374,000)
Net cash provided by financing activities .... $ 3,896,824 $ 1,847,000
REVENUES
Total revenue increased by $11,952,066 over the June 30, 1999 fiscal quarter to
$12,977,066 (an increase of 1,166%) for the six months ended June 30, 2000.
ClearWorks acquired three companies during 1998, two companies during 1999, and
one company in 2000. As a direct result of these acquisitions, ClearWorks have
been able to significantly increase our revenue in the primary areas in which
ClearWorks compete.
Revenues from ClearWorks Structured Wiring decreased from $425,356 through the
second quarter 1999 to $333,677 (a decrease of 22%) for the June 30, 2000
period. Structured wiring revenues are derived from providing wiring solutions
for commercial and education customers. ClearWorks Structured Wiring deployed
its structured wiring solutions to major education and commercial customers in
the Houston area during the six months ended June 30, 2000. ClearWorks
anticipate that the decrease in revenues will continue as resources within
ClearWorks Structured Wiring are deployed on internal projects to build out
Fiber-To-The-Home telecommunications networks.
Revenues from ClearWorks Home Systems increased from $0 through the June 30,
1999 period to $729,658 for the June 30, 2000 period. Home Systems revenues are
derived from providing wiring solutions for residential, security systems and
audio/visual equipment. ClearWorks anticipate that the increase in revenues will
continue as ClearWorks expand into new markets and completes acquisitions.
ClearWorks are currently ramping up to meet the demand generated by communities
in the ClearWorks Communications backlog.
Revenues from ClearWorks Communications increased from $0 through the June 30,
1999 period to $973,918 for the June 30, 2000 period. Revenues from delivery of
our Bundled Digital Services were $42,000 for the year ended December 31, 1999.
ClearWorks currently deliver voice, video and data services to residential homes
in primarily new communities. ClearWorks are currently deploying new
infrastructure to ramp subscribers from its backlog of residential communities.
Our subscriber revenue ramps up directly proportional to the number of new homes
built in its subdivisions each quarter. ClearWorks anticipate bringing new
communities on-line in the fourth quarter of 2000.
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COSTS AND EXPENSES
Costs and expense increased to $12,159,763 through the period ended June 30,
2000 compared to $618,000 through the period ended June 30, 1999. Costs and
expenses grew based on an increase in new revenues primarily from acquisitions
and from the opening of new offices for the company. New offices were
established in Phoenix Arizona, San Antonio and Dallas, Texas. Gross margins
within the subsidiaries were consistent with managements expectations, with
consolidated gross margins decreasing form forty percent (40%) through the June
30, 1999 period to six percent (6%) (a decrease of 34%) for the June 30, 2000
period. This decrease resulted primarily from the operational costs of
acquisitions consummated by the company and from expansion costs of opening new
offices.
General and administrative expenses increased to $3,125,586 through the period
ended June 30, 2000, compared to $1,304,000 through the period ended June 30,
1999. Selling, general and administrative expenses consisted primarily of
compensation to employees and management. During the six months ended June 30,
2000, ClearWorks continued our rapid growth, deploying resources to expand in
all areas. ClearWorks Home Systems expansion included the acquisition of all
personnel from Secure-All Security, which are primarily sales oriented and the
establishment of a Phoenix Arizona office. ClearWorks Communications continued
deploying on their Bundled Digital Services (BDS(sm)) contracts including adding
customer service personnel to support the increasing subscriber base as well as
field personnel to physically deploy fiber optics cable. ClearWorks IT Solutions
added sales personnel to support the increase in revenue as well as accounting
personnel to assist with record keeping. ClearWorks added a director of
marketing to begin the extensive development of materials, advertising, and
consumer awareness products. ClearWorks also expanded our accounting workforce
by the addition of human resources specific personnel as well as the addition of
a new controller. Several areas of the Home Systems business were streamlined
including the closing of all secondary market offices including Laredo,
Harlingen, and McAllen, Texas locations. The Company had approximately 200
management, sales and administrative personnel at June 30, 2000.
ClearWorks has recorded goodwill equivalent to the excess of the cost of
companies acquired over the fair value of their net assets at the dates of
acquisition. ClearWorks amortize this cost over a five-year period. In addition
ClearWorks acquired fixed assets to support the business growth. The fixed
assets are depreciated over a two to seven year period. Depreciation and
Amortization expenses increased by $733,752 to $819,752 for the six months ended
June 30, 2000 primarily due to the amortization of goodwill associated with
acquisitions.
OTHER INCOME/EXPENSE
Other income and expense is comprised of interest income and expense. ClearWorks
earned $8,768 in interest in this six month period ended June 30, 2000. Interest
expenses increased to $4,367,891 through the period June 30, 2000, compared to
$13,000 through the period ended June 30, 1999. Interest accrued primarily on
outstanding convertible debentures which are due August 2000 and May 2001.
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CAPITAL EXPENDITURES
ClearWorks have incurred capital expenditures for construction of operating
facilities, transportation and other field equipment, office furniture and
computer equipment and software used in our operations. Capital expenditures for
the six months ended June 30, 2000 were $1,968,323 compared to $1,339,000
through the period ended June 30, 1999. Capital expenditures were primarily
utilized for the deployment of the Company's Fiber-To-The-Home (FTTH) program to
deliver high speed broadband services to residential communities.
CAPITAL RESOURCES
During the six months ended June 30, 2000, Candlelight exercised its right to
acquire, upon total payment to us of $4,000,000, an additional $4,000,000 face
value of debentures and additional warrants to purchase up to 280,000 shares of
common stock. In connection with the private placement, ClearWorks agreed not to
sell any of our securities until ninety (90) days after the effectiveness of
this registration statement, unless the securities are
o issued in connection with a public offering of at least $15 million
o in connection with and acquisition of additional businesses or assets
or compensation to employees, consultants, officers or directors.
LIQUIDITY
ClearWorks ability to satisfy its obligations depends in part upon our ability
to reach a profitable level of operations and securing short and long-term
financing for development of our commercial and residential products. ClearWorks
is currently in discussions with other financial institutions to provide
additional funding through a combination of debt and equity to fund its business
plan. There is no assurance that short and long-term financing can be obtained
to fulfill our capital needs. Without the short or long-term financing,
ClearWorks will attempt to sell additional common stock to meet our current and
future capital needs. If ClearWorks is not able to obtain either short or
long-term funding or funding through the sale of common stock, ClearWorks would
be required to cut back our expansion plans and operate the facilities
ClearWorks currently has built, and fund operations with internally generated
funds from its integration, structured wiring and communications business units.
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THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
The following table includes information regarding our operations during 1999
and 1998:
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
Revenues ........................... $ 3,032,000 $ 1,090,000
Cost and expenses .................. 7,430,000 1,332,000
Loss from operations ............... (4,398,000) (242,000)
Net loss ........................... $(5,159,000) $ (252,000)
Basic and diluted loss per share ... $ (.29) $ (.03)
The following summary table presents our comparative cash flows for 1999 and
1998:
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
Net cash used by operating activities ...... $(2,697,000) $ (91,000)
Net cash used by investing activities ...... $(2,459,000) $ (235,000)
Net cash provided by financing activities .. $ 6,241,000 $ 484,000
Cash used in operating activities for 1999 was $2,697,000, an increase of
$2,606,000 over 1998. The primary components of the increase were a net loss of
$5,159,000, an increase in accounts receivable of $739,000 and an increase in
inventories and other assets of $129,000 and $398,000, respectively. This was
partially offset by an increase in accounts payable of $926,000. Cash used by
investing activities was $2,459,000, an increase of $2,224,000 over the same
period in 1998. The primary components of the increase were the construction of
the head-end facility at the Canyon Gate at Northpointe sub-division and cash
issued in our two 1999 acquisitions. Cash provided by financing activities for
1999 was $6,241,000 which was provided by the sale of common stock, borrowings
and the issuance of 6% convertible debentures. This was an increase of
$5,757,000 over the 1998 period.
REVENUES
Total revenue increased by $1,942,000 for 1998 to $3,032,000 (an increase of
178%) for 1999. ClearWorks acquired three companies during 1998 and two
companies during 1999. As a direct result of these acquisitions, ClearWorks have
been able to significantly increase revenue in the primary areas in which
ClearWorks operates. Further increases are projected for the year 2000 as a
result of the acquisition of United Computing Group and United Consulting Group
on December 30, 1999.
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Revenues from integration services increased from $535,000 during 1998 to
$1,607,000 (an increase of 200%) for the 1999 period. Integration revenues are
derived from three principal product lines; information technology staffing and
network engineering, vendor evaluation of network hardware and implementation of
network hardware and support of private and enterprise networks. ClearWorks have
been able to increase revenues in the integration area primarily due to the
acquisition of Archer Mickelson, LLC in May 1999 and an increased customer base
and expansion of Bundled Digital Services.
Revenues from structured wiring solutions for residential, commercial and
education customers was $1,383,000, an increase of $828,000 (149%) over the same
period last year. ClearWorks Structured Wiring Services, Inc. deployed its
structured wiring solutions in 408 homes in the Canyon Gate at Northpointe,
Stonegate, the Brazos and Cinco Ranch sub-divisions in the Houston area during
1999. A total of eight home-builders used our structured wiring solutions during
this period. ClearWorks also deployed our structured wiring solutions to three
Houston area independent school districts, two universities and twenty-one
commercial customers.
Revenues from delivery of our Bundled Digital Services were $42,000 for 1999.
ClearWorks began billing for our services at Canyon Gate at Northpointe
sub-division in September 1999. ClearWorks currently deliver video and data
services to homes at Northpointe and have signed an interconnection agreement
with Southwestern Bell Telephone Company to begin delivering voice during the
first quarter of 2000. Subscriber revenues will increase as additional homes are
completed within the sub-division and a full complement of integrated voice,
video and data services are delivered to the homes. Furthermore, revenues will
increase as ClearWorks begin to provide Bundled Digital Services to the back-log
of new sub-divisions currently under contract.
COSTS AND EXPENSES
Costs and expenses increased to $7,430,000 for 1999 compared to $1,332,000 for
1998. Integration services and materials increased to $1,280,000, an increase of
$778,000 over 1998. Salaries of network engineers and information technology
consultants, coupled with increased purchases for resale of computer hardware
and software were the primary components of the increase. The gross profit
margin for integration services increased from 7% in 1998 to 26% for 1999. This
increase resulted primarily from the acquisition of Archer Mickelson, which had
customers that provided better profit margins than our customers during 1998.
Structured Wiring Services' labor and materials increased to $1,295,000 for
1999, an increase of $756,000 over 1998. Increased business activity was the
primary reason for the increase. The gross profit margin for structured wiring
increased from 3% for 1998 to 7% for 1999. Bundled Digital Services costs were
$222,000. There were no Bundled Digital Services costs for 1998. ClearWorks are
building our infrastructure and, as such, have incurred start-up expenses for
deployment of services.
Selling, general and administrative expenses increased by $4,221,000 to
$4,428,000 for 1999, from $207,000 in 1998. During 1999, ClearWorks concentrated
on building infrastructure for implementation of our business plan. ClearWorks
added key management and other personnel in all areas of our organization to
provide support for deployment of Bundled Digital Services and other revenue
generating areas. Salaries and related expenses increased from $12,000 for 1998
to
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$1,187,000. ClearWorks had 22 management, sales and administrative personnel at
December 31, 1999. As part of our compensation plan, ClearWorks awarded shares
of common stock and cash to certain employees and other service providers during
1999. The value associated with the issuance of the stock and warrants was
$1,277,000 and $648,000 respectively and was a non-cash charge against earnings.
There was no stock issued for compensation to employees in 1998.
Legal fees increased from $10,000 in 1998 to $243,000 in 1999, Legal fees were
related to SEC filings, litigation and general corporate matters in the amounts
of $66,000, $84,000 and $93,000, respectively. Accounting fees were $139,000 and
were comprised of expenses associated with the Company's audit for the year
ended December 31, 1998, SEC reporting and compliance, and outside consultants.
There were no accounting fees incurred during 1998. The cost of investor
relations increased from $3,000 in 1998 to $175,000 in 1999. These expenses are
comprised of transfer agent expenses, investor relations firm fees, press
release services, printing and postage. Rents increased from $15,000 in 1998 to
$112,000 in 1999. The primary component of this category was the cost associated
with the lease of executive office space. Other selling, general and
administrative expenses increased from $167,000 in 1998 to $607,000 in 1999.
This category is primarily comprised of travel and entertainment expenses,
outside consultants, insurance, office supplies and telephone and communications
expenses.
ClearWorks recorded goodwill equivalent to the excess of the cost of companies
acquired over the fair value of their net assets at the dates of acquisition.
ClearWorks amortize this cost over a five-year period. Amortization of goodwill
was $121,000 and $70,000 for 1999 and 1998, respectively. Depreciation expense
for 1999 was $84,000 compared to $14,000 for 1998.
OTHER INCOME/EXPENSE
Other income and expense is comprised of interest income and expense. ClearWorks
earned $63,000 in interest during 1999. Interest expense increased to $824,000
during 1999 and is composed primarily of the value attributable to the
beneficial conversion feature of the 6% convertible debentures issued in
December 1999 plus interest accrued on field vehicle loans and promissory notes.
CAPITAL EXPENDITURES
ClearWorks incurred capital expenditures for construction of operating
facilities, transportation and other field equipment, office furniture and
computer equipment and software used in operations. Capital expenditures for
1999 totaled $1,994,000 and for 1998 totaled $208,000. ClearWorks have completed
the head-end facility at Canyon Gate at Northpointe and have begun installing
conduit in the ground at the Stonegate sub-division to begin deployment of
Bundled Digital Services to the residents of Stonegate.
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CAPITAL RESOURCES
During 1999, capital resources were provided primarily by capital contributions
from stockholders, through an offering of common stock under Rule 504 of
Regulation D under the Securities Act of 1933 which realized $1,000,000, and two
private placements of common stock to a total of three entities which realized
$1,450,000. In addition, ClearWorks issued a promissory note on August 4, 1999,
which is due July 9, 2000, in the principal amount of $801,512 at an annual
interest rate of twelve percent. If the note and all accrued interest is not
paid when due, the delinquent amount automatically converts into shares of
common stock at the rate of one share for each $1.375 of principal and/or
interest. ClearWorks may prepay principal and interest only after giving the
holder 30 days prior notice to effect conversion. At maturity, the holder of the
note has the right to convert the principal and unpaid interest of the note into
restricted common stock.
On October 14, 1999, ClearWorks issued a promissory note to NTL Securities in
the principal amount of $500,000. This note carries a 12% rate per year and is
payable on or before May 1, 2001.
On December 13, 1999, ClearWorks borrowed $150,000 from Michael T. McClere, its
Chairman of the Board and Chief Executive Officer. This loan was evidenced by a
promissory note and bore interest at the rate of 12% per year until ClearWorks
repaid it on January 10, 2000.
On September 29, 2000, ClearWorks borrowed $101,000 from Michael T. McClere, its
Chairman of the Board and Chief Executive Officer. This loan was evidenced by a
promissory note and bore interest at the rate of 12% per year until ClearWorks
repaid it on October 11, 2000.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No,
133, "Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes new accounting and reporting standards requiring that all derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS
133, as amended, is effective for all fiscal years beginning after June 15,
2000. ClearWorks has not yet determined the impact, if any, SFAS 133 will have
on our financial position or results of operations, and plan to adopt this
standard for the year ending December 31, 2001.
DESCRIPTION OF PROPERTY
The principal offices of ClearWorks are located in Houston, Texas, consisting of
approximately 9,000 square feet of space. The Company leases this space under an
agreement that expires in
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2003 at a current annual base rental of approximately $129,000. The Company also
leases warehouse space in Houston, Texas at a current annual rental rate of
approximately $20,000. This agreement expires on September 30, 2000. There is
also an office located in Phoenix, Arizona, and with the acquisition of
Secure-All Security, an office in San Antonio, Texas.
United Computing Group, Inc. leases approximately 8,000 square feet of office
and warehouse space in Houston, Texas. The current annual base rental is
approximately $74,000 and the lease expires on August 31, 2001. United Computing
Group also has office and warehouse space leased at an annual rental rate of
approximately $17,000 which lease expires on February 28, 2001. United Computing
Group has sub-leased this space through the end of the lease to a third party at
an annual sub-lease rate of $12,000.
LEGAL PROCEEDINGS
CLEARWORKS IS SUBJECT TO LEGAL PROCEEDINGS AND CLAIMS WHICH ARISE IN THE
ORDINARY COURSE OF BUSINESS. CLEARWORKS DOES NOT EXPECT THAT THE RESULTS IN ANY
OF THESE LEGAL PROCEEDINGS WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION OR RESULTS OF OPERATIONS.
ClearWorks is currently plaintiff in CLEARWORKS.NET, INC. V. MICHAEL C. CALLIHAN
AND LINDA CALLIHAN; 157th Judicial District Court of Harris County, Texas; Cause
No. 2000-10296. Suit was filed February 25, 2000 after attempts to mediate were
unsuccessful alleging causes of action based on breach of contract, breach of
warranty, fraud in stock transactions and common law fraud. The facts underlying
the lawsuit are as follows: On or about May 21, 1998, the principal shareholder
of Team Renaissance, Inc. entered into a merger agreement with us. Shortly
thereafter, the principal shareholder, Michael Callihan, requested that
ClearWorks pay in full promissory notes in which Mr. Callihan was the payee.
However, those promissory notes were neither disclosed in the merger agreement
nor attached to the merger agreement as exhibits. A dispute arose between us and
Mr. Callihan regarding the validity of the promissory notes. Additionally, a
dispute arose regarding credit card accounts held in the name of Mr. Callihan
which Mr. Callihan claims are a ClearWorks obligation and which ClearWorks
claims are the personal debt of Mr. and Mrs. Callihan. Also, prior to closing,
we learned that the Callihans had failed to make payments to its employees and
contractors, and had also failed to pay its suppliers, in direct violation on of
the merger agreement between the parties. ClearWorks intends to continue to
vigorously prosecute our claims against the Callihans and ClearWorks is seeking
to be reimbursed for, among other things, the funds expended by the Company to
make the payments to the employees, contractors and suppliers and for return of
or reduction of the shares paid to the Callihans. ClearWorks further seeks
damages for breach of contract, breach of warranty, fraud in stock transactions
and common law fraud and are seeking recovery of the stock issued to the
Callihans. The Court has ordered the case to mediation on or before November 30,
2000. The case is currently set for trial during the two week period beginning
June 18, 2001.
ClearWorks is a defendant in Cause No. 98-34 190; MARTIN R. NATHAN V. CLEAR
WORKS TECHNOLOGIES, INC., ET. al.; In the 216th Judicial District Court, Harris
County, Texas, which case was referred to arbitration in Case No.
70-168-00402-99; American Arbitration Association, CLEARWORKS TECHNOLOGIES,
INC.; MICHAEL T MCCLERE, RACHEL MCCLERE 1998 TRUST; MCCLERE
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FAMILY TRUST; AND SHANNON MCLEROY VS. TIM PENNINGTON, RECOH TRICOTE, INC.,
INTERNAL REVENUE SERVICE AND MCMANUS & COMPANY, P.C., JAMES W. WALTERS, J.
STANFORD LIFSEY AND JANET W. LIFSEY, EARL STOVER AND DEBRA SMITH. This suit,
however, has been dismissed, and the parties have agreed to work out a
settlement of all claims. One of the claims among the parties to this proceeding
is focused upon apportionment of liability among the parties for damages, if
any, payable to Tim Pennington in the action brought by him against ClearWorks.
This suit was originally instituted by Plaintiffs' Original Petition filed in
the above referenced cause of action by Martin R. Nathan, alleged escrow agent,
against the Company and others. This suit was filed as an interpleader action
and arises out of the reverse merger pursuant to that one certain Agreement for
Purchase of Common Stock dated April 1, 1998, which created the public form of
the Company as it now exists. Pursuant to the terms of certain escrow agreements
or arrangements between the original stockholders of Millennium Integration
Technologies, a predecessor to the Company, and Southeast Tire Recycling, Inc.,
the original owners of Southeast Tire escrowed shares of stock in the Company
that they received in the transaction in order to satisfy any disclosed or
undisclosed outstanding obligations of Southeast Tire as of the date of the
merger. The claimants in the proceeding are the Company and the former
stockholders of Millennium Integration Technologies. The principal respondents
are those former stockholders of Southeast Tire, referred to as the Walters
Group, who are alleged to have indemnity obligations to the claimants and who
have escrowed approximately 86,000 shares of the Company's stock to secure any
outstanding obligations claimed by any party and arising prior to the date of
the merger. The known claims are Recoh Tricote, Inc., Internal Revenue Service,
Tim Pennington and McManus & Company, P.C.
ClearWorks is currently a defendant in Cause No. 98-34 190-A; TIM PENNINGTON V.
CLEAR WORKS TECHNOLOGIES, INC. AND JAMES W. WALTERS; In the 269th Judicial
District Court of Harris County, Texas. Reference is made to the foregoing
paragraphs describing the Nathan lawsuit. While all other interpleader claims
referenced in the foregoing paragraphs were referred to arbitration and
subsequently dismissed pursuant to agreement, the remaining claim by Tim
Pennington was severed into an independent cause of action. Tim Pennington has
filed a petition asserting claims against the Company. These claims allegedly
first arose with Mr. Pennington's employment with Southeast Tire Recycling, Inc.
Mr. Pennington claims that he had an employment agreement with Southeast Tire
Recycling, Inc. providing him with approximately $42,000.00, options to purchase
up to 175,000 shares of free trading stock, 100,000 shares of restricted stock,
and an additional 50,000 shares for every six (6) months of Pennington's
employment. Pennington claims that his employment agreement was breached by
Southeast Tire prior to the merger. Pennington also claims that he was also the
owner of 300,000 shares of common stock of Southeast Tire. Pennington's claims
are addressed to ClearWorks, although the alleged misconduct was not the conduct
of ClearWorks but that of its predecessor, Southeast Tire, and its stockholders,
officers and directors. Pennington's claims are grounded in breach of contract,
fraud, state and federal securities fraud, and conversion. Pennington seeks a
judgment in excess of $100,000 plus punitive damages, court cost, attorneys'
fees and interest. The Company has filed its answer and a counterclaim to the
filing by Pennington. The Company intends to dispute the claim and to raise
affirmative defenses on behalf of the Company, such as failure of a condition or
conditions to the agreement, estoppel, latches, and that Pennington's claims are
limited to claims against the escrowed shares and that Pennington's claims are
not properly asserted against the Company, but should be addressed to the former
officers, directors, and stockholders.
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This lawsuit is currently in the discovery phase. A the Court has ordered that
this lawsuit be mediated. Trial date is scheduled for December 11, 2000. The
Company intends to vigorously contest all claims in this case. The Company also
expects to pursue its indemnity claims in this proceeding against the former
stockholders of Southeast Tire of whom have agreed to indemnify the Company of
these claims or are otherwise legally obligated to do so. The Company also
expects to assert claims for any out of pocket expenses, attorneys' fees and
other costs of defense in this case against the former stockholders and the
proceeds of the shares of stock held in the registry of the District Court in
the proceeding identified in the Nathan lawsuit above.
ClearWorks also currently is a defendant in CAUSE NO. 1999-15281; ROBERT HORN
VS. CLEAR WORKS TECHNOLOGIES, INC. Suit was filed March 25, 1999, in the 333rd
Judicial District Court of Harris County, Texas, alleging causes of action based
on breach of contract in the amount of approximately $200,000.00. The facts
underlying this lawsuit are as follows: Robert Horn entered into an employment
agreement with us effective April 1, 1998. The employment agreement contained a
condition precedent which stated: "The completion and subsequent release of
escrow money associated with the initial 504 offering of the Company's
securities on or before May 1, 1998, is a condition precedent to the obligation
of any party hereunder." The condition precedent was not met because ClearWorks
did not have a 504 offering prior to May 1, 1998. On July 1, 1998, Mr. Horn
tendered his notice of resignation effective July 31, 1998. On March 25, 1999,
Mr. Horn filed a lawsuit claiming that ClearWorks had terminated Mr. Horn's
employment without cause. ClearWorks filed an Answer on April 16, 1999 denying
the claim and asserting our affirmative defenses. This lawsuit is currently in
the discovery phase. The parties have scheduled a mediation in this lawsuit.
Trial is scheduled for the two-week period beginning February 5, 2001.
ClearWorks are vigorously contesting these claims by Robert Horn on the basis
that they are without merit.
ClearWorks is a defendant CAUSE NO. 1999-62209; SHERMAN GERALD MASON, D/B/A
CASTLE DEVELOPMENTS, LTD. V. CLEARWORKS.NET, INC. FORMERLY CLEARWORKS
TECHNOLOGIES, INC.; IN THE DISTRICT COURT OF HARRIS COUNTY, TEXAS; 157TH
JUDICIAL DISTRICT. On December 17, 1999, Sherman Gerald Mason d/b/a Castle
Developments, Ltd. filed suit against the Company in the 157th Judicial District
Court of Harris County, Texas. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with the Company and seeks recovery of 500,000
shares of stock. He also seeks recovery of alleged monthly retainer payments in
an undisclosed amount and seeks injunctive relief. The Company has filed an
answer disputing all liability, asserting that the contract was terminable and
that the contract is not enforceable because of the prior breaches of the
consulting agreement by Mr. Mason.
ClearWorks has answered. ClearWorks has moved to have the case submitted to
arbitration, and the Plaintiff has agreed to do so. No discovery has been
propounded and no scheduling order or trial date has been entered in connection
with the case or the arbitration.
ClearWorks is a defendant in CAUSE NO. 728431; CHARTERWOOD ASSOCIATES, LTD. V.
CLEARWORKS STRUCTURED WIRING SERVICES, INC.; IN THE COUNTY CIVIL COURT AT LAW
NUMBER THREE (3), HARRIS
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COUNTY, TEXAS. On January 21, 2000, Charterwood Associates, a Texas Limited
Partnership, sued Clearworks Structured Wiring Services, Inc., a subsidiary of
the Company. The suit presents claims for breach of a contract to design,
operate and maintain "bundled digital services" to Plaintiffs apartment complex.
The suit seeks recovery of damages in the sum of $78,746.69 plus interest,
attorneys' fees and cost of court. The Company denies the claims. The Company
maintains its own claims for breach of contract in connection with the same
project. The Company has filed an affidavit claiming lien against the apartment
project owned by the Plaintiffs claiming that $52,800 is unpaid for services and
materials provided. The Company will seek attorneys' fees, interest and cost of
court in connection with its counter-claim, when filed.
No discovery has been taken. The Court has scheduled a trial date beginning the
week of March 5, 2001.
The Company intends to vigorously contest all claims in this case. The Company
also expects to vigorously pursue collection of its claims for services rendered
and materials provided.
ClearWorks is a defendant in CAUSE NO. 2000-30394; MERGER COMMUNICATIONS, INC.
