SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[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.
--------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its Charter)
Delaware 76-0576542
------------------------------ --------------------------
State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.
2450 Fondren, Suite 200, Houston, Texas 77063
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(713) 334-2595
--------------------------------------------------------------------------------
(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 21,993,707
------------------------------ -----------------------------
Title of Class Number of Shares
outstanding at March 31, 2000
One exhibit included.
<PAGE>
CLEARWORKS.NET, INC.
INDEX
PART 1 FINANCIAL INFORMATION - AS RESTATED
PAGE NO.
Item 1. Consolidated Balance Sheets 3
March 31, 2000 and December 31, 1999
Consolidated Statements of Operations 4
For the Three Months Ended March 31,
2000 and 1999
Consolidated Statements of Cash Flows 5
For the Three Months Ended March 31,
2000 and 1999
Consolidated Statements of Shareholders' 6
Equity (Deficit)
December 31, 1999 and March 31, 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
PART 2 OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matter to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
-2-
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS (RESTATED)
<S> <C> <C>
Current assets:
Cash ................................................................................... $ 770,377 $ 1,247,000
Accounts receivable, net of allowance for doubtful
accounts of $193,081, and $93,081, respectively ...................................... 3,493,387 3,388,000
Stock subscription receivable .......................................................... -- 450,000
Inventories ............................................................................ 634,086 332,000
Prepaid expenses and other current assets .............................................. 162,564 229,000
------------ ------------
Total current assets ............................................................. 5,060,414 5,646,000
Property and equipment, net .............................................................. 3,768,592 2,256,000
------------ ------------
Other assets:
Goodwill, net .......................................................................... 5,752,444 5,449,000
Deferred financing costs ............................................................... 364,852 378,000
Other intangible assets ................................................................ 1,189,909 29,000
------------ ------------
Total assets ..................................................................... $ 16,136,211 $ 13,758,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ................................................................ $ 2,838,908 $ 3,197,000
Accrued expenses ....................................................................... 1,577,111 461,000
Current maturities of long-term debt ................................................... 899,844 860,000
Note payable, shareholder .............................................................. -- 150,000
------------ ------------
Total current liabilities ........................................................ 5,315,863 4,668,000
Long-term debt, net of current maturities ................................................ 500,000 535,000
6% Convertible debentures, net of discount of $386,558 and
$215,000, respectively ............................................................. 3,113,442 2,785,000
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 ............................................................... 18,756,033 11,472,000
Stock subscription receivable ............................................................ (600,000) --
Deferred financing charges .............................................................. (2,707,342) (285,000)
Accumulated deficit ...................................................................... (8,263,779) (5,438,000)
------------ ------------
7,206,906 5,770,000
------------ ------------
Total liabilities and shareholders' equity ....................................... $ 16,136,211 $ 13,758,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
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
------------ ------------
(RESTATED)
<S> <C> <C>
Revenues:
Integration Services .......................................................... $ 4,655,113 $ 430,442
Home Systems .................................................................. 302,768 --
Structured Wiring ............................................................. 155,965 --
Communications ................................................................ 280,902 --
------------ ------------
5,394,748 430,442
------------ ------------
Costs and expenses:
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 ............................... 1,463,803 97,295
Depreciation and amortization .............................................. 323,027 18,052
------------ ------------
6,233,254 249,437
------------ ------------
Income (loss) from operations .................................................. (838,506) 181,005
Other income/(expense):
Interest income ............................................................ 6,755 --
Interest expense ........................................................... (1,994,028) --
------------ ------------
Income (loss) before taxes ..................................................... (2,825,779) 181,005
Income taxes ................................................................... -- --
------------ ------------
Net income (loss) .............................................................. $ (2,825,779) $ 181,005
============ ============
Income (loss) per share:
Basic ...................................................................... (.13) .01
Diluted .................................................................... (.13) .01
Weighted average number of common shares outstanding:
Basic ...................................................................... 21,439,332 15,538,159
Diluted .................................................................... 21,439,332 15,538,159
