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 September 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.
--------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its Charter)
Delaware 76-0576542
------------------------------ ----------------------------------
State or other Jurisdiction of I.R.S. Employer Identification No.
Incorporation or Organization
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 28,783,264
----------------------------- -------------------------------
Title of Class Number of Shares outstanding at
October 31, 2000
One exhibit included.
<PAGE>
CLEARWORKS.NET, INC.
INDEX
PART 1 FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Consolidated Balance Sheets 3
September 30, 2000 (unaudited) and December 31,1999
Consolidated Statements of Operations 4
For the Three and Nine Months Ended September 30,
2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows 5
For the Three and Nine Months Ended September 30,
2000 and 1999 (unaudited)
Consolidated Statements of Shareholders' Equity 6
For the Nine Months Ended September 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 16
Condition and Results of Operations
PART 2 OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matter to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
2
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 And December 31, 1999
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ ------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 59,649 $ 1,247,000
Accounts receivable, net of allowance for doubtful
accounts of $463,188 and $93,081, respectively ............. 5,764,477 3,388,000
Stock subscription receivable ................................ 450,000
Inventories .................................................. 1,250,346 332,000
Prepaid expenses and other current assets .................... 174,629 229,000
------------------ ------------------
Total current assets ................................... 7,249,101 5,646,000
------------------ ------------------
Property and equipment, net .................................... 7,270,463 2,256,000
------------------ ------------------
Other assets:
Goodwill, net ................................................ 6,771,182 5,449,000
Deferred financing costs ..................................... 311,869 378,000
Other ........................................................ 1,067,510 29,000
------------------ ------------------
8,150,561 5,856,000
------------------ ------------------
Total assets ........................................... $ 22,670,125 $ 13,758,000
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ...................................... $ 6,228,802 $ 3,197,000
Accrued expenses ............................................. 1,444,444 461,000
Current maturities of long-term debt ......................... 1,496,322 860,000
Note payable, shareholder .................................... -- 150,000
------------------ ------------------
Total current liabilities .............................. 9,169,568 4,668,000
------------------ ------------------
Long-term debt, net of current maturities ...................... 69,670 535,000
------------------ ------------------
6% Convertible debentures, net of discount ..................... 1,902,750 2,785,000
------------------ ------------------
Shareholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
28,030,231 and 20,884,957 shares issued and
outstanding September 30, 2000 and December 31,
1999, respectively ............................................. 28,030 21,000
Additional paid-in capital ................................... 40,406,757 11,472,000
Stock subscription receivable ............................... (604,491) --
Deferred financing charges ................................... (1,102,965) (285,000)
Accumulated deficit .......................................... (27,199,194) (5,438,000)
------------------ ------------------
11,528,137 5,770,000
------------------ ------------------
Total liabilities and shareholders' equity ............. $ 22,670,125 $ 13,758,000
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER ENDED SEPTEMBER ENDED SEPTEMBER
30, 2000 30, 1999 30, 2000 30, 1999
--------------- --------------- --------------- ---------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
ClearWorks IT Solutions ............................. $ 5,798,852 $ 615,814 $ 16,738,665 $ 1,215,458
ClearWorks Home Systems ............................. 1,043,765 -- 1,773,423 --
ClearWorks Structured Wiring ........................ 254,955 411,186 588,632 836,542
ClearWorks Communications ........................... 392,662 -- 1,366,580 --
--------------- --------------- --------------- ---------------
7,490,234 1,027,000 20,467,300 2,052,000
--------------- --------------- --------------- ---------------
Costs and expenses:
ClearWorks IT Solutions services and materials ..... 4,783,645 226,500 14,395,679 516,849
Home Systems services and materials ................ 997,646 -- 2,125,431 --
Structured Wiring services and materials ........... 318,870 528,500 587,440 856,151
Communications services and materials .............. 203,504 -- 1,354,878 --
Selling, general and administrative expenses ....... 14,846,036 675,000 17,971,621 1,979,000
Depreciation and amortization ...................... 378,138 53,000 1,197,890 139,000
--------------- --------------- --------------- ---------------
21,527,839 1,483,000 37,632,939 3,491,000
--------------- --------------- --------------- ---------------
Loss from operations ................................... (14,037,605) (456,000) (17,165,639) (1,439,000)
Other income/(expense):
Interest income .................................... 2,013 55,000 8,768 55,000
Interest expense ................................... (236,431) (11,000) (4,604,323) (24,000)
--------------- --------------- --------------- ---------------
Loss before income taxes ............................... (14,272,023) (412,000) (21,761,194) (1,408,000)
--------------- --------------- --------------- ---------------
Income taxes, net of valuation allowances .............. -- (45,000) -- (45,000)
--------------- --------------- --------------- ---------------
Net loss ............................................... $ (14,272,023) $ (457,000) $ (21,761,194) $ (1,453,000)
=============== =============== =============== ===============
Loss per share:
Basic .............................................. (.57) (.03) (.91) (.09)
Diluted ............................................ (.57) (.03) (.91) (.09)
Weighted average number of common shares outstanding:
Basic .............................................. 24,912,345 15,301,957 23,957,594 15,301,957
Diluted ............................................ 24,912,345 15,301,957 23,957,594 15,301,957
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities: (Restated)
Net loss ............................................................................. $ (21,761,194) $ (1,408,000)
----------------- -----------------
Adjustments to reconcile net loss to net cash
used by operating activities, net of
acquisitions:
Depreciation and amortization ..................................................... 1,197,890 139,000
Stock issued for compensation and services ........................................ 12,756,592 755,000
Non-Cash interest expense ......................................................... 3,454,468 --
Amortization of deferred financing charges, costs
and debt discount ............................................................... 704,988 --
(Increase) Decrease in accounts receivable ,net .................................. (2,376,477) (923,000)
(Increase) Decrease in inventories ................................................ (918,346) (22,000)
(Increase) Decrease in prepaids and other assets .................................. 125,146 (20,000)
Increase in accounts payable ..................................................... 2,492,287 914,000
Increase (Decrease) in accrued expenses ........................................... 859,785 (63,000)
----------------- -----------------
Net cash used by operating activities ................................................ 18,296,333 780,000
Cash flows from investing activities:
Acquisitions, net ............................................................... 1,306,171 (35,000)
Capital expenditures ............................................................ (3,109,494) (2,032,000)
----------------- -----------------
Net cash used by investing activities ................................................ (1,803,323) (2,067,000)
Cash flows from financing activities:
Net borrowings of notes payable ................................................. (99,407) 782,000
Proceeds from issuance of convertible debentures ................................ 4,000,000 --
Payments of deferred financing costs ............................................ (223,991) --
Payments of syndication costs ................................................... (45,769) --
Proceeds from common stock sales, net ........................................... -- 1,853,000
Decrease in stock subscription receivable ....................................... 450,000
----------------- -----------------
Net cash provided by financing activities ............................................ 4,080,833 2,635,000
Net decrease in cash ................................................................. (1,187,351) (60,000)
Cash at the beginning of the period .................................................. 1,247,000 162,000
----------------- -----------------
Cash at the end of the period ........................................................ $ 59,649 $ 102,000
================= =================
Supplemental disclosures of cash flow
Interest expense paid .......................................................... $ 296,017 $ 14,000
Supplemental disclosures of non-cash
Issuance of common stock for asset acquisitions ...................................... $ 4,306,000 --
