SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period from
_________________ to _______________
Commission File Number 000-26547
CLEARWORKS.NET, INC.
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(Exact Name of Registrant as specified in its Charter)
Delaware 76-0576542
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State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
2450 Fondren, Suite 200, Houston, Texas 77063
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(Address of Principal Executive Offices) (Zip Code)
(713) 334-2595
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(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13, or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practical date.
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Common Stock, $.001 par value 21,993,707
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Number of Shares
outstanding at March 31,
Title of Class 2000
One exhibit included.
<PAGE>
CLEARWORKS.NET, INC.
INDEX
PART 1 FINANCIAL INFORMATION
PAGE NO.
Item 1. Consolidated Balance Sheets
March 31, 2000 and 1999 3
Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Changes in Shareholders'
Equity (Deficit)
December 31, 1999 and March 31, 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART 2 OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matter to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
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PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000 And December 31, 1999
March 31, December 31,
2000 1999
ASSETS (Unaudited) (Audited)
------------ ------------
Current assets:
Cash ......................................... $ 770,377 $ 1,247,000
Accounts receivable, net of allowance for
doubtful accounts of $93,081 ............... 3,681,241 3,388,000
Stock subscription receivable ................ 450,000
Inventories .................................. 1,034,086 332,000
Prepaid expenses and other current assets .... 74,079 229,000
------------ ------------
Total current assets ................... 5,560,414 5,646,000
------------ ------------
Property and equipment, net .................... 3,368,592 2,256,000
------------ ------------
Other assets:
Goodwill, net ................................ 5,752,444 5,449,000
Deferred financing costs ..................... 1,760,369 1,142,000
Other ........................................ 70,148 407,000
------------ ------------
7,582,961 6,998,000
------------ ------------
Total assets ........................... $ 16,511,967 $ 14,900,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ...................... $ 2,838,908 $ 3,197,000
Accrued expenses ............................. 698,911 461,000
Current maturities of long-term debt ......... 899,844 860,000
Note payable, shareholder .................... 0 150,000
------------ ------------
Total current liabilities .............. 4,437,663 4,668,000
------------ ------------
Long-term debt, net of current maturities ...... 500,000 535,000
------------ ------------
6% Convertible debentures, net of discount of
$265,000...................................... 3,235,500 2,735,000
------------ ------------
Shareholders' equity:
Common stock, $.001 par value; 50,000,000
shares authorized; 21,993,707 and ........... 20,884,957
shares issued and outstanding March 31, 2000
and December 31, 1999, respectively .......... 21,994 21,000
Additional paid-in capital ................... 13,057,122 10,988,000
Accumulated deficit .......................... (4,740,312) (4,047,000)
------------ ------------
8,338,804 6,962,000
------------ ------------
Total liabilities and
shareholders' equity ................ $ 16,511,967 $ 14,900,000
============ ============
See accompanying notes to consolidated financial statements.