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<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: (Restated)
Net income (loss) ........................................................................ $ (2,825,779) $ 181,005
Adjustments to reconcile net income (loss) to net cash
used by operating activities, net of acquisition:
Depreciation and amortization ....................................................... 323,027 13,212
Stock issued for compensation and services .......................................... 122,600 --
Non-cash interest expense ........................................................... 1,701,000 --
Amortization of deferred financing charges ......................................... 34,908 --
Amortization of debt discount and deferred financing costs .......................... 145,175 --
(Increase) decrease in accounts receivable ......................................... (105,387) (300,617)
(Increase) decrease in inventories .................................................. (302,086) (21,558)
(Increase) decrease in prepaids and other current assets ........................... 564,688 (38,283)
Increase (decrease) in accounts payable ............................................. (358,092) 86,824
Increase (decrease) in accrued expenses ............................................. (133,689) (129,288)
--------------- ---------------
Total adjustments ...................................................................... 1,992,144 (389,710)
--------------- ---------------
Net cash used by operating activities .................................................... (833,635) (208,705)
Cash flows from investing activities:
Acquisition, net of cash received ................................................... (225,000) --
Capital expenditures ................................................................ (1,437,063) (412,598)
--------------- ---------------
Net cash used by investing activities .................................................... (1,662,063) (412,598)
Cash flows from financing activities:
Net repayments of notes payable ..................................................... (145,156) 2,919
Proceeds from issuance of convertible debentures .................................... 2,000,000 --
Payments of deferred financing costs ................................................ (240,000) --
Payments of syndication costs ....................................................... (45,769) --
Proceeds from common stock sales, net ............................................... -- 909,383
Decrease in stock subscription receivable ........................................... 450,000 --
--------------- ---------------
Net cash provided by financing activities ................................................ 2,019,075 912,302
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
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF ADDITIONAL
COMMON COMMON PAID-IN STOCK
STOCK STOCK CAPITAL SUBSCRIPTION
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 ................................ 11,460,249 $ 11,000 $ 1,152,000 $ 0
Stock issued for acquisitions .............................. 2,075,000 2,000 4,893,000 --
Stock issued for cash, net of registration fees and
expenses ................................................... 6,817,910 6,885 2,260,000 --
Warrants issued for services ............................... -- -- 1,026,000 --
Stock issued for incentive
Compensation and services .................................. 531,798 1,000 1,276,000 --
Beneficial conversion feature for 6% convertible
debentures ................................................. -- -- 650,000 --
Warrants issued with convertible debentures ................ -- -- 215,000 --
Amortization of deferred financing charges ................. -- -- -- --
Net loss ................................................... -- -- -- --
------------ ------------ ------------ ------------
Balances, December 31, 1999 ................................ 20,884,957 $ 20,885 $ 11,472,000 $ 0
============ ============ ============ ============
Stock issued for acquisition ............................... 34,000 34 305,966 --
6% convertible debentures converted to stock, net
of deferred financing costs and discount ................... 724,760 725 1,263,975 --
Beneficial conversion feature for 6% convertible
debentures ................................................. -- -- 1,701,000 --
Stock issued for services .................................. 50,000 50 122,550 --
Warrants issued for services ............................... -- -- 3,201,611 --
Warrants issued with convertible debentures ................ -- -- 299,000 --
Conversion of warrants to stock ............................ 300,000 300 599,700 (600,000)
Amortization of deferred
financing charges .......................................... -- -- (164,000) --
Syndications costs ......................................... -- -- (45,769) --
Shares cancelled ........................................... (10) -- -- --
Net loss ................................................... -- -- -- --
------------ ------------ ------------ ------------
Balances, March 31, 2000 ................................... 21,993,707 $ 21,994 $ 18,756,033 $ (600,000)
============ ============ ============ ============
<CAPTION>
DEFERRED TOTAL
FINANCING ACCUMULATED SHAREHOLDERS'
CHARGES DEFICIT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balances, December 31, 1998 ................................ $ 0 $ (279,000) $ 884,000
Stock issued for acquisitions .............................. -- -- 4,895,000
Stock issued for cash, net of registration fees and
expenses ................................................... -- -- 2,266,885
Warrants issued for services ............................... (378,000) -- 648,000
Stock issued for incentive
Compensation and services .................................. -- -- 1,277,000
Beneficial conversion feature for 6% convertible
debentures ................................................. -- -- 650,000
Warrants issued with convertible debentures ................ -- -- 215,000
Amortization of deferred financing charges ................. 93,000 -- 93,000