VS. CLEARWORKS TECHNOLOGIES, INC.; IN THE 281ST JUDICIAL DISTRICT COURT OF
HARRIS COUNTY, TEXAS. On June 16, 2000, Merger Communications, Inc. sued the
Company. The suit presents claims for breach of a contract to provide Company
public relations services. The suit seeks recovery of damages in the sum of
$7,797.92, the value of 106,667 restricted shares of Company common stock as of
the date of the alleged breach plus interest, attorneys' fees and cost of court.
The Company denies the claims and has filed an answer.
No discovery has been taken. The Court has not scheduled a trial date. The
Company intends to vigorously contest all claims in this case.
ClearWorks is a defendant in CASE NO. CV2000015051; VALLEY FIRST COMMUNITY BANK
VS. CLEARWORKS.NET, INC. AND CLEARWORKS HOME SYSTEMS, INC.; IN THE SUPERIOR
COURT OF ARIZONA, MARICOPA COUNTY. On August 16, 2000, Valley First Community
Bank. sued the Company and its subsidiary ClearWorks Home Systems, Inc. The
facts underlying the lawsuit are as follows: On or about June 21, 2000,
ClearWorks Home Systems, Inc. executed a binding letter of intent to purchase
from Valley First certain assets, which Valley First represented to ClearWorks
Home System that it held a first lien. The purchase price for such assets was
set at $150,000.00. Subsequently, ClearWorks Home Systems, Inc. discovered that
Valley First did not in fact hold a first lien on such assets. Moreover,
ClearWorks Home Systems discovered that such assets were sold in a landlord's
auction. As a result, ClearWorks Home Systems, Inc. did not pay Valley First
$150,000. Valley First filed its lawsuit and such suit presents claims for
breach of contract, breach of implied duty of good faith and fair dealing,
conversion, intentional interference with contract, and promissory
estoppel/detrimental reliance. The suit seeks recovery of an unspecified amount
of damages not less than $150,000, attorneys' fees and cost of court. The
Company denies the claims and has filed an answer, including affirmative
defenses.
No discovery has been taken. The Court has not scheduled a trial date.
ClearWorks intends to vigorously contest all claims in this case.
Clearworks is a defendant in CAUSE NO. 00-361-C; BUCKALEW EMPLOYMENT SERVICES,
INC. VS. CLEARWORK.NET, INC. DBA CLEARWORKS TECHNOLOGIES, INC.; IN THE DISTRICT
COURT OF KLEBERG COUNTY, TEXAS. On July 14, 2000, Buckalew sued Clearworks
presenting claims for payment of an account. The Suit seeks recovery of damages
in the sum of $13,832.96, attorneys' fees and cost of court. Buckalew filed a
motion for substitute service and the company was served on September 27, 2000
by posting the petition to the door at 2450 Fondren, Suite 200, Houston, Texas
77063. Clearworks, however never became aware of such lawsuit, and Buckalew made
no attempt to contact Clearworks' general counsel. Clearworks became aware of
such lawsuit on October 25, 2000 and immediately contacted Buckalews' counsel.
Upon receiving a copy of the lawsuit via fax, Clearworks immediately filed an
answer denying all claims.
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ClearWorks is a defendant in CIVIL NO. 00-K-1982; CARL THOMPSON ASSOCIATES, INC.
VS. CLEARWORKS.NET, INC.; IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT
OF COLORADO. On October 4, 2000, Carl Thompson Associates, Inc. sued the
Company. The facts underlying the lawsuit are as follows: On or about January
13, 2000, ClearWorks.net, Inc. executed a letter agreement for investor
relations services for a term of one year. During the month of March, a dispute
arose regarding Carl Thompson's hourly billing rates for answering shareholder's
telephone inquiries, which billing rates were not initially disclosed to the
Company. Thereafter, the Company ceased using Carl Thomson's services, and Carl
Thompson ceased providing services. Carl Thomson filed its lawsuit presenting
claims for breach of contract, unjust enrichment, action on account, quantum
meruit, and breach of contract-implied covenant of good faith and fair dealing.
The suit seeks recovery of damages in the sum of $521,415.00, attorneys' fees
and cost of court. The Company denies the claims and will be filing an answer
and affirmative defenses.
ClearWorks intends to vigorously contest all claims in this case.
A ClearWorks subsidiary is a defendant in CAUSE NO. 741287; INTERNATIONAL
INTEGRATED SOLUTIONS VS. CLEARWORKS INTEGRATION SERVICES, INC. AKA AND DBA
CLEARWORKS INTEGRATION SVCS AND ARCHER MICKELSON TECHNOLOGIES; IN THE COUNTY
CIVIL COURT AT LAW NUMBER 4 OF HARRIS COUNTY, TEXAS. On September 22, 2000,
International Integrated Solutions sued ClearWorks Integration Services
presenting claims for an action on account. The suit seeks recovery of damages
in the sum of $29,890.20, attorneys' fees and cost of court. The Company filed
an answer denying all claims. The Company is currently in settlement
negotiations.
ClearWorks is a defendant in CAUSE NO. 740809; CONSECO FINANCED VENDOR SERVICES
CORPORATION FORMERLY DOING BUSINESS AS GREEN TREE VENDOR SERVICES CORPORATION
VS. CLEARWORK.NET, INC. FORMERLY DBA CLEARWORKS TECHNOLOGIES, INC. AND MICHAEL
T. MCCLERE; IN THE COUNTY CIVIL COURT AT LAW NUMBER 1 OF HARRIS COUNTY, TEXAS.
On October 3, 2000, Conseco Financed Vendor Services sued the Company presenting
claims for breach of lease, and sued Michael T. McClere as guarantor under the
contract. The suit seeks recovery of damages in the sum of $19,785.84,
attorneys' fees and cost of court. The Company filed an answer denying all
claims. ClearWorks is currently in settlement negotiations.
United Consulting Group, Inc. and United Computing Group, Inc., each of which
became a wholly owned subsidiary of our ClearWorks Integration subsidiary on
December 30, 1999, are defendants and counter-plaintiffs in SALES CONSULTANTS OF
HOUSTON'S. UNITED CONSULTING GROUP, INC. AND UNITED COMPUTING GROUP, INC.; In
the County Civil Court at Law Number 1 of Harris County, Texas; Cause No.
720200. Plaintiffs filed their lawsuit on August 24, 1999 alleging causes of
action based on breach of contract and fraud. The facts underlying the lawsuit
are as follows: On or about March 16, 1999, Sales Consultants of Houston ("Sales
Consultants"), which is in the personnel placement business, entered into an
agreement with United Consulting Group, Inc. in which United Consulting agreed
to pay Sales Consultants a finder's fee for placing an employee with United
Consulting. United Consulting agreed to pay a finder's fee in the amount of 30%
of the new employee's base salary. Shortly thereafter, a dispute arose regarding
the amount of the new employee's base salary. United Consulting claims that the
base salary was $8,000 because the new employee was offered $4,000 per month for
only two months
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plus commissions. Sales Consultants claims that the new employee's base salary
is calculated by multiplying $4,000 (the first two month's base salary) by 12
months and arrives at a base salary of $48,000. Consequently, the finder's fee
was not paid. This suit was an uninsured claim in the amount of approximately
$5,000. United Consulting filed an Answer on August 30, 1999 denying Sales
Consultants' claims and also filed a Counterclaim for Declaratory Judgement on
October 21, 1999. ClearWorks are vigorously contesting the claims by Sales
Consultants on the basis that they are without merit.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ClearWorks common stock is traded on the American Stock Exchange under the
symbol "CLW." On September 15, 2000, the last full trading day prior to the
public announcement of the proposed Merger Agreement, ClearWorks' common stock
closed at $4.94 per share. On October 20, 2000, ClearWorks' common stock closed
at $2.375 per share. ClearWorks is authorized to issue 50,000,000 shares of
common stock, of which 24,474,818 shares were issued and outstanding at
September 1, 2000. At October 31, 2000, ClearWorks had approximately ____
holders of record.
The table below sets forth, for the periods indicated, the reported high and low
sale prices per share of ClearWorks common stock on the OTC Bulletin Board until
and including the quarter ended March 31, 2000 and on the American Stock
Exchange for the quarter ended June 30, 2000.
CLEARWORKS COMMON STOCK
-----------------------
High Low
---------------------------------------------------------------------------
FISCAL 1998
------------------------------------------------------- -------- --------
Quarter ended March 31, 1998 .................... $ 0.5625 $ 0.3750
------------------------------------------------------- -------- --------
Quarter ended June 30, 1998 ..................... $ 3.6250 $ 0.5625
------------------------------------------------------- -------- --------
Quarter ended September 30, 1998 ................ $ 3.3125 $ 1.0313
------------------------------------------------------- -------- --------
Quarter ended December 31, 1998 ................. $ 2.1563 $ 0.3125
------------------------------------------------------- -------- --------
FISCAL 1999
------------------------------------------------------- -------- --------
Quarter ended March 31, 1999 .................... $ 1.2500 $ 0.4375
------------------------------------------------------- -------- --------
Quarter ended June 30, 1999 ..................... $ 3.8750 $ 1.05
------------------------------------------------------- -------- --------
Quarter ended September 30, 1999 ................ $ 8.56 $ 1.81
------------------------------------------------------- -------- --------
Quarter ended December 31, 1999 ................. $ 4.25 $ 2.00
------------------------------------------------------- -------- --------
FISCAL 2000
------------------------------------------------------- -------- --------
Quarter ended March 31, 2000 .................... $ 14.50 $ 2.56
------------------------------------------------------- -------- --------
Quarter ended June 30, 2000 ..................... $ 10.63 $ 3.37
------------------------------------------------------- -------- --------
Because the Merger Agreement contemplates each ClearWorks shareholder receiving
0.8 Eagle share for each ClearWorks share, the percentage of common stock that
each officer and director and ClearWorks shareholder beneficially owns will be
substantially decreased.
ClearWorks has not paid dividends since its inception.
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<PAGE>
VOTING AND MANAGEMENT INFORMATION
EAGLE
The special meeting of the stockholders of Eagle will be held at 2:00 9.m.,
Texas time on December 29, 2000 at 2500 South Shore Blvd., League City, Texas
77573. At the special meeting, Eagle stockholders will be asked to authorize the
proposed issuance of 29,450,740 shares of Eagle common stock and the assumption
of stock options and warrants in connection with the Merger Agreement.
Stockholders may revoke their proxies at any time before the vote is taken by
delivering to Eagle either a written revocation or a later-dated proxy.
Stockholders may also revoke their proxies orally at the special meeting. This
proxy statement/prospectus is dated __________, 2000 and is first being mailed
to stockholders on or about ____________, 2000. This proxy solicitation is being
made by Eagle.
On November 1, 2000, Eagle had 26,524,163 shares of common stock outstanding.
Each share is entitled to one vote per share. Only stockholders of record as of
____________, 2000 are entitled to vote at this meeting and any adjournments
thereof. The vote of the stockholders required for approval of the issuance of
shares shall be the majority of the shares voting at the special meeting. Eagle
stockholders are being asked to approve the issuance of additional shares of
Eagle common stock to complete the merger as part of Eagle's listing agreement
with the American Stock Exchange.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Eagle's directors and executive officers are:
NAME AGE POSITION
H. Dean Cubley 59 Chairman of the board of directors,
president and chief executive officer
Christopher W. "James" Futer 60 Director, executive vice president and
chief operating officer
A. L. Clifford 55 Director
Dr. Glenn Allan Goerke 69 Director
Richard Royall 54 Chief financial officer
DR. H. DEAN CUBLEY has served as chairman of the board, president and chief
executive officer of Eagle since March 1996. Before that, Dr. Cubley served as
vice-president of Eagle Telecom, Inc. from 1993 to March 1996. Dr. Cubley is
also a member of the Oversight
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Committee for the University of Houston Epitaxy Center which managed the Wake
Shield Flight aboard the Shuttle in September 1995. Dr. Cubley has over 35 years
of extensive experience in the field of telecommunications. From 1965 to 1984,
Dr. Cubley worked for the NASA Manned Spacecraft Center in the Electromagnetic
Systems Branch of the Engineering and Development Directorate. For a five-year
portion of that period, Dr. Cubley was the Antenna Subsystems Manager for all
spacecraft antennas for the Shuttle Program. Dr. Cubley's duties included
overall responsibility for the design, development, costs schedules and testing
of the antennas and hardware for all Shuttle flights. Throughout his career, Dr.
Cubley has authored or co-authored over fifty publications. In addition, he has
a total of eight patents and patents-pending registered in his name. Dr. Cubley
received a bachelor of science degree in electrical engineering from the
University of Texas in 1964 and a masters degree in electrical engineering from
the University of Texas in 1965. In 1970, Dr. Cubley received his Ph.D. in
electrical engineering from the University of Houston.
CHRISTOPHER W. "JAMES" FUTER has served as a director, chief operating officer
and vice president of Eagle since March 1996. Before that, Mr. Futer served as
sales manager of Eagle Aerospace, Inc. Telecom Division from November 1994 until
February 1996. From May 1993 to November 1994, Mr. Futer was employed as a vice
president of operations with Starcom, Inc. Before May 1993, he was employed with
Paging Products International. Mr. Futer was a manager of Universal Cellular,
Inc., a California corporation ("UCI"), from October 1990 until February 1991.
Mr. Futer resigned from UCI in February 1991 due to his disagreement with UCI
management over its business policy and practices. In June 1993, UCI filed for
protection under the federal bankruptcy laws. Mr. Futer's spectrum of experience
has included work in the fields of hi-tech flight simulation and display
technologies (especially those of light emitting diodes and liquid crystal
displays), and in consumer electronics, i.e. electronic watches, pocket
calculators, and electronic games. Most recently, he has been involved in pager
design, manufacture and marketing, as well as the wider field of messaging
equipment. His international background includes work with Hatfield Instrument
(in England, where he was born), Canadian Aviation Electronics, located in
Montreal, Canada, General Instruments (in Canada and the United States),
Litronix (in California) and Siemens (living in California and England and
commuting to the head office in Munich, as well as Berlin, Paris and Milan). In
1975, he was instrumental in implementing a major "turn-key" technology transfer
from Canada to the (then) Soviet Union for the manufacture of hand-held
electronic calculators, an operation which the Soviets then improved from the
consumer level and adapted to suit their particular requirements. Since 1975,
Mr. Futer has had extensive in-depth experience of interfacing with Pacific Rim
countries. In 1992 and 1993, he spent time in the People's Republic of China
coordinating a successful technology transfer for one of the first pager
manufacturing facilities.
A. L. CLIFFORD has served as a director since December 1996. Mr. Clifford has
served as president of Clifford & Associates for over five years, a company
involved in the distribution of electrical and electronic products throughout
the Midwest since 1920. Mr. Clifford is a graduate of the University of Miami,
where he studied business and attended law school.
DR. GLENN ALLAN GOERKE has served as a director since March 2000. Dr. Goerke is
president emeritus of the University of Houston and currently serves a director
of The Institute for the Future of Higher Education. The institute's mission is
to provide research and policy
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<PAGE>
analysis on higher education issues within state, national, and international
contexts. Prior to his current position, Dr. Goerke served as president of the
University of Houston from June 1995 to September 1997, and president of the
University of Houston - Clear Lake from August 1991 to June 1995 and has been
associated with the University of Houston system since 1986. While at the
University of Houston, Dr. Goerke initiated significant international program
development with particular focus on Mexico and Taiwan and received the
"Breaking the Mold" award given by the Texas Comptroller's Office for
responsible fiscal planning efforts. Dr. Goerke was named "Manager of the Year"
by the Texas Gulf Coast Council of the National Management Association in 1992.
Dr. Goerke received his Ph.D. in Adult and Higher Education from Michigan State
University in 1962. Dr. Goerke received his M.A. and B.A. degrees from Eastern
Michigan University in 1955 and 1952, respectively.
RICHARD R. ROYALL has served as chief financial officer since March 1996. Mr.
Royall has been a certified public accountant since 1971. From 1971 to 1976, Mr.
Royall was employed with Haskins & Sells, Laventhol & Horwath (a partner from
1976 to 1986), and Bracken, Krutilek & Royall (1986). In 1986, Mr. Royall
practiced accounting as a sole proprietor. Since 1987, Mr. Royall has been a
partner in Royall & Fleschler, certified public accountants. In addition, Mr.
Royall serves as financial officer and director of companies operating in the
finance and chemical industries, including Fleetclean Systems, Inc., none of
which are affiliated with Eagle.
Eagle's directors hold office until the next annual meeting of the stockholders
and until their successors are duly elected and qualified. Directors are
reimbursed for out-of-pocket expenses to attend meetings. Eagle has established
and does maintain compensation, audit, executive and nominating committees.
There are no family relationships among any of the directors and executive
officers of Eagle.
EXECUTIVE COMPENSATION
The following table provides information regarding compensation paid to Eagle's
chief executive officer. No other executive officer received in excess of
$100,000 in compensation during the fiscal year ended August 31, 1999.
Summary Compensation Table
Annual Compensation
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------- -------------------------
YEAR SALARY BONUS OTHER OPTIONS OTHER
---- -------- ----- ----- ------- -----
H. Dean Cubley 1999 $100,000 $ -- $ -- $ -- $ --
Chief Executive
Officer 1998 $ 91,923 $ -- $ -- $ -- $ --
1997 $ 65,407 $ -- $ -- $ -- $ --
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<PAGE>
Eagle has not entered into employment agreements with any of its executive
officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of Eagle's principal stockholders, or their affiliates, including Messrs.
Futer and Clifford, are also principal stockholders of Link Two, which is one of
Eagle's principal customers. Mr. Clifford is also the chairman, and chief
executive officer of Link Two and Dr. Cubley is a director of Link Two. Eagle
has entered into an agreement with Link Two which provides that it may receive
up to an eight percent equity interest in Link Two in lieu of accruing finance
charges on the outstanding balance owed to Eagle by Link Two. Under the
agreement, equity in Link Two was earned at a rate of 0.2% per month per
$100,000 payable and outstanding for more than thirty days. In addition, because
of the size of this receivable, Link Two has provided Eagle with an UCC filing
on all of its assets included all its wireless license holdings. At August 31,
1999 and 1999, Eagle earned a 5.0% and 5.0%, respectively, minority equity
interest in Link Two. This is evidenced by the issuance of 240,000 shares of
Link Two common stock to Eagle. On October 1, 1999, Link Two refinanced its
existing accounts payable to Eagle through the issuance of a $733,571 ten
percent note secured by all lease station licenses and a $6,000,000 ten percent
note secured by all assets excluding licenses. These notes are due September 1,
2001. See "Material Contracts with ClearWorks".
In September 1996, Richard Royall was issued $.05 warrants to purchase 12,500
shares of common stock, and $5.00 warrants to purchase 12,500 shares of common
stock. In July 1999, Mr. Royall exchanged these warrants for 12,500 shares of
common stock. In July 1999, Mr. Futer exchanged 110,000 $.05 warrants, 110,000
$0.50 warrants, and $147,000 for 220,000 shares of common stock. In December
1997, Senator Gary Hart was issued class C $2.00 warrants to purchase 50,000
shares of common stock as compensation for serving on Eagle's board of
directors. The class C warrants expire August 31, 2000 and are callable by Eagle
at a price of $.05 per class C warrant when the closing bid price of the common
stock shall have equaled or exceeded $5.50 per share for a period of twenty
consecutive trading days.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 1, 2000, the number and
percentage of outstanding shares of Eagle; common stock owned by (i) each person
known to beneficially own more than 5% of Eagle's outstanding common stock, (ii)
each director, (iii) each named executive officer, and (iv) all officers and
directors as a group.
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SHARES OF COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED % OF VOTING POWER
Hou-Tex Trust ....................... 1,405,247 5%
1331 Lamar, Suite 1375
Houston, TX 77010
H. Dean Cubley....................... 3,333 less than 1%
101 Courageous Drive
League City, TX 77573
Futer Family Trust .................. 1,296,500 5%
1331 Lamar, Suite 1375
Houston, TX 77010
Christopher W. Futer ................ 5,000 less than 1%
101 Courageous Drive
League City, TX 77573
A.L. Clifford ....................... 632,667 2%
101 Courageous Drive
League City, TX 77573
Glenn Allan Goerke .................. 25,000 less than 1%
911 Live Oak Lane
Seabrook, TX 77586
Richard Royall ...................... 131,710 less than 1%
1331 Lamar, Suite 1375
Houston, TX 77010
All officers and directors
as a group(5 persons) ............... 672,667 3%
It is assumed for the purposes of this table that no trading will occur within
60 days of the date of this document.
The shares held by Hou-Tex Trust include warrants to purchase 266,250 shares of
Eagle common stock at $6.00 per share which expire on August 31, 2000, and are
redeemable by Eagle at $.05 per share if at any time the closing bid price of
the common stock shall have equaled or exceeded $7.50 per share for a period of
20 consecutive trading days (the class B warrants). Dr. Cubley's ownership
consists of options to purchase 3,333 shares of common stock issued under
Eagle's employee stock option program at $1.50 per share and which will expire
on December 15, 2004.
The shares held by the Futer Family Trust include 110,000 shares of common stock
underlying class A warrants, and 110,000 shares of common stock underlying class
B warrants. Mr. Futer disclaims beneficial ownership, as well as voting and
disposition power of the shares of common stock and warrants owned by the Futer
Family Trust. Mr. Futer's ownership consists of options to purchase 5,000 shares
of common stock at $1.25 per share which will expire on August 3, 2003, issued
under Eagle's employee stock option program.
Mr. Clifford has voting and disposition power of the 105,000 shares held in his
name, 141,000 shares which are held in the name of The Clifford Family Trust,
and 61,667 held by his wife. Mr. Clifford owns 110,000 shares of common stock
underlying class A warrants and 110,000 shares of common stock underlying class
B warrants.
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<PAGE>
Dr. Glenn Goerke holds options to purchase 25,000 shares of Eagle common stock
at $2.00 per share. These options expire April 10, 2002 and have piggyback
registration rights after March 10, 2001.
The total number of shares held by officers and directors include options and
warrants to purchase 275,000 shares of common stock that are currently
exercisable.
CLEARWORKS
The special meeting of the stockholders of ClearWorks will be held at 10:00
a.m., Texas time on December 29, 2000 at 2900 Briarpark Ave., Houston, Texas
77042. At the special meeting, ClearWorks stockholders will be asked to approve
the Agreement and Plan of Reorganization between Eagle and ClearWorks.
Stockholders may revoke their proxies at any time before the vote is taken by
delivering to ClearWorks either a written revocation or a later-dated proxy.
Stockholders may also revoke their proxies orally at the special meeting. This
proxy statement/prospectus is dated _______________, 2000 and is first being
mailed to stockholders on or about ____________, 2000. This proxy solicitation
is being made by ClearWorks.
On October 1, 2000, ClearWorks had 28,783,264 shares of common stock
outstanding. Each share is entitled to one vote per share. Only stockholders of
record as of ____________, 2000 are entitled to vote at this meeting and any
adjournments thereof. Under Delaware General Corporation Law, a majority of the
outstanding common stock entitled to vote thereon must approve the Merger
Agreement. There are no dissenter's right of appraisal because Eagle's common
stock is traded on the American Stock Exchange.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 1, 2000, the number
and percentage of outstanding shares of ClearWorks; common stock owned by (i)
each person known to beneficially own more 5% of Eagle's common stock, (ii) each
director, (iii) each named executive officer, (iv) all officers and directors as
a group:
SHARES OF COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED % OF VOTING POWER
Michael T. McClere ........................ 5,770,436 20%
2450 Fondren, Suite 200
Houston, Texas 77063
Shannon D. McLeroy ........................ 2,102,800 7%
2450 Fondren, Suite 200
Houston, Texas 77063
Raymond G. Harrell III .................... 150,000 *
4335 Alysheba Lane
Friendswood, Texas 77546
Hal Peterson
2450 Fondren, Suite 200
Houston, Texas 77063
All Executive Officers and
Directors as a group (four persons) 7,881,236(2)(3) 27%
*Less than one percent.
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(1) "Beneficial ownership" is defined in the regulations promulgated by the U.S.
Securities and Exchange Commission as having or sharing, directly or indirectly
(i) voting power, which includes the power to vote or to direct the voting, or
(ii) investment power, which includes the power to dispose or to direct the
disposition, of shares of the common stock of an issuer. The definition of
beneficial ownership includes shares underlying options or warrants to purchase
common stock, or other securities convertible into common stock, that currently
are exercisable or convertible or that will become exercisable or convertible
within 60 days. Unless otherwise indicated, the beneficial owner has sole voting
and investment power.
(2) Includes Class A warrants to purchase 210,000 shares of common stock held by
Mr. McClere, Class A warrants to purchase 50,000 shares held by the Rachel
McClere 1998 Trust and Class A warrants to purchase 200,000 shares held by the
McClere Family Trust. The Class A warrants currently are exercisable at an
exercise price of $3.00 per share until the warrants expire on April 24, 2003.
Also includes Class B warrants to purchase 210,000 shares of common stock held
by Mr. McClere, Class B warrants to purchase 50,000 shares held by the Rachel
McClere 1998 Trust and Class B warrants to purchase 200,000 shares held by the
McClere Family Trust. The Class B warrants currently are exercisable at an
exercise price of $6.00 per share until the warrants expire on April 24, 2008.
Also includes 312,500 shares held by the Rachel McClere 1998 Trust and 1,250,000
shares held by the McClere Family Trust. Also includes 1,500,000 shares of
common stock and warrants to purchase 460,000 shares of common stock, all of
which are held by Tech Technologies Services LLC. Mr. McClere owns 90 percent of
the outstanding equity interests in Tech Technologies Services LLC.
(3) Includes immediately exercisable Class A warrants to purchase 300,000 shares
of common stock at an exercise price of $3.00 per share until the warrants
expire on April 24, 2003. Also includes immediately exercisable Class B warrants
to purchase 300,000 shares of common stock at an exercise price of $6.00 per
share until the warrants expire on April 24, 2008. Also includes 625 shares held
by Mr. McLeroy's wife.
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DIRECTORS AND EXECUTIVE OFFICERS OF EAGLE AFTER THE MERGER AGREEMENT
If the Merger Agreement is approved by the ClearWorks stockholders, then at the
effective time of the merger, Eagle has agreed to ask Michael T. McClere,
Shannon D. McLeroy and Raymond G. Harrell, III to join the board of directors of
Eagle. Accordingly, following the effective time of the merger, Eagle's
management team would consist of the following persons.
NAME AGE POSITION
H. Dean Cubley 59 Chairman of the Board of Directors,
President and Co-Chief Executive Officer
Christopher W. "James" Futer 60 Director, Executive Vice President and
Chief Operating Officer
A. L. Clifford 55 Director
Dr. Glenn Allan Goerke 69 Director
Richard Royall 54 Chief Financial Officer
Michael T. McClere 40 Director, Co-Chief Executive Officer, and
Chief Technical Officer
Shannon D. McLeroy 34 Director, President and Secretary
of ClearWorks
Raymond G. Harrell III 37 Director
Information regarding each of the individuals who will join Eagle's management
team following the merger is set forth below.
