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 June 30, 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.
Common Stock, $.001 par value 25,324,818
------------------------------ ------------------------------
Title of Class Number of Shares
outstanding at August 21, 2000
One exhibit included.
1
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CLEARWORKS.NET, INC.
INDEX
PART 1 FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Consolidated Balance Sheets 3
June 30, 2000 (unaudited) and December 31,1999
Consolidated Statements of Operations 4
For the Three and Six Months Ended June 30,
2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows 5
For the Three and Six Months Ended June 30,
2000 and 1999 (unaudited)
Consolidated Statements of Shareholders' Equity 6
For the Six Months Ended June 30, 2000 (unaudited)
And the Year Ended December 31, 1999
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART 2 OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matter to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
2
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PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 And December 31, 1999
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
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ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 86,023 $ 1,247,000
Accounts receivable, net of allowance for doubtful
accounts of $343,081 and $93,081, respectively ......... 5,076,338 3,388,000
Stock subscription receivable ............................ 450,000
Inventories .............................................. 1,043,975 332,000
Prepaid expenses and other current assets ................ 163,475 229,000
------------- -----------------
Total current assets ............................... 6,369,811 5,646,000
------------- -----------------
Property and equipment, net ................................ 3,843,671 2,256,000
------------- -----------------
Other assets:
Goodwill, net ............................................ 5,343,360 5,449,000
Deferred financing costs ................................. 311,869 378,000
Other .................................................... 1,057,026 29,000
------------- -----------------
6,712,255 5,856,000
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Total assets ....................................... $ 16,925,737 $ 13,758,000
============= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade .................................. $ 4,274,930 $ 3,197,000
Accrued expenses ......................................... 1,494,384 461,000
Current maturities of long-term debt ..................... 1,403,724 860,000
Note payable, shareholder ................................ -- 150,000
------------- -----------------
Total current liabilities .......................... 7,173,038 4,668,000
------------- -----------------
Long-term debt, net of current maturities .................. 41,869 535,000
------------- -----------------
6% Convertible debentures, net of discount ................. 3,035,850 2,785,000
------------- -----------------
Shareholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
22,794,458 and 20,884,957 shares issued and outstanding
June 30, 2000 and December 31, 1999, respectively .......... 22,795 21,000
Additional paid-in capital ............................... 21,411,514 11,472,000
Stock subscription receivable ............................ (600,000) --
Deferred financing charges ............................... (1,234,171) (285,000)
Accumulated deficit ...................................... (12,925,158) (5,438,000)
------------- -----------------
6,674,980 5,770,000
------------- -----------------
Total liabilities and shareholders' equity ......... $ 16,925,737 $ 13,758,000
============= =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
ClearWorks Integration Services .................. $ 6,284,700 $ 356,177 $ 10,939,813 $ 599,644
ClearWorks Home Systems .......................... 426,890 -- 729,658 --
ClearWorks Structured Wiring ..................... 177,712 237,823 333,677 425,356
ClearWorks Communications ........................ 693,016 -- 973,918 --
-------------- -------------- -------------- --------------
7,582,318 594,000 12,977,066 1,025,000
-------------- -------------- -------------- --------------
Costs and expenses:
ClearWorks Integration services and materials ... 5,615,885 146,400 9,612,034 290,349
Home Systems services and materials ............. 935,650 -- 1,127,785 --
Structured Wiring services and materials ........ 220,293 341,600 268,570 327,651
Communications services and materials ........... 941,511 -- 1,151,374 --
Selling, general and administrative expenses .... 1,661,783 1,207,000 3,125,586 1,304,000
Depreciation and amortization ................... 496,725 44,000 819,752 86,000
-------------- -------------- -------------- --------------
9,871,847 1,739,000 16,105,101 2,008,000
-------------- -------------- -------------- --------------
Loss from operations ................................ (2,289,529) (1,145,000) (3,128,035) (983,000)
Other income/(expense):
Interest income ................................. 2,013 8,768
Interest expense ................................ (2,373,863) (8,000) (4,367,891) (13,000)
-------------- -------------- -------------- --------------
Loss before income taxes ............................ (4,661,379) (1,153,000) (7,487,158) (996,000)
-------------- -------------- -------------- --------------
Income taxes, net of valuation allowances ........... -- -- -- --
-------------- -------------- -------------- --------------
Net loss ............................................ $ (4,661,379) $ (1,153,000) $ (7,487,158) $ (996,000)
============== ============== ============== ==============
Loss per share:
Basic ........................................... (.21) (.08) (.34) (.07)
Diluted ......................................... (.21) (.08) (.34) (.07)
Weighted average number of common shares outstanding:
Basic ........................................... 22,029,589 14,473,856 21,850,835 14,473,856
Diluted ......................................... 22,029,589 14,473,856 21,850,835 14,473,856
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999
-------------------------- --------------------------
<S> <C> <C>
Cash flows from operating activities: (Restated)
Net loss .................................................... $ (7,487,158) $ (996,000)
-------------------------- --------------------------
Adjustments to reconcile net loss to net cash
used by operating activities, net of
acquisitions:
Depreciation and amortization .......................... 819,752 86,000
Stock issued for compensation and services ............. 106,350 800,000
Non-Cash interest expense .............................. 3,417,463 --
Amortization of deferred financing charges, costs and debt
discount ............................................. 704,988 --
(Increase) Decrease in accounts receivable, net ....... (1,688,338) (801,000)
(Increase) Decrease in inventories ..................... (711,975) (22,000)