Fair value of assets acquired ................................................... $ 2,352,708 $ 95,000
Fair value of capital stock issued .............................................. $ 4,000,000 $ 60,000
Liabilities assumed ............................................................. -- $ 35,000
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED
SHARES OF COMMON PAID-IN FINANCING
COMMON STOCK STOCK CAPITAL CHARGES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 .... 11,460,249 $ 11,000 $ 1,152,000 $ --
Stock issued for acquisitions .. 2,075,000 2,000 4,893,000 --
Stock issued for cash, net of .. 6,817,910 6,885 2,260,000 --
registration fees and expenses
Warrants issued for services ... -- -- 1,026,000 (378,000)
Stock issued for incentive
compensation and services ...... 531,798 1,000 1,276,000 --
Beneficial conversion feature
for 6% convertible debenture ... -- -- 650,000 --
Warrants issued with convertible
debentures ..................... -- -- 215,000 --
Amortization of deferred
financing charges .............. -- -- -- 93,000
------------ ------------ ------------ ------------
Balances, December 31, 1999 .... 20,884,957 $ 20,885 $ 11,472,000 $ (285,000)
============ ============ ============ ============
(The following information is
unaudited)
Stock issued for acquisitions .. 1,034,000 1,034 4,304,966 --
6% convertible debentures
converted to stock, net of
deferred financing costs and
discounts ...................... 2,619,083 2,619 3,058,163 1,721,326
Warrants issued for services ... -- -- 3,712,522 (3,132,161)
Stock issued for incentive
compensation and services ...... 2,783,919 2,784 13,627,075 --
Beneficial conversion feature
for 6% convertible debenture ... -- -- 3,417,463 --
Warrant issued with convertible
debentures ..................... -- -- 582,537 --
Common stock issued for warrant
conversion ..................... 708,262 708 603,783 --
Amortization of deferred
financing charges .............. -- -- (325,983) 592,870
Syndications Costs ............. -- -- (45,769) --
Net Loss ....................... -- -- --
------------ ------------ ------------ ------------
Balances September 30, 2000 .... 28,030,231 $ 28,030 $ 40,406,757 $ (1,102,965)
============ ============ ============ ============
<CAPTION>
STOCK RETAINED EARNINGS TOTAL
SUBSCRIPTION (ACCUMULATED SHAREHOLDERS'
RECEIVABLE DEFICIT) EQUITY
------------ ----------------- ------------
<S> <C> <C> <C>
Balances, December 31, 1998 .... $ -- $ (279,000) $ 884,000
Stock issued for acquisitions .. -- -- 4,895,000
Stock issued for cash, net of .. -- -- 2,266,885
registration fees and expenses
Warrants issued for services ... -- -- 648,000
Stock issued for incentive
compensation and services ...... -- -- 1,277,000
Beneficial conversion feature
for 6% convertible debenture ... -- 650,000
Warrants issued with convertible
debentures ..................... -- -- 215,000
Amortization of deferred
financing charges .............. -- 93,000
------------ ----------------- ------------
Balances, December 31, 1999 .... $ -- $ (5,438,000) $ 5,769,885
============ ================= ============
(The following information is
unaudited)
Stock issued for acquisitions .. -- -- 4,306,000
6% convertible debentures
converted to stock, net of
deferred financing costs and
discounts ...................... -- -- 4,782,108
Warrants issued for services ... -- -- 580,361
Stock issued for incentive
compensation and services ...... -- -- 13,629,859
Beneficial conversion feature
for 6% convertible debenture ... -- -- 3,417,463
Warrant issued with convertible
debentures ..................... -- -- 582,537
Common stock issued for warrant
conversion ..................... (604,491) -- --
Amortization of deferred
financing charges .............. -- -- 266,887
Syndications Costs ............. -- -- (45,769)
Net Loss ....................... -- (21,761,194) (21,761,194)
------------ ----------------- ------------
Balances September 30, 2000 .... $ (604,491) $ (27,199,194) $ 11,528,137
============ ================= ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CLEARWORKS.NET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
a) UNAUDITED
The unaudited financial statements included herein for the Company
for the three and nine months ended September 30, 2000 and 1999 have
been prepared without audit pursuant to the rules and regulations of
the Securities and Exchange Commission and include all adjustments
which are, in the opinion of management, necessary for a fair
presentation. Certain information and footnote disclosures required
by generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the audited financial
statements and related notes thereto for the annual periods ended
December 31, 1999 and 1998.
b) Liquidity
The ability of the Company to satisfy its obligations depends in
part upon its ability to reach a profitable level of operations and
securing short and long-term financing for development of its
commercial and residential products. The Company is currently in
discussions with other financial institutions to provide additional
funding through a combination of debt and equity to fund its
business plan. There is no assurance that short and long-term
financing can be obtained to fulfill the Company's capital needs.
Without the short or long-term financing, the Company will attempt
to sell additional common stock to meet its current and future
capital needs. If the Company is not able to obtain either short or
long-term funding or funding through the sale of its common stock,
the Company would be required to cut back its expansion plans and
operate the facilities it currently has built, and fund its
operations with internally generated funds from its integration,
structured wiring and communications business units.
c) CONSOLIDATION
At September 30, 2000, the Company has four wholly owned
subsidiaries: ClearWorks Communications, Inc., ClearWorks Structured
Wiring Services, Inc., ClearWorks Home Systems, Inc., and ClearWorks
Integration Services, Inc. (also known as ClearWorks IT Solutions,
Inc.). The consolidated financial statements include the accounts of
the Company and all of its subsidiaries. All significant
inter-company transactions and balances have been eliminated in
consolidation.
d) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. The markets for the Company's
services are characterized by intense competition, rapid
technological development, regulatory changes and frequent new
product introductions, all of which could impact the future value of
the Company's assets.
e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an initial maturity of three months or less to be cash equivalents.
f) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated by using the straight-line
method over the following useful lives:
YEARS
-----
Head-end facilities .......................... 20
Field operating equipment .................... 3-7
Satellite demonstration equipment ............ 7
Furniture, fixtures and office equipment...... 2-7
Expenditures for maintenance and repairs are charged against income
as incurred and major improvements are capitalized.
7
<PAGE>
g) INVENTORIES
Inventories are valued at the lower of cost or market. The cost is
determined by using the first in first out ("FIFO") method.
Inventories consist primarily of materials, equipment and work in
process.
h) GOODWILL
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over five years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation.
The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount
rate reflecting the Company's average cost of funds. The assessment
of the recoverability of goodwill may be impacted if the estimated
future operating cash flows are not achieved.
i) REVENUE RECOGNITION
The Company recognizes revenue and the related costs at the time the
services are rendered. Revenue is derived from fees charged for the
delivery of Bundled Digital Services, integration services and
cabling and wiring.
Revenue from long-term contracts is recognized using the percentage
of completion method, measured by the percentage of total costs
incurred to date to estimated total costs for each contract. This is
used because management considers actual costs to be the best
available measure of progress on these contracts.
j) EARNINGS (LOSS) PER COMMON SHARE
The Company computes net income/(loss) per share pursuant to
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". Basic net income/(loss) per share is computed by dividing
income or loss applicable to common stockholders by the weighted
average number of shares of the Company's common stock outstanding
during the period. Diluted net income/(loss) per share is determined
in the same manner as basic net income/(loss) per share except that
the number of shares is increased assuming exercise of dilutive
stock options and warrants using the treasury stock method and
dilutive conversion of the Company's convertible debt. For the three
and nine months ended September 30, 1999 and 2000, the dilutive
effect of all stock options, warrants and convertible debt were not
included in the calculation of diluted loss per share as the Company
is reporting net losses for each period.
Note 2. Restatement of Prior Years Results
The results of operations for the nine months ended September 30, 1999
have been restated to reflect adjustments recorded in connection with the
Company's financial statements for the year ended December 31, 1999, as reported
in the Company's annual report, as amended, in Form 10-KSB/A. Such adjustments
resulted in additional compensation expense of $696,000 for the nine months
ended September 30,1999.
Note 3. Related Party Transactions
On September 29, 2000, ClearWorks borrowed $101,000 from Michael T.
McClere, its Chairman of the Board and Chief Executive Officer. This loan was
evidenced by a promissory note and bore interest at the rate of 12% per annum.