Michael T. McClere. Currently, Mr. McClere is Chairman of the Board, Chief
Executive Officer and a director of ClearWorks. Prior to joining ClearWorks, Mr.
McClere had been involved in several businesses in the information technology
(IT) area, serving on the board of directors and as chief executive officer. Mr.
McClere has been involved in the purchasing of numerous businesses, as well as
selling businesses that he had assisted in the development. Mr. McClere's
business background includes all aspects of the development and implementation
of information technology businesses. Mr. McClere has also assisted in the
development and implementation of major technology deployments for NASA in
various space centers throughout the world. As a consultant on information
systems, Mr. McClere assisted Lockheed Engineering & Sciences Company from May
1988 to October 1990, SAE, Inc. from May 1984 to May 1988, and Baker Hughes from
May 1979 to May 1984. Mr. McClere has over seventeen years experience in the
information technology field. He has received a Bachelor of Science in Computer
Science from The University of Houston-University Park in 1988. Mr. McClere is
not a director of any other entity that has securities registered under the
Securities Exchange Act of 1934.
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Shannon D. McLeroy. Mr. McLeroy serves as President and Secretary of ClearWorks.
Mr. McLeroy has been in the systems integration business for over ten years. He
has worked beginning as a technician and has progressed through various stages
of management. Mr. McLeroy has managed teams of engineers to deploy technical
computer services with the last three companies with which he has worked. Mr.
McLeroy was solely responsible for managing and putting together a team of
computer professionals to run a major portion of Exxon USA's network. This
network was responsible for delivering key financial and business data to enable
Exxon to perform its business.
Raymond G. Harrell III has been a director of ClearWorks since January 2000. Mr.
Harrell currently is employed by Continental Airlines as a Director of
International Schedules and has been employed by Continental Airlines since
September 1987. He attended the University of Houston and in 1985 earned a
Bachelor of Science degree in Industrial Distribution. Mr. Harrell is not a
director of any other entity that has securities registered under the Securities
Exchange Act of 1934.
The following table sets forth in summary form the compensation received during
each of the last three successive completed fiscal years by Michael T. McClere,
Chief Executive Officer and Chairman of The Board of ClearWorks and Shannon D.
McLeroy, President and Secretary of ClearWorks.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------
Annual Compensation Awards Payouts
-------------------------- ---------------------------------------------- -------------------- ------- ------------
Other
Annual Restricted LTIP All Other
Name and Fiscal Salary Bonus Compensation Stock Options Payouts Compensation
Principal Position Year ($)(1) ($)(2) ($)(3) Awards($) (#) ($)(4) ($)(5)
-------------------------- ------ -------- ------ ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael T. McClere,
Chief Executive Officer 1999 $144,792 -0- -0- -0- -0- -0- -0-
and Chairman Of The 1998(6)(8) $ 78,125 -0- -0- -0- -0- -0- -0-
Board 1997 $ -0- -0- -0- -0- -0- -0- -0-
-------------------------- ------ -------- ------ ------------ ------------ ------- ------- ------------
Shannon D. McLeroy, 1999 $104,792 -0- -0- -0- () -0- -0-
President and 1998(6) $ 73,375 -0- -0- -0- -0- -0- -0-
Secretary 1997 $ 11,250 -0- -0- -0- -0- -0- -0-
-------------------------- ----- -------- ------ ------------ ------------ ------- ------- ------------
</TABLE>
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(1) The dollar value of base salary (cash and non-cash) received during the
year indicated.
(2) The dollar value of bonus (cash and non-cash) received during the year
indicated.
(3) During the period covered by the Summary Compensation Table, the
Company did not pay any other annual compensation not properly categorized as
salary or bonus, including perquisites and other personal benefits, securities
or property.
(4) Except for the Stock Warrant Plan (which was not approved by the
stockholders), the Company does not have in effect any plan that is intended to
serve as incentive for performance to occur over a period longer than one fiscal
year.
(5) All other compensation received that the Company could not properly
report in any other column of the Summary Compensation Table including annual
contributions or other allocations to vested and unvested defined contribution
plans, and the dollar value of any insurance premiums paid by the Company on its
behalf with respect to term life insurance for the benefit of the named
executive officer, and the full dollar value of the remainder of the premiums
paid by the Company on its behalf.
(6) As part of the Company's April 1998 recapitalization with Southeast, a
Stock Warrant Plan dated April 24, 1998 was executed by the former management of
Southeast in conjunction with the Agreement for Purchase of Common Stock dated
April 1, 1998 and Addendum to Agreement for Purchase of Common Stock dated April
24, 1998. In the Addendum to Agreement for Purchase of Common Stock, the
management of Southeast agreed to issue warrants to each of the stockholders of
Southeast in amounts proportionate to their stockholdings in Southeast. The
names of the stockholders and the number of warrants issued to each are set
forth below. Although Mr. McLeroy, Mr. McClere and entities related to Mr.
McClere each received warrants in this transaction, the Company did not
recognize issuance of the warrants to be compensation to either Mr. McLeroy or
Mr. McClere because the warrants were exchanged for equity interests owned by
each of the persons or entities named below:
NAME: WARRANT CLASS AMOUNT
----- ------------- -------
Shannon D. McLeroy A 290,000
B 300,000
Michael T. McClere A 0
B 210,000
Tech Technologies Services LLC* A 240,000
B 240,000
Rachel McClere 1998 Trust A 50,000
B 50,000
McClere Family Trust A 200,000
B 200,000
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* Celia Figueroa is the General Manager of Tech Technologies Services LLC and
therefore may be considered a beneficial owner of the warrants held in the
name of Tech Technologies. At the time of the transaction described above,
Ms. Figueroa was Secretary and General Counsel of the Company.
(8) From January 1, 1998 to March 31, 1998, the Company engaged Tech
Technologies as a consultant pursuant to a consulting agreement that provided
that Tech Technologies would provide financial and managerial consulting
services to the Company in exchange for $10,000 per month. During that period,
Michael T. McClere was the General Manager of Tech Technologies. Effective April
1, 1998 the consulting agreement with Tech Technologies was terminated and Mr.
McClere became an employee of the Company.
Stock Warrant Plan
Effective as of April 24, 1998, Southeast instituted a Stock Warrant Plan (the
"Warrant Plan"). After the merger of Southeast into ClearWorks on May 12, 1998,
the Warrant Plan continued to be effective as the Company's stock warrant plan.
Pursuant to the Warrant Plan, ClearWorks may issue Class A Warrants or Class B
Warrants to key employees, directors, and other persons who have contributed or
are contributing to the Company's success. Each Class A or Class B Warrant
allows the holder to purchase one share of common stock. The maximum number of
shares underlying all warrants that may be granted pursuant to the Warrant Plan
is limited to 5,000,000 shares. The warrants granted pursuant to the Warrant
Plan may be considered either incentive options qualifying for beneficial tax
treatment for the recipient or nonqualified options. The Warrant Plan is
administered by the Board of Directors. At February 17, 2000, Class A Warrants
to purchase 1,000,000 shares and Class B Warrants to purchase 1,000,000 shares
were outstanding under the Warrant Plan, and warrants to purchase 3,000,000
shares were available to be granted pursuant to the Warrant Plan.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Currently, there are no written employment contracts with respect to any of the
ClearWorks officers and no compensatory plan or arrangement that results or will
result from the resignation, retirement, or any other termination of an
executive officer's employment or from a change in control of the company or a
change in an executive officer's responsibilities following a change in control.
In connection with the transaction between Millennium Integration Technologies,
Inc., a Texas corporation, ("Millennium Texas") and Southeast Tire Recycling,
Inc., during 1998 a total of 1,312,500 shares of common stock were issued to
Michael T. McClere and 1,875,000 shares of common stock were issued to Shannon
D. McLeroy, who together were the principal stockholders of Millennium Texas.
ClearWorks also agreed to issue warrants to purchase
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920,000 shares of stock to Mr. McClere and his affiliates, warrants to purchase
600,000 shares of stock to Mr. McLeroy and warrants to purchase 480,000 shares
of stock to Tech Technologies Services LLC. Mr. McClere is the beneficial owner
of 90 percent of the outstanding equity interests of Tech Technologies. The
General Manager of Tech Technologies is Celia Figueroa who was ClearWorks'
General Counsel and Secretary at the time of this transaction. One-half of the
warrants were Class A warrants and one-half were Class B warrants.
During the fiscal year 1997, ClearWorks borrowed $22,000 from Michael T.
McClere, Chairman of the Board, with a note due November 13, 1998; and borrowed
an additional $30,000 with a note due March 31, 1999. These notes were repaid
during 1999. On December 13, 1999, ClearWorks borrowed $150,000 from Mr.
McClere. This loan was evidenced by a promissory note and bore interest at the
rate of 12% per year until it was repaid on January 10, 2000. On September 29,
2000, ClearWorks borrowed $101,000 from Mr. McClere. This loan was evidenced by
a promissory note and bore interest at the rate of 12% per year until it was
repaid on October 11, 2000.
Except as described above, during the last two years there were no transactions
between ClearWorks and its directors, executive officers or known holders of
greater than five percent of the common stock in which the amount involved
exceeded $60,000 and in which any of the foregoing persons had or will have a
material interest.
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FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
EAGLE WIRELESS INTERNATIONAL, INC.
Independent Auditor's Report .......................................... F-2
Balance Sheets as of August 31, 1999 and August 31, 1998 .............. F-3
Statements of Earnings for the years ended August 31, 1999,
August 31, 1998 and August 31, 1997 ................................. F-4
Statement of Changes in Shareholders Equity for the years ended
August 31, 1999, August 31, 1998 and August 31, 1997 ................ F-5
Statements of Cash Flows for the years ended August 31, 1999,
August 31, 1998 and August 31, 1997 ................................. F-6
Notes to Financial Statements for the years ended August 31, 1999
and August 31, 1998 .................................................. F-7
Balance Sheets for the nine months ended May 31, 2000 and the year
ended August 31, 1999 ............................................... F-19
Statements of Earnings for the three and nine months ended
May 31, 2000 and May 31, 1999 ....................................... F-20
Statement of Changes in Shareholders Equity for the nine months
ended May 31, 2000 and the year ended August 31, 1999 ............... F-21
Statements of Cash Flows for the nine months ended May 31, 2000
and May 31, 1999 .................................................... F-22
Notes to Financial Statements for the nine months ended May 31, 2000
and May 31, 1999 .................................................... F-23
CLEARWORKS.NET, INC.
Independent Auditors' Reports ......................................... F-37
Balance Sheets as of December 31, 1999 and December 31, 1998 .......... F-39
Statements of Earnings for the years ended December 31, 1999 and
December 31, 1998 ................................................... F-40
Statement of Changes in Shareholders Equity for the years ended
December 31, 1999 and December 31, 1998 ............................. F-41
Statements of Cash Flows for the years ended December 31, 1999 and
December 31, 1998 ................................................... F-42
Notes to Financial Statements for the years ended December 31, 1999
and December 31, 1998 ............................................... F-43
Balance Sheets for the six months ended June 30, 2000 and
December 31, 1999 ................................................... F-56
Statements of Operations for the three and six months ended
June 30, 2000 and June 30, 1999 ..................................... F-57
Statements of Cash Flows for the six months ended June 30, 2000 and
June 30, 1999 ....................................................... F-58
Statement of Changes in Shareholders Equity for the six months ended
June 30, 2000 and the year ended June 30, 1999 ...................... F-59
Notes to Financial Statements for the six months ended June 30, 2000
and June 30, 1999 ................................................... F-60
F-1
<PAGE>
[MCMANUS & CO. LETTERHEAD]
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF EAGLE WIRELESS INTERNATIONAL, INC.:
We have audited the accompanying balance sheets of Eagle Wireless International,
Inc. as of August 31, 1999 and 1998 and the related statements of earnings,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of Eagle Wireless International, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of Eagle
Wireless International, Inc. as of August 31, 1999 and 1998 and the results of
their earnings, shareholders' equity, and their cash flows for the years then
ended are in conformity with generally accepted accounting principles.
MCMANUS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
MORRIS PLAINS, NEW JERSEY
December 13, 1999
F-2
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
AUGUST 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents (Note 1) .................. $ 187,965 $ 1,097,245
Accounts Receivable (Note 2) ........................ 286,269 245,889
Inventories (Note 1) ................................ 2,355,861 1,273,281
Prepaid Expenses .................................... 242,551 69,490
------------ ------------
Total Current Assets ............................. 3,072,646 2,685,905
PROPERTY AND EQUIPMENT (NOTE 1):
Operating Equipment ................................. 922,204 933,050
Less: Accumulated Depreciation ...................... (333,474) (223,645)
------------ ------------
Total Property and Equipment ..................... 588,730 709,405
OTHER ASSETS:
Security Deposits ................................... 17,014 8,944
Investment In Affiliate (Note 9) ................... 6,641,892 5,146,189
------------ ------------
Total Other Assets ............................... 6,658,906 5,155,133
TOTAL ASSETS ........................................ $ 10,320,282 $ 8,550,443
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable .................................... $ 207,949 $ 336,782
Accrued Expenses .................................... 106,355 117,915
Shareholders' Advances (Note 11) .................... 0 24,519
Notes Payable (Note 3) .............................. 16,643 12,731
Capital Lease Obligations (Note 4) .................. 14,962 11,125
Deferred Revenues ................................... 532,772 56,504
Federal Income Taxes Payable (Notes 1 & 5) .......... 468,064 375,171
Franchise Taxes Payable ............................. 13,108 41,854
Sales Taxes Payable ................................. 48,348 37,983
Deferred Taxes (Note 5) ............................. 6,142 4,888
------------ ------------
Total Current Liabilities ........................ 1,414,343 1,019,472
LONG-TERM LIABILITIES:
Capital Lease Obligations
(net of current maturities) (Note 4) ............. 3,939 8,621
Deferred Taxes (Note 5) ............................. 7,683 6,182
------------ ------------
Total Long - Term Liabilities ................... 11,622 14,803
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 13)
SHAREHOLDERS' EQUITY:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares 0 0
Common Stock - $.001 par value
Authorized 100,000,000 shares
Issued and Outstanding at 1999 and 1998
13,479,833 and 11,670,154, respectively ...... 13,480 11,670
Paid in Capital ..................................... 7,180,900 5,972,832
Retained Earnings ................................... 1,699,937 1,531,666
------------ ------------
Total Shareholders' Equity ....................... 8,894,317 7,516,168
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 10,320,282 $ 8,550,443
============ ============
</TABLE>
F-3
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES ........................................ $ 2,217,275 $ 4,827,434 $ 3,971,369
COST OF GOODS SOLD
Materials and Supplies ........................ 542,515 1,181,776 920,375
Direct Labor and Related Costs ................ 219,285 355,644 260,776
Depreciation and Amortization ................. 80,069 17,542 21,400
Other Manufacturing Costs ..................... 494,633 409,992 346,453
----------- ----------- -----------
Total Cost of Goods Sold ................... 1,336,502 1,964,954 1,549,004
----------- ----------- -----------
GROSS PROFIT ..................................... 880,773 2,862,480 2,422,365
----------- ----------- -----------
OPERATING EXPENSES
Selling, General and Administrative
Salaries and Related Costs ................. 58,880 736,734 607,160
Advertising and Promotion .................. 75,816 193,172 176,131
Depreciation and Amortization .............. 65,095 128,997 58,135
Research & Development ..................... 438,693 236,869 333,200
Other Support Costs ........................ 680,497 811,286 430,413
----------- ----------- -----------
Total Operating Expenses ................... 1,318,981 2,107,058 1,605,039
----------- ----------- -----------
EARNINGS/(LOSS) FROM OPERATIONS BEFORE OTHER
REVENUES/(EXPENSES), INCOME TAXES, AND
LOSS FROM MINORITY INTEREST IN AFFILIATE ....... (438,208) 755,422 817,326
OTHER REVENUES/(EXPENSES)
Interest Income ............................... 799,098 427,144 328,760
Interest Expense .............................. (10,081) (5,451) (6,533)
----------- ----------- -----------
Total Other Revenues ....................... 789,017 421,693 322,227
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES & LOSS FROM
MINORITY INTEREST IN AFFILIATE ................. 350,809 1,177,115 1,139,553
Gain/(Loss) From Minority Interest in
Affilite ................................... (91,678) (28,663) (71,337)
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES ..................... 259,131 1,148,452 1,068,216
Provision For Income Taxes .................... 90,860 377,484 339,722
=========== =========== ===========
NET EARNINGS ..................................... 168,271 770,968 728,494
RETAINED EARNINGS - BEGINNING OF YEAR ............ 1,531,666 760,698 32,204
----------- ----------- -----------
RETAINED EARNINGS - END OF YEAR .................. $ 1,699,937 $ 1,531,666 $ 760,698
=========== =========== ===========
Net Earnings Per Common Share:
Primary (Note 1) ........................... $ 0.01 $ 0.07 $ 0.07
Fully Diluted (Note 1) ..................... $ 0.01 $ 0.05 $ 0.04
</TABLE>
F-4
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
SEPTEMBER 1, 1996 ------------------------- PREFERRED PAID IN RETAINED SHAREHOLDERS'
TO AUGUST 31, 1999 SHARES VALUE STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' Equity
As Of September 1, 1996 .......... 6,946,145 $ 6,946 $ 0 $ 2,037,856 $ 32,204 $ 2,077,006
----------- ----------- ----------- ----------- ----------- -----------
Net Earnings 1997 .................. 728,494 728,494
Private Placement .................. 1,587,189 1,587 0 4,117,759 0 4,119,346
Conversion of Notes Payable and
Advances to Common Stock ......... 2,277,000 2,277 0 487,092 0 489,369
Exercise of $.01 Warrants:
B & F Trust .................. 490,000 490 0 4,410 0 4,900
Futer Family Trust ........... 154,000 154 0 1,386 0 1,540
John Nagel ................... 28,000 28 0 252 0 280
Bailey Trust ................. 28,000 28 0 252 0 280
Issuance of Warrants for
Fundraising Activities ........... 0 0 0 192,000 0 192,000
Syndication Costs .................. 0 0 0 (1,020,827) 0 (1,020,827)
----------- ----------- ----------- ----------- ----------- -----------
Total Shareholders' Equity
As Of August 31, 1997 ............ 11,510,334 11,510 0 5,820,180 760,698 6,592,388
Net Earnings 1998 .................. 770,968 770,968
New Stock Issued to Shareholders
J. Hamilton (Nov. 1997) ......... 39,820 40 0 59,960 0 60,000
D. Walker (Nov. 1997) ........... 55,000 55 0 82,445 0 82,500
D. Walker (Aug. 1998) ........... 65,000 65 0 95,564 0 95,629
Syndication Costs .................. 0 0 (85,317) 0 (85,317)
----------- ----------- ----------- ----------- ----------- -----------
Total Shareholders' Equity
As Of August 31, 1998 ............ 11,670,154 11,670 0 5,972,832 1,531,666 7,516,168
----------- ----------- ----------- ----------- ----------- -----------
Net Earnings 1999 .................. 168,271 168,271
New Stock Issued to Shareholders
Issuance of Common Stock
For Services Rendered ...... 34,470 34 0 163,457 0 163,491
For Exercise of Warrants ... 1,775,209 1,776 0 1,044,611 0 1,046,387
----------- ----------- ----------- ----------- ----------- -----------
Total Shareholders' Equity
As Of August 31, 1999 ............ 13,479,833 $ 13,480 $ 0 $ 7,180,900 $ 1,699,937 $ 8,894,317
=========== =========== =========== =========== =========== ===========
</TABLE>
F-5
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings ................................................ $ 168,271 $ 770,968 $ 728,494
Adjustments To Reconcile Net Earnings To Net Cash
Used By Operating Activities:
Depreciation and Amortization ............................ 145,164 146,539 79,535
Stock Issued for Services Rendered ....................... 163,491 0 0
(Increase)/Decrease in Accounts Receivable ............... (40,380) (2,496,797) (2,536,348)
(Increase)/Decrease in Inventories ....................... (1,082,580) (261,063) (486,907)
(Increase)/Decrease in Prepaid Expenses .................. (173,061) (12,021) (40,846)
Increase/(Decrease) in Accounts Payable .................. (128,833) 19,613 9,868
Increase/(Decrease) in Accrued Payroll Taxes ............. 0 0 16,635
Increase/(Decrease) in Accrued Expenses .................. (11,560) 117,915 (53,374)
Increase/(Decrease) in Deferred Taxes .................... 2,755 (14,147) 19,534
Increase/(Decrease) in Customer Deposits ................. 0 0 (209,283)
Increase/(Decrease) in Deferred Revenues ................. 476,268 56,504 0
Increase/(Decrease) in Sales Tax Payable ................. 10,365 37,983 0
Increase/(Decrease) in Federal Income Taxes Payable....... 92,893 114,259 260,912
Increase/(Decrease) in Franchise Taxes Payable ........... (28,746) 21,854 20,000
----------- ----------- -----------
Total Adjustments ........................................ (574,224) (2,269,361) (2,920,274)
----------- ----------- -----------
Net Cash Used By Operating Activities ....................... (405,953) (1,498,393) (2,191,780)
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase)/Disposal of Property and Equipment ............ (24,489) (377,247) (164,937)
(Increase)/Decrease in Other Assets ...................... (8,070) 4,065 35,769
(Increase)/Decrease in Investment in Affiliate ........... (1,495,703) 28,663 (28,663)
----------- ----------- -----------
Net Cash Used By Investing Activities ....................... (1,528,262) (344,519) (157,831)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(Decrease) in Notes Payable (Long-Term) ......... 0 0 (375,000)
Increase/(Decrease) in Notes Payable (Short-Term) ........ 3,912 12,731 (11,082)
Increase/(Decrease) in Capital Leases .................... (845) (15,094) (2,558)
Increase/(Decrease) in Shareholders' Advances ............ (24,519) (104,853) (160,628)
Increase/(Decrease) in Subscriptions Payable ............. 0 0 (97,500)
Proceeds From Sale of Common Stock, Net .................. 1,046,387 152,812 3,786,888
----------- ----------- -----------
Net Cash Provided By Financing Activities ................... 1,024,935 45,596 3,140,120
Net Increase/(Decrease) in Cash ............................. (909,280) (1,797,316) 790,509
CASH AT THE BEGINNING OF THE YEAR .............................. 1,097,245 2,894,561 2,104,052
----------- ----------- -----------
CASH AT THE END OF THE YEAR .................................... $ 187,965 $ 1,097,245 $ 2,894,561
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Netcash paid during the year for:
Interest .............................................. $ 10,081 $ 5,451 $ 6,533
Income Taxes .......................................... 75,051 338,688 306,254
</TABLE>
F-6
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Eagle Wireless International, Inc., (the Company), incorporated as a Texas
corporation on May 24, 1993 and commenced business in April of 1996. The
Company is a worldwide supplier of telecommunications equipment and
related software used by service providers in the paging and other
wireless personal communications markets. The Company designs,
manufactures, markets and services its products under the Eagle name.
These products include transmitters, receivers, controllers, software and
other equipment used in personal communications systems (including paging,
voice messaging, cellular and message management and mobile data systems)
and radio and telephone systems.
Prior to April 1996, the Company was inactive. During April, 1996, the
Company commenced operations by the issuance of stock for cash, certain
inventories, test equipment, other assets, and the assumption of certain
liabilities to its principal shareholder. Concurrent with this
transaction, the Company entered into an asset purchase agreement with a
company to acquire certain other production equipment, inventories and
furniture and equipment.
A) Cash and Cash Equivalents
The Company has $29,059 and $1,088,555 invested in interest bearing
accounts at August 31, 1999 and 1998, respectively.
B) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated by using the straight-line method for financial
reporting and accelerated methods for income tax purposes. The recovery
classifications for these assets are listed as follows:
YEARS
Machinery and equipment 7
Furniture and Fixtures 7
Expenditures for maintenance and repairs are charged against income as
incurred and major improvements are capitalized.
C) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the following
items:
AUGUST 31,
--------------------------------
1999 1998
---------- ----------
Raw Materials ...................... $1,215,003 $ 719,157
Work in Process .................... 1,119,672 554,124
Finished Goods ..................... 21,186 - 0 -
---------- ----------
$2,355,861 $1,273,281
========== ==========
D) Organizational Costs
For the year ended August 31, 1998, the Company has adopted the provisions
of the AICPA's Statement of Position (SOP) No. 98-5 "Reporting on the
Costs of Start-Up Activities", which requires that all costs related to a
companies start-up activities should now be expensed during the period
incurred rather than capitalized and amortized over a period of time.
Prior to the year ended August 31, 1998, organizational costs had been
amortized using the straight - line method over a period of sixty (60)
months. As a result of "SOP" 98-5, unamortized organization costs of
$2,328 have been expensed through amortization expense for the year ended
August 31, 1998.
F-7
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
E) Research and Development Costs
The Company's research and development costs include obligations to
perform contractual services for outside parties. These costs are expensed
as contract revenues are earned. Research and development costs of
$438,693 and $236,869 were expensed for the periods ended August 31, 1999
and 1998, respectively. Contract revenues earned for the periods ended
August 31, 1999 and 1998 were approximately $755,771 and $656,512,
respectively.
F) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires a
change from the deferral method to assets and liability method of
accounting for income taxes. Timing differences exist between book income
and tax income which relate primarily to depreciation methods.
G) Net Earnings Per Common Share
Net earnings per common share is shown as both basic and diluted. Basic
earnings per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average number
of shares of common stock outstanding. Diluted earnings per common share
are computed by dividing net income less any preferred stock dividends (if
applicable) by the weighted average number of shares of common stock
outstanding plus any dilutive common stock equivalents. The components
used for the computations are shown as follows:
AUGUST 31, 1999 AUGUST 31, 1998
---------------- ---------------
Weighted Average Number of Common
Shares Outstanding Including:
Primary Common Stock Equivalents 11,980,911 11,594,902
Fully Dilutive Common Stock Equivalents 12,049,911 14,019,902
H) Impairment of Long Lived and Identifiable Intangible Assets
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. An impairment loss would be deemed necessary when the estimated
non-discounted future cash flows are less than the carrying net amount of
the asset. If an asset were deemed to be impaired, the asset's recorded
value would be reduced to fair market value. In determining the amount of
the charge to be recorded, the following methods would be utilized to
determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
As of August 31, 1999 and 1998, no impairment existed.
I) Warrants for Funding Activities
To date, the Company has issued the following warrants: 5,033,334 Class A;
5,033,334 Class B; 1,050,000 Class C; 1,050,000 $.05; 1,375,000 $.50;
425,000 $5.00;150,000 $1.50; 150,000 $2.00; 200,000 $3.00; 200,000 $5.00;
200,000 $7.00; 200,000 $9.00; 200,000 $11.00; and 50,000 $2.00. Certain of
these warrants were issued to individuals and trusts for their assistance
in the fundraising activities. The Company has assigned a value of
$280,343 as compensation for these fund raising activities.