(Increase) Decrease in prepaids and other assets ....... 136,300 (24,000)
Increase in accounts payable ........................... 538,415 577,000
Increase (Decrease) in accrued expenses ................ 909,725 (154,000)
-------------------------- --------------------------
Net cash used by operating activities ....................... (3,254,478) (534,000)
Cash flows from investing activities:
Acquisitions, net ...................................... (225,000) (35,000)
Capital expenditures ................................... (1,578,323) (1,339,000)
-------------------------- --------------------------
Net cash used by investing activities ....................... (1,803,323) (1,374,000)
Cash flows from financing activities:
Net repayments of notes payable ........................ (99,407) (6,000)
Proceeds from issuance of convertible debentures ....... 4,000,000 --
Payments of deferred financing costs ................... (408,000) --
Payments of syndication costs .......................... (45,769) --
Proceeds from common stock sales, net .................. -- 1,853,000
Decrease in stock subscription receivable .............. 450,000
-------------------------- --------------------------
Net cash provided by financing activities ................... 3,896,824 1,847,000
Net decrease in cash ........................................ (1,160,977) (61,000)
Cash at the beginning of the period ........................... 1,247,000 162,000
-------------------------- --------------------------
Cash at the end of the period ................................. $ 86,023 $ 101,000
========================== ==========================
Supplemental disclosures of cash flow
Interest expense paid ................................. $ 296,017 $ 14,000
Supplemental disclosures of non-cash
Issuance of common stock for asset acquisitions ............... $ 306,000 --
Fair value of assets acquired .......................... -- $ 38,000
Fair value of capital stock issued ..................... -- $ 4,000
Liabilities assumed .................................... -- $ 35,000
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED STOCK RETAINED EARNINGS TOTAL
SHARES OF COMMON PAID-IN FINANCING SUBSCRIPTION (ACCUMULATED SHAREHOLDERS'
COMMON STOCK STOCK CAPITAL CHARGES RECEIVABLE DEFICIT) EQUITY
------------ ----------- ------------ ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 .. 11,460,249 $ 11,000 $ 1,152,000 $ -- $ -- $ (279,000) $ 884,000
Stock issued for acquisitions 2,075,000 2,000 4,893,000 -- -- -- 4,895,000
Stock issued for cash, net of
registration fees and expenses 6,817,910 6,885 2,260,000 -- -- -- 2,266,885
Warrants issued for services . -- -- 1,026,000 (378,000) -- -- 648,000
Stock issued for incentive
compensation and services 531,798 1,000 1,276,000 -- -- -- 1,277,000
Beneficial conversion feature
for 6% convertible debenture. -- -- 650,000 -- -- 650,000
Warrants issued with
convertible debentures ....... -- -- 215,000 -- -- -- 215,000
Amortization of deferred
financing charges ............ -- -- -- 93,000 -- 93,000
Net loss ..................... -- -- -- -- -- (5,159,000) (5,159,000)
------------ ----------- ------------ ----------- ------------ ----------------- -------------
Balances, December 31, 1999 .. 20,884,957 $ 20,885 $ 11,472,000 $ (285,000) $ -- $ (5,438,000) $ 5,769,885
============ =========== ============ =========== ============ ================= =============
(The following information
is unaudited)
Stock issued for acquisitions 34,000 34 305,966 -- -- -- 306,000
6% convertible debentures
converted to stock, net of
deferred financing costs and
discounts .................... 1,345,364 1,346 1,586,958 1,590,120 -- -- 3,178,424
Warrants issued for services . -- -- 3,712,522 (3,132,161) -- -- 580,361
Stock issued for incentive
compensation and services .... 41,875 42 106,308 -- -- -- 106,350
Beneficial conversion feature
for 6% convertible debenture . -- -- 3,417,463 -- -- -- 3,417,463
Warrant issued with
convertible debentures ....... -- -- 582,537 -- -- -- 582,537
Common stock issued for
warrant conversion ........... 488,262 488 599,512 -- (600,000) -- --
Amortization of deferred
financing charges ............ -- -- (325,983) 592,870 -- -- 266,887
Syndications Costs ........... -- -- (45,769) -- -- -- (45,769)
Net Loss ..................... (7,487,158) (7,487,158)
------------ ----------- ------------ ----------- ------------ ----------------- -------------
Balances, June 30, 2000 ...... 22,794,458 $ 22,795 $ 21,411,514 $(1,234,171) $ (600,000) $ (12,925,158) $ 6,674,980
============ =========== ============ =========== ============ ================= =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
A) UNAUDITED
The unaudited financial statements included herein for the Company for
the three and six months ended June 30, 2000 and 1999 have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission and include all adjustments which are, in the opinion
of management, necessary for a fair presentation. Certain information and
footnote disclosures required by generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the audited
financial statements and related notes thereto for the annual periods
ended December 31, 1999 and 1998.
b) LIQUIDITY
The ability of the Company to satisfy its obligations depends in part
upon its ability to reach a profitable level of operations and securing
short and long-term financing for development of its commercial and
residential products. The Company is currently in discussions with other
financial institutions to provide additional funding through a
combination of debt and equity to fund its business plan. There is no
assurance that short and long-term financing can be obtained to fulfill
the Company's capital needs. Without the short or long-term financing,
the Company will attempt to sell additional common stock to meet its
current and future capital needs. If the Company is not able to obtain
either short or long-term funding or funding through the sale of its
common stock, the Company would be required to cut back its expansion
plans and operate the facilities it currently has built, and fund its
operations with internally generated funds from its integration,
structured wiring and communications business units.
C) CONSOLIDATION
At June 30, 2000, the Company has four wholly owned subsidiaries:
ClearWorks Communications, Inc., ClearWorks Structured Wiring Services,
Inc., ClearWorks Home Systems, Inc., and ClearWorks IT Solutions, Inc. The
consolidated financial statements include the accounts of the Company and
all of its subsidiaries. All significant inter-company transactions and
balances have been eliminated in consolidation.
D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The markets for the Company's services are characterized by
intense competition, rapid technological development, regulatory changes
and frequent new product introductions, all of which could impact the
future value of the Company's assets.
E) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial MATURITY of three months or less to be cash equivalents.
F) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated by using the straight-line method over the
following useful lives:
YEARS
-----
Head-end facilities 20
Field operating equipment 3-7
Satellite demonstration equipment 7
Furniture, fixtures and office equipment 2-7
Expenditures for maintenance and repairs are charged against income as
incurred and major improvements are capitalized.
7
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G) INVENTORIES
Inventories are valued at the lower of cost or market. The cost is
determined by using the first in first out ("FIFO") method. Inventories
consist primarily of materials, equipment and work in process.
H) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over five
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill may be impacted if the
estimated future operating cash flows are not achieved.
I) REVENUE RECOGNITION
The Company recognizes revenue and the related costs at the time the
services are rendered. Revenue is derived from fees charged for the
delivery of Bundled Digital Services, integration services and cabling and
wiring.
Revenue from long-term contracts is recognized using the percentage of
completion method, measured by the percentage of total costs incurred to
date to estimated total costs for each contract. This is used because
management considers actual costs to be the best available measure of
progress on these contracts.
J) EARNINGS (LOSS) PER COMMON SHARE
The Company computes net income/(loss) per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic net
income/(loss) per share is computed by dividing income or loss applicable
to common stockholders by the weighted average number of shares of the
Company's common stock outstanding during the period. Diluted net
income/(loss) per share is determined in the same manner as basic net
income/(loss) per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the
treasury stock method and dilutive conversion of the Company's convertible
debt. For the three and six months ended June 30, 1999 and 2000, the
dilutive effect of all stock options, warrants and convertible debt were
not included in the calculation of diluted loss per share as the Company
is reporting net losses for each period.
Note 2. Restatement of Prior Years Results
The results of operations for the three and six months ended June 30, 1999
have been restated to reflect adjustments recorded in connection with the
Company's financial statements for the year ended December 31, 1999, as reported
in the Company's annual report, as amended, in Form 10-KSB/A. Such adjustments
resulted in additional compensation expense of $696,000 for the three and six
months ended June 30,1999.
Note 3. Business Combinations
On May 9, 2000 ClearWorks Home Systems, Inc. entered into a letter of
intent with Home Systems Integration (H.S.I.) to acquire substantially all of
the assets of the business. H.S.I. is in the business of providing residential
structured wiring, security systems, audio/video solutions and home automation.
The transaction is still pending and is in dispute (See Item 2 Legal Proceedings
concerning Valley First.)
8
<PAGE>
Note 4. Issuance of Common Stock
During the six month period ended June 30, 2000, the Company issued
1,721,229 shares of common stock. The following table summarizes the shares of
common stock issued:
Shares outstanding December 31, 1999 20,884,957
----------
Shares issued from 6% debenture conversion 1,345,364
Shares issued for acquisitions 34,000
Shares issued for services 41,875
Shares issued for warrant conversion 488,272
Shares cancelled (10)
----------
Shares outstanding June 30, 2000 22,794,458
The Company issued 1,345,364 shares of its common stock associated with
conversion of the 6% convertible debentures.
The Company issued 41,875 shares of its common stock associated with
services performed for the Company.
The Company issued 488,272 shares of its common stock associated with
conversion of warrants.
The Company issued 34,000 shares of its restricted common stock associated
with the acquisition of Secure-All Security.
Note 5. Convertible Debentures
On December 13, 1999, the Company closed a private placement transaction
with Candlelight Investors, LLC, ("Candlelight") a Delaware limited liability
company. In the private placement, the Company received from Candlelight a total
of $3,000,000 in exchange for $3,000,000 total face value 6% convertible
debentures due December 13, 2001, together with warrants to purchase up to
210,000 shares of common stock. The Company determined the warrants to have a
total value of $265,000 on the date of issuance and recorded this amount as a
discount against the convertible debentures.
The warrants are exercisable at $3.16 per share. The debentures are
convertible at the lower of $3.30 per share or 92 percent of the average of the
three lowest closing bid prices for the Company's common stock during the 30
days immediately preceding conversion. However, if the average lowest closing
price is less than $1.50 per share, then the conversion price of the debentures
shall be equal to the average lowest closing price without modification.
Because the conversion price of these debentures was less than the fair
value of the Company's common stock on the date of issuance, the Company
recorded as interest expense the value of the beneficial conversion feature. The
value of the beneficial conversion feature was determined to be $650,000. The
Company also gave Candlelight the right to acquire, upon total payment to the
Company of $2,000,000, an additional $2,000,000 face value of debentures and
additional warrants to purchase up to 140,000 shares of common stock.
In connection with the private placement, the Company agreed not to sell
any of its securities until July 4, 2000, unless the securities are (1) issued
in connection with a public offering of at least $15 million, (2) in connection
with an acquisition of additional businesses or assets or (3) as compensation to
employees, consultants, officers or directors.
On March 15, 2000, the Company issued an additional $2,000,000 of 6%
convertible debentures to Candlelight with conversion features similar to those
noted above. Because the conversion price of these debentures was less than the
fair value of the Company's common stock on the date of issuance, the Company
has recorded as interest expense the value of the beneficial conversion feature.
The value of the beneficial conversion feature exceeded the carrying value of
the convertible debentures (net of discount allocable to detachable warrants
discussed below), therefore, the charge to interest expense was limited to
$1,701,000.
The 6% convertible debentures issued on March 15, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can be
converted into 140,000 shares of common stock. The Company determined the
warrants to have a total value of $299,000 on the date of issuance and recorded
this amount as a discount against the convertible debentures. This discount will
be amortized to interest expense over the term on the convertible debentures.
On April 19, 2000, the Company issued an additional $2,000,000 of 6%
convertible debenture to Candlelight with conversion features similar to those
noted above. Because the conversion price of these debentures was less than the
fair value of the Company's common stock on the date of issuance, the Company
has recorded as interest expense the value of the beneficial conversion feature.