ClearWorks subsequently repaid this note on October 11, 2000.
Note 4. Business Combinations
On August 3, 2000 ClearWorks entered into a letter of intent to acquire a
controlling interest in Link Two Communications, a nationwide provider of high
speed wireless broadband access. The acquisition of Link Two Communications is
anticipated to provide ClearWorks with a strategic arm in which to address the
large retrofit market in wireless Bundled Digital Services.
On September 15, 2000, ClearWorks purchased the assets of LDConnect.com,
which is engaged in the business of providing flat fee telephone long distance
service and debit calling cards for the United States and Canada. At the time of
the acquisition, LDConnect.com was a Texas corporation. ClearWorks paid
1,000,000 shares of common stock for the purchase of LDConnect.com, which
ClearWorks valued at $4.00 per share for the purposes of this transaction.
8
<PAGE>
On September 18, 2000, ClearWorks entered into an Agreement and Plan of
Reorganization with Eagle Wireless International, Inc, a Texas corporation, and
Eagle Acquisition Corporation. Under the Merger Agreement, Eagle will acquire
100% of the outstanding common stock of ClearWorks and merge Eagle Acquisition
Corporation, a wholly-owned subsidiary of Eagle, with ClearWorks. As a result of
the merger, stockholders of ClearWorks will hold in the aggregate approximately
53% of the outstanding common stock of Eagle following completion of the merger.
Eagle will issue 0.8 shares of Eagle common stock for each share of ClearWorks.
Further, Eagle will assume all outstanding ClearWorks stock options and warrants
based upon the same 0.8 exchange ratio.
The business purpose of the merger between Eagle and ClearWorks is to
create a company with unique product and service offerings. This merger is, in
effect, creating a new company that will have the ability to provide a full
complement of broadband products and services to a wide range of customers and
applications in a manner that currently is not being provided by any other
competitor. Each Bundled Digital Service or BDSsm subscriber gives the new
company an opportunity to create a long-term recurring revenue stream and to
generate up-front product revenue by adding a number of current and future
hardware and software and service products, such as the convergence set-top-box
to the existing ClearWorks contracts. This balance of near-term and long-term
recurring revenue is a combination that in the opinion of management is highly
desirable. Hardware, installation and home wiring for the current BDSsm
contracts alone have the potential to generate substantial near-term revenue for
the new company in the next 24 months. And, since these same contracts are
expected to generate large amounts of recurring revenue over the next
twenty-five years, the new company is looking forward to establishing this
revenue stream as soon as possible. The new company is also looking forward to
applying the BDSsm concept to some of the current Eagle contract applications in
the near future. The combination of Eagle's convergent hardware products,
network services, wireless products, wireless network and spectrum services, and
strong manufacturing and R&D capabilities and ClearWorks, BDSsm, "last mile"
cable and fiber installation, and ClearWorks competitive local exchange carrier
("CLEC") status should provide a well-balanced revenue mix as the combined
company provides a full complement of broadband products and services to its
customers.
The merger is subject to the approval by the stockholders of Eagle of the
proposed share issuance in connection with the merger, the approval by the
stockholders of ClearWorks of the Merger Agreement, and other customary closing
conditions. Following the merger, Eagle's common stock will continue to be
listed on the American Stock Exchange under the symbol "EAG."
The board of directors of Eagle has approved the proposed issuance of
shares of Eagle common stock and the assumption of stock options and warrants in
connection with the merger and unanimously recommends that Eagle's stockholders
vote in favor of the proposed share issuance to complete the merger.
Note 5. Issuance of Common Stock and Warrants
During the nine month period ended September 30, 2000, the Company issued
7,145,274 shares of common stock. The following table summarizes the shares of
common stock issued:
Shares outstanding December 31, 1999 ............ 20,884,957
-----------
Shares issued from 6% debenture conversion... 2,619,083
Shares issued for acquisitions .............. 1,034,000
Shares issued for services and compensation.. 2,783,929
Shares issued for warrant conversion ........ 708,272
Shares cancelled ............................ (10)
-----------
Shares outstanding September 30, 2000 ........... 28,030,231
The Company issued 2,619,083 shares of its common stock associated with
conversion of the 6% convertible debentures.
The Company issued 2,783,929 shares of its common stock associated with
compensation and services performed for the Company.
The Company issued 708,272 shares of its common stock associated with
conversion of warrants.
The Company issued 1,034,000 shares of its restricted common stock
associated with the acquisition of Secure-All Security..
In July 2000 the Company granted 888,015 shares of stock to its employees.
This bonus resulted in a non-cash compensation expense of $ 4,773,081.
On September 11, 2000 the Company granted 400,000 shares of stock to
its employees. This bonus resulted in a non-cash compensation expense of
$1,700,000.
The Company issued 175,000 warrants to Intratech Capital Partners, Ltd.
and its affiliates in connection with the April 19, 2000 Candlelight
transaction. Such warrants have an exercise price of $2.50 per share and vest
from April 19, 2000 and expire on April 19, 2001. The Intratech warrants also
have a cashless feature.
9
<PAGE>
On August 10, 2000, the Company's chief executive officer elected to
exercise 210,000 warrants through a cash payment of $630,000.
On August 21, 2000, the Company's chief operations officer elected to
exercise 10,000 warrants through a cash payment of $30,000.00.
On August 31, 2000, the Company issued a total of 99,996 warrants to Carl
A. Chase which have an exercise price of $0.25 per share. The warrants have a
one year term and vest monthly in increments of 8,333 warrants per month
beginning on August 31, 2000. See below:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
ISSUED WARRANTS PRICE VESTS EXPIRATION
------ -------- ----- ----- ----------
<S> <C> <C> <C> <C> <C>
Carl A. Chase 8/31/00 8,333 $ .250 8/31/00 8/31/01
Carl A. Chase 8/31/00 8,333 $ .250 9/30/00 9/30/01
Carl A. Chase 8/31/00 8,333 $ .250 10/31/00 10/31/01
Carl A. Chase 8/31/00 8,333 $ .250 11/30/00 11/30/01
Carl A. Chase 8/31/00 8,333 $ .250 12/31/00 12/31/01
Carl A. Chase 8/31/00 8,333 $ .250 1/30/00 1/30/01
Carl A. Chase 8/31/00 8,333 $ .250 2/28/01 2/28/02
Carl A. Chase 8/31/00 8,333 $ .250 3/31/01 3/31/02
Carl A. Chase 8/31/00 8,333 $ .250 4/30/01 4/30/02
Carl A. Chase 8/31/00 8,333 $ .250 5/31/01 5/31/02
Carl A. Chase 8/31/00 8,333 $ .250 6/30/01 6/30/02
Carl A. Chase 8/31/00 8,333 $ .250 7/31/01 7/31/02
</TABLE>
Subsequent to September 30th, 24,999 warrants have been exercised (see Note 7.)
During the month of September, 2000, Kevan Casey and Tommy Allen elected
to exercise their nonqualified stock options, which options were issued as
additional consideration pursuant to the Agreement and Plan of Acquisition
between the Company and ClearWorks Integration Services, Inc. and United
Computing Group, Inc., et. al dated December 30, 1999. The Company issued 12,248
shares to Kevan Casey and 8,165 shares to Tommy Allen. At this time, the Company
is still waiting payment form Mr. Casey and Mr. Allen in the amounts of
$2,449.60 and $2,041.25, respectively.
Note 6. Convertible Debentures
On December 13, 1999, the Company closed a private placement transaction
with Candlelight Investors, LLC, ("Candlelight") a Delaware limited liability
company. In the private placement, the Company received from Candlelight a total
of $3,000,000 in exchange for $3,000,000 total face value 6% convertible
debentures due December 13, 2001, together with warrants to purchase up to
210,000 shares of common stock. The Company determined the warrants to have a
total value of $265,000 on the date of issuance and recorded this amount as a
discount against the convertible debentures.