J) Advertising and Promotion
All advertising related costs are expensed as incurred. The Company does
not incur any cost for direct-response advertising. For the periods ended
August 31, 1999 and 1998, the Company had expensed $75,816 and $193,172,
respectively.
F-8
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
K) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent asset and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
L) Comprehensive Income
There were no items of other comprehensive income in 1999 and 1998, and,
thus, net income is equal to comprehensive income for each of those years.
M) Reclassification
The Company has reclassified certain costs and expenses for the year ended
August 31, 1998 to facilitate comparison to the year ended August 31,
1999.
NOTE 2 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
AUGUST 31,
--------------------
1999 1998
-------- --------
Accounts Receivable .............................. $286,269 $245,889
Allowance for Doubtful Accounts - 0 - - 0 -
-------- --------
Net Accounts Receivable .......................... $286,269 $245,889
======== ========
NOTE 3 - NOTES PAYABLE:
AUGUST 31,
--------------------
1999 1998
-------- --------
Unsecured note to Imperial Premium
Finance bearing interest at 14.9%,
due $1,795 monthly until February 2000. $ 5,386 $ - 0 -
Unsecured note to Central Insurance
bearing no interest, due $1,031
monthly until March 2000. 5,220 - 0 -
Unsecured note to Paula Insurance
bearing no interest, due $373 monthly
until March 2000. 1,124 - 0 -
Unsecured note to West Coast Life
Insurance bearing no interest, due
$2,457 quarterly until May 2000. 4,913 - 0 -
Unsecured note to Canawill Insurance
bearing interest at 9.6%, due $2,122
monthly until January 1999. $ - 0 - $ 12,731
-------- --------
Total 16,643 12,731
Less Current Portion of
Long - Term Debt 16,643 12,731
-------- --------
Total Long - Term Debt $ - 0 - $ - 0 -
======== ========
F-9
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
NOTE 4 - CAPITAL LEASE OBLIGATIONS:
AUGUST 31,
--------------------
1999 1998
-------- --------
Equipment lease with Konica bearing
interest at 8.9%, payable in monthly
installments of $445; due Aug. 2001. 9,720 - 0 -
Equipment lease with Associates
Capital bearing interest at 7%,
payable in monthly installments
of $1,177; due Sept. 1998. - 0 - 2,272
Equipment lease with IKON Office
Solutions bearing interest at 18% payable
in monthly installments of $105; due March 2000. 695 1,746
Software lease with Manifest Group
bearing interest at 14%, payable in
monthly installments of $751; due
August 2000. $ 8,487 $ 15,728
-------- --------
Total Obligations 18,902 19,746
Less Current Portion of
Lease Obligations 15,047 11,125
-------- --------
Total Long - Term Capital
Lease Obligations $ 3,855 $ 8,621
======== ========
The capitalized lease obligations are collateralized by the related
equipment acquired with a net book value of approximately $ 29,600 and $
45,000 at August 31, 1999 and 1998, respectively. The future minimum lease
payments under the capital leases and the net present value of the future
lease payments at August 31, 1999 and 1998 are as follows:
AUGUST 31,
--------------------
1999 1998
-------- --------
Total minimum lease payments $ 20,405 $ 22,319
Less: Amount representing interest 1,503 2,573
-------- --------
Present value of net minimum
lease payments $ 18,902 $ 19,746
Future obligations under the lease terms are:
PERIOD ENDING
AUGUST 31, AMOUNT
---------- ------
2000 $14,522
2001 4,380
------
Total $18,902
======
NOTE 5 - INCOME TAXES:
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". Implementation of SFAS 109 did not have a material cumulative
effect on prior periods nor did it result in a change to the current
year's provision.
F-10
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
A) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
AUGUST 31,
--------------------
1999 1998
-------- --------
% %
U.S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference 1 (1)
-------- --------
Effective U.S. Tax Rate 35 33
Foreign Tax Valuation - 0 - - 0 -
-------- --------
Effective Tax Rate 35 33
======== ========
B) Items giving rise to deferred tax assets / liabilities are as follows:
AUGUST 31,
--------------------
1999 1998
-------- --------
Deferred Tax Assets:
Tax Loss Carry-forward $ - 0 - $ - 0 -
-------- --------
Deferred Tax Liability:
Depreciation 13,852 11,070
-------- --------
Valuation Allowance - 0 - - 0 -
-------- --------
Net Deferred Tax Asset / Liability $ 13,852 $ 11,070
======== ========
NOTE 6 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
In July 1996, the Board of Directors and majority shareholders authorized
5,000,000 shares of Preferred Stock with a par value of $0.001. As of
August 31, 1999, no Preferred Stock has been issued.
In July 1996, the Board of Directors and majority shareholders adopted an
employee stock option plan under which 400,000 shares of Common Stock have
been reserved for issuance. The options granted for under this plan are to
purchase fully paid and non-assessable shares of the Common Stock, par
value $.001 per share at a price equal to the underlying common stock's
market price at the date of issuance. These options may be redeemed six
months after issuance, expire five years from the date of issuance and
contain a cash-less exercise feature. The underlying shares of common
stock were registered for resale under the Securities Act of 1933 on
February 19, 1999. As of August 31, 1999, 146,375 options have been
granted pursuant to such plan with 29,000 being exercised.
In May of 1996, the Company received an aggregate of $375,000 in bridge
financing in the form of interest-free convertible notes from unaffiliated
individuals. Holders of $369,000 of these notes converted into 369,000
shares of Company common stock, and the balance of $6,000 was retired in
November of 1996. In conjunction with the issuance of such indebtedness,
the Company has issued such investors $.50 Warrants to purchase 375,000
shares of common stock, and $5.00 Warrants to purchase up to 375,000
shares of common stock.
The Company has issued the following warrants that have since been
exercised or expired:
700,000 stock purchase warrants which expire July 2000. The warrants
are to purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $.01 per
share. These warrants were exercised as of August 31, 1997.
1,050,000 stock purchase warrants which expire July 1999. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share at a purchase price of $.05
per share. These warrants, however, are not exercisable until and
unless the shares of Common Stock trade at a minimum of $5.50 per
share for twenty consecutive trading days, yet still expire July
1999 if not exercised. During April 1999,
F-11
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
the Company's Board of Directors removed the requirement that the
Company's common stock trade at a price of no less than $5.50 per
share for twenty consecutive trading days provided that the holders
of the warrants exercise the warrants prior to the expiration date
and remit to the Company a fee of $.70 per underlying share upon
exercise of the warrants. Prior to expiration, 1,037,500 warrants
had been exercised whereas 12,500 warrants expired.
1,375,000 stock purchase warrants which expire July 1999. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share at a purchase price of $.50
per share. These warrants, however, are not exercisable until and
unless the shares of Common Stock trade at a minimum of $5.50 per
share for twenty consecutive trading days, yet still expire July
1999 if not exercised. During April 1999, the Company's Board of
Directors removed the requirement that the Company's common stock
trade at a price of no less than $5.50 per share for twenty
consecutive trading days provided that the holders of the warrants
exercise the warrants prior to the expiration date and remit to the
Company a fee of $.25 per underlying share upon exercise of the
warrants. Prior to expiration, 1,325,000 warrants had been exercised
whereas 50,000 warrants expired.
425,000 stock purchases warrants that expire July 1999. The warrants
are to purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $5.00 per
share. These warrants are subject to restrictions regarding the
timing of exercise. The underlying shares of common stock were
registered for resale on September 4, 1997 under the Securities Act
of 1933. Prior to expiration, no warrants had been exercised whereas
425,000 warrants expired.
The Company has issued and outstanding the following warrants which have
not yet been exercised at August 31, 1999:
150,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $1.50 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $4.00 per share for sixty-one
consecutive trading days. The underlying shares of common stock were
registered for resale under the Securities Act of 1933 on March 19,
1999. These warrants will expire on March 19, 2000.
150,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $2.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $5.50 per share for sixty-one
consecutive trading days. The underlying shares of common stock were
registered for resale under the Securities Act of 1933 on March 19,
1999. These warrants will expire on March 19, 2000.
50,000 stock purchase warrants which expire August 31 2000. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share, at a purchase price of
$2.00 per share. If, however, the closing bid price of the Common
Stock shall have equaled or exceeded $5.50 per share for a period of
twenty consecutive trading days at any time, the Company may redeem
the warrants by paying holders $.05 per warrant. As of August 31,
1999, the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $3.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $7.50 per share for sixty-one
consecutive trading days. The underlying shares of common stock were
registered for resale under
F-12
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
the Securities Act of 1933 on March 19, 1999. These warrants will
expire on March 19, 2000.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $5.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $10.00 per share for thirty-one
consecutive trading days. These warrants will expire three years
from the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $7.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $12.00 per share for thirty-one
consecutive trading days. These warrants will expire three years
from the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $9.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $14.00 per share for thirty-one
consecutive trading days. These warrants will expire five years from
the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $11.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $16.00 per share for thirty-one
consecutive trading days. These warrants will expire five years from
the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
5,033,334 Class A stock purchase warrants which expire August 31,
2000. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $4.00 per share. If, however, the closing bid price of the
Common Stock shall have equaled or exceeded $5.50 per share for a
period of twenty consecutive trading days at any time, the Company
may redeem the Class A Warrants by paying holders $.05 per Class A
Warrant. The underlying shares of common stock were registered for
resale on September 4, 1997 under the Securities Act of 1933.
5,033,334 Class B stock purchase warrants which expire August 31,
2000. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share, at a purchase
price of $6.00 per share. If, however, the closing bid price of the
Common Stock shall have equaled or exceeded $7.50 per share for a
period of twenty consecutive trading days at any time, the Company
may redeem the Class B Warrants by paying holders $.05 per Class B
Warrant. The underlying shares of common stock and Class B Warrants
were registered for resale on September 4, 1997 under the Securities
Act of 1933. These warrants trade under the symbol "EGLWZ".
1,050,000 Class C stock purchase warrants which expire August 31
2000. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share, at a purchase
price of $2.00 per share. If, however, the closing bid price
F-13
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
of the Common Stock shall have equaled or exceeded $5.50 per share
for a period of twenty consecutive trading days at any time, the
Company may redeem the Class C Warrants by paying holders $.05 per
Class C Warrant. The underlying shares of common stock were
registered for resale on September 4, 1997 under the Securities Act
of 1933.
The warrants outstanding are segregated into four categories (exercisable,
non-exercisable, non-registered, and expired). They are summarized as
follows:
<TABLE>
<CAPTION>
WARRANTS ISSUED WARRANTS EXERCISABLE WARRANTS EXPIRED
CLASS AUGUST 31, AUGUST 31, WARRANTS AUGUST 31,
OF ---------------------- --------------------- --------------------------------- --------------------
WARRANTS 1999 1998 1999 1998 NON-EXERCISABLE NON-REGISTERED 1999 1998
---------- --------- --------- --------- --------- --------------- --------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.01 Exercised Exercised -- -- -- -- -- --
0.05 Exercised 1,050,000 -- -- -- -- 12,500 --
0.50 Exercised 1,375,000 -- -- -- -- 50,000 --
5.00 Expired 425,000* -- 425,000 -- -- 425,000 --
4.00 5,033,334* 5,033,334* 5,033,334 5,033,334 -- -- -- --
6.00 5,033,334* 5,033,334* 5,033,334 5,033,334 -- -- -- --
2.00 1,050,000* 1,050,000* 1,050,000 1,050,000 -- -- -- --
1.50 150,000* 150,000 150,000 -- -- -- -- --
2.00 150,000* 150,000 150,000 -- -- -- -- --
3.00 200,000* 200,000 200,000 -- -- -- -- --
5.00 200,000 200,000 -- -- -- 200,000 -- --
7.00 200,000 200,000 -- -- -- 200,000 -- --
9.00 200,000 200,000 -- -- -- 200,000 -- --
11.00 200,000 200,000 -- -- -- 200,000 -- --
2.00 50,000* 50,000* 50,000 50,000 -- -- -- --
ESOP 27,375* 14,875* 13,625 12,125 3,500 -- 10,250 --
ESOP 119,000 68,000 69,000 6,000 50,000 -- -- --
</TABLE>
An asterisk (*) denotes warrants which would have an anti-dilutive effect
if currently used to calculate earnings per share for the year ended
August 31, 1999.
NOTE 7 - RELATED PARTY TRANSACTIONS:
For the year ended August 31, 1999, the Company has repaid certain
advances to shareholders. (See Note 11)
NOTE 8 - SEGMENT INFORMATION:
The Company had gross revenues of $2,359,184 and $4,827,434 for the years
ended August 31, 1999 and 1998, respectively. The following parties
individually represent a greater than ten percent of these revenues.
AUGUST 31, 1999 AUGUST 31, 1998
--------------------- ---------------------
CUSTOMER AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- ---------- ---------- ----------
Link-Two Communications, Inc. $ 991,692 42.83% $2,892,769 59.92%
RFTL ........................ $ 755,771 32.64% 656,512 11.71%
========== ===== ========== =====
NOTE 9 - INVESTMENT IN LINK - TWO COMMUNICATIONS, INC.:
The Company and Link - Two Communications, Inc. (Link II) have executed an
agreement, whereby the Company would receive up to an eight percent equity
interest in Link II in lieu of accruing finance charges on the outstanding
balance owed by Link II to the Company. Under the agreement, equity in
Link II was earned at a rate of 0.2% per month per $100,000 payable and
outstanding for more than thirty days. At August 31, 1999 and 1998, the
Company had earned a 5.0% and 5.0%, respectively, minority equity interest
in Link II. This is evidenced by the issuance of 240,000 shares of Link II
common stock to the Company. As of August 31, 1999 and 1998, the Company
has recorded it share of losses in this unconsolidated affiliate. The loss
as a minority shareholder totaled $91,678 and $28,663, respectively. The
Company has reclassified its balances due from Link II as additional
advances to affiliates.
F-14
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
Certain principal stockholders (or affiliates thereof) of the Company,
including James Futer, executive vice president, director, and chief
operating officer, and A. L. Clifford, a director of the Company, are also
principal stockholders of Link II. Mr. Clifford is also the chairman,
president, and chief executive officer of Link II and Dr. Cubley is a
director of Link II. Subsequent to August 31, 1999, Link II has entered
into negotiations to acquire existing paging operations in Dallas, San
Antonio and Houston. Additionally the company is currently negotiating
with a utility company to install wireless meter reading equipment which
will utilize the Link II radio frequency licenses and equipment.
On October 1, 1999, Link II refinanced its existing accounts payable to
Eagle Wireless International through the issuance of a $733,571 ten
percent (10%) note secured by all lease station licenses and a $6,000,000
ten percent (10%) note secured by all assets (excluding licenses). These
notes are due September 1, 2000. During October 1999, the Company pledged
as collateral on a $4,500,000 convertible note, the $6,000,000 note
receivable and its underlying collateral.
NOTE 10 - RISK FACTORS:
For the years ended August 31, 1999 and 1998, substantially all of the
Company's business activities have remained within the United States and
have been extended to the wireless infrastructure industry. Approximately
eighty-four percent of the Company's revenues and receivables have been
created solely in the state of Texas, one-half percent have been created
in the international market, and the approximate fifteen and one-half
percent remainder has been created relatively evenly over the rest of the
nation during the year ended August 31, 1999 whereas approximately
seventy-four percent of the Company's revenues and receivables have been
created solely in the state of Texas, one and one-half percent have been
created in the international market, and the approximate twenty-four and
one-half percent remainder has been created relatively evenly over the
rest of the nation for the year ended August 31, 1998.
Through the normal course of business, the Company generally does not
require its customers to post any collateral. However, because Link II
constitutes 43% and 60% of the Company's gross revenues and 64% and 60% of
its gross assets for the years ended August 31, 1999 and 1998,
respectively, the two companies have reached an agreement whereby the
Company has received a minority interest in Link II based upon accounts
receivable and has fully collateralized the debt. (See Note 9)
Although the Company has concentrated its efforts in the wireless
infrastructure industry during the years ended August 31, 1999 and 1998,
it is management's belief that the Company faces little credit or economic
risk due to the continuous growth the market is experiencing.
NOTE 11 - SHAREHOLDERS' ADVANCES:
Certain officers and an employee advanced the Company $290,000. At August
31, 1999 and 1998, the Company owes $ -0- and $24,519, respectively. The
shareholder advances are non-interest bearing and payable upon demand.
NOTE 12 - FOREIGN OPERATIONS:
Although the Company is based in the United States, its product is sold on
the international market. Presently, international sales total
approximately 0.5 % and 1.4% at August 31, 1999 and 1998, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Company leases its primary office space for $10,000 per month with
Space Industries, Inc. ("Space"). This non-cancelable lease commenced on
July 1, 1999 and expires on March 29, 2001. In addition to the monthly
rental, the Company will issue 100,000 shares of its common stock to
Space. Space will have the right to sell no more than 10,000 shares per
month until all shares have been sold. Additionally, Space will have the
right to put to the Company all unsold shares held by Space in exchange
for a payment calculated using the following formula:
$173,000 - (gross proceeds from stock sales above $1.70 per share)
minus ($1.73 x quantity of shares sold below $1.70 per share)
F-15
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
It is understood and agreed, and it is the intention of both parties, that
this put right will provide Space with a guarantee that, so long as (a)
Space does not sell or otherwise dispose of the common stock for less than
$1.70 per share, and (b) Space exercises its put right between August 15,
2000 and August 31, 2000, Space will receive a minimum economic benefit of
at least $170,000 from the common stock issued by the Company to Space.
For the periods ending August 31, 1999 and 1998, rental expenses of
$120,906 and $93,510, respectively, were incurred.
Future obligations under the non-cancelable lease terms are:
PERIOD ENDING
AUGUST 31, AMOUNT
------------- ----------
2000 $ 217,140
2001 $ 126,665
==========
During the year ended August 31, 1998, the Company entered into an
agreement with a public relations consultant whereby the consultant will
develop, implement, and maintain an ongoing program to increase the
investment community's awareness of the Company's activities and to
stimulate the investment community's interest in the Company. As
compensation for these services, the consultant will be paid $5,000 per
month. Additionally, the consultant will receive options to purchase
100,000 shares of the Company's common stock for $1.00 per share. The
delivery of the options to purchase the 100,000 shares of common stock is
contingent upon the attainment of certain objective criteria as outlined
in the July 16, 1998 agreement between the Company and the public
relations consulting firm. At August 31, 1999, these options have been
issued and exercised.
The Company has been named as defendant in a lawsuit involving the
Company's previous landlord with regard to breach of the lease. The
Company has counter-claimed, also alleging breach of the lease. The
Company intends to vigorously defend this matter as well as prosecute its
counter-claim.
The Company has provided a finance company a limited manufacturer's
guarantee for an amount not to exceed $910,845 for equipment and services
sold to a customer of the Company. In the event of default by the
customer, after a minimum period of ninety days from the date default is
declared and after having exhausted all available remedies against the
customer, the finance company may seek payment directly from the Company.
Under this guarantee, the Company may elect to assume the lease from the
finance company under the original terms and conditions or may elect to
pay all amounts due in arrears under the original agreement and pay-off
the lease through a one-time payment of the unamortized balance.
During September 1998, the Company has filed a petition with the District
Court in Harris County, Texas against a California corporation that sells
manufacturing and accounting software, alleging deceptive trade practices,
fraud, misrepresentation, negligence, and breach of implied warranty. At
August 31, 1999, the Company had received full compensation and the case
has been terminated.
NOTE 14 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE YEAR ENDED AUGUST, 1999
------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ---------- ----------
Net Income .............................. $ 168,272
Basic EPS:
Income available to common stockholders 168,272 11,980,911 $ 0.01
==========
Effect of Dilutive Securities:
Warrants .............................. - 0 - 69,000
---------- ----------
Diluted EPS:
Income available to common stockholders
and assumed conversions ............. $ 168,272 12,049,911 $ 0.01
========== ========== ==========
F-16
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
FOR THE YEAR ENDED AUGUST 31, 1998
-----------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ---------- ---------
Net Income ............................... $ 770,968
Basic EPS:
Income available to common stockholders 770,968 11,594,902 $0.07
=========
Effect of Dilutive Securities: .......... - 0 - 2,425,000
---------- ----------
Diluted EPS:
Income available to common stockholders
and assumed conversions ............. $ 770,968 14,019,902 $0.06
========== ========== =====
For the years ended August 31, 1999 and 1998, anti-dilutive securities
existed. (see Note 6)
For the period September 1, 1999 to December 13, 1999, there were no
transactions that would have materially changed the number of common
shares or potential common shares outstanding.
NOTE 15 - EMPLOYEE STOCK OPTION PLAN:
In July 1996, the Board of Directors and majority stockholders adopted a
stock option plan under which 400,000 shares of the Company's common stock
have been reserved for issuance. Under this plan, as of August 31, 1999
and 1998, 146,375 and 82,875 warrants have been issued to various
employees. Of these outstanding warrants, 29,000 were exercised for the
year ended August 31, 1999 and none for the year ended August 31, 1998.
Additionally, 10,250 warrants have expired as of August 31, 1999.
NOTE 16 - RETIREMENT PLANS:
During October 1997, the Company initiated a 401(k) plan for its employees
which is funded through the contributions of its participants. This plan
maintains that the Company will match up to 3% of each participant's
contribution. For the years ended August 31, 1999 and 1998, employee
contributions were approximately $103,000 and $56,500, respectively. The
Company matched approximately $33,500 and $17,000, respectively for those
same periods.
NOTE 17 - MAJOR CUSTOMER:
As of August 31, 1998, the Company had a receivable due from Link - Two
Communications (Link II) in the amount of $5,142,950. This account
receivable has been converted to a note receivable (see Note 9). As of
August 31, 1999, Link II is continuing to sell equity securities, assets,
and products that are being used to retire this note receivable. This
receivable is secured by substantially all assets of Link II including
radio frequency licenses that have been valued by outside appraisal firms
to in excess of twenty million dollars. In August 1999, Link II commenced
operations of its nationwide two-way messaging system. Based upon the
aforementioned, management believes the risks involved with this
receivable are minimal.
NOTE 18 - SUBSEQUENT EVENTS:
The Company entered into a convertible debenture arrangement with Global
Capital Advisors, LTD to fund up to $4,500,000 over a two-year period. On
October 7, 1999 the Company borrowed $1,500,000 under this agreement. The
three-year convertible debenture bears interest at seven percent (7%) and
can be redeemed in the Company's common stock or cash. Additionally, the
Company is committed to issue up to 280,000 warrants with a strike price
of $1.54 per warrant. These convertible debentures are secured by a note
receivable from Link Two Communications, Inc. of $6,000,000.
F-17
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 1999
Subsequent to August 31, 1999, the Company has signed a letter of intent
with Atlantic Pacific Communications, Inc. to start negotiations with
regard to entering into a merger, acquisition, or joint venture.
Subsequent to August 31, 1999, the Company has signed a letter of intent
with a Florida Company to start negotiations with regard to entering into
a merger, acquisition, or joint venture.
Subsequent to August 31, 1999, the Company has formed BroadbandMagic.com,
Inc., a wholly owned subsidiary. This subsidiary has been created
primarily to market and sell the Company's products.
F-18
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MAY 31, 2000 AUGUST 31, 1999
(UNAUDITED) (AUDITED)
------------ ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents (Note 1) ........................ $ 26,658 $ 188
Accounts Receivable (Note 2) ................................ 1,942 286
Inventories (Note 1) ......................................... 5,809 2,356
Prepaid Expenses ............................................. 193 242
------------ ---------------
Total Current Assets .................................... 34,602 3,072
PROPERTY AND EQUIPMENT (NOTE 1):
Operating Equipment .......................................... 2,016 922
Less: Accumulated Depreciation ............................... (710) (333)
------------ ---------------
Total Property and Equipment ............................ 1,306 589
OTHER ASSETS:
Security Deposits ............................................ 20 17
Trade Show Capitalization (net) .............................. 30 0
Goodwill ..................................................... 3,823 0
Patents ...................................................... 135 0
Deferred Advertising ......................................... 749 0
Other ........................................................ 532 0
Investment In Affiliate (Note 9) ............................. 6,605 6,642
------------ ---------------
Total Other Assets ...................................... 11,894 6,659
TOTAL ASSETS ................................................. $ 47,802 $ 10,320
============ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ............................................. $ 1,916 $ 208
Accrued Expenses ............................................. 144 106
Notes Payable (Note 3) ....................................... 350 17
Capital Lease Obligations (Note 4) ........................... 36 15
Deferred Revenues ............................................ -- 533
Federal Income Taxes Payable (Notes 1 & 5) ................... 300 468
Franchise Taxes Payable ...................................... 17 13
Sales Taxes Payable .......................................... 84 48
Deferred Taxes (Note 5) ...................................... 6 6
------------ ---------------
Total Current Liabilities ............................... 2,853 1,414
LONG - TERM LIABILITIES:
Capital Lease Obligations (net of current maturities) (Note 4) 27 4
Deferred Taxes (Note 5) ...................................... 8 8
------------ ---------------
Total Long - Term Liabilities ........................... 35 12
SHAREHOLDERS' EQUITY:
Preferred Stock - $.001 par value, Authorized 5,000,000 shares
Issued -0- shares ....................................... -- --
Common Stock - $.001 par value, Authorized 100,000,000 shares
Issued and Outstanding at May 31, 2000 and August 31,
1999, 23,984,446 shares and 13,479,833, respectfully .. 24 13
Paid in Capital .............................................. 42,746 7,181
Retained Earnings ............................................ 2,144 1,700
------------ ---------------
Total Shareholders' Equity .............................. 44,914 8,894
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $ 47,802 $ 10,320
============ ===============
</TABLE>
See accompanying notes to the financial statements.
