UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EAGLE WIRELESS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 3663 76-0494995
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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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 WITH A COPY TO:
101 COURAGEOUS DRIVE RICHARD O. WEED, ESQ.
LEAGUE CITY, TX 77573-3925 WEED & CO. L.P.
(281) 538-6000 4695 MACARTHUR CT., SUITE 1450
(Name, address, including zip code, and NEWPORT BEACH, CA 92660
telephone number, including area code, TELEPHONE 949.475.9086
of agent for service) 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.
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
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Proposed
Title of each maximum Proposed
class of offering maximum Amount of
securities to Amount to be price per aggregate registration
be registered registered share offering price fee
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$.001 par value
common stock 35,186,944 1.375(1) $48,382,048 $12,773 (2)
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(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 December 26, 2000 of $1.375.
(2) Previously paid.
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.
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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 December 20, 2000 the last reported sale
price for Eagle common stock was $1.44 per share. On December 20, 2000 the last
reported sale price for ClearWorks common stock was $1.13 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 ClearWorks' 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 5.
The date, times and places of the Eagle annual meeting and ClearWorks special
meeting are as follows:
For Eagle stockholders: For ClearWorks stockholders:
2:00 p.m. 10:00 a.m.
January 31, 2001 January 31, 2001
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 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 December 29, 2000 and was first mailed to
Eagle and ClearWorks stockholders on January 5, 2001.
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 January 31, 2001
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., central time on January
31, 2001 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 re-elect the following persons to our board of directors: H. Dean Cubley,
Christopher W. Futer, A.L. Clifford, and Glenn Allan Goerke.
3. To elect the following persons to our board of directors pending approval of
the merger: Michael T. McClere, Shannon D. McLeroy, and Raymond G. Harrell III.
4. To ratify McManus & Co. as our independent auditors for the fiscal year ended
August 31, 2001.
5. To act upon such other matters as may properly come before the meeting.
Only stockholders of record as of December 29, 2000 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 January 31, 2001
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., central time on January 31, 2001 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 December 29, 2000 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
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Joint Proxy Statement
For
Eagle Wireless International, Inc.
Special Meeting of Stockholders
To be held on January 31, 2001
And
ClearWorks.net, Inc.
Special Meeting of Stockholders
To be held on January 31, 2001
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 5.
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 JANUARY 24, 2001.
The date of this joint proxy statement/prospectus is December 29, 2000.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT / 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 JOINT PROXY STATEMENT / PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION CONTAINED HEREIN AT ITS DATE IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.......................................................... 3
The Companies............................................................. 3
The Merger Agreement...................................................... 3
Questions and Answers about the Merger.................................... 3
Risk Factors.............................................................. 5
Risk Factors Related to The Merger Agreement.............................. 5
Risk Factors Relating to the Business of Eagle............................ 5
Selected Historical Consolidated and Unaudited Pro Forma Combined
Financial Information................................................... 8
Comparative Per Share Data................................................ 11
Comparative Market Price Information...................................... 12
Directors, Executive Officers and Their Affiliates........................ 13
Other Matters............................................................. 13
TERMS OF THE MERGER......................................................... 13
The Merger Agreement...................................................... 13
Differences between Rights of Stockholders................................ 14
Federal Tax Consequences.................................................. 15
PRO FORMA FINANCIAL INFORMATION............................................. 16
BACKGROUND OF MERGER........................................................ 17
MATERIAL CONTRACTS WITH CLEARWORKS.......................................... 20
INTERESTS OF NAMED EXPERTS AND COUNSEL...................................... 21
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES........................................................... 21
INFORMATION ABOUT THE REGISTRANT
Eagle Wireless International, Inc......................................... 22
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 30
Description of Property................................................... 32
Legal Proceedings......................................................... 33
Market Price of and Dividends on Common Equity and Related Stockholder
Matters................................................................. 33
INFORMATION ABOUT THE COMPANY BEING ACQUIRED
ClearWorks.net, Inc....................................................... 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Description of Property................................................... 47
Legal Proceedings......................................................... 47
Market Price of and Dividends on Common Equity and Related Stockholder
Matters................................................................. 49
VOTING AND MANAGEMENT INFORMATION FOR EAGLE AND MATTERS TO BE VOTED ON
AT THE MEETING............................................................ 50
Eagle Wireless International, Inc......................................... 50
Item 1 - Election of Directors............................................ 50
Item 2 - Ratification of Independent Public Accountants................... 56
Item 3 - Eagle - ClearWorks Merger Proposal............................... 56
VOTING AND MANAGEMENT INFORMATION FOR CLEARWORKS AND MATTERS TO BE VOTED
ON AT THE MEETING......................................................... 57
ClearWorks.net............................................................ 57
Item 1 - ClearWorks - Eagle Merger Proposal............................... 57
FINANCIAL STATEMENTS........................................................ F-1
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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 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 35,186,944 shares of Eagle common stock in connection
with an Agreement and Plan of Reorganization dated September 15, 2000. As a
result of the merger, stockholders of ClearWorks will receive in the aggregate
approximately 58% 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 December 29, 2000, ClearWorks had warrants to purchase
approximately 4,909,584 shares of ClearWorks common stock outstanding, which
would become options to purchase approximately 3,927,667 shares of Eagle common
stock after 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. Registrar
& Transfer Company will act as the exchange agent for the merger.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: AS AN EAGLE STOCKHOLDER, WHY AM I BEING ASKED TO APPROVE THE MERGER?
A: The Merger Agreement requires Eagle to issue approximately 35,186,944
additional shares of its common stock. The issuance of new shares will result in
a 140% 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.
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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.
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 14 below.
Eagle and ClearWorks have conditioned the completion of the merger on receipt of
a legal opinion 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.
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 the Merger Agreement.
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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 COULD NEGATIVELY IMPACT EAGLE'S STOCK PRICE AND
FUTURE BUSINESS AND OPERATIONS. If the merger 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
will be completed. Also, the costs incurred by Eagle related to the merger,
including legal and accounting fees, and a portion of financial advisor fees,
must be paid even if the merger is not completed.
THERE MAY NOT BE A MARKET FOR EAGLE COMMON STOCK FOLLOWING THE COMPLETION OF
THIS MERGER. 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.
UNCERTAINTIES ASSOCIATED WITH THE MERGER 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. The announcement and closing of the merger could cause
customers and potential customers of Eagle and ClearWorks to delay or 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
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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 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 $5,239,670 and net earnings of $193,041
for the year ended August 31, 2000. However, for the fiscal years ended 2000 and
1999, Eagle has had losses from operations of $1,226,791 and $438,208,
respectively. Eagle may incur losses in the future, and there can be no
assurance when or if it will sustain long-term profitability.
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, it 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 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 Ceasing the sale of its products that use the challenged intellectual
property;
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o Obtaining 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 Redesigning 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 dependent 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. 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.
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 December 29, 2000, a total of 25,968,763 shares of Eagle 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 determine. 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
7
<PAGE>
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.
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 contractswould be on favorable terms.
FORWARD-LOOKING STATEMENTS
Except for historical information contained in this joint proxy statement /
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.
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, 2000 and August 31, 1999 are found on pages F-1
through F-32. The financial statements for ClearWorks for the fiscal years ended
December 31, 1999 and December 31, 1998 are found on pages F-33 through F-68.
8
<PAGE>
The unaudited selected historical financial information as of September 30, 2000
of ClearWorks are derived from its 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 ClearWorks'
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 August 31, 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.
Eagle Historical Condensed Financial Data
At and For Year Ended August 31,
<TABLE>
<CAPTION>
----------------------- ----------------- ------------- -------------- -------------- ----------------
1996 1997 1998 1999 2000
(audited) (audited) (audited) (audited) (audited)
----------------------- ----------------- ------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS
DATA
----------------------- ----------------- ------------- -------------- -------------- ----------------
Total Revenue 1,028,942 4,300,129 5,254,578 3,016,373 5,239,670
----------------------- ----------------- ------------- -------------- -------------- ----------------
Total Costs and 991,055 3,231,913 4,106,126 2,757,242 6,466,461
Operating
Expenses
----------------------- ----------------- ------------- -------------- -------------- ----------------
Income (Loss) 37,887 1,068,216 1,148,452 259,131 (1,226,791)
From Operations
----------------------- ----------------- ------------- -------------- -------------- ----------------
Net Income (Loss) 32,204 728,494 770,968 168,271 193,041
----------------------- ----------------- ------------- -------------- -------------- ----------------
CONSOLIDATED
BALANCE
SHEET DATA
----------------------- ----------------- ------------- -------------- -------------- ----------------
Working Capital 1,657,320 6,090,971 6,812,622 1,658,303 45,798,423
(deficit)
----------------------- ----------------- ------------- -------------- -------------- ----------------
Total Assets 3,446,992 7,379,898 8,550,443 10,320,282 57,640,811
----------------------- ----------------- ------------- -------------- -------------- ----------------
Long Term Debt 16,704 2,791 8,621 3,939 73,354
----------------------- ----------------- ------------- -------------- -------------- ----------------
Stockholder's 2,077,006 6,592,388 7,516,168 8,894,317 54,059,968
Equity (Deficit)
----------------------- ----------------- ------------- -------------- -------------- ----------------
Cash Dividends 0.00 0.00 0.00 0.00 0.00
Declared Per Common
Share
----------------------- ----------------- ------------- -------------- -------------- ----------------
</TABLE>
9
<PAGE>
ClearWorks Historical Condensed Financial Data
At and For Year Ended December 31,
<TABLE>
<CAPTION>
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
For the nine
months ended
September 30,
1995 1996 1997 1998 1999 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 16,738,665
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Total Costs and n/a n/a 105,000 1,332,000 7,430,000 21,527,839
Operating
Expenses
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Income (Loss) n/a n/a 9,000 (242,000) (4,398,000) (14,272,023)
From Operations
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Net Income (Loss) n/a n/a 8,000 (252,000) (5,159,000) (14,272,023)
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
CONSOLIDATED
BALANCE
SHEET DATA
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Working Capital
(Deficit) n/a n/a 4,000 91,000 978,000 (1,920,467)
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Total Assets n/a n/a 72,000 1,190,000 13,758,000 22,670,125
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Long Term Debt n/a n/a 46,000 70,000 3,320,000 1,972,420
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Stockholder's n/a n/a 9,000 884,000 5,770,000 11,528,137
Equity (Deficit)
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
Cash Dividends n/a n/a 0.00 0.00 0.00 0.00
Declared Per
Common Share
----------------------- ------------- ------------- -------------- --------------- ---------------- -----------------
</TABLE>
Unaudited Eagle and ClearWorks Pro Forma Combined Condensed
Historical Financial Data
(In Thousands, Except Per Share Data)
-------------------------------- -------------------
PRO FORMA COMBINED CONDENSED Year Ended
STATEMENT OF INCOME DATA August 31, 2000
-------------------------------- -------------------
Total Revenue $26,687
-------------------------------- -------------------
Total Cost of Revenue $22,775
-------------------------------- -------------------
Total Operating Expenses $26,192
-------------------------------- -------------------
Income (Loss) From Operations $(22,280)
-------------------------------- -------------------
Net Income (Loss) $(27,058)
-------------------------------- -------------------
-------------------------------- -------------------
PRO FORMA CONSOLIDATED As of
BALANCE SHEET DATA August 31, 2000
-------------------------------- -------------------
Cash and Cash Equivalents $33,377
-------------------------------- -------------------
Working Capital $48,122
-------------------------------- -------------------
Total assets $165,712
-------------------------------- -------------------
Long Term Debt $2,045
-------------------------------- -------------------
Stockholder's Equity $150,984
-------------------------------- -------------------
10
<PAGE>
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 August 31, 2000
EAGLE HISTORICAL
-------------------------------------- -----------
Net Income Per Share-Basic $.01
And Diluted
-------------------------------------- -----------
Book Value Per Share (1) $2.11
-------------------------------------- -----------
PRO FORMA COMBINED:
-------------------------------------- -----------
Net Income (Loss) Per Share-
Basic $(.68)
Diluted (.56)
-------------------------------------- -----------
Book Value Per Share (2) $2.61
-------------------------------------- -----------
CLEARWORKS HISTORICAL
-------------------------------------- -----------
Net Income (Loss) Per Share-Basic $(.83)
And Diluted (4)
-------------------------------------- -----------
Book Value Per Share (1)(4) $1.24
-------------------------------------- -----------
EQUIVALENT PRO FORMA COMBINED (3):
-------------------------------------- -----------
Net Income (Loss) Per Share-
Basic $(.54)
Diluted (.44)
-------------------------------------- -----------
Book Value Per Share (1) $2.09
-------------------------------------- -----------
(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 pro forma period. These acquisitions occurred
after the execution of the Merger Agreement.
11
<PAGE>
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 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, Eagle's common
stock closed at $5.63 per share, and ClearWorks' common stock closed at $4.94
per share. On December 20, 2000, Eagle's common stock closed at $1.44 per share
and ClearWorks' common stock closed at $1.13per share.
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
----------------------------------------- ------- ------
FISCAL 1998 High Low
----------------------------------------- ------- ------
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
----------------------------------------- ------- ------
Quarter ended August 31, 2000 $8.75 $5.63
----------------------------------------- ------- ------
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 quarters ended June 30, 2000 and September 30, 2000.
ClearWorks Common Stock
----------------------------------------- -------- --------
FISCAL 1998 High Low
----------------------------------------- -------- --------
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
----------------------------------------- -------- --------
Quarter ended September 30, 2000 $5.75 $3.19
----------------------------------------- -------- --------
12
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES
As reported on Eagle's 10-KSB for the year ended August 31, 2000, Eagle's
officers, directors, executive officers and their affiliates own 2.2% 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 present in person or
represented by proxy 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' 10-KSB for the year ended December 31, 1999,
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 at the meeting 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. 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 common stock at the closing. As a
result of the merger, stockholders of ClearWorks will hold in the aggregate
approximately 58% 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.
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 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 both companies believe is not currently being provided by any
other competitor. Each Bundled Digital Service, or BDSsm 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. The companies believe that hardware, installation and home wiring for
the current BDSsm contracts alone have the potential to generate substantial
near-term revenue for the new company in the next 24 months. The new company is
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'
BDSsm, "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
13
<PAGE>
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 General Corporation Law. Upon consummation of the Merger,
stockholders of ClearWorks, whose rights are governed by ClearWorks Certificate
of Incorporation and bylaws and by the Delaware General Corporation Law, will
become stockholders of Eagle, and their rights will be governed by Eagle's
Articles of Incorporation and bylaws and by the Texas Business Corporation Act.
The following is a summary of the material differences between the rights of the
stockholders of Eagle and ClearWorks. This summary is not 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.
AUTHORIZED COMMON STOCK
Eagle is authorized to issue 100,000,000 shares of common stock, of which
25,968,763 shares were issued and outstanding at December 29, 2000. ClearWorks
is authorized to issue 50,000,000 shares of common stock, of which 43,983,680
shares were issued and outstanding at December 29, 2000.
AMENDMENT OF ARTICLES
An amendment to Eagle's Articles 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 a meeting. An amendment to ClearWorks' Certificate of
Incorporation requires a majority vote of the outstanding stock of ClearWorks
entitled to vote at a 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, or the distribution exceeds the surplus of the corporation.
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.
14
<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 a gain or a 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.
15
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Eagle Wireless International, Inc. and Clearworks.net, Inc.
Consolidated ProForma Statement of Operations
For The Year Ended August 31, 2000
(Unaudited)(In Thousands)
Combined
Totals
---------
Revenues $ 26,687
Cost of goods sold 22,775
Gross profit 3,912
Selling, general and
administrative 26,192
Loss from operations before other
income(expense) (22,280)
Other income(expense) (4,788)
(Net loss) (27,068)
Earnings(loss)per share:
Primary (.68)
Diluted (.56)
Eagle Wireless International, Inc.
Consolidated ProForma Balance Sheet
August 31, 2000
(Unaudited) (In Thousands)
Merged
Total
---------
Assets
Current assets $ 60,732
Property and equipment,net 12,100
Other 1,071
Goodwill,net 5,771
Deferred charges 1,195
Licenses 20,000
Customer contracts 64,842
---------
$ 165,711
=========
Liabilities and Stockholders' Equity
Current liabilities $ 12,682
Long-term debt 2,046
Stockholders' equity:
Common stock 57,917
Paid in capital 149,051
Retained earnings 1,875
---------
150,983
$ 165,711
=========
16
<PAGE>
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' BDSsm
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.
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:
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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;
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's belief 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' BDSsm 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;
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.
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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 was
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 believed would 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;
o ClearWorks management's belief 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; and
o The strong financial position of the combined company.
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:
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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 common 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 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. Link Two has been a major customer of Eagle and accounted
for a majority of Eagle's revenue for the year ended August 31, 1999. 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, ClearWorks agreed to issue an aggregate of 7,667,000 shares of its
common stock for all outstanding shares of Link Two common stock, and Eagle will
receive 4,105,643 shares of ClearWorks common stock in satisfaction of the Link
Two indebtedness owed to Eagle.Some of the principal stockholders, directors,
and officers of Eagle, including James Futer and A.L. Clifford are also
principal stockholders of Link Two.
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, November, and December 2000, Eagle loaned ClearWorks an aggregate of
$2,500,000, 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 an aggregate of 3,000,000 shares of common stock as
collateral for the loan, which will be returned to ClearWorks on re-payment.
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 as collateral.
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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. 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 are 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 indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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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, 1999 and 2000, 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 67% and 33%, respectively, 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, 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 messaging device 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 messaging device has an advantage over a landline telephone in that the
messaging device's reception is not restricted to a single location, and has an
advantage over a cellular portable telephone in that a messaging device 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.
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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 or build-out requirements on all narrowband personal communication
services license holders. Each narrowband personal communication services
license holder must establish 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).
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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.
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 family 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.
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
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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.
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 and value added reseller 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.
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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.
BROADBAND MULTIMEDIA AND INTERNET PRODUCTS
Eagle developed a complete new line of broadband multimedia set-top-box products
during 1999 and 2000 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 is 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.
FIBER AND CABLING
Through its subsidiary Atlanticpacific, Eagle resells and installs fiber and
cabling to commercial and industrial clients throughout the United States.
Eagle's services include end-to-end project management. Eagle provides project
planning, installation, project management, testing, and documentation. For the
year ended August 31, 2000, fiber and cabling sales represented 65% of Eagle's
sales. For the year ended August 31, 2000, Sprint PCS was Eagle's largest
customer representing 15% of Eagle's total sales.
WIRELESS BROADBAND CONNECTIVITY
During 2000, Eagle has developed certain wireless broadband products and
services and is currently testing these products in multiple locations in the
U.S. markets. Eagle plans to introduce these new products in the near future.
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, telecommunications
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.
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Eagle's second largest customer for 2000, Link Two, accounted for approximately
12% of Eagle's sales for the fiscal year ended August 31, 2000. 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 20.
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.
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 hired 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 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.
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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.
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,
2000, and August 31, 1999 were $370,828, and $438,693 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.
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.
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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.
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.
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You may request a copy of these filings, at no cost, by writing or telephoning
as follows:
Eagle Wireless 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with Eagle's financial
statements and accompanying notes to the financial statements.
OVERVIEW
During the year ended August 31, 2000, 65% of Eagle's revenues were derived from
the fiber and cabling operations of Atlanticpacific. Other sales during this
period were to Eagle's broader customer base and were comprised principally of
paging infrastructure products. During the year, Eagle began taking steps to
diversify its product and service offerings beyond the paging infrastructure
market. Examples of new products either in development or in production are
wireless set-top devices and utility meters, vehicle tracking systems and
wireless backups for residential security monitoring systems. In accordance with
this strategy, Eagle entered into an acquisition agreement with ClearWorks that,
if closed, Eagle believes will integrate their wireless and broadband products
and services to a wide range of customers and applications.
REVENUE RECOGNITION
Eagle reports income from long-term contracts by the percentage-of-completion
method of accounting. This method recognizes income and costs with respect to
individual contracts on the basis of the proportionate value of work completed
during the period. Estimated losses are recognized in full as soon as they are
identifiable. Earnings are charged with a provision for doubtful accounts
receivable based on collection experience and current review of the
collectability of accounts. The majority of cabling contracts are completed in
less than one month.
RECEIVABLES
For fiscal 2000, Eagle accounts receivables increased to $1,247,113 from
$286,269 for fiscal 1999. This $960,844 increase is primarily due to increased
sales from Atlanticpacific. A note receivable from Link-Two Communications for
$8,655,126 represents a substantial portion of Eagle's assets for fiscal 2000.