The warrants are exercisable at $3.16 per share. The debentures are
convertible at the lower of $3.30 per share or 92 percent of the average of the
three lowest closing bid prices for the Company's common stock during the 30
days immediately preceding conversion. However, if the average lowest closing
price is less than $1.50 per share, then the conversion price of the debentures
shall be equal to the average lowest closing price without modification.
Because the conversion price of these debentures was less than the fair
value of the Company's common stock on the date of issuance, the Company
recorded as interest expense the value of the beneficial conversion feature. The
value of the beneficial conversion feature was determined to be $650,000. The
Company also gave Candlelight the right to acquire, upon total payment to the
Company of $2,000,000, an additional $2,000,000 face value of debentures and
additional warrants to purchase up to 140,000 shares of common stock.
In connection with the private placement, the Company agreed not to sell
any of its securities until July 4, 2000, unless the securities are (1) issued
in connection with a public offering of at least $15 million, (2) in connection
with an acquisition of additional businesses or assets or (3) as compensation to
employees, consultants, officers or directors.
On March 15, 2000, the Company issued an additional $2,000,000 of 6%
convertible debentures to Candlelight with conversion features similar to those
noted above. Because the conversion price of these debentures was less than the
fair value of the Company's common stock on the date of issuance, the Company
has recorded as interest expense the value of the beneficial conversion feature.
The value of the beneficial conversion feature exceeded the carrying value of
the convertible debentures (net of discount allocable to detachable warrants
discussed below), therefore, the charge to interest expense was limited to
$1,701,000.
10
<PAGE>
The 6% convertible debentures issued on March 15, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can be
converted into 140,000 shares of common stock. The Company determined the
warrants to have a total value of $299,000 on the date of issuance and recorded
this amount as a discount against the convertible debentures. This discount will
be amortized to interest expense over the term on the convertible debentures.
On April 19, 2000, the Company issued an additional $2,000,000 of 6%
convertible debenture to Candlelight with conversion features similar to those
noted above. Because the conversion price of these debentures was less than the
fair value of the Company's common stock on the date of issuance, the Company
has recorded as interest expense the value of the beneficial conversion feature.
The value of the beneficial conversion feature exceeded the carrying value of
the debentures (net of discount allocable to detachable warrants discussed
below), therefore, the charge to interest expense was limited to $1,716,000.
This debenture required the Company to register all underlying shares of
common stock by May 19,2000. As of 9/30/00, these shares have not yet been
registered resulting in a situation of default. Accordingly, the Company is
deemed to owe approximately $171,000 to Candlelight as a result of this default.
At November 12, 2000, this liability has increased to approximately $228,000.
The 6% convertible debentures issued on April 19, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can be
converted into 140,000 shares of common stock. The Company determined the
warrants have a total value of $284,000 on the date of issuance and recorded
this amount as a discount against the convertible debentures. This discount will
be amortized to interest expense over the term on the convertible debentures.
In February, May and June 2000 Candlelight converted $3,500,000 total face
value of the 6% convertible debentures into 1,345,364 shares of common stock. At
the dates of these conversions, the Company charged a total of deferred
financing charges, accrued interest and convertible discount of $1,911,696 to
additional paid-in capital.
On July 20, 2000 the Company received conversion notice from Candlelight
to convert $150,000 of the outstanding 6% convertible debentures into 49,511
shares of common stock.
On July 27, 2000 the Company received conversion notice from Candlelight
to convert $10,000 of the outstanding 6% convertible debentures into 3,087
shares of common stock.
On August 7, 2000 the Company received conversion notice from Candlelight
to convert $740,000 of the outstanding 6% convertible debentures into 270,717
shares of common stock
On August 10, 2000 the Company received conversion notice from Candlelight
to convert $400,000 of the outstanding 6% convertible debentures into 146,404
shares of common stock.
On August 15, 2000, the Company received conversion notice from
Candlelight to convert $200,000 of the outstanding 6% convertible debentures
into 73,261 shares of common stock.
Note 7. Subsequent Events
On October 12, 2000, Mr. Chase elected to exercise 16,666 warrants (August
and September warrants) through a cash payment of $4,166.50 to the Company. On
October 31, 2000, Mr. Chase elected to exercise 8,333 warrants (October
warrants) through a cash payment of $2,083.25 to the Company.
In October 2000, Eagle loaned ClearWorks $1,000,000, accruing interest at
the prime rate, to meet its immediate cash flow needs. Repayment of the loan is
secured by all of the assets of ClearWorks. ClearWorks issued Eagle 750,000
shares of common stock as additional consideration for the loan.
In November 10, 2000, Eagle loaned ClearWorks $1,000,000, accruing
interest at the prime rate, to meet its immediate cash flow needs. Repayment of
the loan is secured by all of the assets of ClearWorks. ClearWorks will issue
Eagle 750,000 shares of common stock as additional consideration for the loan.
Moreover, it is likely that Eagle will loan additional funds to ClearWorks prior
to the Special Meeting of Stockholders to approve the Merger Agreement. Any
additional loans are likely to involve the issuance of additional shares of
ClearWorks common stock.
As stated in Note 4 the Company signed a letter of intent to acquire a
controlling interest in Link2. During November 2000 the Company acquired
approximately 60% of Link 2 for 10,526,163 shares of the Company's common stock.
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Note 8: Industry Segments
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." At December 31, 1999 the
Company's three business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into three reportable segments (described below) since the
long-term financial performance of these reportable segments is affected by
similar economic conditions.
CLEARWORKS COMMUNICATIONS, INC. subsidiary focuses primarily on the
delivery of integrated voice, video and data services to the residential and
commercial marketplace. Its proprietary technology enables it to proceed into
the voice, video and data market for bundled consumption. The Company deploys
dial tone, multi-channel digital video services, dedicated Internet
connectivity, on-demand video rental, voicemail, security monitoring and a
community intranet as a Bundled Digital Service into the home or office.
ClearWorks Communications provides solutions to consumers by implementing
technology, both within the community and within the home. Within the
residential community, ClearWorks Communications is installing fiber optic
backbones to deliver voice, video and data solutions directly to consumers.
CLEARWORKS STRUCTURED WIRING SERVICES, INC. subsidiary focuses primarily
on developing residential, commercial and educational accounts for deployment of
structured wiring solutions and sale of audio and visual equipment to new
construction single family and multi-family dwelling units. These customers
consist of companies, school districts and universities and individuals that
seek outside expertise to deploy fiber-optic and copper-based structured wiring
solutions. ClearWorks Structured Wiring Services generates revenue through time
and materials billings, consulting contracts, service and support contracts.
CLEARWORKS IT SOLUTIONS, INC. subsidiary provides information technology
staffing personnel, network engineering, vendor evaluation of network hardware,
resale of network hardware, implementation of network hardware and support of
private and enterprise networks. Additional services include desktop rollouts,
multi-platform supports and Local Area Networks ("LAN"), as well as Wide Area
Networks ("WAN") analysis and server deployment.
CLEARWORKS HOME SYSTEMS, INC. subsidiary addresses new home building with
the goal of integrating technology into the home. This includes structured
wiring, security systems, audio/video solutions and home automation. As such,
the primary customers of ClearWorks Home Systems are major builders and the home
buyers themselves. Many of the systems installed are bundled into the mortgage
of the actual home. The company integrates with its counterparts in delivery the
key systems inside the home to prepare the home for high speed data services and
other future technologies.
The accounting policies of the reportable segments are the same as those
described in Note 2. The Company evaluates the performance of its operating
segments based on income before net interest expense, income taxes, depreciation
and amortization expense, accounting changes and non-recurring items.