Net loss ................................................... -- (5,159,000) (5,159,000)
------------ ------------ ------------
Balances, December 31, 1999 ................................ $ (285,000) $ (5,438,000) $ 5,769,885
============ ============ ============
Stock issued for acquisition ............................... -- -- 306,000
6% convertible debentures converted to stock, net
of deferred financing costs and discount ................... -- -- 1,264,700
Beneficial conversion feature for 6% convertible
debentures ................................................. -- -- 1,701,000
Stock issued for services .................................. -- -- 122,600
Warrants issued for services ............................... (2,621,250) -- 580,361
Warrants issued with convertible debentures ................ -- -- 299,000
Conversion of warrants to stock ............................ -- -- --
Amortization of deferred
financing charges ......................................... 198,908 -- 34,908
Syndications costs ......................................... -- -- (45,769)
Shares cancelled ........................................... -- -- --
Net loss ................................................... -- (2,825,779) (2,825,779)
------------ ------------ ------------
Balances, March 31, 2000 ................................... $ (2,707,342) $ (8,263,779) $ 7,206,906
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
-6-
<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 ClearWorks.net,
Inc. and subsidiaries (collectively, 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 (as restated) and 1998 included in the Company's 10-KSB/A filed
on July 3, 2000.
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 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 Home
Systems, 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 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.
Note 2. Restatement Adjustments
The Company has recorded certain accounting adjustments that were required to
restate the March 31, 2000 financial statements as originally filed. These
restatement adjustments increased previously reported net loss by $2,133,000,
and primarily consist of the following: an increase to interest expense of
$1,701,000 to record the beneficial conversion feature attributable to the 6%
convertible debentures issued in March 2000; an increase in interest expense of
$180,000 to record the amortization of deferred financing costs and debt
-7-
<PAGE>
discounts associated with the Company's December 1999 and
March 2000 6% convertible debenture issuances; and an increase in selling,
general and administrative expenses of $123,000 to record the fair value of
common stock issued for services performed.
Other adjustments that did not affect net loss, but that did affect other
amounts as previously filed primarily consists of the following: a decrease of
$299,000 in the carrying value of 6% convertible debentures issued in March 2000
to record the relative fair value of detachable warrants as a discount with an
offsetting increase to additional paid-in capital; an increase of $2,621,000 in
deferred financing charges recognized as a separate component of sharesholders'
equity attributable to the fair value of warrants issued to advisors of the
Company in connection with the March 2000 convertible debentures; a decrease in
additional paid-in capital of $399,000 to reflect the adjusted carrying value of
the deferred financing costs and debt discount in connection with the February
2000 conversion of 6% convertible debentures to common stock; an increase of
$540,000 in other intangible assets and accrued expenses related to amounts
payable under an exclusivity agreement; an increase of $580,000 in other
intangible assets and additional paid-in capital attributable to the fair value
of warrants issued in connection with such exclusivity agreement; an increase in
stock subscriptions receivable of $600,000 to record notes received upon the
conversion of warrants; and a $400,000 decrease in inventory and corresponding
increase in property and equipment to reclassify equipment not yet placed in
service. The effects of the restatement adjustments are as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE QUARTER ENDED AS PREVIOUSLY
MARCH 31, 2000 REPORTED AS RESTATED
---------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Balance sheet:
Accounts receivable ......................................... $ 3,681,241 $ 3,493,387
Inventories ................................................. 1,034,086 634,086
Prepaid expenses and other current assets ................... 74,079 162,564
Property and equipment, net ................................. 3,368,592 3,768,592
Deferred financing costs .................................... 1,760,369 364,852
Other assets ................................................ 70,148 1,189,909
Accrued expenses ............................................ 698,911 1,577,111
6% convertible debentures ................................... 3,235,500 3,113,442
Additional paid-in capital .................................. 13,057,122 18,756,033
Stock subscription receivable ............................... -- (600,000)
Deferred financing charges .................................. -- (2,707,342)
Accumulated deficit ......................................... (4,740,312) (8,263,779)
Statement of operations:
Selling, general and administrative expenses ................ $ 1,212,345 $ 1,463,803
Interest expense ............................................ 112,961 1,994,028
Net loss .................................................... (693,254) (2,825,779)
Loss per share .............................................. (0.03) (0.13)
</TABLE>
Note 3. Business Combinations
On March 17, 2000 the Company acquired all of the assets of Secure-All
Security, a sole proprietorship engaged in the business of selling and
installing security systems and monitoring the systems it installs. The Company
paid $225,000, assumed liabilities totaling $131,000 and issued 34,000 shares of
its common stock for the assets of Secure-All Security. The total purchase price
paid for this acquisition, including certain acquisition costs, was $700,000,
which has been recorded as goodwill to be amortized over 5 years.