Subsequent to the end of fiscal 2000, this note receivable was repaid by
ClearWorks, which owns a majority of Link Two Communications, in the form of
2,856,000 shares of ClearWorks common stock.
RECENT ACQUISITIONS; GOODWILL
During the year ended August 31, 2000, Eagle recognized goodwill of $5,965,437
due primarily to the acquisitions of Atlanticpacific, Comtel, and eToolz.
Goodwill represented the excess of the cost of the acquired companies over the
fair value of their net assets on the date of acquisition. Eagle amortizes
goodwill over a twenty-year period.
In September 2000, Eagle entered into a merger agreement with ClearWorks,
whereby it agreed to acquire 100% of the outstanding common stock of ClearWorks
in exchange for 0.8 shares of Eagle common stock for each share of ClearWorks
common stock at the closing. In addition to the share issuance, Eagle will
assume all outstanding ClearWorks stock options and warrants based upon the same
0.8 exchange ratio. Eagle has set the date of its meeting to vote on the merger
for January 31, 2001. The merger requires the vote of a majority of Eagle
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shareholders voting at the meeting, and a majority of the ClearWorks
shareholders entitled to vote at the meeting. Eagle can provide no assurance
that the merger will be completed.
MARKETABLE SECURITIES
Eagle has adopted the provisions of SFA No. 115, as amended by SFAS 130, which
provides that all marketable equity securities be classified as
available-for-sale or trading securities, and be carried on the balance sheet at
fair market value. Any unrealized holding gains or losses affiliated to these
securities are carried below net income under the caption "Other Comprehensive
Income," net of tax.
INVENTORY
Inventories are valued at the lower of cost or market. The cost is determined by
using the first-in first-out method. At August 31, 2000, Eagle's inventory
consisted of $5,755,778, as compared to $2,355,861 at August 31, 1999. The
additional inventory is primarily attributable to Eagle's set-top devices and
cabling held for sale.
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 2000 COMPARED TO THE YEAR ENDED AUGUST 31, 1999
NET SALES. For the year ended August 31, 2000, net sales increased to $5,239,670
from $2,217,275 during the year ended August 31, 1999. The increase of 136% was
primarily attributable to added sales from Atlanticpacific.
COST OF GOODS SOLD. For the year ended August 31, 2000, cost of goods sold on
Eagle's product sales increased to $2,481,695 from $1,336,502 during the year
ended August 31, 1999. The increase of 86% is primarily associated with the
cable and fiber products. Although Eagle's cost of sales increased, Eagle's
gross profit percentage for products sold increased to 53% from 40% during the
year ended August 31, 1999.
OPERATING EXPENSES. For the year ended August 31, 2000, operating expenses
increased to $3,984,767 from $1,318,981 during the year ended August 31, 1999,
an increase of 219%. The primary portions of the increase are discussed below:
o A $1,365,194 increase in salaries, or 2,319%, as a result of its
acquisitions and expanded business.
o A $263,893 increase in advertising and promotion, or 636%, due
primarily to increased attendance at conventions and trade shows on
a worldwide basis.
o A $438,605 increase in depreciation and amortization, or 674%, due
to an increase in amortization of goodwill and purchase of
additional assets.
o A $665,959 increase in other support costs, or 98%.
NET EARNINGS. For the year ended August 31, 2000, Eagle's net earnings increased
to $193,040 from $168,271 during the year ended August 31, 1999.
CHANGES IN CASH FLOW. Eagle's operating activities used net cash of $5,299,367
in fiscal 2000, compared to $1,901,656 in fiscal 1999. The increase in net cash
used by operating activities in fiscal 2000 was primarily attributable to an
increase in receivables and inventory. Eagle's investing activities used net
cash of $2,223,570 in fiscal 2000, compared to $32,559 in fiscal 1999. The
increase was due primarily to investment in acquisitions and purchase of
equipment. Eagle's financing activities provided cash of $39,681,262, in fiscal
2000, compared to $1,024,935 in fiscal 1999. The increase was primarily the
result the exercise of outstanding warrants during fiscal 2000.
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
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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.
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 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.
LIQUIDITY AND CAPITAL RESOURCES.
Current assets for the fiscal year ended August 31, 2000 totaled $49,305,912 as
compared to $9,714,538 reported in the fiscal year ended August 31, 1999. Of
this amount, $32,346,289 consisted of cash and cash equivalents, $8,655,126
consisted of other receivables that were converted into ClearWorks common stock
subsequent to the end of the fiscal year, and $5,775,778 consisted of inventory.
Eagle's increase in current assets is primarily due to its substantial increase
in cash received from the exercise of outstanding warrants during the fiscal
year ended August 31, 2000. Eagle believes that its working capital of
$45,798,424 as of August 31, 2000 should be sufficient to fund operations
through the end of the fiscal year 2001. Historically, Eagle has financed its
operations through the sale of debt and equity securities. As such, if its
current cash is insufficient to fund its long-term capital needs, Eagle will
rely on future best-efforts financings for capital. As of August 31, 2000, Eagle
had no material capital commitments other than its federal income and state
franchise tax liabilities.
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.
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LEGAL PROCEEDINGS
In connection with the merger, Eagle has been added as defendant to the lawsuit
invoked by Sherman, Gerald Mason d/b/a Castle Developments, Ltd. against
ClearWorks. The suit alleges that ClearWorks breached a contract whereby it
failed to pay consulting fees. Castle is seeking from Eagle a temporary
injunction preventing the merger between Eagle and ClearWorks. Eagle intends to
vigorously defend this matter.
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 December 20, 2000 Eagle's common stock closed at
$1.44 per share. Eagle is authorized to issue 100,000,000 shares of common
stock, 25,968,763 of which were issued and outstanding at December 29, 2000. At
December 29, 2000, there were approximately 411 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
------------------------------------------ -------- -------
FISCAL 1998 High Low
------------------------------------------ -------- -------
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
------------------------------------------ -------- -------
Quarter ended August 31, 2000 $8.75 $5.63
------------------------------------------ -------- -------
The Merger Agreement requires Eagle to issue approximately 35,186,944 additional
shares of its common stock. The issuance of new shares will result in an
approximately 140% 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.
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.
ClearWorks 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' operations are primarily
focused in the Houston, Texas area and it also operates and provides service in
San Antonio and Austin, Texas, and Phoenix, Arizona. In addition, ClearWorks
opened an office in London, England and seeks to offer its products there.
To provide services, ClearWorks installs and maintains fiber optic and copper
data transmission lines from its data transmission facilities to its prospective
customers' properties. After the lines have been installed, ClearWorks sells its
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 "BDSsm", and ClearWorks has applied for and received
servicemark protection for the term BDSsm.
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.
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 ClearWorks stockholders. The exchange of shares
with Southeast was accounted for as a second recapitalization of the Millennium
Texas operations into ClearWorks corporate shell.
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On May 26, 1998, ClearWorks expanded its high tech business by acquiring
InfraResources, L.L.C. through ClearWorks 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 ClearWorks 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 ClearWorks wholly owned
subsidiary. Archer provides the 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
ClearWorks' 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 utilizes Internet protocol
technology in providing Bundled Digital Services to its customers. ClearWorks
activities also relate to the Internet because its 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.
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 a private placement. On July 13, 2000, ClearWorks announced its plan to merge
United Computing Group with and into its subsidiary ClearWorks Integrated
Services and change the name of the subsidiary to "Clearworks IT Solutions,
Inc."
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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 a private placement.
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. 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 has four wholly owned subsidiaries which constitute its 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 has a subsidiary known as ClearWorks.net UK, PLC which was
formed to market and deliver ClearWorks' 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. On July 13, 2000, ClearWorks announced its plan to merge
United Computing Group with and into its subsidiary ClearWorks Integrated
Services and change the name of the subsidiary to "ClearWorks IT Solutions,
Inc." ClearWorks believes that it has an advantage by operating these companies
together based on delivering similar services to both commercial and residential
customers. Additionally, ClearWorks can utilize its proprietary technology to
deliver voice, data and video solutions to both sets of customers via the
Internet.
ClearWorks Structured Wiring Services, Inc. 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 Structured Wiring does not intend to
focus on product sales, but rather on acting as a provider of structured wiring
solutions.
ClearWorks Communications, Inc. focuses primarily on the delivery of integrated
voice, data and video services to the residential marketplace. ClearWorks'
proprietary technology enables this subsidiary to proceed into the voice, data
and video market for bundled consumption. ClearWorks foresees 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 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.
ClearWorks Integration Services, Inc. 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, or LANs, as well as Wide Area Networks, or WANs, 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. This business includes the sale,
installation and integration of computer hardware equipment as well as
information technology and staffing.
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ClearWorks Home Systems, Inc. focuses on installing and maintaining in-home
security systems.
To further its operations, ClearWorks has 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 ClearWorks' Systems Engineers to
monitor and administer clients' LAN and WAN systems remotely from its
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 intends to leverage the services provided by the
Remote Response Center in order to enhance its 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 its ability to
provide complex technology solutions for enterprise-wide networks. ClearWorks is
an authorized nonexclusive reseller of networking products, which enables it to
deliver integration services. Generally, ClearWorks' 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 value added reseller,meaning it purchases hardware
and software directly from the manufacturer and resells these products at a
higher retail price directly to its customers. ClearWorks' relationships with
these leading aggregators of computer hardware and software enable it 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
ClearWorks 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, Siemens 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 derives 51% of its 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 ClearWorks' 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.
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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.
ClearWorks has not experienced shortages or other difficulties in obtaining
components, supplies or other materials. ClearWorks currently anticipates that
components, supplies and other necessary materials will remain readily
available.
CLEARWORKS WEB SITE
ClearWorks maintains an Internet web site at www.clearworks.net where
information about its services can be found. The web site 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 web
site, which is informational only. Moreover, ClearWorks' web site is not a part
of this joint proxy statement / prospectus.
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 its 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.
The Bundled Digital Services installation in the 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 its Bundled Digital
Services business, ClearWorks can 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.
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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 is taking advantage of these
opportunities by developing and providing high-speed Internet access via its
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 ClearWorks' 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.
SALES FORCE
ClearWorks' sales professionals are trained to provide commercial and
residential customers with sales and customer service relating to all of its
services. Once a customer contracts with ClearWorks for services, it 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. ClearWorks' 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 its
industry and has identified the potential to carry out a market roll-up within
the systems integration marketplace. Initially, ClearWorks intends to expand its
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 its 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 connection with this strategy ClearWorks identified Link Two as an
acquisition candidate, and on August 3, 2000 entered into a letter of intent to
acquire Link Two, a nationwide provider of high speed wireless broadband access.
The acquisition of Link Two is anticipated to provide ClearWorks with a
strategic arm in which to address the large retrofit market in wireless Bundled
Digital Services. See "Material Contracts with ClearWorks".
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<PAGE>
In September 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. ClearWorks paid
1,000,000 shares of common stock for the purchase of LDConnect.com.
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 its
operations.
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;
o 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 ClearWorks' 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 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 "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 direct-to-home.
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
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<PAGE>
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 ClearWorks'
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, ClearWorks' 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.
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 services related to billing its BDSsm products. ClearWorks' employees
are not represented by a labor union. ClearWorks has not experienced any
organized work stoppages and believe that its relationship with employees is
good.
OUTSTANDING LOANS
On August 4, 1999 ClearWorks borrowed $801,512 from KMA Investments at an
interest rate of 12% per year. ClearWorks repaid the loan in April 2000, through
the issuance of 588,747 shares of common stock at the rate of one share for each
$1.375 of principal and interest. ClearWorks intends to rely upon future debt
and equity offerings to finance its 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 is due on May 1, 2001.
In October , November, and December 2000, ClearWorks borrowed an aggregate of
$2,500,000 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 nine-month periods ended September 30,
2000 and September 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.
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<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues $ 20,467,300 $ 2,052,000
Costs and expenses 37,632,939 3,491,000
Loss from operations (17,165,639) (1,439,000)
Net loss (21,761,194) (1,453,000)
Basic and diluted loss per share (.91) (.09)
</TABLE>
The following summary table presents comparative cash flows of ClearWorks for
the nine-month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net cash used by operating activities $ 18,296,333 $ (628,000)
Net cash used by investing activities $ (1,803,323) $ (2,067,000)
Net cash provided by financing activities $ 4,080,833 $ 2,635,000
</TABLE>
REVENUES
REVENUES. Total revenue increased by $18,415,300 over the September 30, 1999
fiscal quarter to $20,467,300 (an increase of 897%) for the nine months ended
September 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 has been able to increase significantly its revenue in
the primary areas in which it operates.
Revenues from ClearWorks IT Solutions increased from $1,215,458 through the
third quarter 1999 to $16,738,665 (an increase of 1,277%) for the September 30,
2000 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 has been able to increase
its revenues in the integration area primarily due to the acquisition of United
Computing Group in December 1999 and an increased customer base through sales
leverage between the companies.
Revenues from ClearWorks Structured Wiring decreased from $836,542 through the
third quarter 1999 to $588,632 (a decrease of 30%) for the September 30, 2000
period. Structured wiring revenues are derived from providing wiring solutions
for commercial and education customers. ClearWorks Structured Wiring Services
deployed its structured wiring solutions to major education and commercial
customers in the Houston area during the nine months ended September 30, 2000.
ClearWorks anticipates 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 September
30, 1999 period to $1,761,381 for the September 30, 2000 period. Home Systems
revenues are derived from providing wiring solutions for residential, security
systems and audio/visual equipment. ClearWorks anticipates that the increase in
revenues will continue as ClearWorks expands into new markets and completes
acquisitions. ClearWorks is currently ramping up to meet the demand generated by
communities in the ClearWorks Communications backlog.
Revenues from ClearWorks Communications increased from $0 through the September
30, 1999 period to $1,366,580 for the September 30, 2000 period. Revenues from
delivery of ClearWorks' BDSsm services were $42,000 for the year ended December
31, 1999. ClearWorks currently delivers voice, video and data services to
residential homes in primarily new communities. ClearWorks is currently
deploying new infrastructure to ramp up subscribers from its backlog of
residential communities. ClearWorks' subscriber revenue ramps up directly
proportional to the number of new homes built in its subdivisions each quarter.
COSTS AND EXPENSES RELATED TO REVENUES
COSTS AND EXPENSES. Costs and expenses increased to $18,463,428 through the
period ended September 30, 2000 compared to $1,340,000 through the period ended
September 30, 1999. Costs and expenses grew based on an increase in new revenues
primarily from acquisitions and from the opening of new offices. New offices
were
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<PAGE>
established in Phoenix, Arizona, and San Antonio and Dallas, Texas. Gross
margins within the subsidiaries were consistent with management's expectations,
with consolidated gross margins decreasing from thirty-five percent (35%)
through the September 30, 1999 period to ten percent (10%) (a decrease of 25%)
for the September 30, 2000 period. This decrease resulted primarily from the
operational costs of acquisitions consummated and from expansion costs of
opening new offices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $17,971,621 through
the period ended September 30, 2000, compared to $2,012,000 through the period
ended September 30, 1999. Selling, general and administrative expenses consisted
primarily of compensation to employees and management. During the nine months
ended September 30, 2000, ClearWorks continued its 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 which has been
relocated to new facilities at a lower rental cost. ClearWorks Communications
continued deploying on their BDSsm 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 its accounting workforce by the addition of
human resources specific personnel as well as the addition of a new company
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. ClearWorks had approximately 200
management, sales and administrative personnel at September 30, 2000.
DEPRECIATION AND AMORTIZATION
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 amortizes this cost over a five-year period. In addition
ClearWorks acquired fixed assets to support its business growth. The fixed
assets are depreciated over a two to twenty year period. Depreciation and
Amortization expenses increased by $1,058,890 to $1,197,890 for the nine months
ended September 30, 2000 primarily due to the amortization of goodwill
associated with acquisitions.
INTEREST EXPENSE
Interest expense increased to $4,604,323 through the period ended September 30,
2000, compared to $24,000 through the period ended September 30, 1999. Interest
accrued primarily on outstanding convertible debentures that are due August 2000
and May 2001.
INTEREST INCOME
Interest income remained at $8,768 through the period ended September 30, 2000,
compared to $55,000 through the period ended September 30, 1999. Interest was
earned primarily on overnight bank sweeps on current cash balances.
LIQUIDITY
The ability of ClearWorks 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.
There is no assurance that short and long-term financing can be obtained to
fulfill ClearWorks' capital needs. Without short or long-term financing,
ClearWorks will attempt to sell additional common stock to meet its current and
future capital needs. If ClearWorks is not able to obtain either short or
long-term funding or funding through the sale of its common stock, ClearWorks
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.
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CAPITAL EXPENDITURES
ClearWorks has incurred capital expenditures for construction of operating
facilities, transportation and other field equipment, office furniture and
computer equipment and software used in its operations. Capital expenditures for
the nine months ended September 30, 2000 were $3,109,494 compared to $2,032,000
through the period ended September 30, 1999. Capital expenditures were primarily
utilized for the deployment of ClearWorks' Fiber-To-The-Home program to deliver
high speed broadband services to residential communities.
CAPITAL RESOURCES
During the nine months ended September 30, 2000, Candlelight exercised its right
to acquire, upon total payment to ClearWorks 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. ClearWorks is obligated to register for resale,
the common stock underlying all debentures and warrants that have been or may be
issued to Candlelight. ClearWorks has not satisfied its obligation to register
the resale of the shares of common stock discussed above, and is currently
subject to penalty provisions as a result. In addition, upon the consummation of
the merger, Candlelight has the option to require ClearWorks to redeem any
outstanding debentures at 125% of the principal amount plus accrued interest.
Candlelight has notified ClearWorks that it intends to exercise this right. At
the present time, there are debentures in principal amount of $2,000,000
outstanding.
THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
The following table includes information regarding ClearWorks operations during
1999 and 1998:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Revenues $ 3,032,000 $ 1,090,000
Costs 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)
</TABLE>
The following summary table presents ClearWorks comparative cash flows for 1999
and 1998:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
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
</TABLE>
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 ClearWorks 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.
44
<PAGE>
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 has
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.
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 has
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 BDSsm 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 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 ClearWorks' structured wiring solutions during this
period. ClearWorks also deployed its structured wiring solutions to three
Houston area independent school districts, two universities and twenty-one
commercial customers.
Revenues from delivery of ClearWorks' BDSsm services were $42,000 for 1999.
ClearWorks began billing for its services at Canyon Gate at Northpointe
sub-division in September 1999. ClearWorks currently delivers voice, video and
data services to homes at Northpointe.
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 ClearWorks 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. BDSsm services' costs were $222,000.
There were no BDSsm services' costs for 1998. ClearWorks is building its
infrastructure and, as such, has 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 its business plan. ClearWorks
added key management and other personnel in all areas of its organization to
provide support for deployment of BDSsm services and other revenue generating
areas. Salaries and related expenses increased from $12,000 for 1998 to
$1,187,000. ClearWorks had 22 management, sales and administrative personnel at
December 31, 1999. As part of its 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 ClearWorks' 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.
45
<PAGE>
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 amortizes 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 has completed
the head-end facility at Canyon Gate at Northpointe and has begun installing
conduit in the ground at the Stonegate sub-division and has begun providing
BDSsm to the residents of Stonegate in sections 1 and 2 of Stonegate as of
November 2, 2000.
CAPITAL RESOURCES
During 1999, capital resources were provided primarily by capital contributions
from stockholders, through the sale of exempt securities that 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, in the principal amount of $801,512 at an annual
interest rate of twelve percent. The note and all accrued interest was repaid in
April 2000, throught the issuance of 588,747 shares of common stock at the rate
of one share for each $1.375 of principal and interest. .
On October 14, 1999, ClearWorks issued a promissory note to NTL Securities in
the principal amount of $500,000. This note carried a 12% rate per year and was
payable on or before May 1, 2001. The note was repaid in September 2000 through
the issuance of 250,000 shares of common stock.
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.
In October, November, and December 2000, ClearWorks borrowed an aggregate of
$2,500,000 from Eagle accruing interest at the prime rate, to meet its immediate
cash flow needs.
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
46
<PAGE>
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 its 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. leases this space under an agreement
that expires in 2003 at a current annual base rental of approximately $129,000.
ClearWorks 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 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 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 FAMILY TRUST; AND
SHANNON MCLEROY VS. 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 by Martin R.