Summarized financial information concerning the Company's reportable segments is
shown below in the following table:
<TABLE>
<CAPTION>
CLEARWORKS STRUCTURED CLEARWORKS CORPORATE AND
COMMUNICATIONS WIRING IT SOLUTIONS HOME SYSTEMS ELIMINATIONS CONSOLIDATED
-------------- ----------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
Revenues from unaffiliated customers 1,378,622 588,632 16,738,665 1,761,381 -- 20,467,300
Segment profit (loss) ............... (433,950) (146,111) 262,509 (791,359) (14,728,158) (15,837,069)
Total assets ........................ 4,222,402 1,487,501 5,233,771 953,810 10,772,642 22,670,126
Capital expenditures ................ 2,147,801 81,969 102,176 72,490 315,058 2,719,494
Depreciation and amortization ....... 96,591 25,144 8,475 13,942 1,053,738 1,197,892
Three Months Ended September 30, 2000
Revenues from unaffiliated customers 404,704 254,955 5,798,852 1,031,723 -- 7,490,234
Segment profit (loss) ............... 73,610 (113,426) (51,685) (162,514) (13,405,452) (13,659,467)
Total assets ........................ 4,222,402 1,487,501 5,233,771 953,810 10,772,642 22,670,126
Capital expenditures ................ 1,051,671 -- 86,075 3,425 -- 1,141,171
Depreciation and amortization ....... 37,099 8,556 2,825 6,098 323,560 378,138
Nine Months Ended September 30, 1999
Revenues from unaffiliated customers -- 836,542 1,215,458 -- -- 2,052,000
Segment profit (loss) ............... -- (19,609) 698,609 -- (1,979,000) (1,300,000)
Total assets ........................ -- 369,659 259,845 -- 2,698,496 4,091,000
Capital expenditures ................ -- 16,374 251,683 -- 1,070,943 2,032,000
Depreciation and amortization ....... -- 1,356 5,650 -- 78,994 139,000
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Months Ended September 30, 1999
Revenues from unaffiliated customers -- 411,186 615,814 -- -- 1,027,000
Segment profit (loss) ............... -- (32,605) 314,194 -- (1,296,122) (403,000)
Total assets ........................ -- 369,659 259,845 -- 2,698,496 4,091,000
Capital expenditures ................ -- 16,374 251,683 -- 1,070,943 2,032,000
Depreciation and amortization ....... -- 2,445 5,650 -- 78,994 53,000
</TABLE>
The following reconciles segment profit (loss) to income (loss) from operations
for the three and nine months ended September 30, 2000 and 1999 Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Total profit (loss) from reportable segments .. (13,378,786) (403,000) (15,687,069) (1,300,000)
Depreciation and amortization ................ (378,138) (53,000) (1,197,892) (139,000)
Income (loss) from operations ................. (14,037,605) (456,000) (17,165,639) (1,439,000)
</TABLE>
Note 9. Commitments and Contingent Liabilities
LEGAL PROCEEDINGS
We are subject to legal proceedings and claims which arise in the ordinary
course of business. We do not expect that the results in any of these legal
proceedings will have a material adverse effect on our financial condition or
results of operations.
We are currently plaintiff in CLEARWORKS.NET, INC. V. MICHAEL C. CALLIHAN
AND LINDA CALLIHAN; 157th Judicial District Court of Harris County, Texas; Cause
No. 2000-10296. Suit was filed February 25, 2000 after attempts to mediate were
unsuccessful alleging causes of action based on breach of contract, breach of
warranty, fraud in stock transactions and common law fraud. The facts underlying
the lawsuit are as follows: On or about May 21, 1998, the principal shareholder
of Team Renaissance, Inc. entered into a merger agreement with us. Shortly
thereafter, the principal shareholder, Michael Callihan, requested that we pay
in full promissory notes in which Mr. Callihan was the payee. However, those
promissory notes were neither disclosed in the merger agreement nor attached to
the merger agreement as exhibits. A dispute arose between us and Mr. Callihan
regarding the validity of the promissory notes. Additionally, a dispute arose
regarding credit card accounts held in the name of Mr. Callihan which Mr.
Callihan claims are our obligation and which we claim are the personal debt of
Mr. and Mrs. Callihan. Also, prior to closing, we learned that the Callihans had
failed to make payments to its employees and contractors, and had also failed to
pay its suppliers, in direct violation of the merger agreement between the
parties. We intend to continue to vigorously prosecute our claims against the
Callihans and the Company is seeking to be reimbursed for, among other things,
the funds expended by the Company to make the payments to the employees,
contractors and suppliers and for return of or reduction of the shares paid to
the Callihans. The Company further seeks damages for breach of contract, breach
of warranty, fraud in stock transactions and common law fraud and are seeking
recovery of the stock issued to the Callihans. The Court has ordered the case to
mediation on or before November 30, 2000. The case is currently set for trial
during the two week period beginning June 18, 2001.
We were defendants in Cause No. 98-34 190; MARTIN R. NATHAN V. CLEAR WORKS
TECHNOLOGIES, INC., ET. AL.; In the 216th Judicial District Court, Harris
County, Texas, which case was referred to arbitration in Case No.
70-168-00402-99; American Arbitration Association, CLEARWORKS TECHNOLOGIES,
INC.; MICHAEL T MCCLERE, RACHEL MCCLERE 1998 TRUST; MCCLERE FAMILY TRUST; AND
SHANNON MCLEROY VS. TIM PENNINGTON, RECOH TRICOTE, INC., INTERNAL REVENUE
SERVICE AND MCMANUS & COMPANY, P.C., JAMES W. WALTERS, J. STANFORD LIFSEY AND
JANET W. LIFSEY, EARL STOVER AND DEBRA SMITH. This suit, however, has been
dismissed, and the parties have agreed to work out a settlement of all claims.
One of the claims among the parties to this proceeding is focused upon
apportionment of liability among the parties for damages, if any, payable to Tim
Pennington in the action brought by him against the Company. This suit was
originally instituted by Plaintiffs' Original Petition filed in the above
referenced cause of action by Martin R. Nathan, alleged escrow agent, against
the Company and others. This suit was filed as an interpleader action and arises
out of the reverse merger pursuant to that one certain Agreement for Purchase of
Common Stock dated April 1, 1998, which created the public form of the Company
as it now exists. Pursuant to the terms of certain escrow agreements or
arrangements between the original shareholders of Millennium Integration
Technologies, a predecessor to the Company, and Southeast Tire Recycling, Inc.,
the original owners of Southeast Tire escrowed shares of stock in the Company
that they received in the transaction in order to satisfy any disclosed or
undisclosed outstanding obligations of Southeast Tire as of the date of the
merger. The claimants in the proceeding are the Company and the former
shareholders of Millennium Integration Technologies. The principal respondents
are those former shareholders of Southeast Tire, referred to as the Walters
Group, who are alleged to have indemnity obligations to the claimants and who
have escrowed approximately 86,000 shares of the Company's stock to secure any
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outstanding obligations claimed by any party and arising prior to the date of
the merger. The known claims are Recoh Tricote, Inc., Internal Revenue Service,
Tim Pennington and McManus & Company, P.C.
We are currently a defendant in Cause No. 98-34 190-A; TIM PENNINGTON V.
CLEAR WORKS TECHNOLOGIES, INC. AND JAMES W. WALTERS; In the 269th Judicial
District Court of Harris County, Texas. Reference is made to the foregoing
paragraphs describing the Nathan lawsuit. While all other interpleader claims
referenced in the foregoing paragraphs were referred to arbitration and
subsequently dismissed pursuant to agreement, the remaining claim by Tim
Pennington was severed into an independent cause of action. Tim Pennington has
filed a petition asserting claims against the Company. These claims allegedly
first arose with Mr. Pennington's employment with Southeast Tire Recycling, Inc.