The value of the beneficial conversion feature exceeded the carrying value of
the debentures (net of discount allocable to detachable warrants discussed
below), therefore, the charge to interest expense was limited to $1,716,000.
9
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The 6% convertible debentures issued on April 19, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can be
converted into 140,000 shares of common stock. The Company determined the
warrants have a total value of $284,000 on the date of issuance and recorded
this amount as a discount against the convertible debentures. This discount will
be amortized to interest expense over the term on the convertible debentures.
In February, May and June 2000 Candlelight converted $3,500,000 total face
value of the 6% convertible debentures into 1,345,364 shares of common stock. At
the dates of these conversions, the Company charged a total of deferred
financing charges, accrued interest and convertible discount of $1,911,696 to
additional paid-in capital.
Note 6. Subsequent Events
The Company plans to issue 100,000 warrants to IntraTech in connection
with the April 19 Candlelight transaction.
On July 13, 2000 the Company announced that its subsidiaries ClearWorks
Integration Services, Inc. and United Computing Group, Inc. would be merged and
operate as ClearWorks IT Solutions, Inc. Kevan Casey will continue as President.
On July 20, 2000 the Company received conversion notice from Candlelight
to convert $150,000 of the outstanding 6% convertible debentures into 49,511
shares of common stock.
On July 25, 2000 the Company entered into a letter of intent to acquire
LDConnect.com, a voice-over-ip (VOIP) worldwide long distance provider. The
acquisition of LDConnect.com is anticipated to add $4 million in new revenues to
the Company in the first twelve months of operation.
In July 2000 the Company granted approximately 888,000 shares of stock to
its employees. This bonus will result in a non-cash compensation expense of
approximately $4.0 million.
On August 3, 2000 the Company entered into a letter of intent to acquire
Link2 Communications, a nationwide provider of high speed wireless broadband
access. The acquisition of Link2 Communications is anticipated to add
approximately $10 million in new revenues to the Company in the first 12 months
of operation and provide the Company with a strategic arm in which to address
the large retrofit market in wireless Bundled Digital Services.
On August 7, 2000 the Company received conversion notice from Candlelight
to convert $740,000 of the outstanding 6% convertible debentures into 270,717
shares of common stock.
On August 10, 2000 the Company received conversion notice from Candlelight
to convert $400,000 of the outstanding 6% convertible debentures into 146,404
shares of common stock.
On August 10, 2000 the Company's chief executive officer elected to
exercise 210,000 through a cash payment of $630,000.
On August 15, 2000 the Company announced it had signed a letter of intent
to merge with Eagle Wireless International. Terms of the merger call for each
ClearWorks.net shareholder to receive four shares of Eagle for each five shares
of ClearWorks.Net. After obtaining all necessary approvals it is hoped that the
deal could close in the next three to six weeks.
On August 15, 2000, the Company received conversion notice from
Candlelight to convert $200,000 of the outstanding 6% convertible debentures
into 73,261 shares of common stock.
Note 7: Industry Segments
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." At December 31, 1999 the
Company's three business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into three reportable segments (described below) since the
long-term financial performance of these reportable segments is affected by
similar economic conditions.
CLEARWORKS COMMUNICATIONS, INC. subsidiary focuses primarily on the
delivery of integrated voice, video and data services to the residential and
commercial marketplace. Its proprietary technology enables it to proceed into
the voice, video and data market for bundled consumption. The Company deploys
dial tone, multi-channel digital video services, dedicated Internet
connectivity, on-demand video rental, voicemail, security monitoring and a
community intranet as a Bundled Digital Service into the home or office.
ClearWorks Communications provides solutions to consumers by implementing
technology, both within the community and within the home. Within the
residential community, ClearWorks Communications is installing fiber optic
backbones to deliver voice, video and data solutions directly to consumers.
10
<PAGE>
CLEARWORKS STRUCTURED WIRING SERVICES, INC. subsidiary focuses primarily on
developing residential, commercial and educational accounts for deployment of
structured wiring solutions and sale of audio and visual equipment to new
construction single family and multi-family dwelling units. These customers
consist of companies, school districts and universities and individuals that
seek outside expertise to deploy fiber-optic and copper-based structured wiring
solutions. ClearWorks Structured Wiring Services generates revenue through time
and materials billings, consulting contracts, service and support contracts.
CLEARWORKS IT SOLUTIONS, INC. subsidiary provides information technology
staffing personnel, network engineering, vendor evaluation of network hardware,
resale of network hardware, implementation of network hardware and support of
private and enterprise networks. Additional services include desktop rollouts,
multi-platform supports and Local Area Networks ("LAN"), as well as Wide Area
Networks ("WAN") analysis and server deployment.
CLEARWORKS HOME SYSTEMS, INC. subsidiary addresses new home building with
the goal of integrating technology into the home. This includes structured
wiring, security systems, audio/video solutions and home automation. As such,
the primary customers of ClearWorks Home Systems are major builders and the home
buyers themselves. Many of the systems installed are bundled into the mortgage
of the actual home. The company integrates with its counterparts in delivery the
key systems inside the home to prepare the home for high speed data services and
other future technologies.
The accounting policies of the reportable segments are the same as those
described in Note 2. The Company evaluates the performance of its operating
segments based on income before net interest expense, income taxes, depreciation
and amortization expense, accounting changes and non-recurring items.