Nathan, alleged escrow agent, against ClearWorks and others. This suit was filed
as an interpleader action and arises out of the reverse merger, which created
the public form of ClearWorks 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 ClearWorks, and Southeast
Tire Recycling, Inc., the original owners of Southeast Tire escrowed shares of
stock in ClearWorks 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 ClearWorks 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 ClearWorks 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 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 $250,000.00; 100,000 shares
of ClearWorks common stock; alleged lost commissions and attorney fees of
$200,000. The facts underlying this lawsuit are as follows: Robert Horn entered
into an employment agreement effective April 1, 1998. The employment agreement
contained a condition precedent. The condition precedent was not met. 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 ClearWorks affirmative defenses. This lawsuit is
currently in the discovery phase. Trial is scheduled for the two-week period
beginning February 5, 2001. ClearWorks is vigorously contesting these claims by
Robert Horn on the basis that they are without merit.
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<PAGE>
ClearWorks is a defendant in 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 ClearWorks in the 157th Judicial District
Court of Harris County, Texas. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with ClearWorks and seeks recovery of 500,000
shares of common stock. He also seeks recovery of alleged monthly retainer
payments in an undisclosed amount and seeks injunctive relief. ClearWorks 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 moved to have
the case submitted to arbitration, and the Plaintiff has agreed to do so.
ClearWorks Structured Wiring Services 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 COUNTY, TEXAS. On January
21, 2000, Charterwood Associates, a Texas Limited Partnership, sued Clearworks
Structured Wiring Services, Inc., a subsidiary of ClearWorks. The suit presents
claims for breach of a contract to design, operate and maintain "bundled digital
services" to Plaintiff's apartment complex. The suit seeks recovery of damages
in the sum of $78,746.69 plus interest, attorneys' fees and court costs.
ClearWorks denies the claims. ClearWorks maintains its own claims for breach of
contract in connection with the same project. ClearWorks has filed an affidavit
claiming a lien against the apartment project owned by the Plaintiffs, claiming
that $52,800 is unpaid for services and materials provided. ClearWorks 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. ClearWorks intends to
vigorously contest all claims in this case. ClearWorks 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
ClearWorks. The suit presents claims for breach of a contract to provide
ClearWorks public relations services. The suit seeks recovery of damages in the
sum of $7,797.92, the value of 106,667 restricted shares of ClearWorks common
stock as of the date of the alleged breach plus interest, attorneys' fees and
court costs. ClearWorks denies the claims and has filed an answer. 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 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 ClearWorks 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 Systems
that it held a first lien. The purchase price for such assets was set at
$150,000.00. Subsequently, ClearWorks Home Systems 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 did not pay Valley First $150,000. Valley First
seeks recovery of an unspecified amount of damages not less than $150,000,
attorneys' fees and court costs. ClearWorks 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 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 ClearWorks.
The facts underlying the lawsuit are as follows: On or about January 13, 2000,
ClearWorks 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 ClearWorks. Carl Thompson
seeks recovery of damages in the sum of $521,415.00, attorneys' fees and court
costs. Clearworks denies the claims and intends to vigorously contest all claims
in this case.
United Consulting Group and United Computing Group are defendants and
counter-plaintiffs in SALES CONSULTANTS OF HOUSTON'S V. 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
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<PAGE>
March 16, 1999, Sales Consultants of Houston, 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 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 is vigorously contesting the claims by Sales Consultants on the basis
that they are without merit.
Settlements:
On November 29, 2000, ClearWorks settled CLEARWORKS.NET, INC. V. MICHAEL C.
CALLIHAN AND LINDA CALLIHAN; 157th Judicial District Court of Harris County,
Texas; Cause No. 2000-10296. This case was settled at mediation on November 29,
2000. Pursuant to the terms of the settlement, ClearWorks is to pay the taxable
costs of the Callihans in the litigation of approximately $1,000.00 and to issue
to the Callihans 140,000 shares of restricted common stock in ClearWorks with
the right to have such shares registered in the next registration that will
allow this to be done. The parties have agreed to execute mutual releases of one
another from any and all claims arising from any past actions by any party and
all past relationships between them.
On December 1, 2000, ClearWorks settled 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. ClearWorks has agreed to pay Tim
Pennington the sum of $135,000.00 on or before February 14, 2001 and to secure
such payment by issuing 135,000 restricted shares of ClearWorks common stock in
the name of an escrow agent. The parties will release each other from any and
all claims that may exist among them, conditioned upon the timely payment of the
settlement funds.
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 December 20, 2000, ClearWorks common stock closed
at $1.13 per share. ClearWorks is authorized to issue 50,000,000 shares of
common stock, of which 43,983,680 shares were issued and outstanding at December
29, 2000. At December 29, 2000, ClearWorks had approximately 12,446 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 quarters ended June 30, 2000 and September 30, 2000.
CLEARWORKS COMMON STOCK
-------------------------------------------- ---------- ----------
FISCAL 1998 High Low
-------------------------------------------- ---------- ----------
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
-------------------------------------------- ---------- ----------
Quarter ended September 30, 2000 $5.75 $3.19
-------------------------------------------- ---------- ----------
ClearWorks has not paid dividends since its inception.
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<PAGE>
VOTING AND MANAGEMENT INFORMATION FOR EAGLE
AND MATTERS TO BE VOTED ON AT THE MEETING
EAGLE
The special meeting of the stockholders of Eagle will be held at 2:00 p.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. In
addition, stockholders will be asked to re-elect directors and to ratify the
appointment of Eagle's independent auditors. 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 joint proxy statement/prospectus is
dated December 29, 2000 and is first being mailed to stockholders on or about
January 5, 2001. This proxy solicitation is being made by Eagle.
On December 29, 2000, Eagle had 25,968,763 shares of common stock outstanding.
Each share is entitled to one vote per share. Only stockholders of record as of
December 29, 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.
ITEM 1 -- ELECTION OF DIRECTORS
The following table lists Eagle's current directors and officers. Eagle's board
of directors has nominated its current Directors to serve until its annual
meeting for fiscal year 2001. Although it is not anticipated that any of the
nominees will be unable to serve, if such a situation arises prior to the
meeting, the persons named in the enclosed proxy will vote for the election of
such person (s) as may be nominated by the board of directors.
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 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
50
<PAGE>
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 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.
51
<PAGE>
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.
Eagle has an Audit Committee. Eagle does not have a Compensation Committee or
Nominating Committee. The Audit Committee is responsible for reviewing and
making recommendations regarding employment of independent auditors, the annual
audit of Eagle's financial statements and its internal accounting practices and
policies. For the fiscal year ended August 31, 2000, the members of the Audit
Committee were Messrs. Goerke and Clifford. The Audit Committee met one time
during the fiscal year. In accordance with a recently issued American Stock
Exchange requirement, Eagle's Board of Directors adopted a written charter for
the Audit Committee. A copy of the charter is attached as Exhibit A to this
Proxy Statement. All members of the Audit Committee are independent as defined
by the American Stock Exchange. The Audit Committee held one meeting during the
last fiscal year at which representatives of Eagle's independent auditors,
McManus & Co., P.C. were present.
Audit Committee Report
In accordance with its written charter, the Audit Committee assists the Board of
directors in fulfilling its responsibility for the oversight of the quality and
integrity of the accounting, auditing and financial reporting practices of
Eagle. During fiscal 2000, the Committee met one time, including meetings to
review with management and the independent auditor the SEC Form 10-KSB for the
fiscal year ending August 31, 2000, the first such filing after charter
adoption. The Committee also discussed with management and the independent
auditors the quality and adequacy of Eagle's internal controls. The Committee
reviewed with the independent auditors their audit, plan, audit scope, and
identification of audit risks. The Committee discussed and reviewed with the
independent auditors all communications required by generally accepted auditing
standards, including those described in Statement on Auditing Standards No. 61,
as amended, "Communications with Audit Committee." The Committee reviewed with
the independent auditors and management the confirmation of auditors'
independence in accordance with Independence Standards Board Standard No. 1 and
the audited financial statements of Eagle for the fiscal year ended August 31,
2000. Management has the responsibility for the preparation and content of those
statements. Based on the above mentioned review and discussions with management
and the independent auditors, the Committee recommended to the Board that
Eagle's audited financial statements be included in its Annual Report on Form
10-KSB for the fiscal year ended August 31, 2000 for filing with the SEC.
Submitted by the Audit Committee of the Board of Directors.
Dr. Glenn Allan Goerke and Mr. A.L. Clifford
THE EAGLE BOARD OF DIRECTORS HAS NOMINATED MESSRS. CUBLEY, FUTER, CLIFFORD, AND
GOERKE FOR ELECTION BY THE STOCKHOLDERS OF EAGLE AND UNANIMOUSLY RECOMMENDS A
VOTE FOR THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE. THE ELECTION OF
THESES DIRECTORS REQUIRES A PLURALITY OF THE VOTES CAST BY THE EAGLE
SHAREHOLDERS PRESENT OR REPRESENTED BY PROXY AT THE MEETING AND ENTITLED TO VOTE
IN THE ELECTION OF DIRECTORS.
If the merger proposal is approved by both Eagle and ClearWorks stockholders,
Michael T. McClere, Shannon D. McLeroy, and Raymond G. Harrell, III have agreed
to join Eagle's board of directors. As such, Eagle's stockholders are being
asked to elect Messrs. McClere, McLeroy, and Harrell to Eagle's board of
directors. The biographies of Messrs. McClere, McLeroy, and Harrell are provided
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.
52
<PAGE>
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.
THE EAGLE BOARD OF DIRECTORS HAS NOMINATED MESSRS. MCCLERE, MCLEROY, AND HARRELL
FOR ELECTION BY THE STOCKHOLDERS OF EAGLE, SUBJECT TO THE APPROVAL OF THE MERGER
PROPOSAL, AND UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
NOMINEES LISTED ABOVE. THE ELECTION OF THESES DIRECTORS REQUIRES A PLURALITY OF
THE VOTES CAST BY THE EAGLE SHAREHOLDERS PRESENT OR REPRESENTED BY PROXY AT THE
MEETING AND ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS.
53
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information regarding compensation paid to Eagle's
chief executive officer. No other executive officer received in excess of
$100,000 in compensation during the fiscal year ended August 31, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG TERM COMPENSATION
------------ ------------------------------------
AWARDS
------------------------------------
SECURITIES
NAME AND RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITIONS YEAR SALARY ($) STOCK AWARD(S) ($) OPTIONS/SARS (#) COMPENSATION ($)
------------------- ---- ---------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
H. Dean Cubley,
Chief Executive Officer 2000 $100,000 -- -- --
1999 $100,000 -- -- --
1998 $91,923 -- -- --
</TABLE>
Eagle has not entered into employment agreements with any of its executive
officers.
STOCK OPTIONS
Eagle's 1996 Stock Option Plan provides for the issuance of an aggregate 400,000
shares of common stock upon the exercise of options granted under the plan. As
of August 31, 2000, options to purchase an aggregate of 242,607 shares of common
stock were outstanding under the plan.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS /
UNDERLYING SARS GRANTED EXERCISE OR
OPTIONS/SARS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE
---- ----------- -------------- ----------- ----------
H. Dean Cubley,
Chief Executive Officer 3,333 3.5% $ 1.50 12/17/04
AGGREGATED OPTION EXERCISES IN 2000
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES
ACQUIRED
ON VALUE NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NAME EXERCISE (#) REALIZED ($) OPTIONS AT FY-END IN-THE-MONEY OPTIONS
---- ------------- ------------ -------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Dean Cubley,
Chief Executive Officer - - 3,333 - $ 16,042 -
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of Eagle's principal stockholders, or their affiliates, including
Messrs. Futer and Clifford, are also principal stockholders of Link Two
Communications, which is one of Eagle's principal customers. Mr. Clifford is
also the
54
<PAGE>
chairman, and chief executive officer of Link Two Communications and Dr. Cubley
is a director of Link Two Communications. During the last two fiscal years, Link
Two Communications issued Eagle an aggregate of 240,000 shares of its common
stock as a result of accrued finance charges on its outstanding account payable
to Eagle. In October 1999, Link Two Communications refinanced this account
payable to Eagle through the issuance of notes maturing in September 2001, which
amount equaled $8,655,126 at August 31, 2000. As a result of ClearWorks
acquiring control of Link Two Communications in November 2000, ClearWorks
discharged this Link Two Communications indebtedness in full through the
issuance of 2,856,000 shares of its common stock to Eagle.
In October, November, and December 2000, Eagle advanced an aggregate of
$2,500,000 to ClearWorks, maturing in December 2001, secured by substantially
all of ClearWorks assets. Additionally, ClearWorks issued Eagle an aggregate of
3,000,000 shares of its common stock in connection therewith.
In April 2000, Eagle entered into a one-year agreement Synchton, Inc., an entity
owned by Dr. Cubley's son, to provide professional business services to Eagle.
As compensation for these services, Eagle agreed to pay Synchton $10,000 per
month and issued a three year warrant to purchase 100,000 shares of common
stock, which shares vest and become exercisable at the then market price
throughout the term of the consulting arrangement.
In July 1999, Mr. Royall exchanged $.05 warrants to purchase 12,500 shares of
common stock, and $5.00 warrants to purchase 12,500 shares of common stock and
$8,400 for 12,500 shares of Eagle 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 Eagle common stock. In July 1999, Mr. Clifford exchanged
166,667, $.05 warrants, 166,667, $.50 warrants, and $223,334 for 333,334 shares
of Eagle common stock. In July 1999 Hou-Tex Trust exchanged 350,000, $.05
warrants, 350,000, $.50 warrants, and $469,000 for 700,000 shares of Eagle
common stock. In July 1999, Futer Family Partnership exchanged 110,000, $.05
warrants, 110,000, $.50 warrants, and $147,400 for 220,000 shares of Eagle
common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 29, 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.
SHARES OF COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED % OF VOTING POWER
---------------- ---------------------- -----------------
H. Dean Cubley
101 Courageous Drive
League City, TX 77573 3,333 less than 1%
Futer Family Trust
1331 Lamar, Suite 1375
Houston, TX 77010 1,076,500 4.1%
Christopher W. Futer
101 Courageous Drive
League City, TX 77573 5,000 less than 1%
A.L. Clifford
101 Courageous Drive
League City, TX 77573 412,667 1.6%
Glenn Allan Goerke
911 Live Oak Lane
Seabrook, TX 77586 25,000 less than 1%
All officers and directors
as a group (5 persons) 577,710 2.2%
55
<PAGE>
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.
Mr. Futer disclaims beneficial ownership, as well as voting and disposition
power of the shares of common stock 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's ownership includes 141,000 shares, which are held in the name of
The Clifford Family Trust, and 61,667 held by his wife.
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 33,333 shares of common stock that are currently
exercisable.
ITEM 2 -- RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Eagle's board of directors wishes to obtain from its shareholders a ratification
of the Board's action in appointing McManus & Co., P.C., as its independent
public accountants for the fiscal year ending August 31, 2001. The engagement of
McManus & Co., P.C. has been approved by the Board. Representatives from the
firm are expected to be present at the meeting, will have an opportunity to make
a statement if they so desire, and are expected to be available to respond to
appropriate questions.
In the event the appointment of McManus & Co., P.C. as Eagle's independent
public accountants is not ratified by its Stockholders, the adverse vote will be
considered as a direction to the Board to select other auditors for the
following year. However, because of the difficulty in making any substitution of
auditors so long after the beginning of the current year, the appointment for
the fiscal year 2001 will be permitted to stand unless the Board finds other
good reason for making a change.
EAGLE'S BOARD OF DIRECTORS HAS APPROVED THE APPOINTMENT OF MCMANUS & CO., P.C.
AS INDEPENDENT PUBLIC ACCOUNTANTS FOR 2001 AND UNANIMOUSLY RECOMMENDS A VOTE FOR
RATIFICATION OF SUCH APPOINTMENT. THE RATIFICATION REQUIRES THE AFFIRMATIVE VOTE
OF THE HOLDERS OF A MAJORITY OF THE SHARES OF EAGLE COMMON STOCK PRESENT OR
REPRESENTED BY PROXY AND ENTITLED TO VOTE AT THE MEETING.
ITEM 3 - EAGLE - CLEARWORKS MERGER PROPOSAL
EAGLE'S BOARD OF DIRECTORS HAS APPROVED THE MERGER PROPOSAL AND UNANIMOUSLY
RECOMMENDS A VOTE FOR THE MERGER PROPOSAL. THE APPROVAL REQUIRES THE AFFIRMATIVE
VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF EAGLE COMMON STOCK PRESENT OR
REPRESENTED BY PROXY AND ENTITLED TO VOTE AT THE MEETING.
56
<PAGE>
VOTING AND MANAGEMENT INFORMATION FOR CLEARWORKS
AND MATTERS TO BE VOTED ON AT THE MEETING
CLEARWORKS
The special meeting of the stockholders of ClearWorks will be held at 10:00
a.m., Texas time on January 31, 2001 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 December 29, 2000 and is first being
mailed to stockholders on or about January 5, 2001. This proxy solicitation is
being made by ClearWorks.
On December 29, 2000, ClearWorks had 43,983,680 shares of common stock
outstanding. Each share is entitled to one vote per share. Only stockholders of
record as of December 29, 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.
ITEM 1 - CLEARWORKS - EAGLE MERGER PROPOSAL
CLEARWORKS' BOARD OF DIRECTORS HAS APPROVED THE MERGER PROPOSAL AND UNANIMOUSLY
RECOMMENDS A VOTE FOR THE MERGER PROPOSAL. THE APPROVAL REQUIRES THE AFFIRMATIVE
VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF CLEARWORKS COMMON STOCK
OUTSTANDING.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 29, 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 5,539,436 (2) 16%
2450 Fondren, Suite 200
Houston, Texas 77063
Shannon D. McLeroy 2,172,800 (3) 6.3%
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
Eagle Wireless International, Inc.
101 Courageous Drive
League City, Texas 77573 4,345,643 (4) 9.9%
All Executive Officers and
Directors as a group (four persons) 7,712,236 (2)(3) 22.3%
57
<PAGE>
*Less than one percent.
(1) "Beneficial ownership" is defined in the regulations promulgated by the SEC
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 $6.00 per share until the warrants expire on April 24, 2008. Also
includes 625 shares held by Mr. McLeroy's wife.
(4) Does not include 3,000,000 shares of common stock held as collateral for
outstanding loans.
DIRECTORS AND EXECUTIVE OFFICERS OF EAGLE AFTER THE MERGER AGREEMENT
If the merger is approved by the ClearWorks and Eagle stockholders, then at the
effective time of the merger, Eagle's management team would consist of the
following persons. Biographies of Messrs. McClere, McLeroy, and Harrell are
included above.
NAME AGE POSITION
---- --- --------
H. Dean Cubley 59 Chairman of the Board of Directors,
President and Co-Chief Executive Officer
Christopher W. "James" Futer 60 Director, Executive Vice President and
Chief Operating Officer
A. L. Clifford 55 Director
Dr. Glenn Allan Goerke 69 Director
Richard Royall 54 Chief Financial Officer
Michael T. McClere 40 Director, Co-Chief Executive Officer, and
Chief Technical Officer
Shannon D. McLeroy 34 Director, President and Secretary
of ClearWorks
Raymond G. Harrell III 37 Director
58
<PAGE>
The following table sets forth in summary form the compensation received during
each of the last three successive completed fiscal years by Michael T. McClere,
Chief Executive Officer and Chairman of the Board of ClearWorks and Shannon D.
McLeroy, President and Secretary of ClearWorks.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------- ------------ ------------- -------- ------------ ----------------------------------------- --------------
Long Term Compensation
----------------------------- -----------
Annual Compensation Awards Payouts
-------------------------- ------------ ------------- -------- ------------ ---------------- ------------ ----------- --------------
Other Annual Restricted LTIP All Other
Name and Salary Bonus Compensation Stock Awards Options Payouts Compensation
Principal Position Fiscal Year ($)(1) ($)(2) ($)(3) ($) (#) ($)(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 Secretary 1998 (6) $73,375 -0- -0- -0- -0- -0- -0-
1997 $11,250 -0- -0- -0- -0- -0- -0-
-------------------------- ------------ ------------- -------- ------------ ---------------- ------------ ----------- --------------
</TABLE>
(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, ClearWorks did
not pay any other annual compensation not properly categorized as salary or
bonus, including perquisites and other personal benefits, securities or
property.
(4) ClearWorks 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 ClearWorks 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
ClearWorks 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 ClearWorks on its behalf.
(6) As part of ClearWorks 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,
ClearWorks 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:
59
<PAGE>
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 220,000
B 240,000
Rachel McClere 1998 Trust A 50,000
B 50,000
McClere Family Trust A 200,000
B 200,000
* 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 ClearWorks.
(8) From January 1, 1998 to March 31, 1998, ClearWorks engaged Tech
Technologies as a consultant pursuant to a consulting agreement that
provided that Tech Technologies would provide financial and managerial
consulting services to ClearWorks 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
ClearWorks.
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 ClearWorks' 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 ClearWorks' 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
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 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
60
<PAGE>
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.