F-19
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, 2000 MAY 31, 1999 MAY 31, 2000 MAY 31, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 1,270 $ 395 $ 3,173 $ 2,053
Costs of goods sold:
Materials and supplies ....................... 207 111 539 455
Direct labor and related costs ............... 107 84 460 421
Depreciation and amortization ................ 18 18 53 54
Other manufacturing costs .................... 14 43 63 152
------------ ------------ ------------ ------------
Total costs of goods sold ........................ 346 256 1,115 1,082
------------ ------------ ------------ ------------
Gross profit ..................................... 925 139 2,058 971
------------ ------------ ------------ ------------
Operating expenses
Selling, general and administrative:
Salaries and related costs ............... 432 90 774 338
Advertising and promotion ................ 83 1 115 96
Depreciation and amortization ............ 36 16 91 42
Other support costs ...................... 343 194 875 520
Research and Development ................. 157 42 412 312
------------ ------------ ------------ ------------
Total operating expenses ................. 1,051 343 2,267 1,308
------------ ------------ ------------ ------------
Income from operations ........................... (126) (204) (209) (337)
Other income
Interest income (net) ........................ 457 209 894 573
Other Income ................................. 3 -- 9 --
------------ ------------ ------------ ------------
Total other income ....................... 460 209 903 573
------------ ------------ ------------ ------------
Earnings Before Income Taxes & Loss From
Minority Interest in Affiliate ................... 334 5 695 236
------------ ------------ ------------ ------------
Gain/(Loss) From Minority Interest in Affiliate .. -- 13 (37) 13
Income before income taxes ....................... 334 18 658 249
Provisions for income taxes ...................... 114 4 214 85
------------ ------------ ------------ ------------
Net income ....................................... $ 220 $ 14 $ 444 $ 164
============ ============ ============ ============
Net earnings per common share:
Basic ............................................ $ 0.01 $ 0.00 $ 0.02 $ 0.01
Diluted .......................................... $ 0.01 $ 0.00 $ 0.02 $ 0.01
============ ============ ============ ============
Weighted average basic common shares outstanding . 16,261,854 11,929,698 20,980,673 11,762,236
Weighted average diluted common shares outstanding 16,336,104 26,522,241 21,054,923 26,354,779
</TABLE>
See accompanying notes to the financial statements.
F-20
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, 1998 COMMON PREFERRED PAID IN RETAINED SHAREHOLDERS'
TO MAY 31, 2000 STOCK STOCK CAPITAL EARNINGS EQUITY
------------------------------------ ------- --------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Total As of August 31, 1998 ....... 12 -- 5,973 1,532 7,516
Net Earnings 1999.................. 168 168
New Stock Issued to Shareholders
For Services Rendered ........ -- 163 -- 163
For Exercise of Warrants ..... 2 1,045 -- 1,047
------- --------- ------- -------- -------------
Total As Of August 31, 1999 ........ 14 -- 7,181 1,700 8,894
Net Earnings For The Nine Months
Beginning September 1, 1999
To May 31, 2000 ............. 444 444
New Stock Issued to Shareholders
For Services Rendered ........ -- -- 1,054 -- 1,054
For Syndication Cost ......... -- -- (695) -- (695)
For Exercise of Warrants ..... 9 -- 30,078 -- 30,087
For Exercise of ESOP ......... -- -- 139 -- 139
For Acquisitions and Other ... 1 -- 3,454 -- 3,455
For Convertible Debt ......... -- -- 1,535 -- 1,535
------- --------- ------- -------- -------------
Total As Of May 31, 2000 ........... 24 -- 42,746 2,144 44,914
</TABLE>
See accompanying notes to the financial statements
F-21
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 2000 MAY 31, 1999
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Earnings .............................................. $ 444 $ 164
Adjustments To Reconcile Net Earnings To Net Cash
Used By Operating Activities:
(Loss)/Gain on Sale of Asset .......................... -- 13
Depreciation and Amortization ......................... 377 84
Services Paid using Common Stock ...................... 1,054 0
(Increase)/Decrease in Accounts Receivable ............ (1,656) (1,291)
(Increase)/Decrease in Inventories .................... (3,453) (210)
(Increase)/Decrease in Prepaid Expenses ............... 49 31
Increase/(Decrease) in Accounts Payable and Accrued Exp 1,746 (127)
Increase/(Decrease) in Deferred Taxes ................. -- --
Increase/(Decrease) in Deferred Revenues .............. (533) (2)
Increase/(Decrease) in Sales Taxes Payable ............ 36 11
Increase/(Decrease) in Fed Inc Taxes Payable .......... (168) 89
Increase/(Decrease) in Franchise Taxes Payable ........ 4 13
------------ ------------
Total Adjustments ..................................... (2,544) (1,389)
------------ ------------
Net Cash Used By Operating Activities ...................... (2,100) (1,225)
Cash Flows From Investing Activities
Purchase of Property and Equipment ......................... (1,094) (3)
(Increase)/Decrease in Other Assets ........................ (96) (4)
------------ ------------
Net Cash Used By Investing Activities ............................ (1,190) (7)
Cash Flows From Financing Activities
Increase/(Decrease) in Notes Payable and Capital Leases .... 377 18
Increase/(Decrease) in Shareholders' Advances .............. -- (24)
Increase/(Decrease) in Syndication Costs ................... (695) --
Proceeds From Sale of Common Stock, Net .................... 30,078 423
------------ ------------
Net Cash Provided/(Used) By Financing Activities ................. 29,760 417
Net Increase/(Decrease) in Cash .................................. 26,470 (815)
Cash at the Beginning of the Year ................................ 188 1,097
------------ ------------
Cash at the End of the Year ...................................... $ 26,658 $ 282
============ ============
</TABLE>
See accompanying notes to the financial statements.
F-22
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Eagle Wireless International, Inc., and Subsidiaries (the Company), was
incorporated as a Texas corporation on May 24, 1993 and commenced business
in April of 1996. The Company and its subsidiaries, BroadbandMagic.com,
Atlanticpacific Communications, Inc. and Comtel Communications are
suppliers of cabling, multi-media set top devices, telecommunications
equipment and related software used by service providers in the computer,
paging and other wireless personal communications markets. The Company
designs, manufactures, markets and services its products under the Eagle,
BroadbandMagic.com and Atlanticpacific Communications, Inc. names. These
products include cabling, multi-media set top devices, transmitters,
receivers, controllers, software and other equipment used in personal
communications systems (including paging, voice messaging and mobile data
systems) and radio telephone systems.
A) Cash and Cash Equivalents
The Company had $25,234,314 and $29,059 invested in interest bearing
accounts at May 31, 2000 and August 31, 1999, respectively.
B) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated by using the straight-line method for financial
reporting and accelerated methods for income tax purposes. The recovery
classifications for these assets are listed as follows:
YEARS
-----
Machinery and equipment 7
Furniture and Fixtures 7
Expenditures for maintenance and repairs are charged against income as
incurred and major improvements are capitalized.
C) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the following
items:
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
Raw Materials ............. $ 5,301,863 $ 1,215,003
Work in Process ........... 507,645 1,119,672
Finished Goods ............ -0- 21,186
------------ ---------------
$ 5,809,508 $ 2,355,861
============ ===============
D) Research and Development Costs
The Company's research and development costs include obligations to
perform contractual services for outside parties. These costs are expensed
as contract revenues are earned. Research and development costs of
$313,386 and $312,269 were expensed for the periods ended May 31, 2000 and
1999, respectively. Contract revenues earned for the periods ended May 31,
2000 and 1999 were approximately $-0- and $690,000 respectively.
E) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires a
change from the deferral method to assets and liability method of
accounting for income taxes. Timing differences exist between book income
and tax income which relate primarily to depreciation methods.
F-23
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
F) Net Earnings Per Common Share
Net earnings per common share is shown as both basic and diluted. Basic
earnings per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average number
of shares of common stock outstanding. Diluted earnings per common share
are computed by dividing net income less any preferred stock dividends (if
applicable) by the weighted average number of shares of common stock
outstanding plus any dilutive common stock equivalents. The components
used for the computations are shown as follows:
MAY 31, 2000 MAY 31, 1999
------------ ------------
Weighted Average Number of Common
Shares Outstanding Including:
Primary Common Stock Equivalents........ 20,980,673 11,929,698
Fully Dilutive Common Stock Equivalents. 21,054,923 26,522,241
G) Impairment of Long Lived and Identifiable Intangible Assets
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. An impairment loss would be deemed necessary when the estimated
non-discounted future cash flows are less than the carrying net amount of
the asset. If an asset were deemed to be impaired, the asset's recorded
value would be reduced to fair market value. In determining the amount of
the charge to be recorded, the following methods would be utilized to
determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
As of May 31, 2000 and August 31, 1999, no impairment existed.
H) Advertising and Promotion
All advertising related costs are expensed as incurred. The Company does
not incur any cost for direct-response advertising. For the periods ended
May 31, 2000 and 1999, the Company had expensed $145,501 and $96,498,
respectively.
I) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent asset and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-24
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 1 -BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
J) Comprehensive Income
There were no items of other comprehensive income in 2000 and 1999, and,
thus, net income is equal to comprehensive income for each of those years.
K) Reclassification
The Company has reclassified certain costs and expenses for the nine
months ended May 31, 2000 to facilitate comparison to the nine months
ended May 31, 1999.
NOTE 2 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
Accounts Receivable ............... $ 1,941,716 $ 286,269
Allowance for Doubtful Accounts ... - 0 - - 0 -
------------ ---------------
Net Accounts Receivable ........... $ 1,941,716 $ 286,269
============ ===============
NOTE 3 - NOTES PAYABLE:
<TABLE>
<CAPTION>
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
<S> <C> <C>
Unsecured note to Imperial Premium
Finance bearing interest at 15.9%,
due $1,690 monthly until February 2001 ............ $ 10,140 $ 5,386
Unsecured note to Central Insurance
bearing no interest, due $886
monthly until January 2001 ........................ 7,085 5,220
Unsecured note Kemper Insurance
bearing no interest, due $694 monthly
until November 2000 ............................... 4,164 1,124
Unsecured note to West Coast Life
Insurance bearing no interest, due
$2,457 quarterly until May 2001 ................... 7,370 4,913
$50,000 Line-of-Credit, Compass Bank,
secured by accounts receivable
Atlanticpacific Communications bearing
interest at 9.5%, interest payable
monthly, principal due on demand,
or if no demand made, due August 2000 .............. 54,141 --
</TABLE>
F-25
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 3 - NOTES PAYABLE: (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Note to Compass Bank, secured by
accounts receivable of Atlanticpacific Communications,
bearing interest at 9.5%, interest payable monthly,
principal due April 2001 ................................................. 12,069 --
Note to PrimeBank secured by inventory And assignment of life insurance
Policies, principal payable in monthly Installments of $2,984, including
interest At prime plus 2%, due on demand or, If no demand made, due
January 2001 Security is accounts receivable ............................. 26,854 --
$250,000 Line-of-Credit, secured by accounts receivable of Comtel
Communications, inventory and assignment of life insurance policies,
bearing interest at prime plus 1%, interest payable monthly, principal due
on demand, or if no demand made, due August 2000 ......................... 228,000 --
------------ ---------------
Total .............................................................. $ 349,823 16,643
Less Current Portion of
Long - Term Debt ................................................ 349,823 16,643
------------ ---------------
Total Long - Term Debt ............................................. $ -0- $ -0-
============ ===============
NOTE 4 - CAPITAL LEASE OBLIGATIONS:
<CAPTION>
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
Equipment lease with Konica bearing
interest at 8.9%, payable in monthly
installments of $445; due Aug. 2001 ...................................... $ 6,676 $ 9,720
Software lease with Manifest Group
bearing interest at 14%, payable in
monthly installments of $751; due
August 2000 ............................................................. 2,211 8,487
Equipment lease with Agilent Technologies,
Payable in monthly installments of $1,076;
due April 2003 .......................................................... 37,669 --
Vehicle lease with GE Capital
Bearing interest, payable in monthly
Installments of $465; due June 2002 ...................................... 13,369 --
</TABLE>
F-26
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 4 - CAPITAL LEASE OBLIGATIONS: (continued)
Equipment lease with GE Capital
Bearing interest, payable in monthly
Installments ........................ 3,963 --
------------ ---------------
Total Obligations .................. 63,888 18,902
Less Current Portion of
Lease Obligations ........ 27,353 15,047
------------ ---------------
Total Long - Term Capital
Lease Obligations ........ $ 36,535 $ 3,855
============ ===============
The capitalized lease obligations are collateralized by the related
equipment acquired with a net book value of approximately $68,526 and
$29,600 at May 31, 2000 and August 31, 1999, respectively. The future
minimum lease payments under the capital leases and the net present value
of the future lease payments at May 31, 2000 and August 31, 1999 are as
follows:
<TABLE>
<CAPTION>
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
<S> <C> <C>
Total minimum lease payments ..................... $ 58,213 $ 20,405
Less: Amount representing interest ............... 5,675 1,503
------------ ---------------
Present value of net minimum
lease payments ............................... $ 63,888 $ 18,902
============ ===============
</TABLE>
Future obligations under the lease terms are:
PERIOD ENDING
MAY 31, 2000, AMOUNT
------------ ---------
2001 $ 26,085
2002 19,827
2003 12,301
---------
Total $ 58,213
=========
NOTE 5 - INCOME TAXES:
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". Implementation of SFAS 109 did not have a material cumulative
effect on prior periods nor did it result in a change to the current
year's provision.
A) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
AUGUST 31,
-------------
1999 1998
---- ----
% %
U.S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference 1 (1)
---- ----
Effective U.S. Tax Rate 35 33
Foreign Tax Valuation -0- -0-
---- ----
Effective Tax Rate 35 33
==== ====
F-27
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 6 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
In July 1996, the Board of Directors and majority shareholders authorized
5,000,000 shares of Preferred Stock with a par value of $0.001. As of May
31, 2000, no Preferred Stock has been issued.
In July 1996, the Board of Directors and majority shareholders adopted an
employee stock option plan under which 400,000 shares of Common Stock have
been reserved for issuance. The options granted for under this plan are to
purchase fully paid and non-assessable shares of the Common Stock, par
value $.001 per share at a price equal to the underlying common stock's
market price at the date of issuance. These options may be redeemed nine
months after issuance, expire five years from the date of issuance and
contain a cash-less exercise feature. The underlying shares of common
stock were registered for resale under the Securities Act of 1933 on
February 19, 1999. As of May 31, 2000, 223,107 options have been granted
pursuant to such plan with 66,875 being exercised and 10,250 have expired.
In May of 1996, the Company received an aggregate of $375,000 in bridge
financing in the form of interest-free convertible notes from unaffiliated
individuals. Holders of $369,000 of these notes converted into 369,000
shares of Company common stock, and the balance of $6,000 was retired in
November of 1996. In conjunction with the issuance of such indebtedness,
the Company has issued such investors $.50 Warrants to purchase 375,000
shares of common stock, and $5.00 Warrants to purchase up to 375,000
shares of common stock. As of May 31, 2000, all such warrants had been
exercised or had expired.
The Company has issued the following warrants that have since been
exercised or expired:
700,000 stock purchase warrants which expire July 2000. The warrants
are to purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $.01 per
share. These warrants were exercised as of August 31, 1997.
1,050,000 stock purchase warrants which expire July 1999. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share at a purchase price of $.05
per share. These warrants, however, are not exercisable until and
unless the shares of Common Stock trade at a minimum of $5.50 per
share for twenty consecutive trading days, yet still expire July
1999 if not exercised. During April 1999, the Company's Board of
Directors removed the requirement that the Company's common stock
trade at a price of no less than $5.50 per share for twenty
consecutive trading days provided that the holders of the warrants
exercise the warrants prior to the expiration date and remit to the
Company a fee of $.70 per underlying share upon exercise of the
warrants. Prior to expiration, 1,037,500 warrants were exercised and
12,500 warrants expired.
1,375,000 stock purchase warrants which expire July 1999. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share at a purchase price of $.50
per share. These warrants, however, are not exercisable until and
unless the shares of Common Stock trade at a minimum of $5.50 per
share for twenty consecutive trading days, yet still expire July
1999 if not exercised. During April 1999, the Company's Board of
Directors removed the requirement that the Company's common stock
trade at a price of no less than $5.50 per share for twenty
consecutive trading days provided that the holders of the warrants
exercise the warrants prior to the expiration date and remit to the
Company a fee of $.25 per underlying share upon exercise of the
warrants. Prior to expiration, 1,325,000 warrants were exercised and
50,000 warrants expired.
F-28
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 6 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS: (continued)
425,000 stock purchases warrants that expire July 1999. The warrants
are to purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $5.00 per
share. These warrants are subject to restrictions regarding the
timing of exercise. The underlying shares of common stock were
registered for resale on September 4, 1997 under the Securities Act
of 1933. These warrants were not exercised.
43,641 stock purchase warrants which expire October 7, 2002. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share, at a purchase price of
$1.75 per share. These warrants were exercised as of May 31, 2000.
100,000 stock purchase warrants which expire October 7, 2002. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share, at a purchase price of
$1.54 per share. These warrants were exercised as of May 31, 2000.
The Company has issued 450,000 shares of common stock in exchange
for the cancellation of the following warrants as of February 29,
1999:
150,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $1.50 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $4.00 per share for sixty-one
consecutive trading days. The underlying shares of common stock were
registered for resale under the Securities Act of 1933 on March 19,
1999. These warrants will expire on March 19, 2000.
150,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $2.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $5.50 per share for sixty-one
consecutive trading days. The underlying shares of common stock were
registered for resale under the Securities Act of 1933 on March 19,
1999. These warrants will expire on March 19, 2000.
50,000 stock purchase warrants which expire August 31 2000. The
warrants are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share, at a purchase price of
$2.00 per share. If, however, the closing bid price of the Common
Stock shall have equaled or exceeded $5.50 per share for a period of
twenty consecutive trading days at any time, the Company may redeem
the warrants by paying holders $.05 per warrant. As of August 31,
1999, the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $3.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $7.50 per share for sixty-one
consecutive trading days. The underlying shares of common stock were
registered for resale under the Securities Act of 1933 on March 19,
1999. These warrants will expire on March 19, 2000.
F-29
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 6 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS: (continued)
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $5.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $10.00 per share for thirty-one
consecutive trading days. These warrants will expire three years
from the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $7.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $12.00 per share for thirty-one
consecutive trading days. These warrants will expire three years
from the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $9.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $14.00 per share for thirty-one
consecutive trading days. These warrants will expire five years from
the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
200,000 stock purchase warrants. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $11.00 per share. These warrants,
however, are not exercisable until and unless the shares of Common
Stock trade at a minimum of $16.00 per share for thirty-one
consecutive trading days. These warrants will expire five years from
the date of effective registration of the underlying shares of
common stock. As of August 31, 1999, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933 and thus have no set expiration date.
F-30
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 6 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS: (continued)
The Company has issued and outstanding the following warrants which
have not yet been fully exercised at May 31, 2000:
5,033,334 Class A stock purchase warrants which expire August 31,
2000. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $4.00 per share. If, however, the closing bid price of the
Common Stock shall have equaled or exceeded $5.50 per share for a
period of twenty consecutive trading days at any time, the Company
may redeem the Class A Warrants by paying holders $.05 per Class A
Warrant. The underlying shares of common stock were registered for
resale on September 4, 1997 under the Securities Act of 1933. As of
May 31, 2000, 4,544,174 warrants had been exercised.
5,033,334 Class B stock purchase warrants which expire August 31,
2000. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share, at a purchase
price of $6.00 per share. If, however, the closing bid price of the
Common Stock shall have equaled or exceeded $7.50 per share for a
period of twenty consecutive trading days at any time, the Company
may redeem the Class B Warrants by paying holders $.05 per Class B
Warrant. The underlying shares of common stock and Class B Warrants
were registered for resale on September 4, 1997 under the Securities
Act of 1933. As of May 31, 2000, 1,574,442 warrants had been
exercised. These warrant trade under the symbol "EAG/WS/B".
1,050,000 Class C stock purchase warrants which expire August 31
2000. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share, at a purchase
price of $2.00 per share. If, however, the closing bid price of the
Common Stock shall have equaled or exceeded $5.50 per share for a
period of twenty consecutive trading days at any time, the Company
may redeem the Class C Warrants by paying holders $.05 per Class C
Warrant. The underlying shares of common stock were registered for
resale on September 4, 1997 under the Securities Act of 1933. As of
May 31, 2000, 1,050,000 warrants had been fully exercised.
The warrants outstanding are segregated into four categories (exercisable,
non-exercisable, non-registered, and expired). They are summarized as
follows:
<TABLE>
<CAPTION>
WARRANTS ISSUED WARRANTS EXERCISABLE WARRANTS WARRANTS EXPIRED
CLASS OF MAY 31, MAY 31, NON NON MAY 31,
WARRANTS 2000 1999 2000 1999 EXERCISED REGISTERED 2000 1999
------- ---------- ---------- --------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
4.00 5,033,334 5,033,334 489,160 5,033,334 -- -- -- --
6.00 5,033,334 5,033,334 3,458,892 5,033,334 -- -- -- --
2.00 1,050,000 1,050,000 -- 1,050,000 -- -- -- --
ESOP * 28,200 * 5,000 5,000 28,200 -- -- --
ESOP 194,907 88,375 74,250 62,875 117,782 -- 10,250 --
</TABLE>
An asterisk (*) denotes warrants which would have an anti-dilutive effect
if currently used to calculate earnings per share for the year ended
August 31, 1999.
F-31
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 7 - SEGMENT INFORMATION:
The Company had gross revenues of $1,270,299 and $395,045 for the nine
months ended May 31, 2000 and 1999, respectively. The following parties
individually represent a greater than ten percent of these revenues.
MAY 31, 2000 MAY 31, 1999
CUSTOMER AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------------ ------- ---------- ------- ----------
Link - Two ....... $ -- -- % 69,900 18 %
RFTL ............. $ -- -- % 213,075 54 %
NOTE 8 - INVESTMENT IN LINK - TWO COMMUNICATIONS, INC.:
The Company and Link - Two Communications, Inc. (Link II) have executed an
agreement, whereby the Company would receive up to an eight percent equity
interest in Link II in lieu of accruing finance charges on the outstanding
balance owed by Link II to the Company. Under the agreement, equity in
Link II was earned at a rate of 0.2% per month per $100,000 payable and
outstanding for more than thirty days. At May 31, 2000 and 1999, the
Company had earned a 5.0% and 5.0%, respectively, minority equity interest
in Link II. This is evidenced by the issuance of 240,000 shares of Link II
common stock to the Company. As of August 31, 1999 and 1998, the Company
has recorded it share of losses in this unconsolidated affiliate. The loss
as a minority shareholder totaled $91,678 and $28,663, respectively. The
Company has reclassified its balances due from Link II as additional
advances to affiliates.
Certain principal stockholders (or affiliates thereof) of the Company,
including James Futer, executive vice president, director, and chief
operating officer, and A.L. Clifford, a director of the Company, are also
principal stockholders of Link II. Mr. Clifford is also the chairman,
president, and chief executive officer of Link II and Dr. Cubley is a
director of Link II. Subsequent to August 31, 1999, Link II has entered
into negotiations to acquire existing paging operations in Dallas, San
Antonio and Houston. Additionally the company is currently negotiating
with a utility company to install wireless meter reading equipment which
will utilize the Link II radio frequency licenses and equipment.
On October 1, 1999, Link II refinanced its existing accounts payable to
Eagle Wireless International through the issuance of a $733,571 ten
percent (10%) note secured by all lease station licenses and a $6,000,000
ten percent (10%) note secured by all assets (excluding licenses). These
notes are due September 1, 2000. During October 1999, the Company pledged
as collateral on a $4,500,000 convertible note, the $6,000,000 note
receivable and its underlying collateral.
NOTE 9 - RISK FACTORS:
For the nine months ended May 2000 and 1999, substantially all of the
Company's business activities have remained within the United States and
have been extended to the wireless infrastructure industry. Approximately
fifty-three percent of the Company's revenues and receivables have been
created solely in the state of Texas, one percent have been created in the
international market, and the approximate forty-six remainder has been
created relatively evenly over the rest of the nation during the nine
months ended May 31, 2000. Approximately 75% of the Company's revenues and
receivables have been created solely in the state of Texas, and the
approximate 25% remainder has been created relatively evenly over the rest
of the nation during the nine months ended May 31, 1999
F-32
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 9 - RISK FACTORS: (continued)
Through the normal course of business, the Company generally does not
require its customers to post any collateral. However, because Link II
constitutes 43% and 60% of the Company's gross revenues and 64% and 60% of
its gross assets for the years ended August 31, 1999 and 1998,
respectively, the two companies have reached an agreement whereby the
Company has received a minority interest in Link II based upon accounts
receivable and has fully collateralized the debt.(See Note 9)
Although the Company has concentrated its efforts in the wireless
infrastructure industry and convergent set top market during the years
ended August 31, 1999 and for the nine months ended May 31, 2000 it is
management's belief that the Company faces little credit or economic risk
due to the continuous growth the market is experiencing.
NOTE 10 - FOREIGN OPERATIONS:
Although the Company is based in the United States, its product is sold on
the international market. Presently, international sales total
approximately .01% and 0% at May 31, 2000 and 1999, respectfully.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Company leases its primary office space for $10,000 per month with
Space Industries, Inc. ("Space"). This non-cancelable lease commenced on
July 1, 1999 and expires on March 29, 2001. In addition to the monthly
rental, the Company will issue 100,000 shares of its common stock to
Space. Space will have the right to sell no more than 10,000 shares per
month until all shares have been sold. Additionally, Space will have the
right to put to the Company all unsold shares held by Space in exchange
for a payment calculated using the following formula:
$173,000 - (gross proceeds from stock sales above $1.70 per share)
minus ($1.73 x quantity of shares sold below $1.70 per share)
It is understood and agreed, and it is the intention of both parties, that
this put right will provide Space with a guarantee that, so long as (a)
Space does not sell or otherwise dispose of the common stock for less than
$1.70 per share, and (b) Space exercises its put right between August 15,
2000 and August 31, 2000, Space will receive a minimum economic benefit of
at least $170,000 from the common stock issued by the Company to Space.
For the periods ending May 31, 2000 and 1999, rental expenses of $164,142
and $74,272 respectively, were incurred.
Future obligations under the non-cancelable lease terms are:
PERIOD ENDING
NOVEMBER 30, AMOUNT
------------- -----------
2000 $ 54,714
2001 $ 127,666
===========
During the year ended August 31, 1998, the Company entered into an
agreement with a public relations consultant whereby the consultant will
develop, implement, and maintain an ongoing program to increase the
investment community's awareness of the Company's activities and to
stimulate the investment community's interest in the Company. As
compensation for these services, the consultant will be paid $5,000 per
month. Additionally, the consultant will receive options to purchase
100,000 shares of the Company's common stock for $1.00 per share. The
delivery of the options to purchase the 100,000 shares of common stock is
contingent upon the attainment of certain objective criteria as outlined
in the July 16, 1998 agreement between the Company and the public
relations consulting firm. At August 31, 1999, these options have been
issued and exercised.
F-33
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES: (continued)
The Company has been named as defendant in a lawsuit involving the
Company's previous landlord with regard to breach of the lease. The
Company has counter-claimed, also alleging breach of the lease. The
Company intends to vigorously defend this matter as well as prosecute its
counter-claim.
The Company has provided a finance company a limited manufacturer's
guarantee for an amount not to exceed $910,845 for equipment and services
sold to a customer of the Company. In the event of default by the
customer, after a minimum period of ninety days from the date default is
declared and after having exhausted all available remedies against the
customer, the finance company may seek payment directly from the Company.
Under this guarantee, the Company may elect to assume the lease from the
finance company under the original terms and conditions or may elect to
pay all amounts due in arrears under the original agreement and pay-off
the lease through a one-time payment of the unamortized balance. The
company is currently negotiating with the lease company to purchase these
certain assets.