Mr. Pennington claims that he had an employment agreement with Southeast Tire
Recycling, Inc. providing him with approximately $42,000.00, options to purchase
up to 175,000 shares of free trading stock, 100,000 shares of restricted stock,
and an additional 50,000 shares for every six (6) months of Pennington's
employment. Pennington claims that his employment agreement was breached by
Southeast Tire prior to the merger. Pennington also claims that he was also the
owner of 300,000 shares of common stock of Southeast Tire. Pennington's claims
are addressed to ClearWorks, although the alleged misconduct was not the conduct
of ClearWorks but that of its predecessor, Southeast Tire, and its shareholders,
officers and directors. Pennington's claims are grounded in breach of contract,
fraud, state and federal securities fraud, and conversion. Pennington seeks a
judgment in excess of $100,000 plus punitive damages, court cost, attorneys'
fees and interest. The Company has filed its answer and a counterclaim to the
filing by Pennington. The Company intends to dispute the claim and to raise
affirmative defenses on behalf of the Company, such as failure of a condition or
conditions to the agreement, estoppel, latches, and that Pennington's claims are
limited to claims against the escrowed shares and that Pennington's claims are
not properly asserted against the Company, but should be addressed to the former
officers, directors, and shareholders.
This lawsuit is currently in the discovery phase. The Court has ordered
that this lawsuit be mediated. Trial date is scheduled for December 11, 2000.
The Company intends to vigorously contest all claims in this case. The Company
also expects to pursue its indemnity claims in this proceeding against the
former shareholders of Southeast Tire of whom have agreed to indemnify the
Company of these claims or are otherwise legally obligated to do so. The Company
also expects to assert claims for any out of pocket expenses, attorneys' fees
and other costs of defense in this case against the former shareholders and the
proceeds of the shares of stock held in the registry of the District Court in
the proceeding identified in the Nathan lawsuit above.
We also currently are a defendant in CAUSE NO. 1999-15281; ROBERT HORN VS.
CLEAR WORKS TECHNOLOGIES, INC. Suit was filed March 25, 1999, in the 333rd
Judicial District Court of Harris County, Texas, alleging causes of action based
on breach of contract in the amount of approximately $200,000.00. The facts
underlying this lawsuit are as follows: Robert Horn entered into an employment
agreement with us effective April 1, 1998. The employment agreement contained a
condition precedent which stated: "The completion and subsequent release of
escrow money associated with the initial 504 offering of the Company's
securities on or before May 1, 1998, is a condition precedent to the obligation
of any party hereunder." The condition precedent was not met because we did not
have a 504 offering prior to May 1, 1998. On July 1, 1998, Mr. Horn tendered his
notice of resignation effective July 31, 1998. On March 25, 1999, Mr. Horn filed
a lawsuit claiming that we had terminated Mr. Horn's employment without cause.
We filed an Answer on April 16, 1999 denying the claim and asserting our
affirmative defenses. This lawsuit is currently in the discovery phase. The
parties have scheduled a mediation in this lawsuit. Trial is scheduled for the
two-week period beginning February 5, 2001. We are vigorously contesting these
claims by Robert Horn on the basis that they are without merit.
We are a defendant CAUSE NO. 1999-62209; SHERMAN GERALD MASON, D/B/A
CASTLE DEVELOPMENTS, LTD. V. CLEARWORKS.NET, INC. FORMERLY CLEARWORKS
TECHNOLOGIES, INC.; IN THE DISTRICT COURT OF HARRIS COUNTY, TEXAS; 157TH
JUDICIAL DISTRICT. On December 17, 1999, Sherman Gerald Mason d/b/a Castle
Developments, Ltd. filed suit against the Company in the 157th Judicial District
Court of Harris County, Texas. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with the Company and seeks recovery of 500,000
shares of stock. He also seeks recovery of alleged monthly retainer payments in
an undisclosed amount and seeks injunctive relief. The Company has filed an
answer disputing all liability, asserting that the contract was terminable and
that the contract is not enforceable because of the prior breaches of the
consulting agreement by Mr. Mason.
The Company has answered. The Company has moved to have the case submitted
to arbitration, and the Plaintiff has agreed to do so. No discovery has been
propounded and no scheduling order or trial date has been entered in connection
with the case or the arbitration.
We are a defendant in CAUSE NO. 728431; CHARTERWOOD ASSOCIATES, LTD. V.
CLEARWORKS STRUCTURED WIRING SERVICES, INC.; IN THE COUNTY CIVIL COURT AT LAW
NUMBER THREE (3), HARRIS COUNTY, TEXAS. On January 21, 2000, Charterwood
Associates, a Texas Limited Partnership, sued Clearworks Structured Wiring
Services, Inc., a subsidiary of the Company. The suit presents claims for breach
of a contract to design, operate and maintain "bundled digital services" to
Plaintiffs apartment complex. The suit seeks recovery of damages in the sum of
$78,746.69 plus interest, attorneys' fees and cost of court. The Company denies
the claims. The Company maintains its own claims for breach of contract in
connection with the same project. The Company has filed an affidavit
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claiming lien against the apartment project owned by the Plaintiffs claiming
that $52,800 is unpaid for services and materials provided. The Company will
seek attorneys' fees, interest and cost of court in connection with its
counter-claim, when filed.
No discovery has been taken. The Court has scheduled a trial date
beginning the week of March 5, 2001.
The Company intends to vigorously contest all claims in this case. The
Company also expects to vigorously pursue collection of its claims for services
rendered and materials provided.
We are a defendant in CAUSE NO. 2000-30394; MERGER COMMUNICATIONS, INC.
VS. CLEARWORKS TECHNOLOGIES, INC.; IN THE 281ST JUDICIAL DISTRICT COURT OF
HARRIS COUNTY, TEXAS. On June 16, 2000, Merger Communications, Inc. sued the
Company. The suit presents claims for breach of a contract to provide Company
public relations services. The suit seeks recovery of damages in the sum of
$7,797.92, the value of 106,667 restricted shares of Company common stock as of
the date of the alleged breach plus interest, attorneys' fees and cost of court.
The Company denies the claims and has filed an answer.
No discovery has been taken. The Court has not scheduled a trial date. The
Company intends to vigorously contest all claims in this case.
We are a defendant in CASE NO. CV2000015051; VALLEY FIRST COMMUNITY BANK
VS. CLEARWORKS.NET, INC. AND CLEARWORKS HOME SYSTEMS, INC.; IN THE SUPERIOR
COURT OF ARIZONA, MARICOPA COUNTY. On August 16, 2000, Valley First Community
Bank. sued the Company and its subsidiary ClearWorks Home Systems, Inc. The
facts underlying the lawsuit are as follows: On or about June 21, 2000,
ClearWorks Home Systems, Inc. executed a binding letter of intent to purchase
from Valley First certain assets, which Valley First represented to ClearWorks
Home System that it held a first lien. The purchase price for such assets was
set at $150,000.00. Subsequently, ClearWorks Home Systems, Inc. discovered that
Valley First did not in fact hold a first lien on such assets. Moreover,
ClearWorks Home Systems discovered that such assets were sold in a landlord's
auction. As a result, ClearWorks Home Systems, Inc. did not pay Valley First
$150,000. Valley First filed its lawsuit and such suit presents claims for
breach of contract, breach of implied duty of good faith and fair dealing,
conversion, intentional interference with contract, and promissory
estoppel/detrimental reliance. The suit seeks recovery of an unspecified amount
of damages not less than $150,000, attorneys' fees and cost of court. The
Company denies the claims and has filed an answer, including affirmative
defenses.
No discovery has been taken. The Court has not scheduled a trial date. The
Company intends to vigorously contest all claims in this case.
We are a defendant in CIVIL NO. 00-K-1982; CARL THOMPSON ASSOCIATES, INC.