61
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--------------------------------------------------------------------------------
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000 AND 1999
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----------
Independent Accountant's Report .................................... F-1
Consolidated Balance Sheets ........................................ F-2
Consolidated Statements of Operations .............................. F-3
Consolidated Statements of Changes in Shareholders' Equity ......... F-4
Consolidated Statements of Cash Flows .............................. F-5
Notes to the Consolidated Financial Statements ..................... F-6 - F-32
--------------------------------------------------------------------------------
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
-----------
Independent Accountant's Report .................................... F-33
Consolidated Balance Sheets ........................................ F-34
Consolidated Statements of Operations .............................. F-35
Consolidated Statements of Changes in Shareholders' Equity ......... F-36
Consolidated Statements of Cash Flows .............................. F-37
Notes to the Consolidated Financial Statements ..................... F-38 - F-54
Item 1. Consolidated Balance Sheets .......................... F-55
September 30, 2000 (unaudited) and December 31,1999
Consolidated Statements of Operations ................ F-56
For the Three and Nine Months Ended September 30,
2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows ................ F-57
For the Three and Nine Months Ended September 30,
2000 and 1999 (unaudited)
Consolidated Statements of Shareholders' Equity ..... F-58
For the Nine Months Ended September 30, 2000
(unaudited) And the Year Ended December 31, 1999
Notes to Consolidated Financial Statements ........... F-59
F-i
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF EAGLE WIRELESS INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of Eagle Wireless
International, Inc. and subsidiaries as of August 31, 2000 and 1999 and the
related consolidated 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 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Eagle Wireless International, Inc. and subsidiaries as of
August 31, 2000 and 1999 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
November 26, 2000
F-1
<PAGE>
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EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
AUGUST 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents (Note 1) .............. $ 32,346,290 $ 187,965
Accounts Receivable (Note 2) .................... 1,247,113 286,269
Other Receivables (Note 21) ..................... 8,655,126 6,641,892
Inventories (Note 1) ............................ 5,755,778 2,355,861
Marketable Securities (Notes 1 & 9) ............. 970,701 0
Prepaid Expenses ................................ 330,904 242,551
------------ ------------
Total Current Assets ......................... 49,305,912 9,714,538
PROPERTY AND EQUIPMENT (NOTES 1 & 3):
Operating Equipment ............................. 2,702,948 922,204
Less: Accumulated Depreciation .................. (1,023,153) (333,474)
------------ ------------
Total Property and Equipment ................. 1,679,795 588,730
OTHER ASSETS:
Security Deposits ............................... 32,415 17,014
Deferred Advertising Costs (Note 1) ............. 384,463 0
Deferred Syndication Costs (Note 1) ............. 270,389 0
Goodwill (Notes 1 & 4) .......................... 5,965,437 0
Less: Accumulated Amortization .................. (193,718) 0
Other Intangible Assets (Note 1) ................ 171,118 0
Other Assets .................................... 25,000 0
------------ ------------
Total Other Assets ........................... 6,655,104 17,014
------------ ------------
TOTAL ASSETS .................................... $ 57,640,811 $ 10,320,282
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ................................ $ 2,007,422 $ 207,949
Accrued Expenses ................................ 308,346 106,355
Notes Payable (Note 5) .......................... 41,607 16,643
Line of Credit (Note 7) ......................... 265,830 0
Capital Lease Obligations (Note 6) .............. 58,995 14,962
Deferred Revenues ............................... 0 532,772
Federal Income Taxes Payable (Notes 1 & 10) ..... 736,292 468,064
Franchise Taxes Payable ......................... 17,161 13,108
Sales Taxes Payable ............................. 56,722 48,348
Deferred Taxes (Note 10) ........................ 15,114 6,142
------------ ------------
Total Current Liabilities .................... 3,507,489 1,414,343
LONG - TERM LIABILITIES:
Capital Lease Obligations
(net of current maturities) (Note 6) ......... 40,988 3,939
Deferred Taxes (Note 10) ........................ 32,366 7,683
------------ ------------
Total Long - Term Liabilities ................ 73,354 11,622
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 17)
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 2000 and 1999
25,609,263 and 13,479,833, respectively .. 25,609 13,480
Paid in Capital ................................. 52,159,531 7,180,900
Retained Earnings ............................... 1,874,828 1,699,937
------------ ------------
Total Shareholders' Equity ................... 54,059,968 8,894,317
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 57,640,811 $ 10,320,282
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
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EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES ........................................ $ 5,239,670 $ 2,217,275 $ 4,827,434
COST OF GOODS SOLD
Materials and Supplies ........................ 1,063,802 542,515 1,181,776
Direct Labor and Related Costs ................ 1,118,648 219,285 355,644
Depreciation and Amortization ................. 72,983 80,069 17,542
Other Manufacturing Costs ..................... 226,261 494,633 409,992
----------- ----------- -----------
Total Cost of Goods Sold ................... 2,481,694 1,336,502 1,964,954
----------- ----------- -----------
GROSS PROFIT ..................................... 2,757,976 880,773 2,862,480
----------- ----------- -----------
OPERATING EXPENSES
Selling, General and Administrative
Salaries and Related Costs ................ 1,424,074 58,880 736,734
Advertising and Promotion .................. 339,709 75,816 193,172
Depreciation and Amortization .............. 503,700 65,095 128,997
Research & Development ..................... 370,828 438,693 236,869
Other Support Costs ........................ 1,346,456 680,497 811,286
----------- ----------- -----------
Total Operating Expenses ................... 3,984,767 1,318,981 2,107,058
----------- ----------- -----------
EARNINGS/(LOSS) FROM OPERATIONS BEFORE OTHER
REVENUES/(EXPENSES), LOSS FROM MINORITY
INTEREST IN AFFILIATE, INCOME TAXES AND OTHER
COMPREHENSIVE INCOME ............................. (1,226,791) (438,208) 755,422
OTHER REVENUES/(EXPENSES)
Interest Income - net ......................... 1,506,436 799,098 427,144
Other Income .................................. 9,357 (10,081) (5,451)
----------- ----------- -----------
Total Other Revenues ....................... 1,515,793 789,017 421,693
----------- ----------- -----------
EARNINGS BEFORE MINORITY INTEREST IN
AFFILIATE, INCOME TAXES & OTHER
COMPREHENSIVE INCOME ............................. 289,002 350,809 1,177,115
Gain/(Loss) From Minority Interest in Affiliate (0) (91,678) (28,663)
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES ..................... 289,002 259,131 1,148,452
Provision For Income Taxes .................... 95,961 90,860 377,484
----------- ----------- -----------
NET EARNINGS ..................................... 193,041 168,271 770,968
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Unrealized Holding Loss ....................... (18,150) 0 0
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME ....................... $ 174,891 $ 168,271 $ 770,968
=========== =========== ===========
Net Earnings Per Common Share:
Primary (Note 1 & 18) ...................... $ 0.01 $ 0.01 $ 0.07
Fully Diluted (Note 1 & 18) ................ $ 0.01 $ 0.01 $ 0.05
Comprehensive Income (Note 1) .............. $ 0.01 $ 0.01 $ 0.07
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
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EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
SEPTEMBER 1, 1997 --------------------------- PREFERRED PAID IN RETAINED SHAREHOLDERS'
TO AUGUST 31, 2000 SHARES VALUE STOCK CAPITAL EARNINGS EQUITY
------------------------- ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Total Shareholders' Equity
As Of September 1, 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 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
Net Earnings 2000 .................... 0 0 0 0 193 041 193,041
New Stock Issued to Shareholders ..... 0
Issuance of Common Stock
For Acquisitions ............. 868,919 869 0 3,661,125 0 3,661,994
For Services and Compensation 981,392 981 0 1,641,990 0 1,642,971
For Warrant Conversion ....... 9,410,954 9,411 0 38,558,726 0 38,568,137
For Debt Conversion .......... 827,557 827 0 1,611,782 0 1,612,609
For Employee Stock Option Plan 40,608 41 0 158,037 0 158,078
Syndication Costs .................... 0 0 0 (653,029) 0 (653,029)
Unrealized Holding Loss .............. 0 0 0 0 (18,150) (18,150)
------------ ------------ ------------ ------------ ------------ -------------
Total Shareholders' Equity
As Of August 31, 2000 ................ 25,609,263 $ 25,609 $ 0 $ 52,159,531 $ 1,874,828 $ 54,059,968
============ ============ ============ ============ ============ =============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
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EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings ......................................... $ 193,041 $ 168,271 $ 770,968
Adjustments To Reconcile Net Earnings To Net Cash
Used By Operating Activities:
Depreciation and Amortization ..................... 576,683 145,164 146,539
Stock Issued for Services Rendered ................ 0 163,491 0
Unrealized Holding Loss on Marketable Securities .. (18,150) 0 0
(Increase)/ Decrease in Marketable Securities ..... (970,701) 0 0
(Increase)/ Decrease in Accounts Receivable ...... (87,471) (40,380) (2,496,797)
(Increase)/ Decrease in Other Receivables ......... (2,013,234) (1,495,703) 28,663
(Increase)/ Decrease in Inventories ............... (3,082,510) (1,082,580) (261,063)
(Increase)/ Decrease in Prepaid Expenses .......... (74,521) (173,061) (12,021)
Increase/(Decrease) in Accounts Payable ........... 539,707 (128,833) 19,613
Increase/(Decrease) in Accrued Expenses ........... (125,306) (11,560) 117,915
Increase/(Decrease) in Deferred Taxes ............. 33,655 2,755 (14,147)
Increase/(Decrease) in Deferred Revenues .......... (532,772) 476,268 56,504
Increase/(Decrease) in Sales Tax Payable .......... (10,067) 10,365 37,983
Increase/(Decrease) in Federal Income Taxes Payable 268,227 92,893 114,259
Increase/(Decrease) in Franchise Taxes Payable .... 4,053 (28,746) 21,854
------------ ------------ ------------
Total Adjustments ................................. (5,492,407) (2,069,927) (2,240,698)
------------ ------------ ------------
Net Cash Used By Operating Activities ................ (5,299,365) (1,901,656) (1,469,730)
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase)/Disposal of Property and Equipment ..... (1,358,298) (24,489) (377,247)
(Increase)/Decrease in Security Deposits .......... (14,302) (8,070) 4,065
(Increase)/Decrease in Deferred Advertising Costs . (384,463) 0 0
(Increase)/Decrease in Deferred Syndication Costs . (270,389) 0 0
(Increase)/Decrease in Other Intangible Assets .... (171,118) 0 0
(Increase)/Decrease in Other Assets ............... (25,000) 0 0
------------ ------------ ------------
Net Cash Used By Investing Activities ................ (2,223,570) (32,559) (373,182)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(Decrease) in Notes Payable (Short-Term) . 1,287,209 3,912 12,731
Increase/(Decrease) in Capital Leases ............. 51,341 (845) (15,094)
Increase/(Decrease) in Line of Credit ............. (7,170) 0 0
Increase/(Decrease) in Shareholders' Advances ..... 0 (24,519) (104,853)
Proceeds From Sale of Common Stock, Net ........... 38,349,880 1,046,387 152,812
------------ ------------ ------------
Net Cash Provided By Financing Activities ............ 39,681,260 1,024,935 45,596
Net Increase/(Decrease) in Cash ...................... 32,158,325 (909,280) (1,797,316)
CASH AT THE BEGINNING OF THE YEAR ....................... 187,965 1,097,245 2,894,561
------------ ------------ ------------
CASH AT THE END OF THE YEAR ............................. $ 32,346,290 $ 187,965 $ 1,097,245
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Net cash paid during the year for:
Interest ....................................... $ 94,381 $ 10,081 $ 5,451
Income Taxes ................................... 24,054 75,051 338,688
Supplemental Non-cash Investing Activities - See Note 4.
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
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 broadband and
telecommunications equipment with related software, broadband products,
and fiber and cable as 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 and
Broadband Magic.com, Inc. names. These products include transmitters,
receivers, controllers, software, convergent set-top boxes, fiber,
cable, and other equipment used in commercial and personal
communications systems and radio and telephone systems.
A) Consolidation
At August 31, 2000, the Company has three wholly owned subsidiaries:
AtlanticPacific Communications, Inc., eToolz, Inc., and Broadband
Magic.com, 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) Cash and Cash Equivalents
The Company has $26,319,359 and $29,059 invested in interest bearing
accounts at August 31, 2000 and 1999, respectively.
C) 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
-----
Manufacturing Equipment 7
Furniture and Fixtures 7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized.
F-6
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
D) 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,
-----------------------------
2000 1999
------------ ------------
Raw Materials $ 2,822,568 $ 1,215,003
Work in Process 2,933,210 1,119,672
Finished Goods - 0 - 21,186
------------ ------------
$ 5,755,778 $ 2,355,861
============ ============
E) Revenue Recognition
The Company reports income from long-term contracts by the
percentage-of-completion method of accounting. This method recognizes
income and costs with respect to individual contracts on the basis of
the proportionate value of work completed during the period. Estimated
losses are recognized in full as soon as they are identifiable.
Earnings are charged with a provision for doubtful accounts receivable
based on collection experience and current review of the collectability
of accounts. Accounts deemed uncollectable are charged against the
allowance for doubtful accounts. The majority of cabling contracts are
completed in less than one month.
F) Research and Development Costs
For the year ended August 31, 2000, the Company commenced research and
development activities for internal projects related to its convergent
set-top boxes as well as its multi-media entertainment centers.
Research and development costs of $370,828 were expensed for the year
ended August 31, 2000.
Prior to this fiscal year, the Company's research and development costs
included obligations to perform contractual services for outside
parties. These costs were expensed as contract revenues were earned.
Research and development costs of $438,693 were expensed for the year
ended August 31, 1999. Contract revenues earned for the year ended
August 31, 1999 were approximately $755,771. No research and
development services were performed for outside parties for the year
ended August 31, 2000.
G) 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-7
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
H) 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:
<TABLE>
<CAPTION>
AUGUST 31, 2000 AUGUST 31, 1999
---------------- ---------------
<S> <C> <C>
Weighted Average Number of Common
Shares Outstanding Including:
Primary Common Stock Equivalents 19,073,071 11,980,911
Fully Dilutive Common Stock Equivalents 22,379,254 12,049,911
</TABLE>
I) 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, 2000 and 1999, no impairment existed.
J) Intangible Assets
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at the dates of acquisition and is
being amortized using the straight-line method over twenty (20) years.
Other intangible assets consist of patents and the intrinsic value
trade-show costs. Patents and trade show costs are being amortized
using the straight-line method over ten (10) years and eighteen (18)
months, respectively.
F-8
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
K) Deferred Advertising Costs
Beginning in fiscal 2000, advertising costs have been capitalized and
amortized on the basis of contractual agreements entered into by the
Company. These contracts are amortized over the life of the individual
contracts. For the year ended August 31, 2000, the Company has expensed
$297,599 whereas $384,463 in costs have been deferred
Prior to fiscal 2000, the Company had no contractual arrangements,
therefore all advertising related costs were expensed as incurred. For
the year ended August 31, 1999, the Company had expensed $75,816.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that
are directly attributable to fundraising and the collection thereto.
Upon successful collection of the funds, all expenses incurred will be
reclassified to additional paid in capital and treated as syndication
costs; netted against the funds raised.
M) 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.
N) Marketable Securities
In May 1993, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", effective for fiscal years
beginning after December 15, 1993. This statements considers debt
securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that
the company does not have the positive intent and ability to hold to
maturity and all marketable equity securities are classified as
available-for-sale or trading securities and are carried at fair market
value. Unrealized holding gains and losses on securities classified as
trading are reported in earnings. Unrealized holding gains and losses
on securities classified as available-for-sale were previously carried
as a separate component of stockholders' equity. SFAS No. 115 as
amended by Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income".
Management determines the appropriate classification of marketable
equity and debt securities at the time of purchase and re-evaluates
such designation as of each balance sheet date.
F-9
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This
statement considers the presentation of unrealized holding gains and
losses attributable to debt and equity securities classified as
available-for-sale. As stated, any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income." For the fiscal year ended August
31, 1999, no other comprehensive income existed.
P) Reclassification
The Company has reclassified certain costs and expenses for the year
ended August 31, 1999 to facilitate comparison to the year ended August
31, 2000.
NOTE 2 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
AUGUST 31,
2000 1999
----------- -----------
Accounts Receivable $ 1,335,888 $ 286,269
Allowance for Doubtful Accounts 88,775 - 0 -
----------- -----------
Net Accounts Receivable $ 1,247,113 $ 286,269
=========== ===========
NOTE 3 - PROPERTY, PLANT & EQUIPMENT:
Components of property, plant & equipment are as follows:
AUGUST 31,
2000 1999
----------- -----------
Automobile $ 58,094 $ - 0 -
Furniture & Fixtures 140,090 32,900
Leasehold Improvements 24,282 9,282
Manufacturing Equipment 1,383,903 482,359
Office Equipment 721,289 78,332
Property & Equipment 375,290 319,331
----------- -----------
Total Property, Plant & Equipment 2,702,948 922,204
Less: Accumulated Depreciation (1,023,153) (333,474)
----------- -----------
Net Property, Plant & Equipment $ 1,679,795 $ 588,730
=========== ===========
F-10
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 4 - BUSINESS COMBINATIONS:
On January 1, 2000, the Company acquired AtlanticPacific
Communications, Inc. (AtlanticPacific) in a business combination
accounted for as a purchase. AtlanticPacific is primarily engaged in
the nationwide sales and installation of fiber and cable to commercial
enterprises. The results of operations for AtlanticPacific are included
in the accompanying financial statements since the date of acquisition.
To culminate this transaction, the Company issued 518,919 shares of its
common stock and paid no cash to AtlanticPacific. However, the Company
assumed debt of $1,304,080 and immediately paid off $830,000. The total
cost of the acquisition was $3,131,850, which exceeded the fair value
of the net assets of AtlanticPacific by $3,662,890. The excess is being
amortized using the straight-line method over twenty (20) years.
On January 1, 2000, the Company acquired Comtel Communications, Inc.
(Comtel) in a business combination accounted for as a purchase. Comtel
is primarily engaged in the sales and installation of fiber and cable
to commercial enterprises in Texas and Louisiana. The results of
operations for Comtel are included in the accompanying financial
statements since the date of acquisition. The Company issued 300,000
shares of its common stock to Comtel. in culminating this transaction.
The total cost of the acquisition was $2,269,856, which exceeded the
fair value of the net assets of Comtel by $1,878,528. The excess is
being amortized as goodwill using the straight-line method over twenty
(20) years.
On March 17, 2000, the Company acquired eToolz, Inc. (ETI) in a
business transaction accounted for as a purchase. ETI specializes in
the development of leading edge, innovative, commercial, industrial and
military technologies. The results of operations for ETI are included
in the accompanying financial statements since the date of acquisition.
The Company issued 50,000 shares of its common stock to ETI in
culminating the transaction. The total cost of the transaction was
$437,500, which exceeded the fair market of the net assets of ETI by
$424,019. The excess is being amortized as goodwill using the
straight-line method over twenty (20) years.
Additionally, on September 18, 2000, the Company entered into a merger
agreement with ClearWorks.net, Inc. (ClearWorks), a voice, data and
video integration firm head-quartered in Houston, Texas. The Company
will acquire 100% of ClearWorks in a transaction anticipated to be
accounted for as a purchase. The Company will issue 0.8 shares of its
common stock for each share of ClearWorks. Further, the Company will
assume all outstanding ClearWorks stock options and warrants based upon
the same 0.8 exchange ratio.
The Company has filed a registration statements Form S-4 with the
Securities and Exchange Commission (SEC) through which it will seek
shareholder approval for the transaction and register the issuance of
its common stock in connection therewith.
F-11
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 4 - BUSINESS COMBINATIONS: (continued)
A) Pro Forma Results
The following summarized pro forma (unaudited) information assumes the
transactions related to AtlanticPacific, Comtel, ETI and
Clearworks.net, Inc. had occurred on September 1, 1999.