NOTE 12 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE 9 MONTHS ENDED MAY, 2000
---------------------------------------
(In thousands)
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net Income ............................... $ 444
Basic EPS:
Income available to common stockholder . $ 444 20,981 $ 0.02
Effect of Dilutive Securities:
Warrants ............................... -0- -0-
----------- ------------- ---------
Diluted EPS:
Income available to common stockholders
and assumed conversions .............. $ 444 20,981 $ 0.02
=========== ============= =========
<CAPTION>
FOR THE YEAR ENDED AUGUST, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Net Income ............................... $ 168
Basic EPS:
Income available to common stockholder . $ 168 12,000 $ 0.01
Effect of Dilutive Securities:
Warrants ............................... -0- -0-
----------- ------------- ---------
Diluted EPS:
Income available to common stockholders
and assumed conversions .............. $ 168 12,000 $ 0.01
=========== ============= =========
</TABLE>
F-34
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 13- EMPLOYEE STOCK OPTION PLAN:
In July 1996, the Board of Directors and majority stockholders adopted a
stock option plan under which 400,000 shares of the Company's common stock
have been reserved for issuance. Under this plan, as of May 31, 2000 and
1999, 223,107 and 88,875 warrants have been issued to various employees.
Of these outstanding warrants, 66,875 and 17,500 were exercised for the
months ended May 31, 2000 and 1999, respectively. Additionally, 10,250
warrants have expired as of August 31, 1999.
NOTE 14 - RETIREMENT PLANS:
During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its participants.
This plan maintains that the Company will match up to 3% of each
participant's contribution. For the nine months ended May 31, 2000 and
1999, employee contributions were approximately $272,914 and $123,189
respectively. The Company matched approximately $44,775 and $38,636
respectively for those same periods.
NOTE 15 - MAJOR CUSTOMER:
As of May 31, 2000, the Company had a receivable due from Link - Two
Communications (Link II) in the amount of $6,641,892. This account
receivable has been converted to a note receivable (see Note 9). As of
August 31, 1999, Link II is continuing to sell equity securities, assets,
and products that are being used to retire this note receivable. This
receivable is secured by substantially all assets of Link II including
radio frequency licenses that have been valued by outside appraisal firms
to in excess of twenty million dollars. In August 1999, Link II commenced
operations of its nationwide two-way messaging system. Based upon the
aforementioned, management believes the risks involved with this
receivable are minimal.
NOTE 16 - BUSINESS COMBINATIONS
Effective January 1, 2000, the Company acquired Atlanticpacific
Communications, Inc. in a business combination accounted for as purchase.
Atlanticpacific Communications, Inc. is primarily in the business of
nationwide sales and installation of fiber optic and Internet wiring to
commercial customers. The results of operations are included in the
accompanying financial statements since the date of acquisition. The
Company issued 518,919 shares in restricted stock and assumed certain
notes and accounts payable. Additionally, the principal shareholders of
Atlanticpacific Communications, Inc. can earn an additional 3,000,000
shares of the Company's common stock based on accumulated sales goals.
Under the terms of this agreement, the Company will issue an additional
500,000 shares at $10,000,000 in accumulated sales, 1,000,000 shares at
$30,000,000 in accumulated sales and 1,500,000 shares at $60,000,000 in
accumulated sales. The total cost of the acquisition exceeded the fair
value of the assets by $2,568,210. This excess is being amortized over
fifteen years.
Effective January 1, 2000, the Company acquired Comtel Communications,
Inc. in a business combination accounted for as purchase. Comtel
Communications, Inc. is primarily in the business of nationwide sales and
installation of fiber optic and Internet wiringto commercial customers.
The results of operations are included in the accompanying financial
statements since the date of acquisition. The Company issued 300,000
shares in restricted stock for the net assets of Comtel Communications,
Inc. The total cost of the acquisition exceeded the fair value of the
assets by $1,455,362. This excess is being amortized over fifteen years.
F-35
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000
NOTE 16 - BUSINESS COMBINATIONS(CONTINUED)
The following summarized pro forma (unaudited) information assumes the
transactions related to Eagle Wireless International, Inc., (EAG)
Atlanticpacific Communications, Inc., (APC) and Comtel Communications,
Inc., (CTC):
1999 PRO FORMA INFORMATION
(In Thousands)
<TABLE>
<CAPTION>
EAG APC CCT ADJ. COMBINED TOTAL
------- ------ ------- ----- --------------
<S> <C> <C> <C> <C>
Net Sales $ 2,217 $1,567 $ 4,135 $ 7,919
Cost of Goods Sold 1,337 1,207 3,249 5,793
------- ------ ------- ----- --------------
Gross Profit 880 360 886 2,126
Operating Expenses 1,319 853 850 3,022
------- ------ ------- ----- --------------
Income (loss) from operations (439) (493) 36 (896)
Other, net 697 (11) 686
------- ------ ------- ----- --------------
Income before income taxes 258 (504) 36 (210)
Income taxes 91 - 15 (106) -
------- ------ ------- ----- --------------
Net income $ 167 $ (504) $ 21 $ 106 $ (210)
======= ====== ======= ===== ==============
</TABLE>
NOTE 17 - SUBSEQUENT EVENTS:
Through July 14, 2000, the Company has received an additional $1,253,416
from the exercise of all warrants.
F-36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ClearWorks.net, Inc.
We have audited the accompanying consolidated balance sheet of
ClearWorks.net, Inc. and subsidiaries as of December 31, 1999, and the
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ClearWorks.net, Inc. and subsidiaries as of December 31, 1999, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
As discussed in Note 3, the accompanying consolidated financial statements
as of and for the year ended December 31, 1999 have been restated.
KPMG LLP
Houston, Texas
March 30, 2000, except as to notes 2, 3, 4, 10, 12, 13 and 16, which are as of
June 23, 2000.
F-37
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
ClearWorks.net, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of
ClearWorks.net, Inc. and Subsidiary as of December 31, 1998 and the related
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of
ClearWorks.net, Inc.'s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the results of
operations, shareholders' equity and cash flows of ClearWorks.net, Inc. and
Subsidiary for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
McManus & Co., P.C.
Morris Plains, New Jersey
May 18, 1999
F-38
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 (Restated)
ASSETS
Current assets:
Cash ......................................................... $ 1,247,000
Accounts receivable, net of allowance for doubtful
accounts of $93,000 ........................................ 3,388,000
Stock subscription receivable ................................ 450,000
Inventories .................................................. 332,000
Prepaid expenses and other current assets .................... 229,000
------------
Total current assets ................................... 5,646,000
------------
Property and equipment, net .................................... 2,256,000
------------
Other assets:
Goodwill, net ................................................ 5,449,000
Deferred financing costs ..................................... 378,000
Other ........................................................ 29,000
------------
5,856,000
------------
Total assets ........................................... $ 13,758,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ...................................... $ 3,197,000
Accrued expenses ............................................. 461,000
Current maturities of long-term debt ......................... 860,000
Note payable, shareholder .................................... 150,000
------------
Total current liabilities .............................. 4,668,000
------------
Long-term debt, net of current maturities ...................... 535,000
6% Convertible debentures, net of discount of $215,000 ......... 2,785,000
Shareholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
20,884,957 shares issued and outstanding .................. 21,000
Additional paid-in capital ................................... 11,472,000
Deferred financing charges ..................................... (285,000)
Accumulated deficit .......................................... (5,438,000)
------------
5,770,000
Total liabilities and shareholders' equity ............. $ 13,758,000
============
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
------------ ------------
(RESTATED)
Revenues:
Integration services ........................ 1,607,000 535,000
Structured wiring solutions ................. 1,383,000 555,000
Bundled Digital Services .................... 42,000 --
------------ ------------
3,032,000 1,090,000
------------ ------------
Costs and expenses:
Integration services and materials .......... 1,280,000 502,000
Structured wiring labor and materials ....... 1,295,000 539,000
Bundled Digital Services .................... 222,000 --
Selling, general and administrative expenses 4,428,000 207,000
Depreciation and amortization ............... 205,000 84,000
------------ ------------
7,430,000 1,332,000
------------ ------------
Loss from operations ............................ (4,398,000) (242,000)
Other income/(expense):
Interest income ............................. 63,000 --
Interest expense ............................ (824,000) (10,000)
------------ ------------
Net loss ........................................ $ (5,159,000) $ (252,000)
============ ============
Loss per share:
Basic ....................................... $ (.29) $ (.03)
Diluted ..................................... $ (.29) $ (.03)
Weighted average number of common shares
outstanding:
Basic ....................................... 17,673,032 8,321,902
Diluted ..................................... 17,673,032 8,321,902
See accompanying notes to consolidated financial statements.
F-40
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 (Restated) AND 1998
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED RETAINED EARNINGS TOTAL
SHARES OF COMMON PAID-IN FINANCING (ACCUMULATED SHAREHOLDERS'
COMMON STOCK STOCK CAPITAL CHARGES DEFICIT) EQUITY
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 ............... 6,250,000 $ 6,000 $ (5,000) $ -- $ 8,000 $ 9,000
Conversion from LLC to C-Corp ............. -- -- 35,000 -- (35,000) --
Stock issued for merger with
Southeast Tire Recycling, Inc. ........ 1,543,960 2,000 (2,000) -- -- --
Stock issued for acquisitions:
InfraResources, LLC ................... 80,000 -- 165,000 -- -- 165,000
Team Renaissance, Inc. ................ 156,250 -- 322,000 -- -- 322,000
Vitadel Communications ................ 98,039 -- 150,000 -- -- 150,000
Conversion of notes payable ............... 272,550 -- 27,000 -- -- 27,000
Stock issued for syndication
costs ................................. 2,477,000 2,000 (2,000) -- -- --
Stock issued for services ................. 50,000 -- 6,000 -- -- 6,000
Common stock issued for cash .............. 532,450 1,000 456,000 -- -- 457,000
Net loss .................................. -- -- -- -- (252,000) (252,000)
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1998 ............... 11,460,249 $ 11,000 $ 1,152,000 $ -- $ (279,000) 884,000
============ ============ ============ ============ ============ ============
Stock issued for acquisitions ............. 2,075,000 2,000 4,893,000 -- -- 4,895,000
Stock issued for cash, net of ............. 6,817,910 7,000 2,260,000 -- -- 2,267,000
registration fees and expenses
Warrants issued for services .............. -- -- 1,026,000 (378,000) -- 648,000
Stock issued for incentive
compensation and services ............. 531,798 1,000 1,276,000 -- -- 1,277,000
Beneficial conversion feature
for 6% convertible debenture ............ -- -- 650,000 -- -- 650,000
Warrants issued with convertible .......... -- -- 215,000 -- -- 215,000
Debentures
Amortization of deferred financing charges -- -- -- 93,000 -- 93,000
Net loss .................................. -- -- -- -- (5,159,000) (5,159,000)
Balances, December 31, 1999 ............... 20,884,957 $ 21,000 $ 11,472,000 $ (285,000) $ (5,438,000) $ 5,770,000
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities: (Restated)
Net loss ............................................................................... $ (5,159,000) $ (252,000)
Adjustments to reconcile net loss to net cash
used by operating activities, net of acquisitions:
Depreciation and amortization ..................................................... 205,000 84,000
Non-cash interest expense ......................................................... 650,000 --
Amortization of deferred financing charges ........................................ 93,000 --
Warrants issued for services ...................................................... 648,000 --
Stock issued for compensation and services ........................................ 1,277,000 6,000
Increase in accounts receivable ................................................... (739,000) (125,000)
Increase in inventories ........................................................... (129,000) --
Increase in prepaids and other current assets .................................... (398,000) (5,000)
Increase in accounts payable ...................................................... 926,000 --
Increase (decrease) in accrued expenses ........................................... (71,000) 201,000
--------------- ---------------
Total adjustments .................................................................... 2,462,000 161,000
--------------- ---------------
Net cash used by operating activities .................................................. (2,697,000) (91,000)
Cash flows from investing activities:
Acquisitions, net of cash received ................................................ (465,000) (27,000)
Capital expenditures .............................................................. (1,994,000) (208,000)
--------------- ---------------
Net cash used by investing activities .................................................. (2,459,000) (235,000)
Cash flows from financing activities:
Proceeds from notes payable, net of repayments .................................... 1,424,000 27,000
Proceeds from issuance of 6% convertible debentures ............................... 3,000,000 --
Proceeds from common stock sales, net ............................................. 2,267,000 457,000
Increase in stock subscription receivable ......................................... (450,000) --
--------------- ---------------
Net cash provided by financing activities .............................................. 6,241,000 484,000
Net increase in cash ................................................................... 1,085,000 158,000
Cash at the beginning of the period ...................................................... 162,000 4,000
--------------- ---------------
Cash at the end of the period ............................................................ $ 1,247,000 $ 162,000
=============== ===============
Supplemental disclosures of cash flow information:
Interest paid .................................................................... $ 2,000 $ 10,000
Taxes paid ....................................................................... $ -- $ --
Supplemental disclosures of non-cash Investing activities:
Issuance of common stock for asset acquisitions .................................. $ 4,895,000 $ 637,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Note 1. Organization and Nature of Business
ClearWorks.net, Inc. and subsidiaries (the "Company" or "ClearWorks"),
commenced operations on September 18, 1997 as Millennium Integration
Technologies, LLC ("MIT"), a Texas limited liability company. On March 5, 1998,
a separate company, Millennium Integration Technologies, Inc. ("Millennium") was
organized under the rules and regulations of the State of Delaware.
On April 1, 1998, Southeast Tire Recycling, Inc. ("Southeast"), a publicly
traded Florida corporation with no ongoing operations that previously had been
engaged in the tire recycling business, entered into an agreement to purchase
one hundred percent of the stock of MIT, which converted to a Texas corporation
on April 9, 1998. The acquisition was consummated effective April 27, 1998 and
MIT, Inc. became a wholly owned subsidiary of Southeast. The exchange of shares
between MIT, Inc. and Southeast was accounted for as a recapitalization of the
MIT, Inc. operations into the corporate shell of Southeast. At the time of this
transaction, Southeast was an empty corporate shell.
Effective May 8, 1998, Millennium changed its name to ClearWorks
Technologies, Inc. On May 12, 1998, Southeast merged with and into ClearWorks
Technologies, Inc. whereby ClearWorks Technologies, Inc. was the surviving
entity. The exchange of shares with Southeast was accounted for as a second
recapitalization of the Millennium operations into the corporate shell. On April
27, 1999, ClearWorks Technologies, Inc. began operating under the name of
ClearWorks.net, Inc.
The Company is a communications carrier providing broadband data, video
and voice communication services to residential and commercial customers,
currently within Houston, Texas. These services are provided over fiber-optic
networks ("Fiber-To-The-Home" or "FTTH") which the Company designs, constructs,
owns and operates inside large residential master-planned communities and office
complexes. The Company also provides information technology staffing personnel,
network engineering, vendor evaluation of network hardware, implementation of
network hardware and support of private and enterprise networks, as well as,
developing residential, commercial and education accounts for deployment of
structured wiring solutions.
Note 2. Summary of Significant Accounting Policies
A) CONSOLIDATION
At December 31, 1999, the Company has three wholly owned subsidiaries:
ClearWorks Communications, Inc., ClearWorks Structured Wiring Services,
Inc. and ClearWorks Integration Services, Inc. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant inter-company transactions and balances have been eliminated
in consolidation.
B) LIQUIDITY
The ability of the Company to satisfy its obligations depends in part upon
its ability to reach a profitable level of operations and securing short
and long-term financing for development of its commercial and residential
products. The Company is currently in discussions with other financial
institutions to provide additional funding through a combination of debt
and equity to fund its business plan. There is no assurance that short and
long-term financing can be obtained to fulfill the Company's capital
needs. Without the short or long-term financing, the Company will attempt
to sell additional common stock to meet its current and future capital
needs. If the Company is not able to obtain either short or long-term
funding or funding through the sale of its common stock, the Company would
be required to cut back its expansion plans and operate the facilities it
currently has built, and fund its operations with internally generated
funds from its integration, structured wiring and communications business
units.
F-43
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
C) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The markets for the Company's services are characterized by
intense competition, rapid technological development, regulatory changes
and frequent new product introductions, all of which could impact the
future value of the Company's assets.
D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
E) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated by using the straight-line method over the
following useful lives:
YEARS
-----
Head-end facilities 20
Field operating equipment 3-7
Satellite demonstration equipment 7
Furniture, fixtures and office equipment 2-7
Expenditures for maintenance and repairs are charged against income as
incurred and major improvements are capitalized.
F) INVENTORIES
Inventories are valued at the lower of cost or market. The cost is
determined by using the first in first out ("FIFO") method. Inventories
consist primarily of purchased technical equipment.
G) RESEARCH AND DEVELOPMENT
The Company charges to expense research and development ("R&D") costs as
incurred. The Company spent approximately $164,000 on R&D during 1999 and
had no R&D expenditures during 1998. The Company expects to continue to
commit substantial resources for R&D in order to improve and expand the
performance and capability of its Bundled Digital Services.
H) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over five
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if the
estimated future operating cash flows are not achieved. Goodwill
amortization expense for the years ended December 31, 1999 and 1998 was
$121,000 and $70,000, respectively. Accumulated amortization at December
31, 1999, was $191,000.
F-44
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
I) INCOME TAXES
During 1998, the Company converted from a limited liability company to a
C-Corporation and, as such, income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
J) REVENUE RECOGNITION
The Company recognizes revenue and the related costs at the time the
services are rendered. Revenue is derived from fees charged for the
delivery of Bundled Digital Services, integration services and cabling and
wiring.
Revenue from long-term contracts is recognized using the percentage
completion method, measured by the percentage of total costs incurred to
date to estimated total costs for each contract. This is used because
management considers actual costs to be the best available measure of
progress on these contracts.
K) EARNINGS (LOSS) PER COMMON SHARE
The Company computes net loss per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic net loss per
share is computed by dividing income or loss applicable to common
stockholders by the weighted average number of shares of the Company's
common stock outstanding during the period. Diluted net loss per share is
determined in the same manner as basic net loss per share except that the
interest expense related to the Company's convertible debentures, net of
tax, is added back to income or loss applicable to common stockholders and
the number of shares is increased assuming exercise of dilutive stock
options and warrants using the treasury stock method and dilutive
conversion of the Company's convertible debt.
During the years ended December 31, 1999 and 1998, warrants to purchase
2,710,000 and 2,000,000, respectively, shares of common stock were
excluded from the calculation of earnings per share since their inclusion
would be antidilutive.
L) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and
involve uncertainties and matters of significant judgement, and therefore
cannot be determined with precision.
The Company believes that the carrying amounts of its financial instrument
current assets and liabilities approximate the fair value of such items
due to their nature. The carrying amounts of long-term debt and
convertible debentures approximate fair value as the interest rates
thereon approximate market.
M) RECLASSIFICATIONS
F-45
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has reclassified certain revenues, costs and expenses for the year
ended December 31, 1998, to facilitate comparison to the year ended December 31,
1999.
Note 3. Restatement Adjustments
The Company has recorded certain accounting adjustments that were required to
restate the December 31, 1999 financial statements as originally filed. These
restatement adjustments increased previously reported net loss by $1,391,000,
and consist of the following: an increase to interest expense of $650,000 to
record the beneficial conversion feature attributable to the 6% convertible
debentures issued in December 1999; an increase to selling, general and
administrative expenses of $648,000 for the elimination of improperly recognized
deferred financing costs related to warrants issued to consultants of the
Company in 1999; and an additional increase in interest expense of $93,000
related to the amortization of deferred financing charges.
Other adjustments that did not affect net loss, but that did affect other
amounts as previously filed include the following: a reclassification of $50,000
to reduce debt discount and increase additional paid-in capital due to a
corrected estimate of the relative fair value of the detachable warrants issued
with the 6% convertible debentures; a reclassification of cash-incurred debt
finance costs from other assets to deferred financing costs in the amount of
$378,000 (no effect on total assets or shareholders' equity); and a corrected
estimate of warrants issued for debt financing costs, resulting in a reduction
of $116,000 to the fair value ascribed to such warrants and the reclassification
of the resulting amount to deferred financing charges as a separate component of
shareholders' equity. The deferred financing charges classified as a reduction
to shareholders' equity will be amortized to interest expense over the life of
the debt.
The effect of the restatement adjustments are as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 AS PREVIOUSLY REPORTED AS RESTATED
---------------------------------------------- ---------------------- -----------
<S> <C> <C>
Balance sheet:
Deferred financing costs ..................... $ 1,142,000 $ 378,000
Other assets ................................. 407,000 29,000
6% convertible debentures .................... 2,735,000 2,785,000
Additional paid in capital ................... 10,988,000 11,472,000
Deferred financing charges ................... -- (285,000)
Accumulated deficit .......................... (4,047,000) (5,438,000)
Statement of Operations:
Selling, general and administrative expenses . $ 3,780,000 $ 4,428,000
Interest expense ............................. 81,000 824,000
Net loss ..................................... (3,768,000) (5,159,000)
Loss per share ............................... (.21) (.29)
</TABLE>
Note 4. Business Combinations
On April 30, 1999, the Company acquired Archer Mickelson Technologies, LLC
("Archer") a systems integration firm located in Houston, Texas. In exchange for
one hundred percent (100%) of the membership interests of Archer, the Company
paid $50,000 in cash and issued 75,000 shares of its restricted common stock,
issued under Rule 144, to the sole member. The total purchase price paid for
this acquisition, including certain acquisition costs, was $130,500. Goodwill in
the approximate amount of $76,000 resulted from this transaction.
F-46
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On December 30, 1999, the Company acquired United Computing Group, Inc. and
United Consulting Group, Inc. (collectively "UCG"), an accelerator company and
computer hardware reseller firm located in Houston, Texas. The Company issued
2,000,000 shares of its restricted common stock and paid $500,000. The total
purchase price for this acquisition was $5,320,000. Goodwill in the approximate
amount of $4,942,000 resulted from this transaction
The Company has entered into employment and stock option agreements with the
former principals of United Computing Group, Inc. at the time of acquisition.
Under the terms of the employment agreements, the former principals receive a
base salary, a monthly cash bonus based on a percentage of earnings of United
Computing Group, Inc. before interest and taxes, reimbursement of all
reasonable, ordinary and necessary business expenses and participation in the
Company's employee benefit plan. In addition, the Company has entered into
option agreements with the former principals pursuant to which they can earn
options to purchase up to a total of 1,000,000 shares of the Company's common
stock to be issued pursuant to the Company's 1999 Long-Term Incentive Plan,
based upon certain pre-determined revenue goals for United Computing Group, Inc.
The options are exercisable, only if the revenue goals are met, at $.25 per
share and expire December 30, 2000. In general, the options become exercisable
in increasing amounts to the extent, if any, that United Computing Group, Inc.'s
revenues exceed $15 million for the calendar year 2000, and all 1,000,000
options become exercisable if United Computing Group, Inc.'s revenues equal or
exceed $42 million for the calendar year 2000.
The purchase agreement provides that, at the election of the UCG shareholders,
all the shares of UCG will be returned to the UCG shareholders and the UCG
shareholders will return all but 500,000 shares of the Company's common stock
(i) if the closing bid price for the Company's common stock is less than $1.50
per share during certain specified periods, or (ii) if the Company does not
provide UCG sufficient capital for UCG to maintain a positive working capital
ratio of 1.2 during the period from March 1, 2000 until December 31, 2000.
Should the Company return all of the shares of UCG to the UCG shareholders and
the UCG shareholders return all but 500,000 shares of the Company's common stock
to the Company, UCG would be required to repay the $500,000 paid to UCG at
closing.
The net purchase price of the 1999 acquisitions has been allocated as follows:
Accounts receivable, net $ 2,526,000
Inventories 191,000
Prepaid expenses and other current assets 131,000
Property and equipment, net 92,000
Goodwill 5,018,000
Other assets 19,000
Accounts payable (2,278,000)
Accrued expenses (290,000)
Notes payable (50,000)
-------------
Purchase price, net of cash received $ 5,359,000
=============
On May 26, 1998, the Company acquired InfraResources, LLC ("InfraResources") in
a business combination accounted for as a purchase. InfraResources is primarily
engaged in integration technology services. To culminate this transaction, the
Company issued 80,000 shares of restricted common stock valued at $165,000 and
paid no cash to InfraResources. However, the Company assumed debt of $40,000 and
immediately paid it off. Goodwill in the approximate amount of $204,000 resulted
from this transaction.
On May 29, 1998, the Company acquired Team Renaissance, Inc. ("Team
Renaissance") in a business combination accounted for as a purchase. Team
Renaissance is primarily engaged in structured wiring solutions for residences
and businesses. The Company issued 156,250 shares of restricted common stock
valued at $322,000 to Team Renaissance in culminating this transaction. Goodwill
in the approximate amount of $292,000 resulted from this transaction.
F-47
<PAGE>
The Company purchased the assets of John Diaz, dba Vitadel Communications, an
individual residing in Texas, on November 19, 1998. In exchange for these
assets, the Company issued 98,039 shares of its common stock valued at $150,000.
Goodwill in the approximate amount of $126,000 resulted from this transaction.
The following unaudited pro forma information represents the combined results of
operations of the Company as if the acquisitions had occurred as of January 1,
1998 and 1999:
1999 1998
------------ ------------
Revenues ............................. $ 13,241,000 $ 3,430,000
Costs and expenses ................... 19,686,000 4,748,000
------------ ------------
Net loss ............................. $ (6,445,000) $ (1,318,000)
============ ============
Basic and diluted loss per share ..... $ (.36) $ (.16)
============ ============
The pro forma information is not necessarily indicative of operating results
that would have occurred if the acquisitions had in fact occurred on January 1,
1998, nor is it necessarily indicative of future operating results. The actual
results of operations of an acquired company are included in the Company's
consolidated financial statements only from the date of acquisition.
Note 5. Factoring
In August 1998, the Company entered into a factoring agreement with Amerisource
Funding, Inc. ("ASF"). Under the agreement, ASF could purchase the Company's
accounts receivable at the Company's discretion in accordance with the terms of
the agreement.
ASF purchased acceptable accounts from the Company at a discount of 6.25%. Under
the agreement, ASF reserved the right to withhold 13.75% of any account in a
non-interest bearing reserve account until the account had been fully paid
and/or satisfied. If ASF deemed any portion of an account to be uncollectable,
the Company was required to repurchase those accounts and proceed with its own
collection. During 1999, the Company terminated its factoring agreement with
ASF.
Note 6. Stock Subscription Receivable
The Company sold 1,800,000 shares of its common stock to KMA Investments during
April 1999 and recorded a stock subscription receivable in the amount of
$450,000. The funds for this stock sale were subsequently collected in February
2000.