VS. CLEARWORKS.NET, INC.; IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT
OF COLORADO. On October 4, 2000, Carl Thompson Associates, Inc. sued the
Company. The facts underlying the lawsuit are as follows: On or about January
13, 2000, ClearWorks.net, Inc. executed a letter agreement for investor
relations services for a term of one year. During the month of March, a dispute
arose regarding Carl Thompson's hourly billing rates for answering shareholder's
telephone inquiries, which billing rates were not initially disclosed to the
Company. Thereafter, the Company ceased using Carl Thomson's services, and Carl
Thompson ceased providing services. Carl Thomson filed its lawsuit presenting
claims for breach of contract, unjust enrichment, action on account, quantum
meruit, and breach of contract-implied covenant of good faith and fair dealing.
The suit seeks recovery of damages in the sum of $521,415.00, attorneys' fees
and cost of court. The Company denies the claims and will be filing an answer
and affirmative defenses.
The Company intends to vigorously contest all claims in this case.
Our subsidiary is a defendant in CAUSE NO. 741287; INTERNATIONAL
INTEGRATED SOLUTIONS VS. CLEARWORKS INTEGRATION SERVICES, INC. AKA AND DBA
CLEARWORKS INTEGRATION SVCS AND ARCHER MICKELSON TECHNOLOGIES; IN THE COUNTY
CIVIL COURT AT LAW NUMBER 4 OF HARRIS COUNTY, TEXAS. On September 22, 2000,
International Integrated Solutions sued ClearWorks Integration Services
presenting claims for an action on account. The suit seeks recovery of damages
in the sum of $29,890.20, attorneys' fees and cost of court. The Company filed
an answer denying all claims. The Company is currently in settlement
negotiations.
The Company is a defendant in CAUSE NO. 740809; CONSECO FINANCED VENDOR
SERVICES CORPORATION FORMERLY DOING BUSINESS AS GREEN TREE VENDOR SERVICES
CORPORATION VS. CLEARWORK.NET, INC. FORMERLY DBA CLEARWORKS TECHNOLOGIES, INC.
AND MICHAEL T. MCCLERE; IN THE COUNTY CIVIL COURT AT LAW NUMBER 1 OF HARRIS
COUNTY, TEXAS. On October 3, 2000, Conseco Financed Vendor Services sued the
Company presenting claims for breach of lease, and sued Michael T. McClere as
guarantor under the contract. The suit seeks recovery of damages in the sum of
$19,785.84, attorneys' fees and cost of court. The Company filed an answer
denying all claims. The Company is currently in settlement negotiations.
The Company is a defendant in CAUSE NO. 00-361-C; BUCKALEW EMPLOYMENT
SERVICES, INC. VS. CLEARWORK.NET, INC. DBA CLEARWORKS TECHNOLOGIES, INC.; IN THE
DISTRICT COURT OF KLEBERG COUNTY, TEXAS. On July 14, 2000, Buckalew sued the
Company presenting claims for payment of an account. The suit seeks recovery of
damages in the sum of $13,832.96, attorneys' fees and cost of court. Buckalew
filed a motion for substitute service and the company was served on September
27, 2000 by posting the
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petition to the door at 2450 Fondren, Suite 200, Houston, Texas 77063. The
Company, however, never became aware of such lawsuit, and Buckalew made no
attempt to contact the Company's general counsel. The Company became aware of
such lawsuit on October 25, 2000 and immediately contacted Buckalew's counsel.
Upon receiving a copy of the lawsuit via fax, the Company immediately filed an
answer denying all claims.
United Consulting Group, Inc. and United Computing Group, Inc., each of
which became a wholly owned subsidiary of our ClearWorks Integration subsidiary
on December 30, 1999, are defendants and counter-plaintiffs in SALES CONSULTANTS
OF HOUSTON'S. UNITED CONSULTING GROUP, INC. AND UNITED COMPUTING GROUP, INC.; In
the County Civil Court at Law Number 1 of Harris County, Texas; Cause No.
720200. Plaintiffs filed their lawsuit on August 24, 1999 alleging causes of
action based on breach of contract and fraud. The facts underlying the lawsuit
are as follows: On or about March 16, 1999, Sales Consultants of Houston ("Sales
Consultants"), which is in the personnel placement business, entered into an
agreement with United Consulting Group, Inc. in which United Consulting agreed
to pay Sales Consultants a finder's fee for placing an employee with United
Consulting. United Consulting agreed to pay a finder's fee in the amount of 30%
of the new employee's base salary. Shortly thereafter, a dispute arose regarding
the amount of the new employee's base salary. United Consulting claims that the
base salary was $8,000 because the new employee was offered $4,000 per month for
only two months plus commissions. Sales Consultants claims that the new
employee's base salary is calculated by multiplying $4,000 (the first two
month's base salary) by 12 months and arrives at a base salary of $48,000.
Consequently, the finder's fee was not paid. This suit was an uninsured claim in
the amount of approximately $5,000. United Consulting filed an Answer on August
30, 1999 denying Sales Consultants' claims and also filed a Counterclaim for
Declaratory Judgement on October 21, 1999. We are vigorously contesting the
claims by Sales Consultants on the basis that they are without merit.
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 September 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, 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
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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" (BDSsm) 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 BDSsm services. Research
and development efforts are directed at improving the performance and expanding
on the capability of BDSsm. 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 IT
Solutions, Inc. (formerly known as Archer Mickelson Technologies, L.L.C., a
Texas limited liability company and United Computing Group, Inc.), and
ClearWorks Home Systems, Inc., a recently formed Texas corporation. ClearWorks
Communications, Inc. has two wholly owned subsidiaries named Northpointe Telecom
Services, L.L.C. and Stonegate Telecom, L.L.C. The Company anticipates the
advantages of operating these companies together based on delivering like
services to both sets of customers, much like the regional Bell operating
companies (RBOCs) do today. Additionally, the Company can utilize its technology
to deliver voice, data and video solutions to both sets of customers via the
internet.
ClearWorks Structured Wiring Services, Inc. focuses primarily on
developing residential, commercial and education accounts for deployment of
structured wiring solutions. These customers consist of schools and or school
districts, companies and individual homeowners that seek outside expertise to
deploy fiber optics and copper-based structured wiring solutions. ClearWorks
Structured Wiring Services, Inc. generates revenue through time and materials
billings, consulting contracts, service and support contracts as well as
hardware and software sales. The Company does not intend for ClearWorks
Structured Wiring Services to focus on product sales, but rather on acting as a
provider of structured wiring solutions.
ClearWorks Communications, Inc. focuses primarily on the delivery of
integrated voice, data and video services to the residential marketplace. The
Company has proprietary technology to enable it to proceed into the voice, data
and video market for bundled consumption via high speed fiber optics
connections. The Company foresees deploying dialtone, multi-channel digital
video services, dedicated internet connectivity, on-demand video rental,
voicemail, and a community intranet as a Bundled Digital Services package over
one fiber connection into the home. The market for these customers is just
beginning to develop and is benefited by a strategic business alliance with
other companies in the technology market. ClearWorks Communications is providing
solutions to consumers by implementing technology both within the community and
within the home. Within the residential community, ClearWorks Communications is
installing FTTH backbones to deliver voice, data and video solutions directly to
consumers. The Company's projects include a Community Intranet for integrating
local businesses and schools into the community. The market for "bundled digital
services" is just beginning to develop in the US based on the Telecommunications
Act and deregulation of the marketplace.