Due to failure of meeting the significance test, AtlanticPacific,
Comtel and ETI are not required to be included in the following
summarization:
2000 PRO FORMA INFORMATION
(In Thousands)
<TABLE>
<CAPTION>
EAGLE
WIRELESS PRO FORMA COMBINED
INTERNATIONAL CLEARWORKS.NET ADJ. TOTALS
------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Cash $ 33,317 $ 60 $ - 0 - $ 33,377
Working Capital (Deficit) 45,870 2,252 - 0 - 48,122
Total Assets 154,565 61,072 (49,925) 165,712
Long Term Debt 73 1,972 - 0 - 2,045
Stockholder's Equity (Deficit) $ 150,984 $ 49,925 $ (49,925) $ 150,984
Total Revenues $ 5,240 $ 21,447 $ - 0 - $ 26,687
Cost of Revenues 2,482 20,293 - 0 - 22,775
--------- --------- --------- ---------
Gross Profit 2,758 1,154 - 0 - 3,912
--------- --------- ---------
Operating Expenses 3,985 22,207 - 0 - 26,192
--------- --------- --------- ---------
Other Income - net 1,516 (6,304) - 0 - (4,778)
--------- --------- --------- ---------
Income From
Continuing Operations $ 289 $ (27,357) $ - 0 - $ (27,068)
========= ========= ========= =========
Earnings Per Share
Basic $ 0.01 $ (0.71)
========= =========
Diluted $ 0.01 $ (0.65)
========= =========
</TABLE>
This pro-forma includes the acquisition by Clearworks.net, Inc. of Link
Two Communications, Inc. and LD Connect, Inc. The results of operations
for these companies are included in the balances of Clearworks.net,
Inc. The elimination entries reflect the adjustment of intangible
assets arising from the acquisition of Clearworks.net, Inc. by the
Company and to eliminate the Company's investment in Clearworks.net,
Inc. All items of amortization arising from this acquisition are
included in the pro-forma results above.
B) Significant Acquisitions
As stated in the aforementioned, the Company consummated three
acquisitions and entered into one merger agreement during the year
ended August 31, 2000. None of the three acquisitions meets the
significance test individually or cumulative when compared to the
Company for the year ended August 31, 2000. The anticipated merger with
ClearWorks is considered to represent a significant acquisition when
compared to the Company for the year ended August 31, 2000 and has
accordingly been included in the above pro forma information for that
same period.
F-12
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 5 - NOTES PAYABLE:
AUGUST 31,
---------------------
2000 1999
------- -------
Unsecured note to Imperial Premium
Finance bearing interest at 14.9%,
due $1,690 monthly until February 2001 $ 5,070 $ 5,386
Unsecured note to Central Insurance
bearing no interest, due $886 monthly
until March 2001 4,428 5,220
Unsecured note to Kemper Insurance
bearing no interest, due $694 monthly
until March 2001 2,082 1,124
Unsecured note to West Coast Life
Insurance bearing no interest, due
$2,457 quarterly until May 2001 4,913 4,913
Unsecured note to All American Insurance
bearing interest at 9.6%, due $317 monthly
until June 2001 635 - 0 -
Note payable to Wells Fargo Bank
bearing interest at 10.5%, due
$2,849 monthly until January, 2001 14,517 - 0 -
Note payable to Compass Bank
bearing interest at 9.5%, due $1,150
monthly until April 2001 $ 9,962 $ - 0 -
------- -------
Total 41,607 16,643
Less Current Portion of
Long - Term Debt 41,607 16,643
------- -------
Total Long - Term Debt $ - 0 - $ - 0 -
======= =======
NOTE 6 - CAPITAL LEASE OBLIGATIONS:
AUGUST 31,
---------------------
2000 1999
------- -------
Equipment lease with Konica bearing
interest at 8.9%, payable in monthly
installments of $445; due Aug. 2001 $5,486 $9,720
F-13
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 6 - CAPITAL LEASE OBLIGATIONS: (continued)
AUGUST 31,
--------------------
2000 1999
------- ------
Equipment lease with Agilent Technologies
bearing no interest, payable in monthly
installments of $1,076; due April 2003 $34,440 $- 0 -
Equipment lease with IKON Office
Solutions bearing interest at 18%
payable in monthly installments of
$105; due March 2000 - 0 - 695
Software lease with Manifest Group
bearing interest at 14%, payable in
monthly installments of $751; due
August 2000 - 0 - 8,487
Equipment lease with Mellon Leasing
bearing interest at 11.19%, payable in
monthly installments of $2,149; due May 2002 40,816 - 0 -
Auto lease with GE Capital bearing interest
at 11.5%, payable in monthly installments
of $465; due June 2002 9,193 - 0 -
Equipment lease with Fleet Leasing Corp
payable in monthly installments of $133;
due February 2002 1,933 - 0 -
Equipment lease with Fleet Leasing Corp
payable in monthly installments of $137;
due February 2002 1,980 - 0 -
Equipment lease with Fleet Leasing Corp
payable in monthly installments of $269;
due May 2001 2,172 - 0 -
Equipment lease with Master Lease bearing
interest at 6.1%, payable in monthly
installments of $249; due May 2001 $ 3,963 $- 0 -
------- ------
F-14
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 6 - CAPITAL LEASE OBLIGATIONS: (continued)
AUGUST 31,
---------------------
2000 1999
------- -------
Total Obligations $99,983 $18,902
Less Current Portion of
Lease Obligations 58,995 15,047
------- -------
Total Long - Term Capital
Lease Obligations $40,988 $ 3,855
======= =======
The capitalized lease obligations are collateralized by the related
equipment acquired with a net book value of approximately $ 116,494 and
$ 29,600 at August 31, 2000 and 1999, respectively. The future minimum
lease payments under the capital leases and the net present value of
the future lease payments at August 31, 2000 and 1999 are as follows:
AUG. 31, 2000 AUG. 31, 1999
------------- -------------
Total minimum lease payments $111,406 $ 20,405
Less: Amount representing interest 11,423 1,503
-------- --------
Present value of net minimum
lease payments $ 99,983 $ 18,902
======== ========
Future obligations under the lease terms are as follows:
AUGUST 31, AMOUNT
--------- -------
2001 $58,995
2002 32,372
2003 8,616
-------
Total $99,983
=======
NOTE 7 - LINE OF CREDIT:
The Company maintains a $250,000 line of credit with Wells Fargo Bank
bearing a variable rate of interest. At August 31, 2000 and 1999,
balances of $225,140 and $0 existed, respectively. Interest is due
monthly whereas principal is payable upon demand. Subsequent to August
31, 2000, this amount was repaid (see Note 23).
The Company also has a $50,000 line of credit with Compass Bank bearing
a variable rate of interest. At August 31, 2000 and 1999, balances of
$40,690 and $0 existed, respectively. Interest is due monthly whereas
principal is payable upon demand. Subsequent to August 31, 2000, this
amount was repaid (see Note 23).
F-15
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 8 - CONVERTIBLE DEBENTURES:
The Company entered into a convertible debenture arrangement with
Global Capital Advisors, LTD (GCA) 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 which was repaid in fiscal 2000.
In conjunction with the $1,500,000 borrowed, the Company issued
warrants to purchase 100,000 shares of common stock at $1.54 per share
to GCA which warrants were exercised during fiscal 2000. In addition to
the note being converted into common stock, GCA exercised the 100,000
warrants during the fiscal year ended August 31, 2000. Although
additional funds are available, management does not intend to draw
further funds from this agreement.
NOTE 9 - MARKETABLE SECURITIES:
As discussed in Note 1, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
and SFAS No. 130, "Accounting for Other Comprehensive Income." At
August 31, 2000, all of the Company's marketable equity securities are
classified as available-for-sale; they were acquired with the intent to
dispose of them within the next year. For the year ended August 31,
1999, no marketable securities were held.
At August 31, 2000, the securities had an original basis of $998,201;
determined by multiplying the number of shares being acquired by the
fair market value of those shares. At the August 31, 2000 balance sheet
date, the fair market value of these securities was $970,701;
determined by multiplying the number of shares held by the fair market
value of those shares at the balance sheet date. The difference between
the cost and fair market value represents an unrealized holding loss
and is included below current earnings in "Other Comprehensive Income".
This unrealized holding loss of $27,500 is reported on the balance
sheet netted against marketable securities. The statement of operations
however, carries this loss net of $9,350 tax.
NOTE 10 - 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-16
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 10 - INCOME TAXES: (continued)
A) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
AUGUST 31,
----------------
2000 1999
----- -----
% %
U.S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference (1) 1
----- -----
Effective U.S. Tax Rate 33 35
Foreign Tax Valuation - 0 - - 0 -
----- -----
Effective Tax Rate 33 35
===== =====
B) Items giving rise to deferred tax assets / liabilities are as follows:
August 31,
-------------------
2000 1999
------- -------
Deferred Tax Assets:
Tax Loss Carry-forward $ - 0 - $ - 0 -
------- -------
Deferred Tax Liability:
Depreciation 47,480 11,070
------- -------
Valuation Allowance - 0 - - 0 -
------- -------
Net Deferred Tax Asset/Liability $47,480 $11,070
======= =======
NOTE 11 - ISSUANCE OF COMMON STOCK:
During the fiscal year ended August 31, 2000, the Company issued
12,129,430 shares of common stock. The following table summarizes the
shares of common stock issued.
Shares Outstanding August 31, 1999 13,479,833
----------
Shares issued for acquisitions 898,919
Shares issued for services and compensation 951,392
Shares issued for warrant conversion 9,410,954
Shares issued for conversion of debt 827,557
Shares issued for Employee Stock Option Plan 40,608
----------
Shares Outstanding August 31, 2000 25,609,263
The Company issued 868,919 shares of its common stock for the
acquisitions of AtlanticPacific Communications, Inc., Comtel
Communications, Inc. and eToolz, Inc.
F-17
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 11 - ISSUANCE OF COMMON STOCK: (continued)
The Company issued 981,392 shares of common stock for compensation and
services performed on the Company's behalf.
The Company issued 9,410,954 shares of common stock associated with the
conversion of various outstanding warrants.
The Company issued 827,557 shares of common stock for conversion of
various debt to GCA DWACS and C. Brazier.
The Company issued 40,608 shares of common stock to the members of its
Employee Stock Option Plan.
NOTE 12 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
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, 2000,
242,607 options have been granted pursuant to such plan with 42,999
being exercised and 10,250 being cancelled.
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:
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 had been
exercised whereas 12,500 warrants expired.
F-18
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 12 - PREFERRED STOCK, STOCK OPTIONS, AND WARRANTS: (continued)
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.
100,000 stock purchase warrants issued to Global Capital
Advisors, LTD expiring October 7, 2002. The warrants are to
purchase fully paid and non-assessable shares of common stock,
par value $.001 per share, at a purchase price of $1.54 per
share. The shares of common stock underlying these warrants
were registered for resale on January 10, 2000, under the
Securities Act of 1933. Prior to expiration, all 100,000
warrants were exercised resulting in cash proceeds of
$154,000.
43,641 stock purchase warrants issued to Midori Capital Corp.
expiring October 7, 2002. The warrants are to purchase fully
paid and non-assessable shares of common stock, par value
$.001 per share, at a purchase price of $1.75 per share. The
shares of common stock underlying these warrants were
registered for resale on January 10, 2000, under the
Securities Act of 1933. Prior to expiration, all 43,641
warrants were exercised resulting in cash proceeds of $76,372.
50,000 stock purchase warrants that 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. Prior to expiration, no warrants
had been exercised whereas 50,000 warrants expired.
1,050,000 Class C stock purchase warrants that 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. Prior
to expiration, all 1,050,000 warrants were exercised resulting
in cash proceeds of $2,100,000.
F-19
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 12 - PREFERRED STOCK, STOCK OPTIONS, AND WARRANTS: (continued)
100,000 stock purchase warrants issued to National Financial
Communications Corp. expiring July 1, 2003. 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 $1.92
per share. The shares of common stock underlying these
warrants were registered for resale on August 3, 2000, under
the Securities Act of 1933. Prior to expiration, all 100,000
warrants were exercised resulting in cash proceeds of
$192,000.
The Company had issued the following warrants to Mega Holding Corp for
services rendered. During 2000, upon mutual agreement, these warrants
were cancelled in exchange for 450,000 shares of the Company's common
stock.
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. These warrants were cancelled during
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. These warrants were cancelled during
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 $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. These warrants were cancelled during
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. These warrants were
cancelled during 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 $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. These warrants were
cancelled during 2000.
F-20
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 12 - 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 $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. These warrants were
cancelled during 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 $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. These warrants were
cancelled during 2000.
The Company has issued and outstanding the following warrants which
have not yet been exercised at August 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
August 31, 2000, 4,716,833 warrants were exercised resulting
in cash proceeds of $18,867,332. Management decided to extend
the expiration date by two weeks to allow further exercise. As
a result, subsequent to August 31, 2000, 40,000 warrants were
exercised resulting in cash proceeds of $160,000 with 276,501
warrants expiring.
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". As of August 31, 2000, 2,842,576 warrants were
exercised resulting in cash proceeds of $17,055,456.
Management decided to extend the expiration date by two weeks
to allow further exercise. As a result, subsequent to August
31, 2000, 557,830 warrants were exercised resulting in cash
proceeds of $3,346,980 with 1,632,928 warrants expiring.
600,000 stock purchase warrants issued to Paladin Associates
expiring September 1, 2001. 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.
166,667 warrants are not exercisable until and unless the
shares of Common Stock trade at a minimum of $4.00 per share
for twenty-one consecutive trading days. 166,667 warrants are
not exercisable until and unless the shares of Common Stock
trade at a minimum of $6.00 per share for twenty-one
consecutive trading days.
F-21
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 12 - PREFERRED STOCK, STOCK OPTIONS, AND WARRANTS: (continued)
166,666 warrants are not exercisable until and unless the
shares of Common Stock trade at a minimum of $8.00 per share
for twenty-one consecutive trading days. The shares of common
stock underlying 350,000 warrants were registered for resale
on August 3, 2000, under the Securities Act of 1933. 100,000
incentive warrants will be made available and will vest at the
end of October 2000 if the first objective of $4.00 is
achieved before the end of October. As of August 31, 2000,
250,000 of the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933.
50,000 stock purchase warrants issued to Weed & Co. L.P.
expiring December 10, 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 $1.55 per share. The
shares of common stock underlying the se warrants were
registered for resale on August 3, 2000, under the Securities
Act of 1933. As of August 31, 2000, 25,000 warrants have been
exercised resulting in cash proceeds of $38,750.
20,000 stock purchase warrants issued to Kason, Inc. expiring
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. The shares of
common stock underlying these warrants were registered for
resale on August 31, 2000, under the Securities Act of 1933.
As of August 31, 2000, 6,234 warrants have been exercised
resulting cash proceeds of $10,910.
50,000 stock purchase warrants issued to Weed & Co. L.P.
expiring June 10, 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 $3.00 per share. The
shares of common stock underlying these warrants were
registered for resale on August 3, 2000, under the Securities
Act of 1933. As of August 31, 2000, none of these warrants
have been exercised.
100,000 stock purchase warrants issued to National Financial
Communications Corp. expiring June 2003. 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. As of August 31, 2000, the underlying shares of
common stock have not yet been registered for resale under the
Securities Act of 1933.
250,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. 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 $7.49 per share.
As of August 31, 2000, the underlying shares of common stock
have not yet been registered for resale under the Securities
Act of 1933.
25,000 stock purchase warrants issued to Synchton, Inc.
expiring July 1, 2003. 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 $7.50 per share. The shares
of common stock underlying these warrants were registered for
resale on August 3, 2000, under the Securities Act of 1933. As
of August 31, 2000, none of these warrants have been
exercised.
50,000 stock purchase warrants issued to Weed & Co. L.P.
expiring June 10, 2003. 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 $9.68 per share. The
shares of common stock underlying these warrants were
registered for resale on August 3, 2000, under the Securities
Act of 1933. As of August 31, 2000, none of these warrants
have been exercised.
F-22
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 12 - PREFERRED STOCK, STOCK OPTIONS, AND WARRANTS: (continued)
25,000 stock purchase warrants issued to Synchton, Inc.
expiring April 1, 2003. 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 $10.00 per share. The
shares of common stock underlying these warrants were
registered for resale on August 3, 2000, under the Securities
Act of 1933. As of August 31, 2000, none of these warrants
have been exercised.
250,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. 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 $10.00 per share.
These warrants, however are not exercisable until and unless
the closing price of Common Stock at any time during the
exercise period reaches $10.00 per share. As of August 31,
2000, the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933.
250,000 stock purchase warrants issued to Hampton-Porter
Investment Bankers LLC expiring June 27, 2003. 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
$12.00 per share. The shares of common stock underlying these
warrants were registered for resale on August 3, 2000, under
the Securities Act of 1933. As of August 31, 2000, none of
these warrants have been exercised.
350,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. 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 $14.00 per share.
These warrants, however, are not exercisable until and unless
the closing price of the Common Stock at any time during the
exercise period reaches $14.00 per share. As of August 31,
2000, the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933.
250,000 stock purchase warrants issued to Hampton-Porter
Investment Bankers LLC expiring June 27, 2003. 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
$18.00 per share. The shares of common stock underlying these
warrants were registered for resale on August 3, 2000, under
the Securities Act of 1933. As of August 31, 2000, none of
these warrants have been exercised.
150,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. 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 $25.00 per share.
These warrants, however, are not exercisable until and unless
the closing price of the Common Stock at any time during the
exercise period reaches $25.00 per share. As of August 31,
2000, the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933.
F-23
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 12 - PREFERRED STOCK, STOCK OPTIONS, AND WARRANTS: (continued)
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 OF AUGUST 31, AUGUST 31, WARRANTS AUGUST 31,
WARRANTS 2000 1999 2000 1999 NON-EXERCISABLE NON-REGISTERED 2000 1999
-------- -------------------------- ------------------------- ------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.01 Exercised Exercised -- -- -- -- -- --
0.05 Exercised Exercised -- -- -- -- -- 12,500
0.50 Exercised Exercised -- -- -- -- -- 50,000
5.00 Expired Expired -- -- -- -- -- 425,000
4.00 316,501 5,033,334 * 316,501 5,033,334 -- -- -- --
6.00 2,190,758 5,033,334 * 2,190,758 5,033,334 -- -- -- --
2.00 Exercised 1,050,000 * -- 1,050,000 -- -- -- --
1.50 Cancelled 150,000 * -- 150,000 -- -- -- --
2.00 Cancelled 150,000 * -- 150,000 -- -- -- --
3.00 Cancelled 200,000 * -- 200,000 -- -- -- --
5.00 Cancelled 200,000 -- -- -- 200,000 -- --
7.00 Cancelled 200,000 -- -- -- 200,000 -- --
9.00 Cancelled 200,000 -- -- -- 200,000 -- --
11.00 Cancelled 200,000 -- -- -- 200,000 -- --
1.50 600,000 -- -- -- 350,000 250,000 -- --
1.54 100,000 -- -- -- -- -- -- --
1.55 50,000 -- 25,000 -- -- -- -- --
1.75 43,641 -- -- -- -- -- -- --
1.75 20,000 -- 13,766 -- -- -- -- --
1.92 100,000 -- -- -- -- -- -- --
3.00 50,000 -- 50,000 -- -- -- -- --
7.00 100,000 -- -- -- -- 100,000 -- --
7.49 250,000 -- -- -- -- 250,000 -- --
7.50 25,000 * -- 25,000 -- -- -- -- --
9.68 50,000 * -- 50,000 -- -- -- -- --
10.00 25,000 * -- 25,000 -- -- -- -- --
10.00 250,000 -- -- -- -- 250,000 -- --
12.00 250,000 * -- 250,000 -- -- -- -- --
14.00 350,000 -- -- -- -- 350,000 -- --
18.00 250,000 * -- 250,000 -- -- -- -- --
25.00 150,000 -- -- -- -- 150,000 -- --
2.00 Expired 50,000 * -- 50,000 -- -- 50,000 --
ESOP 40,200 * 27,375 * -- 13,625 40,200 -- -- 10,250
ESOP 202,407 119,000 110,158 69,000 10,000 -- 10,250 --
--------------------------- ------------------------- ------------------------- -------------------------
5,413,507 12,613,043 3,306,183 11,749,293 400,200 2,150,000 60,250 497,750
=========================== ========================= ========================= =========================
</TABLE>
An asterisk (*) denotes warrants which would have an anti-dilutive
effect if currently used to calculate earnings per share for the years
ended August 31, 2000 and 1999, respectively.
NOTE 13 - CAPITALIZATION ACTIVITIES:
On July 10, 2000, AtlanticPacific Communications, Inc. (a wholly-owned
subsidiary) initiated a stock offering in accordance with the
Securities and Exchange Commission under the Securities act of 1933.
AtlanticPacific is offering units at $25,000 per unit. Each unit
consists of 10,000 shares of common stock and 10,000 Class A warrants
to purchase AtlanticPacific common stock at a price of $6.00 per share
with one warrant being issued as a unit with each common share sold.
AtlanticPacific will sell up to 4,000,000 shares of common stock and up
to 4,000,000 Class A warrants; 400 units. As of August 31, 2000, no
units had been sold. Subsequent to August 31, 2000, 13.25 units have
been sold totaling 132,500 shares and resulting in proceeds of
$331,250.