Note 4. Issuance of Common Stock and Warrants
During the three month period ended March 31, 2000, the Company issued
1,108,750 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 debenture conversion 724,760
Shares issued for acquisition 34,000
Shares issued for services 50,000
Shares issued for warrant conversion 300,000
Shares cancelled (10)
----------------
Shares outstanding March 31, 2000 21,993,707
-8-
<PAGE>
The Company issued 724,760 shares of its common stock associated with
conversion of the 6% convertible debentures. (See note 5).
The Company issued 34,000 shares of its restricted common stock associated
with the acquisition of Secure-All Security. (See note 3).
The Company issued 50,000 shares of its common stock associated with
services performed for the Company. The Company recorded expense of $122,600
based on the fair value of these shares on the date a commitment to provide
services was reached.
The Company issued 300,000 shares of its common stock associated with the
conversion of warrants. (See note 6).
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
relative fair value of $215,000 on the date of issuance and recorded this amount
as a discount against the convertible debentures.
The warrants are exercisable at $3.16 per share. The debentures are
convertible at the lower of $3.30 per share or 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 February 10, 2000 Candlelight converted $1,500,000 total face value of
the 6% convertible debentures into 724,760 shares of common stock. At the date
of the conversion, the Company charged deferred financing charges of $301,000
and convertible debenture discount of $98,000 related to the convertible
debentures to additional paid-in capital.
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 the discount allocable to detachable warrants
discussed below), therefore, the charge to interest expense was limited to
$1,701,000.
-9-
<PAGE>
The 6% convertible debentures issued on March 15, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can be
converted into 140,000 shares of common stock. The Company determined the
warrants to have a total value of $299,000 on the date of issuance and recorded
this amount as a discount against the convertible debentures. This discount will
be amortized to interest expense over the term of the convertible debentures.
The Company has an agreement with Intratech Capital Partners (Intratech)
to assist the Company in raising money. By contract, Intratech is to receive
warrants to purchase 375,000 shares of common stock for every $5 million in
funding raised. In connection with the $2,000,000 6% convertible debentures
issued in March 2000 (which brought to $5 million the total amount of funding
raised by Intratech), the Company issued warrants to Intratech to purchase
375,000 shares of common stock at $2.50 per share. The fair value of these
warrants was determined to be $2,621,000 and has been recorded as a deferred
financing charges on the accompanying consolidated balance sheet to be amortized
to interest expense over the term of the convertible debentures.
Note 6. Services Agreement
In January 2000, the Company entered into a services agreement with Land
Tejas Development LLC (Land Tejas) whereby the Company will serve as the
exclusive provider of Bundled Digital Services in communities developed by Land
Tejas. At the effective date of the agreement, the Company owed to Land Tejas an
up-front fee of approximately $540,000 for the right to access lots at Land
Tejas communities. This amount has not yet been paid, and is recorded as an
accrued liability on the accompanying March 31, 2000 consolidated balance sheet.