Summarized financial information concerning the Company's reportable segments is
shown below in the following table:
<TABLE>
<CAPTION>
CLEARWORKS STRUCTURED CLEARWORKS CORPORATE AND
COMMUNICATIONS WIRING IT SOLUTIONS HOME SYSTEMS ELIMINATIONS CONSOLIDATED
-------------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 2000
Revenues from unaffiliated customers ..... 973,918 333,677 10,939,813 729,658 -- 12,977,066
Segment profit (loss) .................... (507,560) (32,685) 314,194 (628,845) (1,453,387) (2,308,283)
Total assets ............................. 3,698,381 1,054,244 4,265,305 769,950 7,137,857 16,925,737
Capital expenditures ..................... 1,096,130 81,969 16,101 69,065 315,058 1,578,323
Depreciation and amortization ............ 74,723 1,356 5,650 7,844 730,179 819,752
Three Months Ended June 30, 2000
Revenues from unaffiliated customers ..... 693,015 177,713 6,284,700 426,890 -- 7,582,318
Segment profit (loss) .................... (339,170) (80,557) 164,846 (721,498) (816,425) (1,792,804)
Total assets ............................. 3,698,381 1,054,244 4,265,305 769,950 7,137,857 16,925,737
Capital expenditures ..................... 66,231 -- -- -- -- 66,231
Depreciation and amortization ............ 50,063 -- -- 1,384 445,278 496,725
Six Months Ended June 30, 1999
Revenues from unaffiliated customers ..... -- 425,356 599,644 -- -- 1,025,000
Segment profit (loss) .................... -- (32,605) 314,194 -- (1,178,589) (897,000)
Total assets ............................. -- 369,659 259,845 -- 2,698,496 3,328,000
Capital expenditures ..................... -- 16,374 251,683 -- 1,070,943 1,339,000
Depreciation and amortization ............ -- 1,356 5,650 -- 78,994 86,000
Three Months Ended June 30, 1999
Revenues from unaffiliated customers ..... -- 155,965 438,035 -- -- 594,000
Segment profit (loss) .................... -- 45,774 149,348 -- (1,296,122) (1,101,000)
Total assets ............................. -- 369,659 259,845 -- 2,698,496 3,328,000
Capital expenditures ..................... -- 16,374 251,683 -- 657,943 926,000
Depreciation and amortization ............ -- 2,445 5,650 -- 35,905 44,000
</TABLE>
11
<PAGE>
The following reconciles segment profit (loss) to income (loss) from operations
for the three and six months ended June 30, 2000 and 1999 Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total profit (loss) from reportable segments .. (1,792,804) (1,101,000) (2,308,283) (897,000)
Depreciation and amortization ................. (496,725) (44,000) (819,752) (86,000)
Income (loss) from operations ................. (2,289,529) (1,145,000) (3,128,035) (983,000)
</TABLE>
Note 8. Commitments and Contingent Liabilities
LEGAL PROCEEDINGS
Coinciding with the reverse merger with Southeast, the former management
of Southeast established a trust to provide for the orderly liquidation of any
alleged claims existing as of the date of acquisition. Certain stockholders of
Southeast have contributed 86,000 free trading shares of the Company's common
stock to the trust to satisfy approximately $150,000 of alleged claims. Due to
the resignation of the trustee, the trust shares have been deposited in the
registry of the Harris County Texas District Court, and the Company has been
named a nominal defendant in an Interpleader action. The Company intends to
vigorously defend its position by requesting the court release the stock for
payment of all alleged claims as was originally intended. The Company's
management does not expect the results of this legal proceeding will have a
material adverse effect on the Company's financial condition or results of
operations.
The Company is currently a plaintiff in ClearWorks.net, Inc. v. Michael
C.Callihan and Linda Callihan. The suit was filed February 25, 2000 after
attempts to mediate were unsuccessful alleging causes of action based on breach
of contract, breach of warranty, fraud in stock transactions and common law
fraud. The facts underlying the lawsuit are as follows: On or about May 21,
1998, the principal shareholder of Team Renaissance, Inc. entered into a merger
agreement with ClearWorks. Shortly thereafter, the principal shareholder,
Michael Callihan, requested that the Company pay in full promissory notes in
which Mr. Callihan was the payee. However, those promissory notes were neither
disclosed in the merger agreement nor attached to the merger agreement as
exhibits. A dispute arose between ClearWorks and Mr. Callihan regarding the
validity of the promissory notes. Additionally, a dispute arose regarding credit
card accounts held in the name of Mr. Callihan which Mr. Callihan claims are the
obligation of the Company and which the Company claims are the personal debt of
Mr. and Mrs. Callihan. Also, prior to closing, ClearWorks learned that the
Callihans had failed to make payments to its employees and contractors, and had
also failed to pay its suppliers, in direct violation of the merger agreement
between the parties. In this suit, ClearWorks seeks return of shares previously
issued to Mr. Callihan in connection with the events underlying the suit. The
Company intends to continue to vigorously prosecute its claims against the
Callihans.
The Company is currently a defendant in Tim Pennington v. ClearWorks
Technologies, Inc. and James W. Walters. Tim Pennington has recently filed a
petition asserting claims against the Company. These claims allegedly first
arose with Mr. Pennington's employment with Southeast Tire Recycling, Inc. Mr.
Pennington claims that he had an employment agreement with Southeast Tire
Recycling, Inc. providing him with options to purchase up to 175,000 shares of
free trading stock, 100,000 shares of restricted stock, and an additional 50,000
shares for every six (6) months of Pennington's employment. Pennington claims
that his employment agreement was breached by Southeast Tire prior to the
merger. Pennington also claims that he was also the owner of 300,000 shares of
common stock of Southeast Tire. Pennington's claims are addressed to ClearWorks,
although the alleged misconduct was not the conduct of ClearWorks but that of
its predecessor, Southeast Tire, and its shareholders, officers and directors.
Pennington's claims are grounded in fraud, state and federal securities fraud,
and conversion. Pennington seeks a judgment in excess of $100,000 plus punitive
damages, court cost, attorneys' fees and interest. The Company has filed its
answer to the recent filing by Pennington. The answer was due on March 1, 2000.
The Company intends to vigorously defend the claim and to raise affirmative
defenses on behalf of the Company, such as estoppel, latches and that
Pennington's claims are not against the Company, but are against former
officers, directors, and shareholders.