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CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
ClearWorks Integration Services .................. $ 4,655,113 $ 430,442
ClearWorks Home Systems .......................... 302,768 --
ClearWorks Structured Wiring ..................... 155,965 --
ClearWorks Communications ........................ 280,902 --
------------ ------------
5,394,748 430,442
Costs and expenses:
ClearWorks Integration services and materials ... 3,996,149 134,090
Home Systems services and materials ............. 192,135 --
Structured Wiring services and materials ........ 48,277 --
Communications services and materials ........... 209,863 --
Selling, general and administrative expenses .... 1,212,345 97,295
Depreciation and amortization ................... 323,027 13,212
------------ ------------
5,981,796 244,597
Income(loss) from operations ........................ (587,049) 181,005
Other income/(expense):
Interest income ................................. 6,755 --
Interest expense ................................ (112,961) --
------------ ------------
Income taxes, net of valuation allowances ........... -- --
------------ ------------
Net income(loss) .................................... $ (693,254) $ 181,005
============ ============
Income(loss) per share:
Basic ........................................... (.03) .01
Diluted ......................................... (.03) .01
Weighted average number of common shares outstanding:
Basic ........................................... 21,993,707 15,538,159
Diluted ......................................... 23,713,707 15,538,159
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income(loss) ....................................... $ (693,254) $ 181,005
-------------- --------------
Adjustments to reconcile net loss to net cash
used by operating activities, net of
acquisitions:
Depreciation and amortization ..................... 323,027 13,212
Stock issued for compensation and services ........ 10,000 --
(Increase) Decrease in accounts receivable ....... 156,759 (300,617)
(Increase) Decrease in inventories ................ (702,086) (21,558)
(Increases) in prepaids and other current
assets .......................................... (154,921) (38,283)
Increase (Decrease) in accounts payable ........... (358,092) 86,824
Increase (Decrease) in accrued expenses ........... 237,911 (129,288)
-------------- --------------
Total adjustments .................................... (487,402) (389,710)
-------------- --------------
Net cash used by operating activities .................. (1,180,656) (208,705)
Cash flows from investing activities:
Acquisitions, net ................................. 265,000 --
-------------- --------------
Capital expenditures .............................. (1,158,780) (412,598)
-------------- --------------
Net cash used by investing activities .................. (1,423,780) (412,598)
Cash flows from financing activities:
Proceeds from notes payable, net of
repayments ...................................... 224,844 2,919
Proceeds from issuance of convertible
debentures, net ................................. 500,500 --
Proceeds from common stock sales, net ............. 1,754,050 909,383
Deferred financing costs, net ..................... (351,589) --
-------------- --------------
Net cash provided by financing activities .............. 2,127,813 912,302
Net (Decrease) increase in cash ........................ (476,623) 290,999
Cash at the beginning of the period ...................... 1,247,000 161,957
-------------- --------------
Cash at the end of the period ............................ $ 770,377 $ 452,956
============== ==============
Supplemental disclosures of cash flow information:
Interest expense paid ............................ $ 112,961 $ 4,480
Interest income received ......................... $ 6,755 $ --
Supplemental disclosures of non-cash investing activities:
Issuance of common stock for asset acquisitions .. $ 306,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL RETAINED EARNINGS TOTAL
SHARES OF PAID-IN (ACCUMULATED SHAREHOLDERS'
COMMON STOCK COMMON STOCK CAPITAL DEFICIT) EQUITY
------------ ------------ ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998 .................. 11,460,249 11,000 1,152,000 (279,000) 884,000
Stock issued for acquisitions ................ 2,075,000 2,000 4,893,000 -- 4,895,000
Stock issued for cash, net of ................ 6,817,910 7,000 2,260,000 -- 2,267,000
registration fees and expenses
Warrants issued for services ................. -- -- 1,142,000 -- 1,142,000
Stock issued for incentive
compensation and services ................ 531,798 1,000 1,276,000 -- 1,277,000
Warrants issued with convertible ............. -- -- 265,000 -- 265,000
debentures
Net loss ..................................... -- -- -- (3,768,000) (3,768,000)
------------ ------------ ------------ ----------------- -------------
Balances, December 31, 1999 .................. 20,884,957 $ 21,000 $ 10,988,000 $ (4,047,000) $ 6,962,000
============ ============ ============ ================= =============
Stock issued for acquisitions ................ 34,000 30 305,970 -- 306,000
Stock issued for cash, net of
registration fees and expenses ............... 724,760 650 1,499,350 -- 1,500,000
Stock issued for services .................... 50,000 50 9,950 -- 10,000
Common stock issued for cash
(warrant conversion) ......................... 300,000 300 299,700 -- 300,000
Syndications Costs ........................... -- -- (45,848) -- (45,848)
Other, rounding .............................. (9) (36) -- (58) (94)
Net Loss ..................................... -- -- -- (693,254) (693,254)
Balances, December 31, 1999 .................. 21,993,707 $ 21,994 $ 13,057,122 $ (4,740,312) $ 8,338,804
============ ============ ============ ================= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
A) UNAUDITED
The unaudited financial statements included herein for the Company for the
three months ended March 31, 2000 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) CONSOLIDATION
At March 31, 2000, the Company has four wholly owned subsidiaries:
ClearWorks Communications, Inc., ClearWorks Structured Wiring Services,
Inc., and ClearWorks Integration Services, Inc., and ClearWorks
Integration Services, 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.