The Company also issued warrants to purchase 300,000 shares of common stock at
an average price of $2.00 per share to certain principals of Land Tejas. The
fair value of these warrants was determined to be $580,000. Both the accrued
access fees and warrant fair value have been capitalized and included in other
assets in the accompanying balance sheet to be amortized over the asset's
estimated useful life of five years.
In March 2000, the warrants issued to Land Tejas were exercised and the
Company received notes receivable in the amount of $600,000. The notes are
classified as stock subscriptions receivable within shareholders' equity at
March 31, 2000.
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.
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
-10-
<PAGE>
CLEARWORKS INTEGRATION SERVICES, INC. subsidiary provides information
technology staffing personnel, network engineering, vendor evaluation of network
hardware, resale of network hardware, implementation of network hardware and
support of private and enterprise networks. Additional services include desktop
rollouts, multi-platform supports and Local Area Networks ("LAN"), as well as
Wide Area Networks ("WAN") analysis and server deployment.
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 CLEARWORKS
CLEARWORKS STRUCTURED INTEGRATION CLEARWORKS CORPORATE AND
COMMUNICATIONS WIRING SERVICES HOME SYSTEMS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31, 2000
Revenues from unaffiliated customers ... 280,902 155,965 4,655,113 302,768 -- 5,394,748
Segment profit (loss) .................. (68,264) 45,774 149,348 95,421 (737,758) (515,479)
Total assets ........................... (68,574) 172,559 2,284,718 397,753 15,971,005 18,757,461
Capital expenditures ................... 1,030,399 81,969 16,101 69,065 315,058 1,512,592
Depreciation and amortization .......... 24,660 2,445 5,650 6,460 283,812 323,027
</TABLE>
The following reconciles segment profit (loss) to income (loss) from operations
per the March 31, 2000 Consolidated Statements of Operations:
2000
---------------
Total profit (loss) from
reportable segments .................... $ (515,479)
Depreciation and amortization ............ (323,027)
Income (loss) from operations ............ (838,506)
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
-11-
<PAGE>
not expect that the results of this legal proceeding will have a material
adverse effect on the Company's financial condition or results of operations.
The Company is currently a plaintiff in ClearWorks.net, Inc. v. Michael C.
Callihan and Linda Callihan. The suit was filed February 25, 2000 after
attempts to mediate were unsuccessful alleging causes of action based on breach
of contract, breach of warranty, fraud in stock transactions and common law
fraud. The facts underlying the lawsuit are as follows: On or about May 21,
1998, the principal shareholder of Team Renaissance, Inc. entered into a merger
agreement with ClearWorks. Shortly thereafter, the principal shareholder,
Michael Callihan, requested that the Company pay in full promissory notes in
which Mr. Callihan was the payee. However, those promissory notes were neither
disclosed in the merger agreement nor attached to the merger agreement as
exhibits. A dispute arose between ClearWorks and Mr. Callihan regarding the
validity of the promissory notes. Additionally, a dispute arose regarding credit
card accounts held in the name of Mr. Callihan which Mr. Callihan claims are the
obligation of the Company and which the Company claims are the personal debt of
Mr. and Mrs. Callihan. Also, prior to closing, ClearWorks learned that the
Callihans had failed to make payments to its employees and contractors, and had
also failed to pay its suppliers, in direct violation of the merger agreement
between the parties. In this suit, ClearWorks seeks return of shares previously
issued to Mr. Callihan in connection with the events underlying the suit. The
Company intends to continue to vigorously prosecute its claims against the
Callihans.
The Company is currently a defendant in Tim Pennington v. ClearWorks
Technologies, Inc. and James W. Walters. Tim Pennington has recently filed a
petition asserting claims against the Company. These claims allegedly first
arose with Mr. Pennington's employment with Southeast Tire Recycling, Inc. Mr.
Pennington claims that he had an employment agreement with Southeast Tire
Recycling, Inc. providing him with options to purchase up to 175,000 shares of
free trading stock, 100,000 shares of restricted stock, and an additional 50,000
shares for every six (6) months of Pennington's employment. Pennington claims
that his employment agreement was breached by Southeast Tire prior to the
merger. Pennington also claims that he was also the owner of 300,000 shares of
common stock of Southeast Tire. Pennington's claims are addressed to ClearWorks,
although the alleged misconduct was not the conduct of ClearWorks but that of
its predecessor, Southeast Tire, and its shareholders, officers and directors.