The Company also currently is a defendant in Robert Horn vs. ClearWorks
Technologies, Inc. The suit was filed March 25, 1999, alleging causes of action
based on breach of contract in the amount of approximately $200,000. The facts
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<PAGE>
underlying this lawsuit are as follows: Robert Horn entered into an employment
agreement with the Company effective April 1, 1998. The employment agreement
contained a condition precedent which stated: "The completion and subsequent
release of escrow money associated with the initial 504 offering of the
Company's securities on or before May 1, 1998, is a condition precedent to the
obligation of any party hereunder." The condition precedent was not met because
the Company did not have a 504 offering prior to May 1, 1998. On July 1, 1998,
Mr. Horn tendered his notice of resignation effective July 31, 1998. On March
25, 1999, Mr. Horn filed a lawsuit claiming that the Company had terminated Mr.
Horn's employment without cause. The Company filed an answer on April 16, 1999,
denying the claim and asserting its affirmative defenses. The Company is
vigorously contesting these claims by Robert Horn on the basis that they are
without merit.
The Company is a defendant in Sherman Gerald Mason, d/b/a Castle
Developments, Ltd. v. ClearWorks.net, Inc. formerly ClearWorks Technologies,
Inc.. On December 17, 1999, Sherman Gerald Mason d/b/a Castle Developments, Ltd.
filed suit against the Company. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with the Company and seeks recovery of 500,000
shares of stock. He also seeks recovery of alleged monthly retainer payments in
an undisclosed amount and seeks injunctive relief. The Company has filed an
answer disputing all liability, asserting that the contract was terminable and
that the contract is not enforceable because of the prior breaches of the
consulting agreement by Mr. Mason.
This suit was only recently served upon the Company. The Company has
answered. No discovery has been propounded and no scheduling order or trial date
has been entered in connection with the case.
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 June 30, 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, Dallas and Austin 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
13
<PAGE>
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 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 Integration Services, Inc.
has two wholly owned subsidiaries, United Computing Group, Inc. and United
Consulting Group, Inc. both of which are Texas corporations.
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 IT Solutions, 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, implementing, 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 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
14
<PAGE>
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
SIX MONTHS ENDED JUNE 30,2000 TO SIX MONTHS ENDED JUNE 30, 1999
June 30, 2000 June 30, 1999
------------- -------------
Revenues ....................................... $ 12,977,066 $ 1,025,000
Costs and expenses ............................. 16,105,101 2,008,000
Loss from operations ........................... (3,128,035) (983,000)
Net loss ....................................... (7,487,158) (996,000)
Basic and diluted loss per share ............... (.34) (.07)
The following summary table presents comparative cash flows of the Company
for the six month periods ended June 30, 2000 and 1999:
June 30, 2000 June 30, 1999
------------- -------------
Net cash used by operating activities .......... $ (3,254,478) $ (534,000)
Net cash used by investing activities .......... $ (1,803,323) $ (1,374,000)
Net cash provided by financing activities ...... $ 3,896,824 $ 1,847,000
REVENUES
REVENUES. Total revenue increased by $11,952,066 over the June 30, 1999 fiscal
quarter to $12,977,066 (an increase of 1,166%) for the six months ended June 30,
2000. 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
$599,644 through the second quarter 1999 to $10,939,813 (an increase of 1,724%)
for the June 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. 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.
Revenues from ClearWorks Structured Wiring, Inc. decreased from $425,356
through the second quarter 1999 to $333,677 (an decrease of 22%) for the June
30, 2000 period. Structured wiring revenues are derived from providing wiring
solutions for commercial and education customers. ClearWorks Structured Wiring
Services, Inc. deployed its structured wiring solutions to major education and
commercial customers in the Houston area during the six months ended June 30,
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 through the June
30, 1999 period to $729,658 for the June 30, 2000 period. Home Systems revenues
are derived from providing wiring solutions for residential, security systems
and audio/visual equipment 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 through
the June 30, 1999 period to $973,918 for the June 30, 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
15
<PAGE>
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 fourth quarter of 2000.
COSTS AND EXPENSES RELATED TO REVENUES
COSTS AND EXPENSES. Costs and expenses increased to $12,159,763 through the
period ended June 30, 2000 compared to $618,000 through the period ended June
30, 1999. Costs and expenses grew based on an increase in new revenues primarily
from acquisitions and from the opening of new offices for the company. New
offices were established in Phoenix Arizona, San Antonio and Dallas Texas. Gross
margins within the subsidiaries were consistent with managements expectations,
with consolidated gross margins decreasing from forty percent (40%) through the
June 30, 1999 period to six percent (6%) (a decrease of 34%) for the June 30,
2000 period. This decrease resulted primarily from the operational costs of
acquisitions consummated by the company and from expansion costs of opening new
offices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $3,125,586 through the
period ended June 30, 2000, compared to $1,304,000 through the period ended June
30, 1999. Selling, general and administrative expenses consisted primarily of
compensation to employees and management. During the six months ended June 30,
2000, the Company 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. ClearWorks Communications continued
deploying on their Bundled Digital Services (BDS) 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.net the parent company added
a director of marketing to begin the extensive development of materials,
advertising, and consumer awareness products. Clearworks.net 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. The Company
had approximately 200 management, sales and administrative personnel at June 30,
2000.
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 $733,752 to $819,752 for the six months ended
June 30, 2000 primarily due to the amortization of goodwill associated with
acquisitions.
INTEREST EXPENSE
Interest expense increased to $4,367,891 through the period ended June 30, 2000,
compared to $13,000 through the period ended June 30, 1999. Interest accrued
primarily on outstanding convertible debentures which are due August 2000 and
May 2001 (See accompanying notes to consolidated financial statements, Note 4:
Convertible Debentures).