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.
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<PAGE>
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 materials, equipment and work in process.
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.
H) 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.
I) 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
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.
J) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and
involve uncertainties and matters of significant judgement, and therefore
cannot be determined with precision.
The Company believes that the carrying amounts of its financial instrument
current assets and liabilities approximate the fair value of such items
due to their nature. The carrying amounts of long-term debt and
convertible debentures approximate fair value as the interest rates
thereon approximate market.
Note 2. Business Combinations
On March 17, 2000 ClearWorks Home Systems, Inc. paid 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
$265,000 and 34,000 shares of common stock for the assets of Secure-All
Security. The common stock was valued at approximately $9 per share for purposes
of this transaction. The Company assumed liabilities of Secure-All Security
totaling $131,000.
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<PAGE>
Note 3. Issuance of Common Stock
During the three month period ended March 31, 2000, the Company issued
1,108,751 shares of common stock. The following table summarizes the shares of
common stock issued:
Shares outstanding December 31, 1999 20,884,957
------------
Shares issued for cash 724,760
Shares issued for acquisitions 34,000
Shares issued for services 50,000
Shares issued for warrant conversion 300,000
Shares cancelled (9)
------------
Shares outstanding March 31, 2000 21,993,707
The Company issued 724,760 shares of its common stock associated with
conversion of the 6% convertible debentures.
The Company issued 50,000 shares of its common stock associated with
services performed for the Company.
The Company issued 300,000 of its common stock associated with conversion
of warrants.
The Company issued 34,000 shares of its restricted common stock associated
with the acquisition of Secure-All Security.
Note 4. 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. 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 February 10, 2000 the Company converted $1,500,000 total face value of
the 6% convertible debentures into 764,760 shares of common stock.
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<PAGE>
Note 5. Subsequent Events
On April 19, 2000 the Company received from Candlelight a total of
$2,000,000 in exchange for an additional $2,000,000 total face value 6%
convertible debentures due December 13, 2001. The terms of the debenture were
similar in nature to the December 13, 1999 transaction.
On April 28, 2000 The Annual Meeting Of Stockholders of the Company was
held at 10:00 a.m. (local time) at J.W. Marriott, 5150 Westheimer Rd., Houston,
Texas, for the following purposes:
1. To elect a Board Of Directors consisting of three Directors: Michael
T. McClere, Dennis Majeski and Raymond Harrell.
2. To consider a proposal to amend our Certificate Of Incorporation to
change the name of our Company to ClearWorks.net, Inc.
3. To consider a proposal recommended by the Board Of Directors to
approve our 1999 Long-Term Incentive Plan.
4. To consider and vote upon a proposal recommended by the Board Of
Directors to ratify the selection of KPMG LLP to serve as our
independent certified accountants.
5. To transact any other business that properly may come before the
annual meeting.
Only the stockholders of record as shown on the Company's transfer books
at the close of business on March 17, 2000 were entitled to notice of, and to
vote at, the annual meeting.
On the date of the meeting, a quorum was present and voted. All proposals
were passed with the exception of Proposal No. 3--the 1999 Long-Term Incentive
Plan. The 1999 Long Term Incentive Plan was defeated. As a result, the stock
options granted to Company's key employees became unenforceable and invalid. The
Board of Directors intends to propose an alternate employee compensation plan to
compensate its key employees.