F-24
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 14 - 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 the Company had earned a 5.0% 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, the Company has
recorded its share of losses in this unconsolidated affiliate. The loss
as a minority shareholder totaled $91,678. The Company has reclassified
its balances due from Link II as other receivables.
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.
In October 1999, Link II refinanced its existing accounts payable to
Eagle Wireless International through the issuance of a promissory note
that amounted to $8,655,126 at August 31, 2000. Subsequent to August
31, 2000, Clearworks.net, Inc. acquired control of Link II and in
conjunction therewith issued to the Company 2,856,000 shares of
Clearworks.net, Inc. common stock in satisfaction of the Link II
indebtedness.
NOTE 15 - RISK FACTORS:
For the years ended August 31, 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 forty-six percent of the Company's revenues and
receivables have been created solely in the state of Texas, five
percent have been created in the international market, and the
approximate forty-nine percent remainder have been created relatively
evenly over the rest of the nation during the year ended August 31,
2000 whereas 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 for the year
ended August 31, 1999.
Through the normal course of business, the Company generally does not
require its customers to post any collateral.
Although the Company concentrated its efforts in the wireless
infrastructure industry for the year ended August 31, 1999 and has
since expanded into the fiber, cable and broadband markets for the year
ended August 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.
F-25
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 16 - FOREIGN OPERATIONS:
Although the Company is based in the United States, its product is sold
on the international market. Presently, international sales total
approximately 4.8% and 0.5 % at August 31, 2000 and 1999, respectively.
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Company leases its primary office space in League City, Texas 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)
For the periods ending August 31, 2000 and 1999, rental expenses of
approximately $120,000 and $120,906, respectively, were incurred.
The Company also leases office space in Oxnard, California with Tiger
Ventura County, L.P. This three-year non-cancelable lease commenced
August 1, 2000 and expires July 31, 2003. Under the terms of the lease,
monthly payments will be $2,130 for the first twelve months whereat the
monthly payments will increase by 3.5% at the beginning of both the
second and third years. For the periods ended August 31, 2000 and 1999,
rental expense of $2,130 and $0, respectively were incurred.
The Company's wholly owned subsidiary, AtlanticPacific, leases office
space in Houston, Texas with Houston Industrial Partners, Ltd. This
non-cancelable lease expires October 2001. The monthly payments through
October 2000 are $1,420 whereat they will increase to $1,498 for the
remaining twelve months. Additionally, AtlanticPacific is responsible
for monthly CAM fees of approximately $450. For the periods ended
August 31, 2000 and 1999, rental expense of $22,240 and $0,
respectively were incurred.
AtlanticPacific also leases office space in Chicago, Illinois with
Lasalle Bank National Association. This twenty-nine month lease
commenced on October 1, 2000 and expires February 28, 2003. Under the
terms of the lease, monthly payments will be $2,220 for the first
twelve months whereat they will increase by 3.2% at the thirteenth and
twenty-fifth months.
AtlanticPacific also leases office space in Houston, Texas with WL and
Deborah Miller in the amount of $4,500 per month. This non-cancelable
lease expiring September 2002 maintains a five-year renewal option.
Rental expense for the period ended August 31, 2000 of $54,000 was
incurred.
F-26
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES: (continued)
Future obligations under the non-cancelable lease terms are:
PERIOD ENDING
AUGUST 31, AMOUNT
------------- --------
2001 $197,275
2002 111,854
2003 $ 43,358
========
On July 13, 2000, the Company entered into an agreement with Sands
Brothers & Co., LTD. (Sands) whereby Sands will perform financial
advisory services and assist the Company with mergers and acquisitions,
corporate finances and other related matters for a period of two years.
As compensation for these services, the Company will immediately pay
Sands $50,000 and issue them 10,000 shares of the Company's common
stock. As an additional inducement, the Company has issued Sands
1,000,000 stock purchase warrants to be exercisable for a three year
period expiring July 13, 2003. These warrants shall vest and be
exercisable as follows: 25% of such warrants shall vest upon execution
of this agreement and shall have an exercise price per share of $7.49;
an additional 25% shall vest when and if the closing price of the
common stock at any time during the exercise period reaches $10.00 per
share and shall be exercisable at $10.00 per share; an additional 35%
shall vest when and if the closing price of the common stock at any
time during the exercise period reaches $14.00 per share and shall be
exercisable at $14.00 per share; an additional 15% shall vest at any
time during the exercise period when the closing price of the common
stock at any time reaches $25.00 per share and shall be exercisable at
$25.00 per share. Additionally, Sands shall receive further
compensation for other activities such as fund raising based upon a
percent of all monies raised.
On May 25, 2000, the Company entered into an agreement with
Hampton-Porter Investment Bankers LLC.(Hampton) whereby Hampton will
provide a variety of professional services. As compensation for this
agreement, the Company will issue 100,000 restricted shares of the
Company's common stock and 500,000 stock purchase warrants of which
250,000 are exercisable at $12.00 per share and 250,000 are exercisable
at $18.00 per share. Additionally, these warrants expire three years
from the signing of this contract. Hampton shall receive further
compensation for other activities such as fund raising based upon an
escalating percentage of all monies raised. This agreement is
terminable by either party upon giving five days written notice to the
other party.
On April 1, 2000, the Company entered a one-year agreement with
Synchton, Inc. whereby Synchton, Inc. will provide professional
business services. As compensation for these services, the Company will
pay $10,000 per month as well as issue 100,000 stock purchase warrants.
These warrants shall be issued in 25,000 increments on the first day of
each quarter of the agreement with an exercise price equal to the
closing price of the Company's common stock of the prior day to
issuance. Additionally, these warrants are not exercisable until six
months after issuance and expire three years after said issuance.
Although this agreement shall automatically renew on an annual basis,
it is terminable by the Company prior to the annual renewal by
providing Synchton, Inc. with ninety days advance written notice.
F-27
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES: (continued)
On February 7, 2000, the Company entered into an agreement with
StockNorth Associates (SNA) whereby SNA will assist the Company with
various aspects of investor relations. As compensation for these
services, the Company will pay $3,500 per month and issue 5,000 shares
of the Company's restricted common stock quarterly. These shares are to
be issued the first day of each quarter and are dependent upon the
ability of SNA to introduce a minimum of four broker-dealers to the
Company each month. This agreement is a semi-annual agreement for the
term of one year and shall terminate automatically on February 7, 2001.
Either party may, however, terminate the balance of the agreement at
any time provided written notice is given to the other party of the
agreement.
On January 26, 2000, the Company entered into an agreement with Kason,
Inc. (Kason), a public relations firm, whereby Kason will assist the
Company in developing relationships with internet e-commerce companies
and electronics retail outlets in the United States and
Internationally. As compensation for these services, the Company will
pay $5,000 monthly in addition to 100,000 shares of common stock. Of
this stock to be issued, 50,000 shares will be issued immediately in
the form of 144 stock with the balance of 50,000 to be held in escrow
and be released in twelve equal monthly installments of 4,166.
On November 10, 1999, the Company entered into a one-year agreement
with The Compass Point Group, Inc. (Compass) whereby Compass will
assist the Company with various aspects of investor relations. As
compensation for these services, the Company will pay $5,000 per month
commencing December 15, 1999. Additionally, the Company will pay $7,000
and issue 40,000 shares of restricted common stock to Compass due in
each of the third, sixth and ninth months of the contract. Although due
to expire on November 9, 2000, this agreement is terminable by either
party at any time after the seventy-fifth day following the mutual
execution of the agreement by the parties provided written notice is
given to the other party at least fifteen days prior to the expiration
of the current quarter of the agreement.
On September 1, 1999, the Company entered into an agreement with
Paladin Associates (Paladin) whereby Paladin will assist the Company
with general financial related services. These services shall include,
but not be limited to, assistance in writing news releases, stockholder
communications, communications with retail brokers and brokerage firms,
consulting to large shareholders and general image and public relations
issues. As compensation for the services to be rendered under this
twelve-month contract, the Company will pay $3,500 and issue 2,000 free
trading shares of the Company's common stock per month. This agreement
also contains incentive based bonuses tied to the consecutive
twenty-one day average closing bid price of the Company's common stock.
This incentive will consist of 500,000 two-year options for the
purchase of the Company's common stock at $1.50. These options will be
vested in three equal portions based upon the Company's performance in
the stock market. One-third will vest when the closing bid price
reaches $4.00 and remains above this level for a minimum of twenty-one
consecutive trading days. The second one-third will vest when the
closing bid price reaches $6.00 and remains above this level for a
minimum of twenty-one consecutive trading days. The remaining one-third
shall vest when the closing bid price reaches $8.00 and remains above
this
F-28
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES: (continued)
level for a minimum of twenty-one consecutive trading days. This
agreement is cancelable by either party without cause given ten days
written notice.
The Company has entered into an employment contract with Mr. Anthony
Cordaro, the president of AtlanticPacific, terminating on December 31,
2002. The agreement provides that Mr. Cordaro will be compensated with
a gross annual salary of $98,800. Additionally, Mr. Cordaro maintains
the right to participate in all employee benefit plans as established
by the Board of Directors of the Company.
In connection with the anticipated merger between the Company and
ClearWorks.net, Inc., the Company has been added as defendant to the
lawsuit invoked by Sherman, Gerald Mason d/b/a Castle Developments,
Ltd. (Castle) against ClearWorks.net, Inc. The suit alleges that
ClearWorks.net, Inc. breached a contract whereby it failed to pay
certain consulting fees. Castle is seeking from the Company a temporary
injunction preventing the merger between the Company and
ClearWorks.net, Inc. The Company intends to vigorously defend this
matter.
NOTE 18 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST, 2000
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
<S> <C> <C> <C>
Net Income $ 193,041
Basic EPS:
Income available to common stockholders 193,041 19,073,071 $ 0.01
=========
Effect of Dilutive Securities:
Warrants - 0 - 3,306,183
---------- ----------
Diluted EPS:
Income available to common stockholders
and assumed conversions $ 193,041 22,379,354 $ 0.01
========== ========== =========
</TABLE>
F-29
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 18 - EARNINGS PER SHARE: (continued)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST, 1999
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
For the years ended August 31, 2000 and 1999, anti-dilutive securities
existed. (see Note 12)
For the period September 1, 2000 to November 28, 2000, there were no
transactions that would have materially changed the number of common
shares or potential common shares outstanding.
NOTE 19 - 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, 2000 and 1999, 242,607 and 146,375 warrants have been issued to
various employees. Of these outstanding warrants, 42,999 and 29,000
were exercised for the years ended August 31, 2000 and 1999,
respectively. Additionally, 10,250 warrants have expired as of August
31, 2000.
Subsequent to August 31, 2000, the Board of Directors approved a stock
repurchase program for up to 500,000 shares of the Company's common
stock whereby these shares may be used for issuance under this plan.
(see Note 23)
NOTE 20 - 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, 2000
and 1999 and 1998, employee contributions were approximately $293,000
and $103,000, respectively. The Company matched approximately $75,300
and $33,500, respectively for those same periods.
Subsequent to August 31, 2000, the Board of Directors approved a stock
repurchase program for up to 500,000 shares of the Company's common
stock whereby these shares may be used for issuance under this plan.
(see Note 23)
F-30
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 21 - MAJOR CUSTOMER:
As of August 31, 2000, the Company had a receivable due from Link - Two
Communications (Link II) in the amount of $8,655,126. Subsequent to
August 31, 2000, this receivable has been repaid through the issuance
of 2,856,000 shares of ClearWorks.net, Inc. common stock. (see Note 23)
Subsequent to August 31, 2000, Link II has had approximately sixty
percent of its stock purchased by ClearWorks.net, Inc. to become a
majority owned subsidiary of that company.
The Company had gross revenues of $5,239,670 and $2,359,184 for the
years ended August 31, 2000 and 1999, respectively. The following
parties individually represent a greater than ten percent of these
revenues.
<TABLE>
<CAPTION>
AUGUST 31, 2000 AUGUST 31, 1999
CUSTOMER AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Sprint PCS $ 758,660 14.48% $ - 0 - 0.00%
Link - Two Communications, Inc. $ 638,011 12.18% $ 991,692 42.83%
RFTL $ - 0 - 0.00% $ 755,771 32.64%
=========== ====== ========== ======
</TABLE>
NOTE 22 - INDUSTRY SEGMENTS:
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". At August 31,
2000, the Company's two business units have separate management teams
and infrastructures that offer different products and services. The
business units have been aggregated into two reportable segments (as
described below) since the long-term financial performance of these
reportable segments is affected by similar economic conditions.
Eagle Wireless International, Inc. (Eagle) is a worldwide supplier of
broadband and telecommunications equipment with related software and
broadband products.
AtlanticPacific Communications, Inc. specializes in providing
professional data and voice cable and fiber optic installations through
project management services on a nationwide basis for multiple
site-cabling installations for end users and re-sellers.
<TABLE>
<CAPTION>
ATLANTIC
EAGLE PACIFIC ELIMINATIONS CONSOLIDATED
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from Unaffiliated Customers 1,826,463 3,413,207 - 0 - 5,239,670
Segment Profit / (Loss) (412,632) 605,673 - 0 - 193,041
Total Assets 53,470,895 1,820,155 696,745 55,987,795
Capital Expenditures 770,978 1,009,766 - 0 - 1,780,744
Depreciation and Amortization 406,824 169,859 - 0 - 576,683
</TABLE>
F-31
<PAGE>
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 23 - SUBSEQUENT EVENTS:
Subsequent to August 31, 2000, the Company's board of directors has
authorized a stock repurchase program whereby the Company may
repurchase up to 500,000 shares of its outstanding common stock. These
shares will be repurchased periodically in the open market or in
negotiated transactions and be held for issuance in connection with the
Company's ESOP and other employee plans. To date, 193,200 shares of the
Company's common stock have been repurchased for a total price of
$712,968.
On September 29, 2000, AtlanticPacific Communications, Inc. (a wholly
owned subsidiary of the Company) signed a loan agreement with Southwest
Bank of Texas (SWBT) whereby it will borrow $900,000. This 364-day note
bears interest at SWBT's prime rate plus .25% which is payable monthly
with principal due September 28, 2001. In addition to AtlanticPacific's
accounts receivable being put forth as collateral, Eagle Wireless has
signed the document as guarantor. These monies are to be used as
working capital whereby it has been partially used to repay the
outstanding line of credits to both Wells Fargo and Compass Banks.
In October 2000, the Company loaned $1,000,000 to ClearWorks.net, Inc.
This one-year note accrues interest at ten percent (10%) which is to be
paid monthly with the principal due September 2001. In addition to
secondary liens on all assets, Clearworks.net, Inc. has issued 750,000
shares of its common stock as collateral.
On November 10, 2000, the Company loaned an additional $1,000,000 to
ClearWorks.net, Inc. This one-year note accrues interest at ten percent
(10%) which is to be paid monthly with the principal due September
2001. In addition to the secondary liens on all assets, Clearworks.net,
Inc. has again issued 750,000 shares of its common stock as collateral.
Subsequent to August 31, 2000, the receivable due from Link-Two
Communications, Inc. has been satisfied through the issuance of
2,856,000 shares of ClearWorks.net, Inc. common stock. (see Note 21)
F-32
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF CLEARWORKS.NET, INC.:
We have audited the accompanying consolidated balance sheets of ClearWorks.net,
Inc. and Subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. 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 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 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
1998 and the results of their operations, 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
ROCKAWAY, NEW JERSEY
December 18, 2000
F-33
<PAGE>
--------------------------------------------------------------------------------
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents (Note 1) ....................................... $ 1,247,000 $ 162,000
Accounts Receivable ...................................................... 3,374,000 201,000
Deferred Advertising Costs ............................................... -- 5,000
Notes Receivable ......................................................... 58,000 --
Stock Subscription Receivable (Note 4) ................................... 450,000 --
Other Receivable ......................................................... 14,000 3,000
Inventories (Note 1) ..................................................... 332,000 12,000
------------ ------------
Total Current Assets ................................................... 5,475,000 383,000
PROPERTY AND EQUIPMENT (NOTES 1 & 5):
Transportation Equipment ................................................. -- 26,000
Head-end Facilities ...................................................... 1,576,000 --
Operating Equipment ...................................................... 625,000 235,000
Furniture & Fixtures ..................................................... 177,000 6,000
Less: Accumulated Depreciation ........................................... (122,000) (13,000)
------------ ------------
Total Property and Equipment ........................................... 2,256,000 254,000
OTHER ASSETS:
Security Deposits ........................................................ 27,000 --
Prepaid Expenses ......................................................... 171,000 --
Goodwill (Notes 1 & 2) ................................................... 5,641,000 623,000
Less: Accumulated Amortization ........................................... (192,000) (71,000)
Deferred Financing Costs ................................................. 378,000 --
Other Assets ............................................................. 2,000 2,000
------------ ------------
Total Other Assets ..................................................... 6,027,000 554,000
------------ ------------
TOTAL ASSETS ............................................................. $ 13,758,000 $ 1,191,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ......................................................... $ 3,197,000 $ 20,000
Accrued Expenses ......................................................... 149,000 146,000
Notes Payable (Note 7) ................................................... 1,010,000 56,000
Payroll Taxes Payable .................................................... -- 57,000
Federal Income Tax Payable ............................................... 137,000 --
Sales Taxes Payable ...................................................... 175,000 13,000
------------ ------------
Total Current Liabilities .............................................. 4,668,000 292,000
LONG - TERM LIABILITIES:
Debentures (Note 8) ...................................................... 2,785,000 --
Notes Payable - net of current portion (Note 7) .......................... 535,000 14,000
------------ ------------
Total Long - Term Liabilities .......................................... 3,320,000 14,000
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 9)
SHAREHOLDERS' EQUITY:
Preferred Stock - $.001 par value
Authorized at 1999 and 1998
5,000,000 and 5,000,000 shares, respectively ........................... -- --
Common Stock - $.001 and $.001 par value at 1999 and 1998, respectively
Authorized at 1999 and 1998 50,000,000 and 50,000,000 shares,
respectively Issued and Outstanding at 1999 and 1998
20,884,957 and 11,460,249, respectively ................................ 21,000 11,000
Paid in Capital .......................................................... 11,472,000 1,153,000
Deferred Financing Charges ............................................... (285,000) --
Retained Earnings/(Deficit) .............................................. (5,438,000) (279,000)
------------ ------------
Total Shareholders' Equity ............................................. 5,770,000 885,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 13,758,000 $ 1,191,000
============ ============
</TABLE>
F-34
<PAGE>
--------------------------------------------------------------------------------
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES
Integration Services .................. $ 1,607,000 $ 487,000 $ 114,000
Network Cabling and Wiring ............ 1,383,000 555,000 --
Software Administration ............... -- 48,000 --
Bundled Digital Services .............. 42,000 -- --
----------- ----------- -----------
Total Revenues ...................... 3,032,000 1,090,000 114,000
COST OF GOODS SOLD
Intergration Services and Materials ... 1,280,000 502,000 --
Structured Wiring Labor and Materials . 1,295,000 539,000 88,000
Bundled Digital Services .............. 222,000 -- --
Depreciation and Amortization ......... 205,000 84,000 --
----------- ----------- -----------
Total Cost of Goods Sold ............ 3,002,000 1,125,000 88,000
----------- ----------- -----------
GROSS PROFIT ............................. 30,000 (35,000) 26,000
----------- ----------- -----------
OPERATING EXPENSES
Salaries and Related Costs ............ 1,187,000 12,000 --
Advertising and Promotion ............. 34,000 21,000 --
Incentive Compensation ................ 1,317,000 -- --
Other Support Costs ................... 1,890,000 174,000 16,000
----------- ----------- -----------
Total Operating Expenses ............ 4,428,000 207,000 16,000
----------- ----------- -----------
EARNINGS/(LOSS) FROM OPERATIONS BEFORE
OTHER EXPENSES AND INCOME TAXES ....... (4,398,000) (242,000) 10,000
OTHER INCOME/EXPENSES
Interest Income/(Expense) - net ....... (761,000) (10,000) (1,000)
----------- ----------- -----------
Total Other Expenses ................ (761,000) (10,000) (1,000)
----------- ----------- -----------
EARNINGS/(LOSS) BEFORE INCOME TAXES ...... (5,159,000) (252,000) 9,000
Provision For Income Taxes ............ -- -- --
----------- ----------- -----------
NET EARNINGS/(LOSS) ...................... $(5,159,000) $ (252,000) $ 9,000
===========
Earnings Per Share:
Basic (Note 1) ...................... $ (0.29) $ (0.03) $NIL
Diluted (Note 1) .................... $ (0.29) $ (0.03) $NIL
</TABLE>
F-35
<PAGE>
--------------------------------------------------------------------------------
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
SEPTEMBER 18, 1997 (DATE OF INCEPTION) COMMON COMMON PREFERRED PAID-IN FINANCING RETAINED SHAREHOLDERS'
TO DECEMBER 31, 1999 STOCK (SHARES) STOCK STOCK CAPITAL CHARGES EARNINGS/(DEFICIT) EQUITY
----------- --------- -------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
September 18, 1997
(Date of Inception) .............. -- $ -- $ -- $ -- $ -- $ -- $ --
----------- --------- -------- ----------- --------- ----------- ----------
Issuance of Common Stock as
Restated for Recapitalization ... 6,250,000 6,000 -- (5,000) -- -- 1,000
Net Income as of December 31, 1997 . 9,000 9,000
----------- --------- -------- ----------- --------- ----------- ----------
Total Shareholders' Equity
As Of December 31, 1997 ............ 6,250,000 6,000 -- (5,000) -- 9,000 10,000
Conversion From LLC to C-Corp ...... -- -- -- 36,000 -- (36,000) --
Stock Issued for Merger With
Southeast Tire Recycling, Inc.