Pennington's claims are grounded in fraud, state and federal securities fraud,
and conversion. Pennington seeks a judgment in excess of $100,000 plus punitive
damages, court cost, attorneys' fees and interest. The Company has filed its
answer to the recent filing by Pennington. The answer was due on March 1, 2000.
The Company intends to vigorously defend the claim and to raise affirmative
defenses on behalf of the Company, such as estoppel, latches and that
Pennington's claims are not against the Company, but are against former
officers, directors, and shareholders.
The Company also currently is a defendant in Robert Horn vs. ClearWorks
Technologies, Inc. The suit was filed March 25, 1999, alleging causes of action
based on breach of contract in the amount of approximately $200,000. The facts
underlying this lawsuit are as follows: Robert Horn entered into an employment
agreement with the Company effective April 1, 1998. The employment agreement
contained a condition precedent which stated: "The completion and subsequent
release of escrow money associated with the initial 504 offering of the
Company's securities on or before May 1, 1998, is a condition precedent to the
obligation of any party hereunder." The condition precedent was not met because
the Company did not have a 504 offering prior to May 1, 1998. On July 1, 1998,
Mr. Horn tendered his notice of resignation effective July 31, 1998. On March
25, 1999, Mr. Horn filed a lawsuit claiming that the Company had terminated Mr.
Horn's employment without cause. The Company filed an answer on April 16, 1999,
denying the claim and asserting its affirmative defenses. The Company is
vigorously contesting these claims by Robert Horn on the basis that they are
without merit.
The Company is a defendant in Sherman Gerald Mason, d/b/a Castle
Developments, Ltd. v. ClearWorks.net, Inc. formerly ClearWorks Technologies,
Inc.. On December 17, 1999, Sherman Gerald Mason d/b/a Castle Developments, Ltd.
filed suit against the Company. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with the Company and seeks recovery of 500,000
shares of stock. He also seeks recovery of alleged monthly retainer payments in
an undisclosed amount and seeks injunctive relief. The Company has filed an
answer disputing all liability, asserting that the contract was terminable and
that the contract is not enforceable because of the prior breaches of the
consulting agreement by Mr. Mason.
This suit was only recently served upon the Company. The Company has
answered. No discovery has been propounded and no scheduling order or trial date
has been entered in connection with the case.
-12-
<PAGE>
Note 9. 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 1999 and March 2000 transactions. 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 will record as
interest expense the value of the beneficial conversion feature, which is
approximately $1,500,000.
On April 28, 2000, the Annual Meeting of Stockholders of the Company was
held. 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 the Company entered into a letter of intent with Home
Systems Integration (H.S.I.) to acquire substantially all of the assets of the
business for $185,000. H.S.I. is in the business of providing residential
structured wiring, security systems, audio/video solutions and home automation
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/A. 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/A 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/A 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.
-13-
<PAGE>
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 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
-14-
<PAGE>
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 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 ......................... 6,233,254 249,437
Income (loss from operations) .............. (838,506) 181,005
Net income (loss) ......................... (2,825,779) 181,005
Basic and diluted earnings (loss) per share (.13) .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 ... $ (833,635) $ (208,705)
Net cash used by investing activities ... (1,662,063) (412,598)
Net cash provided by financing activities $ 2,019,075 $ 912,302
15
<PAGE>
REVENUES
REVENUES. Total revenue increased by $4,964,306 over the March 31, 1999 fiscal
quarter to $5,394,748 (an increase of 1,153.3%) 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
$430,442 during the first quarter 1999 to $4,655,113 (an increase of 981%) 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.