On May 1, 2000 the Company received conversion notice from Candlelight to
convert $500,000 of the outstanding 6% convertible debentures into 155,050
shares of common stock.
On May 9, 2000 ClearWorks Home Systems, Inc. entered into a letter of
intent with Home Systems Integration (H.S.I.) to acquire substantially all of
the assets of the business. H.S.I. is in the business of providing residential
structured wiring, security systems, audio/video solutions and home automation
On May 8, 2000 the Company's Chief Financial Officer, Carl A. Chase
resigned. The President of the Company is currently assuming the duties of the
Chief Financial Officer.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB, which was filed on April 10, 2000. The following discussion and analysis
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto appearing elsewhere in this report.
RISKS RELATING TO FORWARD-LOOKING STATEMENTS
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements in this
Form 10-QSB and elsewhere which are forward-looking and which provide other than
historical information, involve risks and uncertainties that may impact the
Company's results of operations. These forward-looking statements include, among
others, statements concerning the Company's general business strategies,
financing decisions and expectations for funding capital expenditures and
operations in the future. When used herein, the words "believe", "anticipate",
"hope", "estimate", "project", "intend", "expect" and similar expressions are
intended to identify such forward-looking statements. Although the Company
believes the expectations reflected in such forward-looking statements are based
on reasonable assumptions, no statements contained in this Form 10-QSB should be
relied upon as predictions of future events. Such statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise and
may be incapable of being realized. The risks and uncertainties inherent in
these forward-looking statements could cause actual results to differ materially
from those expressed in or implied by these statements.
Important factors that could cause actual results to differ materially
from the expectations reflected in a forward-looking statement herein include,
among other things, (1) the volatile nature of the securities business, (2) the
uncertainties surrounding the rapidly evolving markets in which the Company
competes, (3) the uncertainties surrounding technological change and the
Company's dependence on computer systems, (4) the Company's dependence on its
intellectual property rights, (5) the potential of increased government
regulation of the industry and subsequent changes in the current laws, rules and
regulations, (6) the changing demands by customers and (7) arrangements with
present and future customers and third parties.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the hereof. Changes may
occur after that date and the Company will not update that information except as
required by law in the normal course of its public disclosure practices.
OVERVIEW
GENERAL
As of March 31, 2000 the Company currently offers voice, data and video services
for both commercial and residential customers. The Company operates and provides
its services in Houston, San Antonio, Austin and McAllen, Texas; Las Vegas,
Nevada; and Phoenix, Arizona. In addition, the Company recently announced the
opening of an office in London, England to continue to expand the market for its
products. The Company's vision is to become an industry leader in integrated
voice, data and video solutions. The Company is pursuing this vision by
integrating technology and technology based companies into its organization
focused on the delivery of a suite of digital services to its clients through
the use of Internet Protocol (IP). The Company is taking advantage of the
convergence of telephone, cable TV, satellite TV, telecommunications and
Internet technology to accomplish its objectives. Additionally, the Company
intends to take advantage of the deregulation of the telecommunications industry
based on the passage by the US Congress of the Telecommunications Act in 1996.
The Company initially began developing its voice, data and video integration
capabilities to address business needs. During its early operations, the Company
recognized an opportunity to utilize its expertise to develop and deliver
"Bundled Digital Services" (BDS) to residential customers directly. The Company
has developed a proprietary
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<PAGE>
solution to deliver a digital services packages directly to consumers. Through
research and development (R&D), the Company possesses technology that can
utilize a high speed Internet connection for the delivery of all services. The
Company currently provides a wide array of digital solutions to its commercial
customers and it began deploying its technology to residential customers during
the third quarter of 1999.
RESEARCH & DEVELOPMENT.
The Company has committed, and expects to continue to commit in the future,
substantial resources for the development of BDS services. Research and
development efforts are directed at improving the performance and expanding on
the capability of BDS. The Company is currently in field trials for BDS and is
evaluating additional services to deliver to its consumers.