(April) ......................... 1,543,960 2,000 -- (2,000) -- -- --
Stock Issued for Acquisitions
Team Renaissance (May) .......... 156,250 -- -- 322,000 -- -- 322,000
InfraResources (May) ............ 80,000 -- -- 165,000 -- -- 165,000
Conversion of Notes Payable
(October) ........................ 272,550 -- -- 27,000 -- -- 27,000
Common Shares Issued For
Syndication Costs (October) ..... 2,477,000 2,000 -- (3,000) -- -- (1,000)
Stock Issued for Services Rendered
(November) ....................... 50,000 -- -- 6,000 -- -- 6,000
Stock Issued for Acquisition of
Assets from Vidatel (November) . 98,039 -- -- 150,000 -- -- 150,000
New Stock Issued for Cash .......... 532,450 1,000 -- 457,000 -- -- 458,000
Net Loss 1998 ...................... (252,000) (252,000)
----------- --------- -------- ----------- --------- ----------- ----------
Total Shareholders' Equity
As Of December 31, 1998 ............ 11,460,249 11,000 -- 1,153,000 -- (279,000) 885,000
Stock Issued for Acquisitions ...... 2,075,000 2,000 -- 4,892,000 -- -- 4,894,000
Stock Issued for Cash - net of
Registration Fees and Expenses .. 6,817,910 7,000 -- 2,260,000 -- -- 2,267,000
Warrants Issued for Services
Rendered ......................... -- -- -- 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
Debenture ........................ -- -- -- 215,000 -- -- 215,000
Amortization of Deferred Financing
Charges .......................... -- -- -- -- 93,000 -- 93,000
Net Loss 1999 ...................... -- (5,159,000) (5,159,000)
----------- --------- -------- ----------- --------- ----------- ----------
Total Shareholders' Equity
As Of December 31, 1999 ............ 20,884,957 $ 21,000 $ -- $11,472,000 $(285,000) $(5,438,000) $5,770,000
=========== ========= ======== =========== ========= =========== ==========
</TABLE>
F-36
<PAGE>
--------------------------------------------------------------------------------
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings/(Loss) ...................................... $(5,159,000) $ (252,000) $ 9,000
----------- ----------- -----------
Adjustments To Reconcile Net Earnings/(Loss) To
Net Cash Used By Operating Activities:
Depreciation and Amortization ......................... 205,000 84,000 0
Non-Cash Interest Expense ............................. 650,000 0 0
Amortization of Deferred Financing Charges ............ 93,000 0 0
Stock Issued For Compensation and Services Rendered ... 1,277,000 6,000 0
Warrants Issued for Services Rendered ................. 648,000 0 0
(Increase)/Decrease in Accounts Receivable ............ (728,000) (125,000) (62,000)
(Increase)/Decrease in Inventory ...................... (129,000) 0 0
(Increase)/Decrease in Deferred Advertising Costs ..... 0 (5,000) 0
(Increase)/Decrease in Other Receivable ............... (11,000) (3,000) 0
(Increase)/Decrease in Security Deposits .............. 0 2,000 (2,000)
(Increase)/Decrease in Other Assets ................... (398,000) (2,000) 0
Increase/(Decrease) in Accounts Payable ............... 926,000 0 4,000
Increase/(Decrease) in Accrued Expenses ............... (71,000) 143,000 3,000
Increase/(Decrease) in Deferred Revenues .............. 0 0 4,000
Increase/(Decrease) in Payroll Taxes Payable .......... 0 52,000 5,000
Increase/(Decrease) in Sales Tax Payable .............. 0 11,000 0
----------- ----------- -----------
Total Adjustments ..................................... 2,462,000 163,000 (48,000)
----------- ----------- -----------
Net Cash Used By Operating Activities .................... (2,697,000) (89,000) (39,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, Net of Cash Received .................... (465,000) (27,000) 0
Investment in Organization Costs ...................... 0 1,000 (1,000)
Purchase of Property and Equipment .................... (1,994,000) (210,000) (2,000)
----------- ----------- -----------
Net Cash Used By Investing Activities .................... (2,459,000) (236,000) (3,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Notes Payable, Net of Repayments ........ 1,424,000 26,000 46,000
Proceeds from Issuance of 6% Convertible Debentures ... 3,000,000 0 0
Increase in Stock Subscriptions Receivable ............ (450,000) 0 0
Proceeds From Sale of Common Stock .................... 2,267,000 457,000 1,000
----------- ----------- -----------
Net Cash Provided By Financing Activities ................ 6,241,000 483,000 47,000
----------- ----------- -----------
Net Increase/(Decrease) in Cash .......................... 1,085,000 158,000 5,000
CASH AT THE BEGINNING OF THE YEAR ........................... 162,000 4,000 0
----------- ----------- -----------
CASH AT THE END OF THE YEAR ................................. $ 1,247,000 $ 162,000 $ 5,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the year for:
Interest ................................. $ 2,000 $ 10,000 $ 1,000
Income Taxes ............................. $ 0 $ 0 $ 0
SUPPLEMENTAL SCHEDULE ON NON-CASH INVESTING ACTIVITIES:
Issuance of Common stock for Asset Acqusition ...... $ 4,895,000 $ 637,000 $ 0
</TABLE>
F-37
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
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 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 operated 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.
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
consolidated.
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-38
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (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) 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 $192,000.
F-39
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
H) 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.
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.
F-40
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
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 of long-term debt and
convertible debentures approximate fair value as the interest rates thereon
approximate market.
M) Reclassification
The Company has reclassified certain revenues, costs and expenses for the
year ended December 31, 1998, and to facilitate comparison to the year
ended December 31, 1999.
NOTE 2 - 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 for this acquisition, including certain acquisition
costs, was $130,500. Goodwill in the approximate amount of $76,000 resulted
from this transaction.
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 approximately $5,320,000.
Goodwill of approximately $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.
F-41
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - BUSINESS COMBINATIONS: (continued)
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 that $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: (in thousands)
Accounts receivable, net $2,526
Inventories 191
Prepaid expenses and other current assets 131
Property and equipment, net 92
Goodwill 5,018
Other assets 19
Accounts payable (2,278)
Accrued expenses (290)
Notes payable (50)
------
Purchase price, net of cash received $5,359
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.
The Company purchased the assets of John Diaz d.b.a. 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.
F-42
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - BUSINESS COMBINATIONS: (continued)
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: (in thousands)
1999 1998
----------------------
Revenues $13,241 $ 3,430
Costs and expenses 19,686 4,748
------- -------
Net loss $(6,445) $(1,318)
------- -------
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 3 - 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 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 4 - 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.
F-43
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1999 and
1998: (in thousands)
1999 1998
----------------------
Head-end Facilities $ 1,576 $ -0-
Operating Equipment 625 235
Transportation Equipment -0- 26
Furniture, Fixtures and Equipment 177 6
------- --------
Total 2,378 267
Accumulated depreciation (122) (13)
-------- --------
Property and equipment, net $ 2,256 $ 254
======== ========
NOTE 6 - ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31, 1999 and 1998:
(in thousands)
1999 1998
-----------------
Accrued payroll $ 45 $ 60
Accrued interest 80 9
Other 24 77
----- -----
Total accrued expenses $ 149 $ 146
===== =====
NOTE 7 - NOTES PAYABLE:
The following table lists the Company's note obligations as of December 31,
1999: (in thousands)
ANNUAL
INTEREST
RATE DUE DATE AMOUNT
-------- -------- -------
KMA Investments 12.0% July 2000 $ 802
NTL Securities 12.0% May 2001 500
M. McClere 12.0% Jan. 2000 150
Other Various Various $ 93
-------
Total notes payable $ 1,545
Less current portion (1,010)
-------
Total long-term debt $ 535
=======
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. During April 2000, this note was
converted into 588,747 shares of the Company's restricted common stock
covering principal and interest.
F-44
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 7 - NOTES PAYABLE: (continued)
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. On September 25, 2000, the two parties agreed to convert this
note into 250,000 shares of the Company's common stock.
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 8 - CONVERTIBLE DEBENTURES:
On December 13, 1999, the Company closed a private placement transaction
with Candlelight Investors, LLC, and ("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.
The warrants are exercisable at $3.16 per share. The debentures are
convertible at the lower of $3.30 per share or ninety-two percent (92%) 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.
This debenture was subsequently converted and additional convertible
debentures were initiated. (see Note 15)
F-45
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9 - 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 sit 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 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. This suit was settled on November 29, 2000 whereby the Company
was ordered to issue 140,000 shares of its common stock to 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 judgement in excess of $100,000 plus punitive damages, court costs,
attorneys' fees and interest. This suit was settled on December 1, 2000
whereby the Company was ordered to pay $135,000 to Mr. Pennington.
F-46
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES: (continued)
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
attempted to mediate this case but was unsuccessful. The suit is currently
in the discovery phase with a trial date set for the two-week period
beginning February 5, 2001. The Company continues to vigorously contest
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. vs. ClearWorks Technologies, Inc. On December 17, 1999,
Sherman 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. In October 2000, both parties
have agreed to binding arbitration. To date, no discovery has occurred.
The Company is a defendant in Valley First Community Bank vs.
ClearWorks.net, Inc. and ClearWorks Home Systems, Inc. On August 16, 2000,
Valley First Community Bank (Valley) filed suit alleging a breach of
contract, breach of implied duty of good faith and fair dealing,
conversion, intentional interference with contract, and promissory
estoppel/detrimental reliance. This suit arose when ClearWorks Home
Systems, Inc. (CHS) executed a binding letter of intent to purchase from
Valley certain assets, which Valley represented to CHS that it held first
lien for a purchase price of $150,000. Subsequently, CHS learned Valley did
not in fact hold a first lien on such assets, rather such assets were sold
in a landlord's auction. As a result, CHS did not remit $150,000 to Valley
for payment. (see Note 15) To date, no discovery has occurred and the
Company intends to vigorously contest all claims in this case.
The Company is a defendant in Carl Thompson Associates, Inc. vs.
ClearWorks.net, Inc. On October 4, 2000, Carl Thompson Associates, Inc.
filed suit 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 and seeks recovery of damages in the sum of
$521,415 plus court costs. The Company denies the claims and has filed an
answer disputing the claims with affirmative defenses.
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, Phoenix, Arizona and
San Antonio, Texas. United Computing Group, Inc. leases approximately 8,000
square feed of office and warehouse space in Houston, Texas, expiring in
2001.
F-47
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES: (continued)
Future minimum lease payments for non-cancelable operating leases having
initial or remaining terms in excess of one year are as follows: (in
thousands)
DECEMBER 31, AMOUNT
----------- ------
2000 $ 246
2001 203
2002 143
2003 46
------
Total $ 638
NOTE 10 - 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 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 31, 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 was defeated
resulting in the stock options granted to the Company's key employees
becoming unenforceable and invalid.
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.
F-48
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 10 - STOCK OPTIONS AND WARRANTS: (continued)
During 1999, the Company issued 210,000 warrants in connections 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 8). 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 amortized over the expected period of benefit.
The Company also issued an 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,
2008.
NOTE 11 - 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:
(in thousands)
1999 1998
-----------------------
Computed "expected" tax benefit $ (1,754) $ (86)
Increase in valuation allowance 1,137 86
Non-deductible warrant and
beneficial conversion expenses 473 -0-
Non-deductible amortization of goodwill 40 -0-
Non-deductible stock option expense 77 -0-
Other 27 -0-
-------- --------
$ -0- $ -0-
======== ========
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: (in thousands)
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 29
Net operating loss carryforwards 1,457
Other 6
-------
Total gross deferred tax assets 1,492
Less valuation allowance (1,409)
-------
Net deferred tax assets 83
-------
Deferred tax liabilities:
Plant and equipment, principally
due to differences in depreciation 83
-------
Net deferred tax liability $ -0-
=======
F-49
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 11 - INCOME TAXES: (continued)
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 12 - 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
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 1993. 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 or $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 13 - 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.
F-50
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 14 - 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 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 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 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 1. 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 &
COMMUNICATIONS WIRING SERVICES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended 12/31/99:
Revenues from unaffected 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 & amortization 14,000 38,000 1,000 152,000 205,000
Year ended 12/31/98
Revenues from unaffected 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
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-51
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 14 - INDUSTRY SEGMENTS: (continued)
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 15 - 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. (See Note 8).
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
features 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 approximately $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 approximately $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 of the convertible debentures.
On April 19, 2000, the Company issued an additional $2,000,000 of 6%
convertible debentures to Candlelight with conversion features similar to
those as issued on March 15, 2000. 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 approximately $1,716,000.
This April 19, 2000 debenture required the Company to register all
underlying shares of common stock by May 19, 2000. These shares were not
registered until November 2000 resulting in a situation of default. As a
result of this default, the Company is deemed to owe approximately $230,000
to Candlelight.
The 6% convertible debentures issued on April 19, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants may
be converted into 140,000 shares of common stock. The Company determined
the warrants have a total value of approximately $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.
F-52
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 15 - SUBSEQUENT EVENTS: (continued)
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 deferred
financing charges, accrued interest and convertible discount amounting
$1,911,696 to additional paid in capital.
During July and August 2000, the Company received conversion notice from
Candlelight to convert $1,500,000 of the outstanding 6% convertible
debentures into 542,980 shares of common stock.
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 issued 34,000 shares of common stock for the assets of
Secure-All Security. The common stock was valued at approximately $9.00 per
share for purposes of this transaction. The Company assumed liabilities of
Secure-All Security totaling $131,000.
In January 2000, the Company entered into a service agreement with Land
Tejas Development LLC (Land Tejas) whereby the Company will serve as the
exclusive provider of Bundled Digital Services in communities developed by
Land Tejas. At the effective date of this agreement, the Company owed to
Land Tejas an up-front fee of approximately $540,000 for the right to
access lots at Land Tejas communities. This amount has not yet been paid
and is recorded as an accrued liability on the accompanying consolidated
balance sheet. The Company also issued warrants to purchase 300,000 shares
of common stock at an average price of $2.00 per share to certain
principals of Land Tejas. The fair value of these warrants was determined
to be $580,000. Both the accrued access fees and warrant fair values have
been capitalized and included in other assets in the accompanying balance
sheet to be amortized over the asset's estimated useful life of five years.
In March 2000, these warrants were exercised and the Company thus received
two note receivables in the amount of $300,000 each. Subsequently, the two
parties agreed to exchange these notes for debt incurred by the Company
payable to Land Tejas. This agreement will remain in effect until the
$600,000 receivable from Land Tejas is exhausted.
Subsequent to December 31, 1999, the Company has established offices in
Phoenix, Arizona and San Antonio, Texas. The Phoenix lease with Airpark
Holdings VI, LLC is a three-year non-cancelable lease that commenced August
1, 2000. Monthly payments begin at approximately $2,350 and escalate as
high as $7,555 whereas the San Antonio office has no signed lease and is
thus on a month to month for $2,000.
On May 9, 2000, Clearworks Home Systems, Inc. (CHS), a wholly owned
subsidiary, entered into a letter of intent with Home Systems Integration
(HSI) to acquire substantially all of the assets of the business. HSI is in
the business of providing residential structured wiring, security systems,
audio/video solutions and home automation. Subsequent to signing the letter
of intent, the principles of HSI disposed of certain assets without the
permission or knowledge of CHS. The transaction is still pending based upon
HSI's ability to recover and retain possession of all assets referred to in
the letter of intent. (see Note 9)
On August 3, 2000, the Company entered into a letter of intent to acquire a
controlling interest in Link-Two Communications, Inc. (Link II), a
nationwide provider of high-speed wireless broadband access. The
acquisition of Link II is anticipated to provide the Company with a
strategic arm in which to address the large retrofit market in wireless
Bundled Digital Services. During November 2000, the Company acquired
approximately sixty percent (60%) of Link II for 10,526,163 shares of its
common stock.
F-53
<PAGE>
CLEARWORKS.NET, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 15 - SUBSEQUENT EVENTS: (continued)
On August 31, 2000, the Company issued 99,996 warrants to Carl A. Chase
which have an exercise price of $0.25 per share. These warrants expire
one-year from issuance and are issued as well as vest monthly in increments
of 8,333 per month beginning on August 31, 2000. As of December 11, 2000,
Mr. Chase has exercised 24,999 warrants.
On September 15, 2000, the Company purchased the assets of LDConnect.com,
Inc. (LD) 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, LD was a Texas corporation. The
Company issued 1,000,000 shares of its common stock for the purchase of LD
that was valued at $4.00 per share for the purposes of this transaction.
On September 18, 2000, the Company entered into an agreement and plan of
reorganization with Eagle Wireless International, Inc. (Eagle), a Texas
corporation, and Eagle Acquisition Corporation. 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 the Clearworks. As a result of the merger, stockholders of Clearworks
will hold in the aggregate approximately53% of the outstanding common stock
of Eagle following completion of the merger. Eagle will issued 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. A registration statement Form S-4 has been filed
with the Securities and Exchange Commission (SEC) to culminate this merger
afterwhich both companies will seek shareholder approval for the
transaction and register the issuance of its common stock in connection
therewith.
In October 2000, Eagle loaned the Company $1,000,000, accruing interest at
ten percent (10%), to meet its immediate cash flow needs. Repayment of the
loan is secured by all of the assets of the Company. The Company issued
750,000 shares of its common stock as additional collateral for the loan.
On November 10, 2000, Eagle loaned the Company $1,000,000, accruing
interest at ten percent (10%), to meet its immediate cash flow needs.
Repayment of the loan is secured by all of the assets of the Company. The
Company issued Eagle 750,000 shares of its common stock as additional
collateral for this loan.