Revenues from ClearWorks Structured Wiring, Inc. increased from $0 during
the first quarter 1999 to $155,965 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 a decrease in revenues will occur 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 $6,233,254 for quarter ended
March 31, 2000 compared to $249,437 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 $948,324 (an increase of 22%) 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 $ 1,366,508 to $
1,463,803 for the quarter ended March 31, 2000, from $97,295 quarter ended March
31, 1999. Selling, general and administrative expenses consist
-16-
<PAGE>
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 Company's 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 $ 304,975 to $323,027 for the quarter ended
March 31, 2000 primarily due to the amortization of goodwill associated with
acquisitions.
INTEREST EXPENSE
Interest expense for the quarter ended March 31, 2000 was $ 1,994,028. Interest
expense consisted primarily of $1,701,000 attributable to the beneficial
conversion feature on the March 2000 6% convertible debenture issuance.
Additionally, interest accrued on outstanding loans which are due August 2000
and May 2001.
INTEREST INCOME
Interest income for the quarter ended March 31, 2000 was $6,755. 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 $ 1,437,063.
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
-17-
<PAGE>
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.
-18-
<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/A.
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. Limited discovery has been propounded. Company has requested that this
suit be referred to arbitration.
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
(A) EXHIBITS
3(i) Articles of Incorporation of the Registrant*
3(ii) Amendment to Articles of Incorporation*
3(iii) By-Laws of the Registrant *
3(iv) Minutes of the Regular Meeting of the Board of Directors dated February
25, 2000, amending Bylaws.
4(a) Convertible Note Regarding KMA Investments among Registrant and KMA
Investments dated July 9, 1999**
4(b) Form of Debenture to Candlelight Investment (Issued pursuant to the
Securities Purchase Agreement dated December 13, 1999 among Registrant and
Candlelight Investment)****
4(c) Form of Warrant to Candlelight Investments (Issued pursuant to the
Securities Purchase Agreement dated December 13, 1999 among Registrant and
Candlelight Investment) ****
4(d) Form of Conditional Warrant to Candlelight Investments (Issued pursuant to
the Securities Purchase Agreement dated December 13, 1999 among Registrant and
Candlelight Investment) ****
-19-
<PAGE>
10(a) Stock Option Plan dated May 12, 1999*
10(b) Stock Warrant Plan dated April 1998*
10(c) Agreement and Plan of Acquisition (Archer Mickelson Technologies, Inc.)
dated April 1, 1999 among Registrant and Archer Mickelson Technologies*
10(d) Agreement and Plan of Acquisition (United Computing Group, Inc. and United
Consulting Group, Inc.) dated December 20, 1999 among Registrant and United
Computing Group, Inc. and United Consulting Group, Inc.***
10(e) Securities Purchase Agreement with Candlelight Investments dated December
13, 1999 among Registrant and Candlelight Investment ****
10(l) Agreement regarding strategic business alliance with Land Tejas
Development, L.L.C. dated March 26, 1999 among Registrant and Land Tejas**
21 A description of the subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarter ended
March 31, 2000:
(i) Current Report on Form 8-K dated January 7, 2000 filed to report, among
other things, that the Company had completed the acquisition of United Computing
Group, Inc. and United Consulting Group, Inc.;
(ii) Current Report on Form 8-K dated February 15, 2000 filed to report, among
other things, the change in the Company's accountants;
(iii) Current Report on Form 8-K/A dated March 16, 2000 filed to report, among
other things, the historical financial statements related to the acquisition
described in subparagraph (i); and
(iv.) Current Report on Form 8-K/A dated March 28, 2000 filed to report, among
other things, the consent of the Company's former auditors with respect to the
historical financial statements filed as described in subparagraph (iii).
*Incorporated by reference from Registrant's Form 10-SB, which was previously
filed on June 29, 1999.
**Incorporated by reference from Registrant's Form 10-SB, which was previously
filed on September 20, 1999.
*** Incorporated by reference from Registrant's Form 8-K, which was previously
filed on January 7, 2000.
**** Incorporated by reference from Registrant's Form SB-2, which was previously
filed on January 12, 2000.
-20-
<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 Michael T. McClere
---------------------------------------
July 3, 2000 Michael T. McClere
Chief Financial Officer
(duly authorized officer)
-21-