PRINCIPAL OPERATING COMPANIES.
The Company presently has four wholly owned subsidiaries which constitute its
principal operating companies: ClearWorks Structured Wiring Services, Inc., a
Texas corporation (formerly known as Millennium Integration Technologies, Inc.);
ClearWorks Communications, Inc., a Texas corporation; ClearWorks Integration
Services, Inc. (formerly known as Archer Mickelson Technologies, L.L.C., a Texas
limited liability company), and ClearWorks Home Systems, Inc., a recently formed
Texas corporation. ClearWorks Communications, Inc. has two wholly owned
subsidiaries named Northpointe Telecom Services, L.L.C. and Stonegate Telecom,
L.L.C. The Company anticipates the advantages of operating these companies
together based on delivering like services to both sets of customers, much like
the regional Bell operating companies (RBOCs) do today. Additionally, the
Company can utilize its 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
residential, commercial and education accounts for deployment of structured
wiring solutions. These customers consist of schools and or school districts,
companies and individual homeowners that seek outside expertise to deploy fiber
optics and copper-based structured wiring solutions. ClearWorks Structured
Wiring Services, Inc. generates revenue through time and materials billings,
consulting contracts, service and support contracts as well as hardware and
software sales. The Company does not intend for ClearWorks Structured Wiring
Services 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. The Company has
proprietary technology to enable it to proceed into the voice, data and video
market for bundled consumption via high speed fiber optics connections. The
Company foresees deploying dialtone, multi-channel digital video services,
dedicated internet connectivity, on-demand video rental, voicemail, and a
community intranet as a Bundled Digital Services package over one fiber
connection into the home. The market for these customers is just beginning to
develop and is benefited 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
FTTH backbones to deliver voice, data and video solutions directly to consumers.
The Company's projects include a Community Intranet for integrating local
businesses and schools into the community. The market for "bundled digital
services" is just beginning to develop in the US based on the Telecommunications
Act and deregulation of the marketplace.
ClearWorks Integration Services, Inc. performs and provides various network
integration and product technology to clients for the delivery of voice, video
and data. Utilizing a high level of technical expertise, such services include
designing, consultation, implementation, building, modifying and supporting a
variety of solutions. Customers consist primarily of Fortune 1000 companies who
seek outside expertise to develop and integrate their various technology
solutions. Among these customers, the company generates revenue through
information technology consulting, computer networking services and equipment
sales. The Company performs hardware and software installations, system upgrades
and enhancements and maintenance services. The Company offers software and
hardware products to enhance its ability to provide complex technology solutions
for enterprise wide networks. The Company is an authorized nonexclusive reseller
of networking products, which enables it to deliver integration services.
Generally, these products are technically sophisticated and require a high level
of integration services for successful deployment. The Company has nonexclusive
reseller relationships with many industry-leading vendors
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<PAGE>
of information technology products, including Compaq, Computer Associates,
Network Associates, IBM, Hewlett Packard, Alctel Cabling Systems and 3Com. The
Company is a value added reseller ("VAR"). That is, it purchases hardware and
software directly from the manufacturer and resells these products at a higher
price (retail) directly to the Company's customers. The Company's relationships
with these leading aggregators of computer hardware and software enable the
Company to provide its clients with competitive product pricing, ready product
availability and services such as electronic product ordering, product
configuration and testing, and product warehousing and delivery. The Company
also purchases technology from Cisco Systems, Netscape and General Instruments.
Moreover, these relationships enable the Company not to carry inventory normally
associated with the delivery of products.
ClearWorks Home Systems, Inc. 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.