F-54
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 And December 31, 1999
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ ------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 59,649 $ 1,247,000
Accounts receivable, net of allowance for doubtful
accounts of $463,188 and $93,081, respectively ............. 5,764,477 3,388,000
Stock subscription receivable ................................ 450,000
Inventories .................................................. 1,250,346 332,000
Prepaid expenses and other current assets .................... 174,629 229,000
------------------ ------------------
Total current assets ................................... 7,249,101 5,646,000
------------------ ------------------
Property and equipment, net .................................... 7,270,463 2,256,000
------------------ ------------------
Other assets:
Goodwill, net ................................................ 6,771,182 5,449,000
Deferred financing costs ..................................... 311,869 378,000
Other ........................................................ 1,067,510 29,000
------------------ ------------------
8,150,561 5,856,000
------------------ ------------------
Total assets ........................................... $ 22,670,125 $ 13,758,000
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ...................................... $ 6,228,802 $ 3,197,000
Accrued expenses ............................................. 1,444,444 461,000
Current maturities of long-term debt ......................... 1,496,322 860,000
Note payable, shareholder .................................... -- 150,000
------------------ ------------------
Total current liabilities .............................. 9,169,568 4,668,000
------------------ ------------------
Long-term debt, net of current maturities ...................... 69,670 535,000
------------------ ------------------
6% Convertible debentures, net of discount ..................... 1,902,750 2,785,000
------------------ ------------------
Shareholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
28,030,231 and 20,884,957 shares issued and
outstanding September 30, 2000 and December 31,
1999, respectively ............................................. 28,030 21,000
Additional paid-in capital ................................... 40,406,757 11,472,000
Stock subscription receivable ............................... (604,491) --
Deferred financing charges ................................... (1,102,965) (285,000)
Accumulated deficit .......................................... (27,199,194) (5,438,000)
------------------ ------------------
11,528,137 5,770,000
------------------ ------------------
Total liabilities and shareholders' equity ............. $ 22,670,125 $ 13,758,000
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER ENDED SEPTEMBER ENDED SEPTEMBER
30, 2000 30, 1999 30, 2000 30, 1999
--------------- --------------- --------------- ---------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
ClearWorks IT Solutions ............................. $ 5,798,852 $ 615,814 $ 16,738,665 $ 1,215,458
ClearWorks Home Systems ............................. 1,043,765 -- 1,773,423 --
ClearWorks Structured Wiring ........................ 254,955 411,186 588,632 836,542
ClearWorks Communications ........................... 392,662 -- 1,366,580 --
--------------- --------------- --------------- ---------------
7,490,234 1,027,000 20,467,300 2,052,000
--------------- --------------- --------------- ---------------
Costs and expenses:
ClearWorks IT Solutions services and materials ..... 4,783,645 226,500 14,395,679 516,849
Home Systems services and materials ................ 997,646 -- 2,125,431 --
Structured Wiring services and materials ........... 318,870 528,500 587,440 856,151
Communications services and materials .............. 203,504 -- 1,354,878 --
Selling, general and administrative expenses ....... 14,846,036 675,000 17,971,621 1,979,000
Depreciation and amortization ...................... 378,138 53,000 1,197,890 139,000
--------------- --------------- --------------- ---------------
21,527,839 1,483,000 37,632,939 3,491,000
--------------- --------------- --------------- ---------------
Loss from operations ................................... (14,037,605) (456,000) (17,165,639) (1,439,000)
Other income/(expense):
Interest income .................................... 2,013 55,000 8,768 55,000
Interest expense ................................... (236,431) (11,000) (4,604,323) (24,000)
--------------- --------------- --------------- ---------------
Loss before income taxes ............................... (14,272,023) (412,000) (21,761,194) (1,408,000)
--------------- --------------- --------------- ---------------
Income taxes, net of valuation allowances .............. -- (45,000) -- (45,000)
--------------- --------------- --------------- ---------------
Net loss ............................................... $ (14,272,023) $ (457,000) $ (21,761,194) $ (1,453,000)
=============== =============== =============== ===============
Loss per share:
Basic .............................................. (.57) (.03) (.91) (.09)
Diluted ............................................ (.57) (.03) (.91) (.09)
Weighted average number of common shares outstanding:
Basic .............................................. 24,912,345 15,301,957 23,957,594 15,301,957
Diluted ............................................ 24,912,345 15,301,957 23,957,594 15,301,957
</TABLE>
See accompanying notes to consolidated financial statements.
F-56
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities: (Restated)
Net loss ............................................................................. $ (21,761,194) $ (1,408,000)
----------------- -----------------
Adjustments to reconcile net loss to net cash
used by operating activities, net of
acquisitions:
Depreciation and amortization ..................................................... 1,197,890 139,000
Stock issued for compensation and services ........................................ 12,756,592 755,000
Non-Cash interest expense ......................................................... 3,454,468 --
Amortization of deferred financing charges, costs
and debt discount ............................................................... 704,988 --
(Increase) Decrease in accounts receivable, net ................................... (2,376,477) (923,000)
(Increase) Decrease in inventories ................................................ (918,346) (22,000)
(Increase) Decrease in prepaids and other assets .................................. 125,146 (20,000)
Increase in accounts payable ..................................................... 2,492,287 914,000
Increase (Decrease) in accrued expenses ........................................... 859,785 (63,000)
----------------- -----------------
Net cash used by operating activities ................................................ 18,296,333 780,000
Cash flows from investing activities:
Acquisitions, net ............................................................... 1,306,171 (35,000)
Capital expenditures ............................................................ (3,109,494) (2,032,000)
----------------- -----------------
Net cash used by investing activities ................................................ (1,803,323) (2,067,000)
Cash flows from financing activities:
Net borrowings of notes payable ................................................. (99,407) 782,000
Proceeds from issuance of convertible debentures ................................ 4,000,000 --
Payments of deferred financing costs ............................................ (223,991) --
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 ............................................ 4,080,833 2,635,000
Net decrease in cash ................................................................. (1,187,351) (60,000)
Cash at the beginning of the period .................................................. 1,247,000 162,000
----------------- -----------------
Cash at the end of the period ........................................................ $ 59,649 $ 102,000
================= =================
Supplemental disclosures of cash flow
Interest expense paid .......................................................... $ 296,017 $ 14,000
Supplemental disclosures of non-cash
Issuance of common stock for asset acquisitions ...................................... $ 4,306,000 --
Fair value of assets acquired ................................................... $ 2,352,708 $ 95,000
Fair value of capital stock issued .............................................. $ 4,000,000 $ 60,000
Liabilities assumed ............................................................. -- $ 35,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED
SHARES OF COMMON PAID-IN FINANCING
COMMON STOCK STOCK CAPITAL CHARGES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 .... 11,460,249 $ 11,000 $ 1,152,000 $ --
Stock issued for acquisitions .. 2,075,000 2,000 4,893,000 --
Stock issued for cash, net of .. 6,817,910 6,885 2,260,000 --
registration fees and expenses
Warrants issued for services ... -- -- 1,026,000 (378,000)
Stock issued for incentive
compensation and services ...... 531,798 1,000 1,276,000 --
Beneficial conversion feature
for 6% convertible debenture ... -- -- 650,000 --
Warrants issued with convertible
debentures ..................... -- -- 215,000 --
Amortization of deferred
financing charges .............. -- -- -- 93,000
------------ ------------ ------------ ------------
Balances, December 31, 1999 .... 20,884,957 $ 20,885 $ 11,472,000 $ (285,000)
============ ============ ============ ============
(The following information is
unaudited)
Stock issued for acquisitions .. 1,034,000 1,034 4,304,966 --
6% convertible debentures
converted to stock, net of
deferred financing costs and
discounts ...................... 2,619,083 2,619 3,058,163 1,721,326
Warrants issued for services ... -- -- 3,712,522 (3,132,161)
Stock issued for incentive
compensation and services ...... 2,783,919 2,784 13,627,075 --
Beneficial conversion feature
for 6% convertible debenture ... -- -- 3,417,463 --
Warrant issued with convertible
debentures ..................... -- -- 582,537 --
Common stock issued for warrant
conversion ..................... 708,262 708 603,783 --
Amortization of deferred
financing charges .............. -- -- (325,983) 592,870
Syndications Costs ............. -- -- (45,769) --
Net Loss ....................... -- -- --
------------ ------------ ------------ ------------
Balances September 30, 2000 .... 28,030,231 $ 28,030 $ 40,406,757 $ (1,102,965)
============ ============ ============ ============
<CAPTION>
STOCK RETAINED EARNINGS TOTAL
SUBSCRIPTION (ACCUMULATED SHAREHOLDERS'
RECEIVABLE DEFICIT) EQUITY
------------ ----------------- ------------
<S> <C> <C> <C>
Balances, December 31, 1998 .... $ -- $ (279,000) $ 884,000
Stock issued for acquisitions .. -- -- 4,895,000
Stock issued for cash, net of .. -- -- 2,266,885
registration fees and expenses
Warrants issued for services ... -- -- 648,000
Stock issued for incentive
compensation and services ...... -- -- 1,277,000
Beneficial conversion feature
for 6% convertible debenture ... -- 650,000
Warrants issued with convertible
debentures ..................... -- -- 215,000
Amortization of deferred
financing charges .............. -- 93,000
------------ ----------------- ------------
Balances, December 31, 1999 .... $ -- $ (5,438,000) $ 5,769,885
============ ================= ============
(The following information is
unaudited)
Stock issued for acquisitions .. -- -- 4,306,000
6% convertible debentures
converted to stock, net of
deferred financing costs and
discounts ...................... -- -- 4,782,108
Warrants issued for services ... -- -- 580,361
Stock issued for incentive
compensation and services ...... -- -- 13,629,859
Beneficial conversion feature
for 6% convertible debenture ... -- -- 3,417,463
Warrant issued with convertible
debentures ..................... -- -- 582,537
Common stock issued for warrant
conversion ..................... (604,491) -- --
Amortization of deferred
financing charges .............. -- -- 266,887
Syndications Costs ............. -- -- (45,769)
Net Loss ....................... -- (21,761,194) (21,761,194)
------------ ----------------- ------------
Balances September 30, 2000 .... $ (604,491) $ (27,199,194) $ 11,528,137
============ ================= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 September 30, 2000, the Company has four wholly owned
subsidiaries: ClearWorks Communications, Inc., ClearWorks Structured
Wiring Services, Inc., ClearWorks Home Systems, Inc., and ClearWorks
Integration Services, Inc. (also known as 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-59
<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 nine months ended September 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 nine months ended September 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 nine months
ended September 30,1999.
Note 3. Related Party Transactions
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 annum.
ClearWorks subsequently repaid this note on October 11, 2000.
Note 4. Business Combinations
On August 3, 2000 ClearWorks entered into a letter of intent to acquire a
controlling interest in Link Two Communications, a nationwide provider of high
speed wireless broadband access. The acquisition of Link Two Communications is
anticipated to provide ClearWorks with a strategic arm in which to address the
large retrofit market in wireless Bundled Digital Services.
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, which
ClearWorks valued at $4.00 per share for the purposes of this transaction.
F-60
<PAGE>
On September 18, 2000, ClearWorks entered into an Agreement and Plan of
Reorganization with Eagle Wireless International, Inc, a Texas corporation, and
Eagle Acquisition Corporation. 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. 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.
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.
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 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 BDSsm 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 BDSsm
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, BDSsm, "last mile"
cable and fiber installation, and ClearWorks competitive local exchange carrier
("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.
Note 5. Issuance of Common Stock and Warrants
During the nine month period ended September 30, 2000, the Company issued
7,145,274 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... 2,619,083
Shares issued for acquisitions .............. 1,034,000
Shares issued for services and compensation.. 2,783,929
Shares issued for warrant conversion ........ 708,272
Shares cancelled ............................ (10)
-----------
Shares outstanding September 30, 2000 ........... 28,030,231
The Company issued 2,619,083 shares of its common stock associated with
conversion of the 6% convertible debentures.
The Company issued 2,783,929 shares of its common stock associated with
compensation and services performed for the Company.
The Company issued 708,272 shares of its common stock associated with
conversion of warrants.
The Company issued 1,034,000 shares of its restricted common stock
associated with the acquisition of Secure-All Security..
In July 2000 the Company granted 888,015 shares of stock to its employees.
This bonus resulted in a non-cash compensation expense of $ 4,773,081.
On September 11, 2000 the Company granted 400,000 shares of stock to
its employees. This bonus resulted in a non-cash compensation expense of
$1,700,000.
The Company issued 175,000 warrants to Intratech Capital Partners, Ltd.
and its affiliates in connection with the April 19, 2000 Candlelight
transaction. Such warrants have an exercise price of $2.50 per share and vest
from April 19, 2000 and expire on April 19, 2001. The Intratech warrants also
have a cashless feature.
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<PAGE>
On August 10, 2000, the Company's chief executive officer elected to
exercise 210,000 warrants through a cash payment of $630,000.
On August 21, 2000, the Company's chief operations officer elected to
exercise 10,000 warrants through a cash payment of $30,000.00.
On August 31, 2000, the Company issued a total of 99,996 warrants to Carl
A. Chase which have an exercise price of $0.25 per share. The warrants have a
one year term and vest monthly in increments of 8,333 warrants per month
beginning on August 31, 2000. See below:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
ISSUED WARRANTS PRICE VESTS EXPIRATION
------ -------- ----- ----- ----------
<S> <C> <C> <C> <C> <C>
Carl A. Chase 8/31/00 8,333 $ .250 8/31/00 8/31/01
Carl A. Chase 8/31/00 8,333 $ .250 9/30/00 9/30/01
Carl A. Chase 8/31/00 8,333 $ .250 10/31/00 10/31/01
Carl A. Chase 8/31/00 8,333 $ .250 11/30/00 11/30/01
Carl A. Chase 8/31/00 8,333 $ .250 12/31/00 12/31/01
Carl A. Chase 8/31/00 8,333 $ .250 1/30/00 1/30/01
Carl A. Chase 8/31/00 8,333 $ .250 2/28/01 2/28/02
Carl A. Chase 8/31/00 8,333 $ .250 3/31/01 3/31/02
Carl A. Chase 8/31/00 8,333 $ .250 4/30/01 4/30/02
Carl A. Chase 8/31/00 8,333 $ .250 5/31/01 5/31/02
Carl A. Chase 8/31/00 8,333 $ .250 6/30/01 6/30/02
Carl A. Chase 8/31/00 8,333 $ .250 7/31/01 7/31/02
</TABLE>
Subsequent to September 30th, 24,999 warrants have been exercised (see Note 7.)
During the month of September, 2000, Kevan Casey and Tommy Allen elected
to exercise their nonqualified stock options, which options were issued as
additional consideration pursuant to the Agreement and Plan of Acquisition
between the Company and ClearWorks Integration Services, Inc. and United
Computing Group, Inc., et. al dated December 30, 1999. The Company issued 12,248
shares to Kevan Casey and 8,165 shares to Tommy Allen. At this time, the Company
is still waiting payment form Mr. Casey and Mr. Allen in the amounts of
$2,449.60 and $2,041.25, respectively.
Note 6. 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.
F-62
<PAGE>
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.
This debenture required the Company to register all underlying shares of
common stock by May 19,2000. As of 9/30/00, these shares have not yet been
registered resulting in a situation of default. Accordingly, the Company is
deemed to owe approximately $171,000 to Candlelight as a result of this default.
At November 12, 2000, this liability has increased to approximately $228,000.
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.
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 27, 2000 the Company received conversion notice from Candlelight
to convert $10,000 of the outstanding 6% convertible debentures into 3,087
shares of common stock.
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 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. Subsequent Events
On October 12, 2000, Mr. Chase elected to exercise 16,666 warrants (August
and September warrants) through a cash payment of $4,166.50 to the Company. On
October 31, 2000, Mr. Chase elected to exercise 8,333 warrants (October
warrants) through a cash payment of $2,083.25 to the Company.
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.
In November 10, 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 will issue
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.
As stated in Note 4 the Company signed a letter of intent to acquire a
controlling interest in Link2. During November 2000 the Company acquired
approximately 60% of Link 2 for 10,526,163 shares of the Company's common stock.
F-63
<PAGE>
Note 8: 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 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>
Nine Months Ended September 30, 2000
Revenues from unaffiliated customers 1,378,622 588,632 16,738,665 1,761,381 -- 20,467,300
Segment profit (loss) ............... (433,950) (146,111) 262,509 (791,359) (14,728,158) (15,837,069)
Total assets ........................ 4,222,402 1,487,501 5,233,771 953,810 10,772,642 22,670,126
Capital expenditures ................ 2,147,801 81,969 102,176 72,490 315,058 2,719,494
Depreciation and amortization ....... 96,591 25,144 8,475 13,942 1,053,738 1,197,892
Three Months Ended September 30, 2000
Revenues from unaffiliated customers 404,704 254,955 5,798,852 1,031,723 -- 7,490,234
Segment profit (loss) ............... 73,610 (113,426) (51,685) (162,514) (13,405,452) (13,659,467)
Total assets ........................ 4,222,402 1,487,501 5,233,771 953,810 10,772,642 22,670,126
Capital expenditures ................ 1,051,671 -- 86,075 3,425 -- 1,141,171
Depreciation and amortization ....... 37,099 8,556 2,825 6,098 323,560 378,138
Nine Months Ended September 30, 1999
Revenues from unaffiliated customers -- 836,542 1,215,458 -- -- 2,052,000
Segment profit (loss) ............... -- (19,609) 698,609 -- (1,979,000) (1,300,000)
Total assets ........................ -- 369,659 259,845 -- 2,698,496 4,091,000
Capital expenditures ................ -- 16,374 251,683 -- 1,070,943 2,032,000
Depreciation and amortization ....... -- 1,356 5,650 -- 78,994 139,000
</TABLE>
F-64
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Months Ended September 30, 1999
Revenues from unaffiliated customers -- 411,186 615,814 -- -- 1,027,000
Segment profit (loss) ............... -- (32,605) 314,194 -- (1,296,122) (403,000)
Total assets ........................ -- 369,659 259,845 -- 2,698,496 4,091,000
Capital expenditures ................ -- 16,374 251,683 -- 1,070,943 2,032,000
Depreciation and amortization ....... -- 2,445 5,650 -- 78,994 53,000
</TABLE>
The following reconciles segment profit (loss) to income (loss) from operations
for the three and nine months ended September 30, 2000 and 1999 Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Total profit (loss) from reportable segments .. (13,378,786) (403,000) (15,687,069) (1,300,000)
Depreciation and amortization ................ (378,138) (53,000) (1,197,892) (139,000)
Income (loss) from operations ................. (14,037,605) (456,000) (17,165,639) (1,439,000)
</TABLE>
Note 9. Commitments and Contingent Liabilities
LEGAL PROCEEDINGS
We are subject to legal proceedings and claims which arise in the ordinary
course of business. We do 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.
We are 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 we 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 our obligation and which we claim 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 of the merger agreement between the
parties. We intend to continue to vigorously prosecute our claims against the
Callihans and the Company 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. The Company 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.
We were defendants 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 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 the Company. 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 shareholders 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
shareholders of Millennium Integration Technologies. The principal respondents
are those former shareholders 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
F-65
<PAGE>
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.
We are 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 shareholders,
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 shareholders.
This lawsuit is currently in the discovery phase. 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 shareholders 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 shareholders 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.
We also currently are 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 we 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 we had terminated Mr. Horn's employment without cause.
We 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. We are vigorously contesting these
claims by Robert Horn on the basis that they are without merit.
We are 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.
The Company has answered. The Company 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.
We are 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 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
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<PAGE>
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.
We are 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.
We are 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. The
Company intends to vigorously contest all claims in this case.
We are 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.
The Company intends to vigorously contest all claims in this case.
Our 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.
The Company 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. The Company is currently in settlement negotiations.
The Company 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 the
Company 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
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<PAGE>
petition to the door at 2450 Fondren, Suite 200, Houston, Texas 77063. The
Company, however, never became aware of such lawsuit, and Buckalew made no
attempt to contact the Company's general counsel. The Company became aware of
such lawsuit on October 25, 2000 and immediately contacted Buckalew's counsel.
Upon receiving a copy of the lawsuit via fax, the Company immediately filed an
answer denying all claims.
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 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. We are vigorously contesting the
claims by Sales Consultants on the basis that they are without merit.
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<PAGE>
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 TITLE
NUMBER
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
8.1 Opinion re: tax matters
10.1 Agreement and Plan of Reorganization with ClearWorks
21 Subsidiaries of Eagle Wireless, Inc.
23.1 Consent of Richard O. Weed
23.2 Consent of Independent Auditors (McManus & Co. for Eagle)
23.3 Consent of Independent Auditors (McManus & Co. for ClearWorks)
23.4 Consent of Person About to be named a Director, Michael T. McClere
23.5 Consent of Person About to be named a Director, Shannon D. McLeroy
23.6 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
II-1
<PAGE>
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.
(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.
II-2
<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
December 26, 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 December 26, 2000
H. Dean Cubley Officer, and Director
/S/ RICHARD ROYALL Chief Financial Officer December 26, 2000
Richard Royall
/S/ CHRISTOPHER W. FUTER Vice President, Director December 26, 2000
Christopher W. Futer
/S/ A.L. CLIFFORD Director December 26, 2000
A.L. Clifford
/S/ GLENN A. GOERKE Director December 26, 2000
Glenn A. Goerke
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER TITLE
-------------- -----
<S> <C> <C>
3(i) Articles of Incorporation of Eagle Wireless Previously filed
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
8.1 Opinion re: tax matters Filed electronically
10.1 Agreement and Plan of Reorganization with Previously filed
ClearWorks
21 Subsidiaries of Eagle Wireless, Inc. Previously filed
23.1 Consent of Richard O. Weed Filed electronically
23.2 Consent of Independent Auditors (McManus & Co. Filed electronically
for Eagle)
23.3 Consent of Independent Auditors (McManus & Co. Filed electronically
for ClearWorks)
23.4 Consent of Person About to be named a Director, Filed electronically
Michael T. McClere
23.5 Consent of Person About to be named a Director, Filed electronically
Shannon D. McLeroy
23.6 Consent of Person About to be named a Director, Filed electronically
Raymond G. Harrell, III
27 Financial Statement Schedules Filed electronically
99.1 Articles 2.02 and 2.02.1 of the Texas Business Previously filed
Corporations Act
99.2 Form of Eagle Proxy Card Filed electronically
99.3 Form of ClearWorks Proxy Card Filed electronically
</TABLE>
II-5