INTEREST INCOME
Interest income increased to $8,768 through the period ended June 30, 2000,
compared to $0 through the period ended June 30, 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.
16
<PAGE>
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 six months ended June 30, 2000 were $1,968,323 compared to $1,339,000
through the period ended June 30, 1999. Capital expenditures were primarily
utilized for the deployment of the Company's Fiber-To-The-Home (FTTH) program to
deliver high speed broadband services to residential communities.
CAPITAL RESOURCES
During the six months ended June 30, 2000, Candlelight exercised its right to
acquire, upon total payment to the Company 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. The Company is in the process of registering for
resale, 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 ninety (90) days after
the effectiveness of the registration statement, 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 (See accompanying
notes to consolidated financial statements, Note 5: Convertible Debentures).
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.
PART II. OTHER INFORMATION
ITEM 1. 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. Shortly after the close of the merger, Mr. Callihan resigned. He has
since counter-claimed in the suit claiming that he was constructively discharged
and raising additional counterclaims under the same theories raised against him.
We intend to continue to vigorously prosecute our claims against the
Callihans and to vigorously defend against the counterclaims by Mr. Callihan.
We are currently defendants in Cause No. 98-34190; Martin R. Nathan v.
ClearWorks Technologies, Inc., et. al.; In the 216th Judicial District Court,
Harris County, Texas, which case has been referred to arbitration in Case No.
70-168-00402-99; American Arbitration Association, ClearWorks Technologies,
Inc.; Michael T. McClere, Rachel McClere 1998 Trust; McClere
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Family Trust; and Shannon McLeroy vs. James W. Walters, J. Stanford Lifsey,
Individually and as Trustee of The Southeast Tire Tract, Janet W. Lifsey, James
W. Walters, Trustee for Southeast Tire Trust, Ronald Hawkins, Loyce Rodgers,
Earl Stover and Debra Smith. This suit was instituted by Plaintiff's 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, Southeast
Tire Recycling, Inc, and the named respondents as original controlling 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 controlling
shareholders of Southeast Tire (hereinafter "Walters Group") who are alleged to
have indemnity obligations to the claimants and who have escrowed approximately
86,000 shares of the Company's stock to secure any outstanding obligations
claimed by any party and arising prior to the date of the merger.
Pursuant to an order of the District Court, the proceedings in the
District Court have been stayed pending arbitration. All the claims described
above are now the subject of the above-referenced arbitration proceedings,
except for those related to the claims of Tim Pennington who intervened in the
District Court proceeding. Mr. Pennington's claims, as alleged by him, are
alleged to constitute claims not disclosed prior to the merger. The claims by
Tim Pennington have been severed and made the subject of a separate cause of
action now pending before the District Court, which is described below. The
claims by Tim Pennington are alleged as damages to the Company sought from the
respondents in the arbitration proceeding. The Order Compelling Arbitration was
entered in December 1999. A preliminary hearing was held before the arbitrators
on July 31, 2000. The matter is scheduled for arbitration in December 2000.
Discovery must be taken and is expected to begin promptly.
The Company's intentions with regard to this case are to obtain a
Declaratory Judgment identifying all outstanding claims that may exist against
the Company arising from pre-merger activity, to liquidate such claims, and to
obtain payment of those claims from the proceeds available from liquidation of
shares held in the registry of the state court and from Respondants for the
purpose of satisfying such claims. At this time, the Company has identified the
following alleged claimants: Recoh Tricote, Inc., Internal Revenue Service,
McManus & Co., P.C. These claims are believed to be in a total sum of less than
$150,000. Tim Pennington's claims are described below. Discovery is underway to
obtain the identification of any other claims that might exist. Although the
Walter's Group has not yet answered, it is expected that the Walter's Group will
dispute any and all liability.
The Company intends to vigorously contest claims in this case other than
those identified above by Recoh Tricote, Inc., Internal Revenue Service and
McManus & Co., P. C. and to prosecute the case with the goal that the Company
should recover payment of all the known and discovered outstanding obligations,
its attorneys fees, expenses and all costs from the proceeds of the sale of the
shares on deposit in the registry of the Court.
We are currently a defendant in Cause No. 98-34190-A; Tim Pennington v.
ClearWorks 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, the
remaining claim by Tim Pennington was severed into an independent cause of
action. Tim Pennington filed a petition asserting claims against the Company.
These claims allegedly first arose with Mr. Pennington's employment with
Southeast Tire Recycling, Inc. prior to the referenced merger Mr. Pennington
claims that he had an employment agreement with Southeast Tire Recycling, Inc.
providing him with options to purchase up to 175,000 shares of free trading
stock, 100,000 shares of restricted stock, and an additional 50,000 shares for
every six (6) months of Pennington's employment. Pennington claims that his
employment agreement was breached by Southeast Tire prior to the merger.
Pennington also claims that he was also the owner of 300,000 shares of common
stock of Southeast Tire. Pennington's claims are addressed to ClearWorks,
although the alleged misconduct was not the conduct of ClearWorks but that of
its predecessor, Southeast Tire, and its shareholders, officers and directors.
Pennington's claims are grounded in fraud, state and federal securities fraud,
and conversion. Pennington seeks a judgment in excess of $100,000 plus punitive
damages, court cost, attorneys' fees and interest. The Company has filed its
answer to the filing by Pennington. The Company intends to dispute the claim and
to raise affirmative defenses on behalf of the Company, such as estoppel,
latches and that Pennington's claims are not against the Company, but are
against former officers, directors, and shareholders.
The Court has scheduled a trial date for December 11, 2000. Discovery is
to take place between the present time and November 15, 2000. The Company
intends to vigorously contest all claims in this case. The Company also expects
to pursue its indemnity claims in this proceeding and in the arbitration
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 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.