CONSOLIDATED RESULTS OF OPERATIONS
FISCAL Q1 2000 COMPARED TO FISCAL Q1 1999
March 31, March 31,
2000 1999
---------------------------
Revenues $ 5,394,748 $ 430,442
Costs and expenses 5,981,796 244,597
Loss from operations (587,049) 181,005
Net loss (693,254) 181,005
Basic and diluted loss per share (.03) .01
The following summary table presents comparative cash flows of the Company
for the periods ended March 31, 1999 and 2000:
March 31, March 31,
2000 1999
---------------------------
Net cash used by operating activities $(1,180,656) $ (208,705)
Net cash used by investing activities $(1,423,780) $ (412,598)
Net cash provided by financing activities $ 2,127,813 $ 912,302
REVENUES
REVENUES. Total revenue increased by $4,964,306 over the March 31, 1999 fiscal
quarter to $5,394,748 (an increase of 1,253.3%) for the quarter ended March 31,
2000. The Company acquired three companies during 1998, two companies during
1999, and one company in 2000. As a direct result of these acquisitions, the
Company has been able to increase significantly its revenue in the primary areas
in which it operates. Further increases are projected for the remainder of the
year 2000 as a result of anticipated acquisitions.
Revenues from ClearWorks Integration Services, Inc. increased from
$119,390 during the first quarter 1999 to $4,655,113 (an increase of 3,899%) for
the March 31, 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. The Company has been able to
increase its revenues in the integration area primarily due to the acquisition
of United Computing Group, LLC in December 1999 and an increased customer base
through sales leverage between the companies.
-13-
<PAGE>
Revenues from ClearWorks Structured Wiring, Inc. decreased from $311,052
during the first quarter 1999 to $155,965 (an decrease of 199.4%) for the March
31, 2000 period. Structured wiring revenues are derived from providing wiring
solutions for commercial and education customers. ClearWorks Structured Wiring
Services, Inc. deployed its structured wiring solutions to major education and
commercial customers in the Houston area during the three months ended March 31,
2000. The Company anticipates that the decrease in revenues will continue as
resources within ClearWorks Structured Wiring, Inc. are deployed on internal
projects to build out Fiber-To-The-Home telecommunications networks.
Revenues from ClearWorks Home Systems increased from $0 during the first
quarter 1999 to $302,768 for the March 31, 2000 period. Home Systems revenues
are derived from providing wiring solutions for residential, security systems
and audio/visual equipment The Company anticipates that the increase in revenues
will continue as the Company expands into new markets and completes
acquisitions. The Company is currently ramping up to meet the demand generated
by communities in the ClearWorks Communications backlog.
Revenues from ClearWorks Communications, Inc. increased from $0 during the
first quarter 1999 to $280,902 for the March 31, 2000 period. Revenues from
delivery of the Company's Bundled Digital Services were $42,000 for the year
ended December 31, 1999. The Company currently delivers voice, video and data
services to residential homes in primarily new communities. The Company is
currently deploying new infrastructure to ramp subscribers from its backlog of
residential communities. The Company's subscriber revenue ramps directly
proportional to the number of new homes built in its subdivisions each quarter.
The Company anticipates bringing new communities on-line in the forth quarter of
2000.
COSTS AND EXPENSES RELATED TO REVENUES
COSTS AND EXPENSES. Costs and expenses increased to $5,981,796 for quarter ended
March 31, 2000 compared to $244,597 for quarter ended March 31, 1999. Costs and
expenses grew based on an increase in new revenues primarily from acquisitions.
Margins within the subsidiaries were consistent with managements expectations,
with gross margins for ClearWorks Structured Wiring at 46%, ClearWorks
Integration Services at 16%, ClearWorks Communications at 62%, and ClearWorks
Home Systems at 31%. Gross margins increased from $134,090 during the first
quarter 1999 to $948,323 (an increase of 707%) for the March 31, 2000 period.