Note 7. Property and Equipment
Property and equipment consist of the following at December 31, 1999:
Head-end facilities $ 1,576,000
Field operating equipment 288,000
Satellite demonstration equipment 337,000
Furniture, fixtures and equipment 177,000
------------
Total 2,378,000
Accumulated depreciation (122,000)
------------
Property and equipment, net $ 2,256,000
============
F-48
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 8. Accrued Expenses
Accrued expenses consist of the following at December 31, 1999:
Sales taxes payable $ 175,000
Accrued payroll 45,000
Accrued interest 80,000
Federal income taxes payable 137,000
Other 24,000
------------
Total accrued expenses $ 461,000
============
Note 9. Notes Payable
The following table lists the Company's note obligations as of December 31,
1999:
ANNUAL
INTEREST
RATE DUE DATE
-------- --------- ------------
KMA Investments 12.0% July 2000 802,000
NTL Securities 12.0% May 2001 500,000
Other Various Various 93,000
------------
Total notes payable 1,395,000
Less current portion (860,000)
------------
Total long-term debt $ 535,000
============
On August 4, 1999, the Company borrowed $802,000 from KMA Investments at an
interest rate of 12% per year. This loan is due and payable on or before July 9,
2000, and is evidenced by a promissory note. If the note and all accrued
interest is not paid when due, the delinquent amount automatically converts into
shares of the Company's common stock at the rate of one share for each $1.375 of
principal and/or interest outstanding. The Company may prepay the principal and
accrued interest only after giving the holder 30 days prior notice to effect
conversion.
On October 14, 1999, the Company borrowed $500,000 from NTL Securities. This
loan is evidenced by a promissory note and accrues interest at the rate of 12%
per year. All accrued interest and unpaid principal are due on May 1, 2001.
Two notes payable to Michael T. McClere, the Company's Chief Executive Officer,
outstanding at December 31, 1998 were repaid during 1999. On December 13, 1999,
the Company borrowed $150,000 from Mr. McClere. This loan was evidenced by a
promissory note and bore interest at the rate of 12% per year until it was
repaid on January 10, 2000.
Note 10. Convertible Debentures
On December 13, 1999, the Company closed a private placement transaction with
Candlelight Investors, LLC, ("Candlelight") a Delaware limited liability
company. In the private placement, the Company received from Candlelight a total
of $3,000,000 in exchange for $3,000,000 total face value 6% convertible
debentures due December 13, 2001, together with warrants to purchase up to
210,000 shares of common stock. The Company determined the warrants to have a
total value of $215,000 on the date of issuance and recorded this amount as a
discount against the convertible debentures.
F-49
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The warrants are exercisable at $3.16 per share. The debentures are convertible
at the lower of $3.30 per share or 92 percent of the average of the three lowest
closing bid prices for the Company's common stock during the 30 days immediately
preceding conversion. However, if the average lowest closing price is less than
$1.50 per share, then the conversion price of the debentures shall be equal to
the average lowest closing price without modification. Because the conversion
price of these debentures was less than the fair value of the Company's common
stock on the date of issuance, the Company has recorded as interest expense the
intrinsic value of the beneficial conversion feature. The intrinsic value of the
beneficial conversion feature was determined to be $650,000.
The Company also gave Candlelight the right to acquire, upon total payment to
the Company of $2,000,000, an additional $2,000,000 face value of debentures and
additional warrants to purchase up to 140,000 shares of common stock.
In connection with the private placement, the Company agreed not to sell any of
its securities until July 4, 2000, unless the securities are (1) issued in
connection with a public offering of at least $15 million, (2) in connection
with an acquisition of additional businesses or assets or (3) as compensation to
employees, consultants, officers or directors.
Note 11. Commitments and Contingent Liabilities
LEGAL PROCEEDINGS
Coinciding with the reverse merger with Southeast, the former management of
Southeast established a trust to provide for the orderly liquidation of any
alleged claims existing as of the date of acquisition. Certain stockholders of
Southeast have contributed 86,000 free trading shares of the Company's common
stock to the trust to satisfy approximately $150,000 of alleged claims. Due to
the resignation of the trustee, the trust shares have been deposited in the
registry of the Harris County Texas District Court, and the Company has been
named a nominal defendant in an Interpleader action. The Company intends to
vigorously defend its position by requesting the court release the stock for
payment of all alleged claims as was originally intended. The Company's
management does not expect that the results of this legal proceeding will have a
material adverse effect on the Company's financial condition or results of
operations.
The Company is currently a plaintiff in ClearWorks.net, Inc. v. Michael C.
Callihan and Linda Callihan. The suit was filed February 25, 2000 [after
attempts to mediate were unsuccessful] alleging causes of action based on breach
of contract, breach of warranty, fraud in stock transactions and common law
fraud. The facts underlying the lawsuit are as follows: On or about May 21,
1998, the principal shareholder of Team Renaissance, Inc. entered into a merger
agreement with ClearWorks. Shortly thereafter, the principal shareholder,
Michael Callihan, requested that the Company pay in full promissory notes in
which Mr. Callihan was the payee. However, those promissory notes were neither
disclosed in the merger agreement nor attached to the merger agreement as
exhibits. A dispute arose between ClearWorks and Mr. Callihan regarding the
validity of the promissory notes. Additionally, a dispute arose regarding credit
card accounts held in the name of Mr. Callihan which Mr. Callihan claims are the
obligation of the Company and which the Company claims are the personal debt of
Mr. and Mrs. Callihan. Also, prior to closing, ClearWorks learned that the
Callihans had failed to make payments to its employees and contractors, and had
also failed to pay its suppliers, in direct violation of the merger agreement
between the parties. In this suit, ClearWorks seeks return of shares previously
issued to Mr. Callihan in connection with the events underlying the suit. The
Company intends to continue to vigorously prosecute its claims against the
Callihans.
The Company is currently a defendant in Tim Pennington v. ClearWorks
Technologies, Inc. and James W. Walters. Tim Pennington has recently filed a
petition asserting claims against the Company. These claims allegedly first
arose with Mr. Pennington's employment with Southeast Tire Recycling, Inc. Mr.
Pennington claims that he had an employment agreement with Southeast Tire
Recycling, Inc. providing him with options to purchase up to 175,000 shares of
free trading stock, 100,000 shares of restricted stock, and an additional 50,000
shares for every six
F-50
<PAGE>
(6) months of Pennington's employment. Pennington claims that his employment
agreement was breached by Southeast Tire prior to the merger. Pennington also
claims that he was also the owner of 300,000 shares of common stock of Southeast
Tire. Pennington's claims are addressed to ClearWorks, although the alleged
misconduct was not the conduct of ClearWorks but that of its predecessor,
Southeast Tire, and its shareholders, officers and directors. Pennington's
claims are grounded in fraud, state and federal securities fraud, and
conversion. Pennington seeks a judgment in excess of $100,000 plus punitive
damages, court cost, attorneys' fees and interest. The Company has filed its
answer to the recent filing by Pennington. The answer was due on March 1, 2000.
The Company intends to vigorously defend the claim and to raise affirmative
defenses on behalf of the Company, such as estoppel, latches and that
Pennington's claims are not against the Company, but are against former
officers, directors, and shareholders.
The Company also currently is a defendant in Robert Horn vs. ClearWorks
Technologies, Inc. The suit was filed March 25, 1999, alleging causes of action
based on breach of contract in the amount of approximately $200,000. The facts
underlying this lawsuit are as follows: Robert Horn entered into an employment
agreement with the Company effective April 1, 1998. The employment agreement
contained a condition precedent which stated: "The completion and subsequent
release of escrow money associated with the initial 504 offering of the
Company's securities on or before May 1, 1998, is a condition precedent to the
obligation of any party hereunder." The condition precedent was not met because
the Company did not have a 504 offering prior to May 1, 1998. On July 1, 1998,
Mr. Horn tendered his notice of resignation effective July 31, 1998. On March
25, 1999, Mr. Horn filed a lawsuit claiming that the Company had terminated Mr.
Horn's employment without cause. The Company filed an answer on April 16, 1999,
denying the claim and asserting its affirmative defenses. The Company is
vigorously contesting these claims by Robert Horn on the basis that they are
without merit.
The Company is a defendant in Sherman Gerald Mason, d/b/a Castle Developments,
Ltd. v. ClearWorks.net, Inc. formerly ClearWorks Technologies, Inc. On December
17, 1999, Sherman Gerald Mason d/b/a Castle Developments, Ltd. filed suit
against the Company. In his Original Petition, Mr. Mason alleges the breach of a
consulting agreement with the Company and seeks recovery of 500,000 shares of
stock. He also seeks recovery of alleged monthly retainer payments in an
undisclosed amount and seeks injunctive relief. The Company has filed an answer
disputing all liability, asserting that the contract was terminable and that the
contract is not enforceable because of the prior breaches of the consulting
agreement by Mr. Mason.
This suit was only recently served upon the Company. The Company has answered.
No discovery has been propounded and no scheduling order or trial date has been
entered in connection with the case.
LEASE COMMITMENTS
The Company leases its principal offices in Houston, Texas, consisting of
approximately 9,000 square feet of office space, expiring in 2003. The Company
also leases warehouse space in Houston, Texas, expiring in 2000. There are small
offices located in Las Vegas, Nevada and Phoenix, Arizona. United Computing
Group, Inc. leases approximately 8,000 square feet of office and warehouse space
in Houston, Texas, expiring in 2001.
Future minimum lease payments for non-cancelable operating leases having initial
or remaining terms in excess of one year are as follows:
December 31, AMOUNT
-----------
2000 $ 246,000
2001 203,000
2002 143,000
2003 46,000
-----------
Total $ 638,000
===========
F-51
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 12. Stock Options and Warrants
LONG-TERM INCENTIVE PLAN
On May 12, 1999, the Long-Term Incentive Plan (the "1999 Plan") was adopted by
the Board of Directors. In order to become and remain fully effective, the 1999
Plan must be approved by the shareholders of the Company on or before May 12,
2000. None of the options granted pursuant to the 1999 Plan may be exercised
unless and until the 1999 Plan is approved by the shareholders. Pursuant to the
1999 Plan, an aggregate of 10,000,000 shares of common stock may be granted to
key employees, directors and other persons who have contributed or are
contributing to the Company's success. Alternatively, options to purchase common
stock, stock appreciation rights or cash may be granted instead of outright
awards of stock. The options that may be granted pursuant to the 1999 Plan may
be either incentive options qualifying for beneficial tax treatment for the
recipient or nonqualified options. The 1999 Plan is administered by the Board of
Directors. Administration of the 1999 Plan includes determination of the terms
of options granted under the 1999 Plan. At December 31,1999, options to purchase
3,027,500 shares were granted upon stockholder approval under the 1999 Plan. On
April 30, 2000, the Company held its Annual Stockholder's meeting in which a
proposal to approve the 1999 Plan was submitted to the stockholders for a vote.
The proposal did not pass and the meeting was continued until May 11, 2000. At
such time, the proposal failed.
STOCK WARRANT PLAN
Effective as of April 24, 1998, Southeast instituted a Stock Warrant Plan (the
"Warrant Plan"). After the merger of Southeast into the Company on May 12, 1998,
the Warrant Plan continued to be effective as the Company's stock warrant plan.
Pursuant to the Warrant Plan, the Company may issue Class A Warrants or Class B
Warrants to key employees, directors, and other persons who have contributed or
are contributing to the Company's success. Each Class A or Class B Warrant
allows the holder to purchase one share of common stock. The maximum number of
shares underlying all warrants that may be granted pursuant to the Warrant Plan
is limited to 5,000,000 shares. The warrants granted pursuant to the Warrant
Plan may be considered either incentive options qualifying for beneficial tax
treatment for the recipient or nonqualified options. The Warrant Plan is
administered by the Board of Directors. At December 31, 1999, Class A Warrants
to purchase 1,000,000 shares at $3.00 per share and Class B Warrants to purchase
1,000,000 shares at $6.00 per share were outstanding under the Warrant Plan.
During 1999, the Company issued 210,000 warrants in connection with the issuance
of 6% convertible debentures and determined them to have a total value of
$215,000 on the date of issuance and recorded this amount as a discount against
the convertible debentures (See Note 10). The Company issued an additional
250,000 warrants to an entity in connection with capital raising activities. The
Company determined the fair value of these warrants to be $ 378,000 on the date
of issuance and has recorded this amount as deferred financing charges, as a
separate component of stockholders' equity to be amortized over the expected
period of benefit. The Company also issued and additional 250,000 warrants to a
consultant of the Company for services performed. The Company determined the
fair value of these warrants to be $648,000 on the date of issuance and charged
this amount to earnings on that date.
Of the 2,710,000 warrants outstanding at December 31, 1999, 500,000 expire
during 2000; 210,000 expire during 2002; 1,000,000 expire on April 24, 2003; and
1,000,000 expire on April 24, 2008.
F-52
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(CONTINUED)
Note 13. Income Taxes
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax income from continuing operations as a
result of the following:
1999 1998
------------ ----------
Computed "expected" tax benefit $ (1,754,000) $ (86,000)
Increase in valuation allowance 1,137,000 86,000
Non-deductible warrant and beneficial
conversion expenses 473,000 --
Non-deductible amortization of goodwill 40,000 --
Non-deductible stock option expense 77,000 --
Other 27,000 --
------------ ----------
$ -- $ --
============ ==========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 are
presented below:
Deferred tax assets:
Accounts receivable, principally due to allowance for $ 29,000
doubtful accounts
Net operating loss carryforwards 1,457,000
Other 6,000
-------------
Total gross deferred tax assets 1,492,000
Less valuation allowance ( 1,409,000)
-------------
Net deferred tax assets 83,000
-------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation (83,000)
-------------
Net deferred tax asset $ --
=============
The valuation allowance for deferred tax assets as of December 31, 1999 was
$1,409,000. The net change in the total valuation allowance for the year ended
December 31, 1999 was an increase of $1,137,000. At December 31, 1999, the
Company has net operating loss carryforwards of $4,284,000 which are available
to offset future federal taxable income, if any, with expirations through 2019.
Note 14. Issuance of Common Stock
During the year ended December 31, 1999, the Company issued 9,424,708 shares of
common stock. The following table summarizes the shares of common stock issued:
Shares outstanding December 31, 1998 11,460,249
Shares issued for cash 5,730,000
Shares issued for acquisitions 2,075,000
Shares issued for syndication costs 1,087,910
Shares issued for compensation and services 531,798
------------
Shares outstanding December 31, 1999 20,884,957
F-53
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During 1999, the Company issued 5,730,000 shares of its common stock for cash in
three separate issuances. The first issuance was 2,930,000 shares for cash
consideration of $831,000 and was in accordance with the transactional exemption
from registration afforded by Rule 504 of Regulation D, as promulgated under
Section 3(b) of the Securities Exchange Act of 1933. The second issuance was
1,000,000 shares of restricted common stock to two entities, neither of which is
affiliated with a director or executive officer of the Company, for cash
consideration of $500,000 each or an aggregate of $1,000,000. The third issuance
was 1,800,000 shares of common stock to one entity, which is not affiliated with
a director or executive officer of the Company, for cash consideration of
$450,000.
The Company issued 2,000,000 shares of its restricted common stock for the
acquisition of United Computing Group, Inc. and United Consulting Group, Inc.
and 75,000 shares of its restricted common stock for the acquisition of Archer
Mickelson Technologies, LLC.
The Company issued 1,087,910 shares of its common stock to certain persons or
entities as compensation for syndication services on behalf of the Company in
completing its Rule 504 placement of common stock as discussed above.
The Company issued 531,798 shares of its restricted common stock to certain
employees of the Company and non-affiliated personnel as compensation for
services to the Company. The Company charged as compensation expense the fair
value of the common stock on the date of issuance.
Note 15. Major Customers
During the year ended December 31, 1999, the Company had sales to the Texas A&M
University system that accounted for 12% of total revenues for the year. During
the period ended December 31, 1998, the Company had sales to Enron Corp. that
accounted for 20% of total revenues for the year.
Note 16. Industry Segments
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." At December 31, 1999 the
Company's three business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into three reportable segments (described below) since the
long-term financial performance of these reportable segments is affected by
similar economic conditions.
CLEARWORKS COMMUNICATIONS, INC. subsidiary focuses primarily on the delivery of
integrated voice, video and data services to the residential and commercial
marketplace. Its proprietary technology enables it to proceed into the voice,
video and data market for bundled consumption. The Company deploys dial tone,
multi-channel digital video services, dedicated Internet connectivity, on-demand
video rental, voicemail, security monitoring and a community intranet as a
Bundled Digital Service into the home or office. ClearWorks Communications
provides solutions to consumers by implementing technology, both within the
community and within the home. Within the residential community, ClearWorks
Communications is installing fiber optic backbones to deliver voice, video and
data solutions directly to consumers.
CLEARWORKS STRUCTURED WIRING SERVICES, INC. subsidiary focuses primarily on
developing residential, commercial and educational accounts for deployment of
structured wiring solutions and sale of audio and visual equipment to new
construction single family and multi-family dwelling units. These customers
consist of companies, school districts and universities and individuals that
seek outside expertise to deploy fiber-optic and copper-based structured wiring
solutions. ClearWorks Structured Wiring Services generates revenue through time
and materials billings, consulting contracts, service and support contracts
CLEARWORKS INTEGRATION SERVICES, INC. subsidiary provides information technology
staffing personnel, network engineering, vendor evaluation of network hardware,
resale of network hardware, implementation of
F-54
<PAGE>
network hardware and support of private and enterprise networks. Additional
services include desktop rollouts, multi-platform supports and Local Area
Networks ("LAN"), as well as Wide Area Networks ("WAN") analysis and server
deployment.
The accounting policies of the reportable segments are the same as those
described in Note 2. The Company evaluates the performance of its operating
segments based on income before net interest expense, income taxes, depreciation
and amortization expense, accounting changes and non-recurring items.
Summarized financial information concerning the Company's reportable segments is
shown below in the following table:
<TABLE>
<CAPTION>
CLEARWORKS CLEARWORKS
CLEARWORKS STRUCTURED INTEGRATION CORPORATE AND
COMMUNICATIONS WIRING SERVICES ELIMINATIONS CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues from unaffiliated customers . 42,000 1,383,000 1,607,000 -- 3,032,000
Segment profit (loss) ................ (419,000) (127,000) 111,000 (3,758,000) (4,193,000)
Total assets ......................... 1,771,000 784,000 3,183,000 8,020,000 13,758,000
Capital expenditures ................. 1,778,000 92,000 24,000 100,000 1,994,000
Depreciation and amortization ........ 14,000 38,000 1,000 152,000 205,000
Year Ended December 31, 1998:
Revenues from unaffiliated customers . -- 555,000 535,000 -- 1,090,000
Segment profit (loss) ................ -- 16,000 33,000 (207,000) (158,000)
Total assets ......................... -- 42,000 47,000 1,101,000 1,190,000
Capital expenditures ................. -- -- -- 208,000 208,000
Depreciation and amortization ........ -- 13,000 -- 71,000 84,000
</TABLE>
The following reconciles segment profit (loss) to loss from operations per the
1999 and 1998 consolidated statements of operations:
1999 1998
----------- -----------
Total loss from reportable segments ............ $(4,193,000) $ (158,000)
Depreciation and amortization .................. (205,000) (84,000)
----------- -----------
Loss from operations ......................... (4,398,000) (242,000)
Note 17. Subsequent Events
On February 14, 2000, Candlelight converted $1,500,000 face value and accrued
interest thereon of the convertible debentures into 724,760 shares of common
stock. Additionally, on March 15, 2000, the Company issued to Candlelight the
remaining $2,000,000 face value of the 6% convertible debentures together with
warrants to purchase 140,000 shares of common stock. (See Note 10).
On March 17, 2000, ClearWorks Home Systems, Inc. acquired all of the assets of
Secure-All Security, a sole proprietorship owned by Ronnie Evans. Secure-All
Security is in the business of selling and installing security systems and
monitoring the systems it installs. The Company paid Ronnie Evans $225,000 and
34,000 shares of common stock for the assets of Secure-All Security. The common
stock was valued at approximately $9 per share for purposes of this transaction.
The Company assumed liabilities of Secure-All Security totaling $131,000.
F-55
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT
June 30, 2000 And December 31, 1999
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 86,023 $ 1,247,000
Accounts receivable, net of allowance for doubtful
accounts of $343,081 and $93,081, respectively ......... 5,076,338 3,388,000
Stock subscription receivable ............................ 450,000
Inventories .............................................. 1,043,975 332,000
Prepaid expenses and other current assets ................ 163,475 229,000
------------- -----------------
Total current assets ............................... 6,369,811 5,646,000
------------- -----------------
Property and equipment, net ................................ 3,843,671 2,256,000
------------- -----------------
Other assets:
Goodwill, net ............................................ 5,343,360 5,449,000
Deferred financing costs ................................. 311,869 378,000
Other .................................................... 1,057,026 29,000
------------- -----------------
6,712,255 5,856,000
------------- -----------------
Total assets ....................................... $ 16,925,737 $ 13,758,000
============= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade .................................. $ 4,274,930 $ 3,197,000
Accrued expenses ......................................... 1,494,384 461,000
Current maturities of long-term debt ..................... 1,403,724 860,000
Note payable, shareholder ................................ -- 150,000
------------- -----------------
Total current liabilities .......................... 7,173,038 4,668,000
------------- -----------------
Long-term debt, net of current maturities .................. 41,869 535,000
------------- -----------------
6% Convertible debentures, net of discount ................. 3,035,850 2,785,000
------------- -----------------
Shareholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
22,794,458 and 20,884,957 shares issued and outstanding
June 30, 2000 and December 31, 1999, respectively .......... 22,795 21,000
Additional paid-in capital ............................... 21,411,514 11,472,000
Stock subscription receivable ............................ (600,000) --
Deferred financing charges ............................... (1,234,171) (285,000)
Accumulated deficit ...................................... (12,925,158) (5,438,000)
------------- -----------------
6,674,980 5,770,000
------------- -----------------
Total liabilities and shareholders' equity ......... $ 16,925,737 $ 13,758,000
============= =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-56
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
ClearWorks Integration Services .................. $ 6,284,700 $ 356,177 $ 10,939,813 $ 599,644
ClearWorks Home Systems .......................... 426,890 -- 729,658 --
ClearWorks Structured Wiring ..................... 177,712 237,823 333,677 425,356
ClearWorks Communications ........................ 693,016 -- 973,918 --
-------------- -------------- -------------- --------------
7,582,318 594,000 12,977,066 1,025,000
-------------- -------------- -------------- --------------
Costs and expenses:
ClearWorks Integration services and materials ... 5,615,885 146,400 9,612,034 290,349
Home Systems services and materials ............. 935,650 -- 1,127,785 --
Structured Wiring services and materials ........ 220,293 341,600 268,570 327,651
Communications services and materials ........... 941,511 -- 1,151,374 --
Selling, general and administrative expenses .... 1,661,783 1,207,000 3,125,586 1,304,000
Depreciation and amortization ................... 496,725 44,000 819,752 86,000
-------------- -------------- -------------- --------------
9,871,847 1,739,000 16,105,101 2,008,000
-------------- -------------- -------------- --------------
Loss from operations ................................ (2,289,529) (1,145,000) (3,128,035) (983,000)
Other income/(expense):
Interest income ................................. 2,013 8,768
Interest expense ................................ (2,373,863) (8,000) (4,367,891) (13,000)
-------------- -------------- -------------- --------------
Loss before income taxes ............................ (4,661,379) (1,153,000) (7,487,158) (996,000)
-------------- -------------- -------------- --------------
Income taxes, net of valuation allowances ........... -- -- -- --
-------------- -------------- -------------- --------------
Net loss ............................................ $ (4,661,379) $ (1,153,000) $ (7,487,158) $ (996,000)
============== ============== ============== ==============
Loss per share:
Basic ........................................... (.21) (.08) (.34) (.07)
Diluted ......................................... (.21) (.08) (.34) (.07)
Weighted average number of common shares outstanding:
Basic ........................................... 22,029,589 14,473,856 21,850,835 14,473,856
Diluted ......................................... 22,029,589 14,473,856 21,850,835 14,473,856
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999
-------------------------- --------------------------
<S> <C> <C>
Cash flows from operating activities: (Restated)
Net loss .................................................... $ (7,487,158) $ (996,000)
-------------------------- --------------------------
Adjustments to reconcile net loss to net cash
used by operating activities, net of
acquisitions:
Depreciation and amortization .......................... 819,752 86,000
Stock issued for compensation and services ............. 106,350 800,000
Non-Cash interest expense .............................. 3,417,463 --
Amortization of deferred financing charges, costs and debt
discount ............................................. 704,988 --
(Increase) Decrease in accounts receivable, net ....... (1,688,338) (801,000)
(Increase) Decrease in inventories ..................... (711,975) (22,000)
(Increase) Decrease in prepaids and other assets ....... 136,300 (24,000)
Increase in accounts payable ........................... 538,415 577,000
Increase (Decrease) in accrued expenses ................ 909,725 (154,000)
-------------------------- --------------------------
Net cash used by operating activities ....................... (3,254,478) (534,000)
Cash flows from investing activities:
Acquisitions, net ...................................... (225,000) (35,000)
Capital expenditures ................................... (1,578,323) (1,339,000)
-------------------------- --------------------------
Net cash used by investing activities ....................... (1,803,323) (1,374,000)
Cash flows from financing activities:
Net repayments of notes payable ........................ (99,407) (6,000)
Proceeds from issuance of convertible debentures ....... 4,000,000 --
Payments of deferred financing costs ................... (408,000) --
Payments of syndication costs .......................... (45,769) --
Proceeds from common stock sales, net .................. -- 1,853,000
Decrease in stock subscription receivable .............. 450,000
-------------------------- --------------------------
Net cash provided by financing activities ................... 3,896,824 1,847,000
Net decrease in cash ........................................ (1,160,977) (61,000)
Cash at the beginning of the period ........................... 1,247,000 162,000
-------------------------- --------------------------
Cash at the end of the period ................................. $ 86,023 $ 101,000
========================== ==========================
Supplemental disclosures of cash flow
Interest expense paid ................................. $ 296,017 $ 14,000
Supplemental disclosures of non-cash
Issuance of common stock for asset acquisitions ............... $ 306,000 --
Fair value of assets acquired .......................... -- $ 38,000
Fair value of capital stock issued ..................... -- $ 4,000
Liabilities assumed .................................... -- $ 35,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED STOCK RETAINED EARNINGS TOTAL
SHARES OF COMMON PAID-IN FINANCING SUBSCRIPTION (ACCUMULATED SHAREHOLDERS'
COMMON STOCK STOCK CAPITAL CHARGES RECEIVABLE DEFICIT) EQUITY
------------ ----------- ------------ ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 .. 11,460,249 $ 11,000 $ 1,152,000 $ -- $ -- $ (279,000) $ 884,000
Stock issued for acquisitions 2,075,000 2,000 4,893,000 -- -- -- 4,895,000
Stock issued for cash, net of
registration fees and expenses 6,817,910 6,885 2,260,000 -- -- -- 2,266,885
Warrants issued for services . -- -- 1,026,000 (378,000) -- -- 648,000
Stock issued for incentive
compensation and services 531,798 1,000 1,276,000 -- -- -- 1,277,000
Beneficial conversion feature
for 6% convertible debenture. -- -- 650,000 -- -- 650,000
Warrants issued with
convertible debentures ....... -- -- 215,000 -- -- -- 215,000
Amortization of deferred
financing charges ............ -- -- -- 93,000 -- 93,000
Net loss ..................... -- -- -- -- -- (5,159,000) (5,159,000)
------------ ----------- ------------ ----------- ------------ ----------------- -------------
Balances, December 31, 1999 .. 20,884,957 $ 20,885 $ 11,472,000 $ (285,000) $ -- $ (5,438,000) $ 5,769,885
============ =========== ============ =========== ============ ================= =============
(The following information
is unaudited)
Stock issued for acquisitions 34,000 34 305,966 -- -- -- 306,000
6% convertible debentures
converted to stock, net of
deferred financing costs and
discounts .................... 1,345,364 1,346 1,586,958 1,590,120 -- -- 3,178,424
Warrants issued for services . -- -- 3,712,522 (3,132,161) -- -- 580,361
Stock issued for incentive
compensation and services .... 41,875 42 106,308 -- -- -- 106,350
Beneficial conversion feature
for 6% convertible debenture . -- -- 3,417,463 -- -- -- 3,417,463
Warrant issued with
convertible debentures ....... -- -- 582,537 -- -- -- 582,537
Common stock issued for
warrant conversion ........... 488,262 488 599,512 -- (600,000) -- --
Amortization of deferred
financing charges ............ -- -- (325,983) 592,870 -- -- 266,887
Syndications Costs ........... -- -- (45,769) -- -- -- (45,769)
Net Loss ..................... (7,487,158) (7,487,158)
------------ ----------- ------------ ----------- ------------ ----------------- -------------
Balances, June 30, 2000 ...... 22,794,458 $ 22,795 $ 21,411,514 $(1,234,171) $ (600,000) $ (12,925,158) $ 6,674,980
============ =========== ============ =========== ============ ================= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
A) UNAUDITED
The unaudited financial statements included herein for the Company for
the three and six months ended June 30, 2000 and 1999 have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission and include all adjustments which are, in the opinion
of management, necessary for a fair presentation. Certain information and
footnote disclosures required by generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the audited
financial statements and related notes thereto for the annual periods
ended December 31, 1999 and 1998.