ClearWorks Technologies, Inc. and Michael T. McClere. 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
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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. Mr. Horn amended his lawsuit on March 15, 2000 adding Mr. McClere, the
Company's chief executive officer, as an individual defendant. The case is set
for a mediated settlement conference on October 12, 2000, and for trial
beginning February 5, 2001. We are vigorously contesting these claims by Robert
Horn on the basis that they are without merit.
We are a plaintiff in Cause No. 1999-45751; ClearWorks.net, , Inc. vs.
Rapid Release Research, L.L.C., Successor in Interest to MCG Unlimited, Inc.,
and the American Arbitration Association. Suit was filed September 14, 1999, in
the 152nd Judicial District Court of Harris County, Texas, seeking a temporary
restraining order, temporary injunction and permanent injunction against the
defendants. Specifically, we sought to restrain defendants from arbitrating a
dispute pursuant to the American Arbitration Association rules ("AAA"). The
facts underlying this lawsuit are as follows: We and MCG Unlimited, Inc., the
predecessor to Rapid Release Research (in which Martin Nathan is a principal),
entered into a consulting agreement. Under the terms of that agreement, the
parties agreed to arbitrate any disputes under the agreement pursuant to the
Texas Arbitration Act. In March 1999 a dispute arose regarding whether we owed
to Rapid Release Research additional compensation under the agreement and
whether we agreed to select three arbitrators for arbitration (one selected by
each party and the third selected by the first two arbitrators). The 152nd
Judicial District Court referred the matter to arbitration to be arbitrated by a
single unbiased arbitrators. The suit was settled on July 25, 2000 on terms
favorable to the Company considering the amounts in controversy and the vagaries
and costs of continued litigation. The terms were for 150,000 shares of Section
144 stock which have not been issued.
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.
This suit was only recently served upon the Company. The Company has
answered. An agreement has been reached to arbitrate this matter before a single
arbitration. Written discovery has been exchanged and an arbitrator has been
selected. No arbitration dates have been scheduled.
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
Plaintiff's apartment complex. The suit seeks recovery of damages in the sum of
$78,746.69 plus interest, attorneys' fees and cost of court. The Company denies
the claims. The Company maintains its own claims for breach of contract in
connection with the same project. The Company has filed an affidavit claiming
lien against the apartment project owned by the Plaintiffs claiming that $52,800
is unpaid for services and materials provided. The Company will seek attorneys'
fees, interest and costs of court in connection with its counter-claim, when
filed.
The Company has just been sued and has filed its Answer. No discovery has
been taken. The Company has filed a counterclaim for outstanding invoices owed
to the Company.
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.
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 vs. 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
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also filed a Counterclaim for Declaratory Judgment on October 21, 1999. We are
vigorously contesting the claims by Sales Consultants on the basis that they are
without merit.
We and our subsidiary, ClearWorks Home Systems, Inc. ("CHS"), are
currently Defendants in Civil Action No. CV 2000-015051 in the Superior Court of
Arizona, Maricopa County, in a case styled Valley First Community Bank vs.
Clearworks.net, Inc., and ClearWorks Home Systems, Inc. This suit was instituted
by Plaintiff's Verified Complaint filed on August 11, 2000. The suit was filed
as a breach of contract action asserting claims for payment pursuant to a
binding letter of intent for purchase by CHS of assets of Home Systems
Integration, Inc. The Verified Complaint also raises alternative claims for
breach of an implied duty of good faith and fair dealing, conversion,
intentional interference with contract, and promissory estoppel. In the suit,
the Plaintiff seeks recovery of the purchase price of the assets in the sum of
$150,000.00, plus interest, and attorney's fees.
The Company asserts that CHS was not provided with accurate information
concerning the liens on the assets and intends to vigorously contest the claims
in this case. The Company's subsidiary will also assert its own claims arising
from the alleged failure to disclose the existence and/or priority of competing
liens to the assets to be purchased.
Item 2. CHANGES IN SECURITIES - None
The following sales of unregistered securities occurred during the quarter
ended June 30, 2000, in private transactions in which the Company relied on the
exemption from registration available under Section 4(2) of the Securities Act
of 1993, as amended:
[list securities issued on reliance of exemption, e.g., shares issued for
services and for acquisition. You need to include the information required
by item 701 of Regulation SB.]
Item 3. DEFAULTS UPON SENIOR SECURITIES - None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
Item 5. OTHER INFORMATION
A special meeting of the Board of Directors was held on June 30, 2000 at
which the number of directors was increased to 4 and Hal "Chip" Peterson was
appointed to serve until the next annual meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K - None
(a) Exhibits
The following exhibits, from which schedules and exhibits have been
omitted and will be furnished to the Commission upon its request, are filed with
this Current Report on Form 10-QSB:
(i) Articles of Incorporation of the Registrant (Incorporated by reference from
Registrant's Form 10-SB, which was previously filed on June 29, 1999).
3(ii) Amendment to Articles of Incorporation (Incorporated by reference from
Registrant's Form 10-SB, which was previously filed on June 29, 1999).
3(iii) By-Laws of the Registrant (Incorporated by reference from Registrant's
Form 10-SB, which was previously filed on June 29, 1999).
3(iv) Minutes of the Regular Meeting of the Board of Directors dated February
25, 2000, amending Bylaws (Incorporated by reference from Registrant's Form
10-QSB/A which was previously filed on July 3, 2000).
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the three-month
period ended June 30, 2000:
1. Current Report on Form 8-K dated May 31, 2000 filed to report, among
other things, that the Company had been listed for trading on the American
Stock Exchange.
2. Current Report on Form 8-K/A-2 dated June 7, 2000 filed to report,
among other things, the pro forma financial information with respect to
the acquisition of United Computing Group, Inc. and United Consulting
Group, Inc.
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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 Michael T. McClere
---------------------------------
August 21, 2000 Michael T. McClere
Chief Financial Officer
(duly authorized officer)
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