This increase resulted primarily from the acquisition of United Computing Group
in December of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $1,115,050 to
$1,212,345 for the quarter ended March 31, 2000, from $97,295 quarter ended
March 31, 1999. Selling, general and administrative expenses consist primarily
of compensation to employees and management. During the first quarter 2000, the
Company concentrated on streamlining it process and controls and focused on the
goal of profitability and growth. The Company was streamlined, and departments
and teams were evaluated for effectiveness. Staff was added in critical areas of
the business including accounting and customer service. The Company had 131
management, sales and administrative personnel at March 31, 2000. Accounting
fees were $76,722 for quarter ended March 31, 2000. Accounting fees were related
to the Company's 1999 audit performed by KPMG, LLP. Legal fees for the quarter
were $27,667 and primarily related to the Companies defense of outstanding civil
litigation. The cost of investor relations for the quarter was $42,269 These
expenses are comprised of transfer agent expenses, investor relations firm fees,
press release services, printing and postage.
DEPRECIATION AND AMORTIZATION
The Company 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. The Company amortizes this cost over a five-year period. In
addition the Company acquired fixed assets to support the business growth. The
fixed assets are depreciated over a two to seven year period. Depreciation and
Amortization expenses increased by $309,815 to $323,027 for the quarter ended
March 31, 2000 primarily due to the amortization of goodwill associated with
acquisitions.
-14-
<PAGE>
INTEREST EXPENSE
Interest expense for the quarter ended March 31, 2000 was $112,961 an increase
over $0 for quarter ended March 31, 1999. Interest accrued primarily on
outstanding loans which are due August 2000 and May 2001 (See accompanying notes
to consolidated financial statements, Note 4: Notes Payable).
INTEREST INCOME
Interest income for the quarter ended March 31, 2000 was $6,722 an increase over
$0 for quarter ended March 31, 1999. Interest was earned primarily on overnight
bank sweeps on current cash balances.
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.
CAPITAL EXPENDITURES
The Company 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 quarter ended March 31, 2000 were $1,158,780.
CAPITAL RESOURCES
During the quarter, Candlelight exercised its 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. The Company registered resale of the common stock underlying all
debentures and warrants that have been or may be issued to Candlelight. 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 and acquisition of additional businesses or assets or (3) as compensation
to employees, consultants, officers or directors.
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.
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"). SFAS 133 establishes new accounting and reporting standards requiring
that all derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS 133, as amended, is effective for all fiscal years beginning
after June 15, 2000. The Company has not yet determined the impact, if any, SFAS
133 will have on its financial position or results of operations, and plans to
adopt this standard during the year ending December 31, 2001.
-15-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. The Company's management does not expect that the
results in any of these legal proceedings will have a material adverse effect on
the Company's financial condition or results of operations. Except for the legal
proceedings described below, all other proceedings are incorporated herein by
reference from Company's Form 10-KSB, which was previously filed on April 10,
2000.
The Company is a defendant CAUSE NO. 1999-62209; SHERMAN GERALD MASON,
D/B/A CASTLE DEVELOPMENTS, LTD. V. CLEARWORKS.NET, INC. FORMERLY CLEARWORKS
TECHNOLOGIES, INC.; IN THE DISTRICT COURT OF HARRIS COUNTY, TEXAS; 157TH
JUDICIAL DISTRICT. On December 17, 1999, Sherman Gerald Mason d/b/a Castle
Developments, Ltd. filed suit against the Company in the 157th Judicial District
Court of Harris County, Texas. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with the Company and seeks recovery of 500,000
shares of stock. He also seeks recovery of alleged monthly retainer payments in
an undisclosed amount and seeks injunctive relief. The Company has filed an
answer disputing all liability, asserting that the contract was terminable and
that the contract is not enforceable because of the prior breaches of the
consulting agreement by Mr. Mason.
This suit was only recently served upon the Company. The Company has
answered. No discovery has been propounded and no scheduling order or trial date
has been entered in connection with the case.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - None
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLEARWORKS.NET, INC.
(Registrant)
S/S Shannon McLeroy
May 19, 2000 Shannon McLeroy
Chief Financial Officer and Treasurer
(duly authorized officer)
-17-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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