B) LIQUIDITY
The ability of the Company to satisfy its obligations depends in part
upon its ability to reach a profitable level of operations and securing
short and long-term financing for development of its commercial and
residential products. The Company is currently in discussions with other
financial institutions to provide additional funding through a
combination of debt and equity to fund its business plan. There is no
assurance that short and long-term financing can be obtained to fulfill
the Company's capital needs. Without the short or long-term financing,
the Company will attempt to sell additional common stock to meet its
current and future capital needs. If the Company is not able to obtain
either short or long-term funding or funding through the sale of its
common stock, the Company would be required to cut back its expansion
plans and operate the facilities it currently has built, and fund its
operations with internally generated funds from its integration,
structured wiring and communications business units.
C) CONSOLIDATION
At June 30, 2000, the Company has four wholly owned subsidiaries:
ClearWorks Communications, Inc., ClearWorks Structured Wiring Services,
Inc., ClearWorks Home Systems, Inc., and ClearWorks IT Solutions, Inc. The
consolidated financial statements include the accounts of the Company and
all of its subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation.
D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The markets for the Company's services are characterized by
intense competition, rapid technological development, regulatory changes
and frequent new product introductions, all of which could impact the
future value of the Company's assets.
E) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial MATURITY of three months or less to be cash equivalents.
F) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated by using the straight-line method over the
following useful lives:
YEARS
-----
Head-end facilities 20
Field operating equipment 3-7
Satellite demonstration equipment 7
Furniture, fixtures and office equipment 2-7
Expenditures for maintenance and repairs are charged against income as
incurred and major improvements are capitalized.
F-60
<PAGE>
G) INVENTORIES
Inventories are valued at the lower of cost or market. The cost is
determined by using the first in first out ("FIFO") method. Inventories
consist primarily of materials, equipment and work in process.
H) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over five
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill may be impacted if the
estimated future operating cash flows are not achieved.
I) REVENUE RECOGNITION
The Company recognizes revenue and the related costs at the time the
services are rendered. Revenue is derived from fees charged for the
delivery of Bundled Digital Services, integration services and cabling and
wiring.
Revenue from long-term contracts is recognized using the percentage of
completion method, measured by the percentage of total costs incurred to
date to estimated total costs for each contract. This is used because
management considers actual costs to be the best available measure of
progress on these contracts.
J) EARNINGS (LOSS) PER COMMON SHARE
The Company computes net income/(loss) per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic net
income/(loss) per share is computed by dividing income or loss applicable
to common stockholders by the weighted average number of shares of the
Company's common stock outstanding during the period. Diluted net
income/(loss) per share is determined in the same manner as basic net
income/(loss) per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the
treasury stock method and dilutive conversion of the Company's convertible
debt. For the three and six months ended June 30, 1999 and 2000, the
dilutive effect of all stock options, warrants and convertible debt were
not included in the calculation of diluted loss per share as the Company
is reporting net losses for each period.
Note 2. Restatement of Prior Years Results
The results of operations for the three and six months ended June 30, 1999
have been restated to reflect adjustments recorded in connection with the
Company's financial statements for the year ended December 31, 1999, as reported
in the Company's annual report, as amended, in Form 10-KSB/A. Such adjustments
resulted in additional compensation expense of $696,000 for the three and six
months ended June 30,1999.
Note 3. Business Combinations
On May 9, 2000 ClearWorks Home Systems, Inc. entered into a letter of
intent with Home Systems Integration (H.S.I.) to acquire substantially all of
the assets of the business. H.S.I. is in the business of providing residential
structured wiring, security systems, audio/video solutions and home automation.
The transaction is still pending and is in dispute (See Item 2 Legal Proceedings
concerning Valley First.)
F-61
<PAGE>
Note 4. Issuance of Common Stock
During the six month period ended June 30, 2000, the Company issued
1,721,229 shares of common stock. The following table summarizes the shares of
common stock issued:
Shares outstanding December 31, 1999 20,884,957
----------
Shares issued from 6% debenture conversion 1,345,364
Shares issued for acquisitions 34,000
Shares issued for services 41,875
Shares issued for warrant conversion 488,272
Shares cancelled (10)
----------
Shares outstanding June 30, 2000 22,794,458
The Company issued 1,345,364 shares of its common stock associated with
conversion of the 6% convertible debentures.
The Company issued 41,875 shares of its common stock associated with
services performed for the Company.
The Company issued 488,272 shares of its common stock associated with
conversion of warrants.
The Company issued 34,000 shares of its restricted common stock associated
with the acquisition of Secure-All Security.
Note 5. Convertible Debentures
On December 13, 1999, the Company closed a private placement transaction
with Candlelight Investors, LLC, ("Candlelight") a Delaware limited liability
company. In the private placement, the Company received from Candlelight a total
of $3,000,000 in exchange for $3,000,000 total face value 6% convertible
debentures due December 13, 2001, together with warrants to purchase up to
210,000 shares of common stock. The Company determined the warrants to have a
total value of $265,000 on the date of issuance and recorded this amount as a
discount against the convertible debentures.
The warrants are exercisable at $3.16 per share. The debentures are
convertible at the lower of $3.30 per share or 92 percent of the average of the
three lowest closing bid prices for the Company's common stock during the 30
days immediately preceding conversion. However, if the average lowest closing
price is less than $1.50 per share, then the conversion price of the debentures
shall be equal to the average lowest closing price without modification.
Because the conversion price of these debentures was less than the fair
value of the Company's common stock on the date of issuance, the Company
recorded as interest expense the value of the beneficial conversion feature. The
value of the beneficial conversion feature was determined to be $650,000. The
Company also gave Candlelight the right to acquire, upon total payment to the
Company of $2,000,000, an additional $2,000,000 face value of debentures and
additional warrants to purchase up to 140,000 shares of common stock.
In connection with the private placement, the Company agreed not to sell
any of its securities until July 4, 2000, unless the securities are (1) issued
in connection with a public offering of at least $15 million, (2) in connection
with an acquisition of additional businesses or assets or (3) as compensation to
employees, consultants, officers or directors.
On March 15, 2000, the Company issued an additional $2,000,000 of 6%
convertible debentures to Candlelight with conversion features similar to those
noted above. Because the conversion price of these debentures was less than the
fair value of the Company's common stock on the date of issuance, the Company
has recorded as interest expense the value of the beneficial conversion feature.
The value of the beneficial conversion feature exceeded the carrying value of
the convertible debentures (net of discount allocable to detachable warrants
discussed below), therefore, the charge to interest expense was limited to
$1,701,000.
The 6% convertible debentures issued on March 15, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can be
converted into 140,000 shares of common stock. The Company determined the
warrants to have a total value of $299,000 on the date of issuance and recorded
this amount as a discount against the convertible debentures. This discount will
be amortized to interest expense over the term on the convertible debentures.
On April 19, 2000, the Company issued an additional $2,000,000 of 6%
convertible debenture to Candlelight with conversion features similar to those
noted above. Because the conversion price of these debentures was less than the
fair value of the Company's common stock on the date of issuance, the Company
has recorded as interest expense the value of the beneficial conversion feature.
The value of the beneficial conversion feature exceeded the carrying value of
the debentures (net of discount allocable to detachable warrants discussed
below), therefore, the charge to interest expense was limited to $1,716,000.
F-62
<PAGE>
The 6% convertible debentures issued on April 19, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can be
converted into 140,000 shares of common stock. The Company determined the
warrants have a total value of $284,000 on the date of issuance and recorded
this amount as a discount against the convertible debentures. This discount will
be amortized to interest expense over the term on the convertible debentures.
In February, May and June 2000 Candlelight converted $3,500,000 total face
value of the 6% convertible debentures into 1,345,364 shares of common stock. At
the dates of these conversions, the Company charged a total of deferred
financing charges, accrued interest and convertible discount of $1,911,696 to
additional paid-in capital.
Note 6. Subsequent Events
The Company plans to issue 100,000 warrants to IntraTech in connection
with the April 19 Candlelight transaction.
On July 13, 2000 the Company announced that its subsidiaries ClearWorks
Integration Services, Inc. and United Computing Group, Inc. would be merged and
operate as ClearWorks IT Solutions, Inc. Kevan Casey will continue as President.
On July 20, 2000 the Company received conversion notice from Candlelight
to convert $150,000 of the outstanding 6% convertible debentures into 49,511
shares of common stock.
On July 25, 2000 the Company entered into a letter of intent to acquire
LDConnect.com, a voice-over-ip (VOIP) worldwide long distance provider. The
acquisition of LDConnect.com is anticipated to add $4 million in new revenues to
the Company in the first twelve months of operation.
In July 2000 the Company granted approximately 888,000 shares of stock to
its employees. This bonus will result in a non-cash compensation expense of
approximately $4.0 million.
On August 3, 2000 the Company entered into a letter of intent to acquire
Link2 Communications, a nationwide provider of high speed wireless broadband
access. The acquisition of Link2 Communications is anticipated to add
approximately $10 million in new revenues to the Company in the first 12 months
of operation and provide the Company with a strategic arm in which to address
the large retrofit market in wireless Bundled Digital Services.
On August 7, 2000 the Company received conversion notice from Candlelight
to convert $740,000 of the outstanding 6% convertible debentures into 270,717
shares of common stock.
On August 10, 2000 the Company received conversion notice from Candlelight
to convert $400,000 of the outstanding 6% convertible debentures into 146,404
shares of common stock.
On August 10, 2000 the Company's chief executive officer elected to
exercise 210,000 through a cash payment of $630,000.
On August 15, 2000 the Company announced it had signed a letter of intent
to merge with Eagle Wireless International. Terms of the merger call for each
ClearWorks.net shareholder to receive four shares of Eagle for each five shares
of ClearWorks.Net. After obtaining all necessary approvals it is hoped that the
deal could close in the next three to six weeks.
On August 15, 2000, the Company received conversion notice from
Candlelight to convert $200,000 of the outstanding 6% convertible debentures
into 73,261 shares of common stock.
Note 7: Industry Segments
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." At December 31, 1999 the
Company's three business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into three reportable segments (described below) since the
long-term financial performance of these reportable segments is affected by
similar economic conditions.
CLEARWORKS COMMUNICATIONS, INC. subsidiary focuses primarily on the
delivery of integrated voice, video and data services to the residential and
commercial marketplace. Its proprietary technology enables it to proceed into
the voice, video and data market for bundled consumption. The Company deploys
dial tone, multi-channel digital video services, dedicated Internet
connectivity, on-demand video rental, voicemail, security monitoring and a
community intranet as a Bundled Digital Service into the home or office.
ClearWorks Communications provides solutions to consumers by implementing
technology, both within the community and within the home. Within the
residential community, ClearWorks Communications is installing fiber optic
backbones to deliver voice, video and data solutions directly to consumers.
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CLEARWORKS STRUCTURED WIRING SERVICES, INC. subsidiary focuses primarily on
developing residential, commercial and educational accounts for deployment of
structured wiring solutions and sale of audio and visual equipment to new
construction single family and multi-family dwelling units. These customers
consist of companies, school districts and universities and individuals that
seek outside expertise to deploy fiber-optic and copper-based structured wiring
solutions. ClearWorks Structured Wiring Services generates revenue through time
and materials billings, consulting contracts, service and support contracts.
CLEARWORKS IT SOLUTIONS, INC. subsidiary provides information technology
staffing personnel, network engineering, vendor evaluation of network hardware,
resale of network hardware, implementation of network hardware and support of
private and enterprise networks. Additional services include desktop rollouts,
multi-platform supports and Local Area Networks ("LAN"), as well as Wide Area
Networks ("WAN") analysis and server deployment.
CLEARWORKS HOME SYSTEMS, INC. subsidiary addresses new home building with
the goal of integrating technology into the home. This includes structured
wiring, security systems, audio/video solutions and home automation. As such,
the primary customers of ClearWorks Home Systems are major builders and the home
buyers themselves. Many of the systems installed are bundled into the mortgage
of the actual home. The company integrates with its counterparts in delivery the
key systems inside the home to prepare the home for high speed data services and
other future technologies.
The accounting policies of the reportable segments are the same as those
described in Note 2. The Company evaluates the performance of its operating
segments based on income before net interest expense, income taxes, depreciation
and amortization expense, accounting changes and non-recurring items.
Summarized financial information concerning the Company's reportable segments is
shown below in the following table:
<TABLE>
<CAPTION>
CLEARWORKS STRUCTURED CLEARWORKS CORPORATE AND
COMMUNICATIONS WIRING IT SOLUTIONS HOME SYSTEMS ELIMINATIONS CONSOLIDATED
-------------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 2000
Revenues from unaffiliated customers ..... 973,918 333,677 10,939,813 729,658 -- 12,977,066
Segment profit (loss) .................... (507,560) (32,685) 314,194 (628,845) (1,453,387) (2,308,283)
Total assets ............................. 3,698,381 1,054,244 4,265,305 769,950 7,137,857 16,925,737
Capital expenditures ..................... 1,096,130 81,969 16,101 69,065 315,058 1,578,323
Depreciation and amortization ............ 74,723 1,356 5,650 7,844 730,179 819,752
Three Months Ended June 30, 2000
Revenues from unaffiliated customers ..... 693,015 177,713 6,284,700 426,890 -- 7,582,318
Segment profit (loss) .................... (339,170) (80,557) 164,846 (721,498) (816,425) (1,792,804)
Total assets ............................. 3,698,381 1,054,244 4,265,305 769,950 7,137,857 16,925,737
Capital expenditures ..................... 66,231 -- -- -- -- 66,231
Depreciation and amortization ............ 50,063 -- -- 1,384 445,278 496,725
Six Months Ended June 30, 1999
Revenues from unaffiliated customers ..... -- 425,356 599,644 -- -- 1,025,000
Segment profit (loss) .................... -- (32,605) 314,194 -- (1,178,589) (897,000)
Total assets ............................. -- 369,659 259,845 -- 2,698,496 3,328,000
Capital expenditures ..................... -- 16,374 251,683 -- 1,070,943 1,339,000
Depreciation and amortization ............ -- 1,356 5,650 -- 78,994 86,000
Three Months Ended June 30, 1999
Revenues from unaffiliated customers ..... -- 155,965 438,035 -- -- 594,000
Segment profit (loss) .................... -- 45,774 149,348 -- (1,296,122) (1,101,000)
Total assets ............................. -- 369,659 259,845 -- 2,698,496 3,328,000
Capital expenditures ..................... -- 16,374 251,683 -- 657,943 926,000
Depreciation and amortization ............ -- 2,445 5,650 -- 35,905 44,000
</TABLE>
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The following reconciles segment profit (loss) to income (loss) from operations
for the three and six months ended June 30, 2000 and 1999 Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total profit (loss) from reportable segments .. (1,792,804) (1,101,000) (2,308,283) (897,000)
Depreciation and amortization ................. (496,725) (44,000) (819,752) (86,000)
Income (loss) from operations ................. (2,289,529) (1,145,000) (3,128,035) (983,000)
</TABLE>
Note 8. Commitments and Contingent Liabilities
LEGAL PROCEEDINGS
Coinciding with the reverse merger with Southeast, the former management
of Southeast established a trust to provide for the orderly liquidation of any
alleged claims existing as of the date of acquisition. Certain stockholders of
Southeast have contributed 86,000 free trading shares of the Company's common
stock to the trust to satisfy approximately $150,000 of alleged claims. Due to
the resignation of the trustee, the trust shares have been deposited in the
registry of the Harris County Texas District Court, and the Company has been
named a nominal defendant in an Interpleader action. The Company intends to
vigorously defend its position by requesting the court release the stock for
payment of all alleged claims as was originally intended. The Company's
management does not expect the results of this legal proceeding will have a
material adverse effect on the Company's financial condition or results of
operations.
The Company is currently a plaintiff in ClearWorks.net, Inc. v. Michael
C.Callihan and Linda Callihan. The suit was filed February 25, 2000 after
attempts to mediate were unsuccessful alleging causes of action based on breach
of contract, breach of warranty, fraud in stock transactions and common law
fraud. The facts underlying the lawsuit are as follows: On or about May 21,
1998, the principal shareholder of Team Renaissance, Inc. entered into a merger
agreement with ClearWorks. Shortly thereafter, the principal shareholder,
Michael Callihan, requested that the Company pay in full promissory notes in
which Mr. Callihan was the payee. However, those promissory notes were neither
disclosed in the merger agreement nor attached to the merger agreement as
exhibits. A dispute arose between ClearWorks and Mr. Callihan regarding the
validity of the promissory notes. Additionally, a dispute arose regarding credit
card accounts held in the name of Mr. Callihan which Mr. Callihan claims are the
obligation of the Company and which the Company claims are the personal debt of
Mr. and Mrs. Callihan. Also, prior to closing, ClearWorks learned that the
Callihans had failed to make payments to its employees and contractors, and had
also failed to pay its suppliers, in direct violation of the merger agreement
between the parties. In this suit, ClearWorks seeks return of shares previously
issued to Mr. Callihan in connection with the events underlying the suit. The
Company intends to continue to vigorously prosecute its claims against the
Callihans.
The Company is currently a defendant in Tim Pennington v. ClearWorks
Technologies, Inc. and James W. Walters. Tim Pennington has recently filed a
petition asserting claims against the Company. These claims allegedly first
arose with Mr. Pennington's employment with Southeast Tire Recycling, Inc. Mr.
Pennington claims that he had an employment agreement with Southeast Tire
Recycling, Inc. providing him with options to purchase up to 175,000 shares of
free trading stock, 100,000 shares of restricted stock, and an additional 50,000
shares for every six (6) months of Pennington's employment. Pennington claims
that his employment agreement was breached by Southeast Tire prior to the
merger. Pennington also claims that he was also the owner of 300,000 shares of
common stock of Southeast Tire. Pennington's claims are addressed to ClearWorks,
although the alleged misconduct was not the conduct of ClearWorks but that of
its predecessor, Southeast Tire, and its shareholders, officers and directors.
Pennington's claims are grounded in fraud, state and federal securities fraud,
and conversion. Pennington seeks a judgment in excess of $100,000 plus punitive
damages, court cost, attorneys' fees and interest. The Company has filed its
answer to the recent filing by Pennington. The answer was due on March 1, 2000.
The Company intends to vigorously defend the claim and to raise affirmative
defenses on behalf of the Company, such as estoppel, latches and that
Pennington's claims are not against the Company, but are against former
officers, directors, and shareholders.
The Company also currently is a defendant in Robert Horn vs. ClearWorks
Technologies, Inc. The suit was filed March 25, 1999, alleging causes of action
based on breach of contract in the amount of approximately $200,000. The facts
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<PAGE>
underlying this lawsuit are as follows: Robert Horn entered into an employment
agreement with the Company effective April 1, 1998. The employment agreement
contained a condition precedent which stated: "The completion and subsequent
release of escrow money associated with the initial 504 offering of the
Company's securities on or before May 1, 1998, is a condition precedent to the
obligation of any party hereunder." The condition precedent was not met because
the Company did not have a 504 offering prior to May 1, 1998. On July 1, 1998,
Mr. Horn tendered his notice of resignation effective July 31, 1998. On March
25, 1999, Mr. Horn filed a lawsuit claiming that the Company had terminated Mr.
Horn's employment without cause. The Company filed an answer on April 16, 1999,
denying the claim and asserting its affirmative defenses. The Company is
vigorously contesting these claims by Robert Horn on the basis that they are
without merit.
The Company is a defendant in Sherman Gerald Mason, d/b/a Castle
Developments, Ltd. v. ClearWorks.net, Inc. formerly ClearWorks Technologies,
Inc.. On December 17, 1999, Sherman Gerald Mason d/b/a Castle Developments, Ltd.
filed suit against the Company. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with the Company and seeks recovery of 500,000
shares of stock. He also seeks recovery of alleged monthly retainer payments in
an undisclosed amount and seeks injunctive relief. The Company has filed an
answer disputing all liability, asserting that the contract was terminable and
that the contract is not enforceable because of the prior breaches of the
consulting agreement by Mr. Mason.
This suit was only recently served upon the Company. The Company has
answered. No discovery has been propounded and no scheduling order or trial date
has been entered in connection with the case.
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PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Texas law, a corporation may indemnify its officers, directors, employees
and agents under certain circumstances, including indemnification of such person
against liability under the Securities Act of 1933. True and correct copies of
Article 2.02 and 2.02.1 of the Texas Business Corporations Act that address
indemnification of officers, directors, employees and agents is attached hereto
as Exhibit 99.1.
In addition, Article 2.02-1(B) of the Texas Business Corporation Act and Eagle's
Articles of Incorporation and Bylaws provide that a director of this corporation
shall not be personally liable to the corporation or its stockholders for
monetary damages due to breach of fiduciary duty as a director except for
liability in circumstances which (1) the person was found liable on the basis
that personal benefit was improperly received by him, whether or not the benefit
resulted from an action taken in the person's official capacity; or (2) the
person is found liable to the corporation.
The effect of these provisions may be to eliminate the rights of Eagle and its
stockholders (through stockholders' derivative suit on behalf of Eagle) to
recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in situations described in clauses (1)-(2) of the preceding
paragraph.
ITEM 21. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this registration statement pursuant
to Item 601 of Regulation S-K and are specifically incorporated herein by this
reference:
EXHIBIT
NUMBER TITLE
------- -----
3(i) Articles of Incorporation of Eagle Wireless International, Inc.
3(ii) By-laws
4.1 Specimen of Share Certificate
5.1 Opinion of Richard O. Weed
10.1 Agreement and Plan of Reorganization with ClearWorks
21 Subsidiaries of Eagle Wireless, Inc.
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<PAGE>
23.1 Consent of Richard O. Weed
23.2 Consent of Independent Auditors (McManus & Co. for Eagle)
23.3 Consent of Independent Auditors (KPMG for ClearWorks)
23.4 Consent of Independent Auditors (McManus & Co. for ClearWorks)
23.5 Consent of Person About to be named a Director, Michael T. McClere
23.6 Consent of Person About to be named a Director, Shannon D. McLeroy
23.7 Consent of Person About to be named a Director, Raymond G. Harrell, III
27 Financial Statement Schedules
99.1 Articles 2.02 and 2.02.1 of the Texas Business Corporations Act
99.2 Form of Eagle Proxy Card
99.3 Form of ClearWorks Proxy Card
ITEM 22. UNDERTAKINGS
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and
(iii) include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by Eagle pursuant to Section 13 or Section
5(d) of the Exchange Act that are incorporated by reference in the registration
statement.
(b) That, for the purpose of determining liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering thereof.
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<PAGE>
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
2. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. (1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through the use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of securities at that time shall be deemed as the initial bona
fide offering thereof.
4. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
5. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in League City, state of Texas, on
November 9, 2000.
EAGLE WIRELESS INTERNATIONAL, INC.
A Texas Corporation
By: /s/ DR. H. DEAN CUBLEY
Dr. H. Dean Cubley,
Director and President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ H. DEAN CUBLEY President, Chief Executive November 9, 2000
H. Dean Cubley Officer, and Director
/s/ RICHARD ROYALL Chief Financial Officer November 9, 2000
Richard Royall
/s/ CHRISTOPHER W. FUTER Vice President, Director November 9, 2000
Christopher W. Futer
/s/ A.L. CLIFFORD Director November 9, 2000
A.L. Clifford
/s/ GLENN A. GOERKE Director November 9, 2000
Glenn A. Goerke
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER TITLE
------- -----
3(i) Articles of Incorporation of Eagle Previously filed
Wireless International, Inc.
3(ii) By-laws Previously filed
4.1 Specimen of Share Certificate Previously filed
5.1 Opinion of Richard O. Weed Filed electronically
10.1 Agreement and Plan of Reorganization Filed electronically
with ClearWorks
21 Subsidiaries of Eagle Wireless, Inc. Filed electronically
23.1 Consent of Richard O. Weed Filed electronically
23.2 Consent of Independent Auditors Filed electronically
(McManus & Co. for Eagle)
23.3 Consent of Independent Auditors To be filed by amendment
(KPMG for ClearWorks)
23.4 Consent of Independent Auditors Filed electronically
(McManus & Co. for ClearWorks)
23.5 Consent of Person About to be named a To be filed by amendment
Director, Michael T. McClere
23.6 Consent of Person About to be named a To be filed by amendment
Director, Shannon D. McLeroy
23.7 Consent of Person About to be named a To be filed by amendment
Director, Raymond G. Harrell, III
27 Financial Statement Schedules To be filed by amendment
99.1 Articles 2.02 and 2.02.1 of the Texas Previously filed
Business Corporations Act
99.2 Form of Eagle Proxy Card Filed electronically
99.3 Form of ClearWorks Proxy Card Filed electronically
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