ClearWorks 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, Alcatel Cabling Systems and 3Com. The
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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
NINE MONTHS ENDED SEPTEMBER 30,2000 TO NINE MONTHS ENDED SEPTEMBER 30, 1999
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
Revenues ........................... $ 20,467,300 $ 2,052,000
Costs and expenses ................. 37,632,939 3,491,000
Loss from operations ............... (17,165,639) (1,439,000)
Net loss ........................... (21,761,194) (1,453,000)
Basic and diluted loss per share ... (.91) (.09)
The following summary table presents comparative cash flows of the
Company for the nine month periods ended September 30, 2000 and 1999:
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
Net cash used by operating activities ... $ 18,296,333 $ (628,000)
Net cash used by investing activities ... $ (1,803,323) $ (2,067,000)
Net cash provided by financing activities $ 4,080,833 $ 2,635,000
REVENUES
REVENUES. Total revenue increased by $18,415,300 over the September 30, 1999
fiscal quarter to $20,467,300 (an increase of 897%) for the nine months ended
September 30, 2000. 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 IT Solutions. increased from $1,215,458 through
the third quarter 1999 to $16,738,665 (an increase of 1,277%) for the September
30, 2000 period. Integration revenues are derived from three principal product
lines; information technology staffing and network engineering, vendor
evaluation of network hardware and implementation of network hardware and
support of private and enterprise networks. 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 $836,542
through the third quarter 1999 to $588,632 (a decrease of 30%) for the September
30, 2000 period. Structured wiring revenues are derived from providing wiring
solutions for commercial and education customers. ClearWorks Structured Wiring
Services, Inc. deployed its structured wiring solutions to major education and
commercial customers in the Houston area during the nine months ended September
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
September 30, 1999 period to $1,761,381 for the September 30, 2000 period. Home
Systems revenues are derived from providing wiring solutions for residential,
security systems and audio/visual equipment The Company anticipates that the
increase in revenues will continue as the Company
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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 September 30, 1999 period to $1,366,580 for the September 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 communities. The
Company is currently deploying new infrastructure to ramp up subscribers from
its backlog of residential communities. The Company's subscriber revenue ramps
up 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 $18,463,428 through the
period ended September 30, 2000 compared to $1,340,000 through the period ended
September 30, 1999. Costs and expenses grew based on an increase in new revenues
primarily from acquisitions and from the opening of new offices 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 thirty-five
percent (35%) through the September 30, 1999 period to ten percent (10%) (a
decrease of 25%) for the September 30, 2000 period. This decrease resulted
primarily from the operational costs of acquisitions consummated by the company
and from expansion costs of opening new offices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $17,971,621
through the period ended September 30, 2000, compared to $2,012,000 through the
period ended September 30, 1999. Selling, general and administrative expenses
consisted primarily of compensation to employees and management. During the nine
months ended September 30, 2000, 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 which
has been relocated to new facilities at a lower rental cost. 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 September 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 twenty year period. Depreciation and
Amortization expenses increased by $1,058,890 to $1,197,890 for the nine months
ended September 30, 2000 primarily due to the amortization of goodwill
associated with acquisitions.
INTEREST EXPENSE
Interest expense increased to $4,604,323 through the period ended
September 30, 2000, compared to $24,000 through the period ended September 30,
1999. Interest accrued primarily on outstanding convertible debentures which are
due August 2000 and May 2001 (See accompanying notes to consolidated financial
statements, Note 6: Convertible Debentures).
INTEREST INCOME
Interest income remained at $8,768 through the period ended September 30,
2000, compared to $55,000 through the period ended September 30, 1999. Interest
was earned primarily on overnight bank sweeps on current cash balances.
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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 nine months ended September 30, 2000 were $3,109,494 compared to
$2,032,000 through the period ended September 30, 1999. Capital expenditures
were primarily utilized for the deployment of the Company's Fiber-To-The-Home
(FTTH) program to deliver high speed broadband services to residential
communities.
CAPITAL RESOURCES
During the nine months ended September 30, 2000, Candlelight exercised its
right to acquire, upon total payment to 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 6: 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. We intend to continue to vigorously prosecute our claims against the
Callihans and the Company is seeking to be reimbursed for, among other things,
the funds expended by the Company to make the payments to the employees,
contractors and suppliers and for return of or reduction of the shares paid to
the Callihans. The
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Company further seeks damages for breach of contract, breach of warranty, fraud
in stock transactions and common law fraud and are seeking recovery of the stock
issued to the Callihans. The Court has ordered the case to mediation on or
before November 30, 2000. The case is currently set for trial during the two
week period beginning June 18, 2001.
We were defendants in Cause No. 98-34 190; MARTIN R. NATHAN V. CLEAR WORKS
TECHNOLOGIES, INC., ET. AL.; In the 216th Judicial District Court, Harris
County, Texas, which case was referred to arbitration in Case No.
70-168-00402-99; American Arbitration Association, CLEARWORKS TECHNOLOGIES,
INC.; MICHAEL T MCCLERE, RACHEL MCCLERE 1998 TRUST; MCCLERE FAMILY TRUST; AND
SHANNON MCLEROY VS. TIM PENNINGTON, RECOH TRICOTE, INC., INTERNAL REVENUE
SERVICE AND MCMANUS & COMPANY, P.C., JAMES W. WALTERS, J. STANFORD LIFSEY AND
JANET W. LIFSEY, EARL STOVER AND DEBRA SMITH. This suit, however, has been
dismissed, and the parties have agreed to work out a settlement of all claims.
One of the claims among the parties to this proceeding is focused upon
apportionment of liability among the parties for damages, if any, payable to Tim
Pennington in the action brought by him against the Company. This suit was
originally instituted by Plaintiffs' Original Petition filed in the above
referenced cause of action by Martin R. Nathan, alleged escrow agent, against
the Company and others. This suit was filed as an interpleader action and arises
out of the reverse merger pursuant to that one certain Agreement for Purchase of
Common Stock dated April 1, 1998, which created the public form of the Company
as it now exists. Pursuant to the terms of certain escrow agreements or
arrangements between the original shareholders of Millennium Integration
Technologies, a predecessor to the Company, and Southeast Tire Recycling, Inc.,
the original owners of Southeast Tire escrowed shares of stock in the Company
that they received in the transaction in order to satisfy any disclosed or
undisclosed outstanding obligations of Southeast Tire as of the date of the
merger. The claimants in the proceeding are the Company and the former
shareholders of Millennium Integration Technologies. The principal respondents
are those former shareholders of Southeast Tire, referred to as the Walters
Group, who are alleged to have indemnity obligations to the claimants and who
have escrowed approximately 86,000 shares of the Company's stock to secure any
outstanding obligations claimed by any party and arising prior to the date of
the merger. The known claims are Recoh Tricote, Inc., Internal Revenue Service,
Tim Pennington and McManus & Company, P.C.
We are currently a defendant in Cause No. 98-34 190-A; TIM PENNINGTON V.
CLEAR WORKS TECHNOLOGIES, INC. AND JAMES W. WALTERS; In the 269th Judicial
District Court of Harris County, Texas. Reference is made to the foregoing
paragraphs describing the Nathan lawsuit. While all other interpleader claims
referenced in the foregoing paragraphs were referred to arbitration and
subsequently dismissed pursuant to agreement, the remaining claim by Tim
Pennington was severed into an independent cause of action. Tim Pennington has
filed a petition asserting claims against the Company. These claims allegedly
first arose with Mr. Pennington's employment with Southeast Tire Recycling, Inc.
Mr. Pennington claims that he had an employment agreement with Southeast Tire
Recycling, Inc. providing him with approximately $42,000.00, options to purchase
up to 175,000 shares of free trading stock, 100,000 shares of restricted stock,
and an additional 50,000 shares for every six (6) months of Pennington's
employment. Pennington claims that his employment agreement was breached by
Southeast Tire prior to the merger. Pennington also claims that he was also the
owner of 300,000 shares of common stock of Southeast Tire. Pennington's claims
are addressed to ClearWorks, although the alleged misconduct was not the conduct
of ClearWorks but that of its predecessor, Southeast Tire, and its shareholders,
officers and directors. Pennington's claims are grounded in breach of contract,
fraud, state and federal securities fraud, and conversion. Pennington seeks a
judgment in excess of $100,000 plus punitive damages, court cost, attorneys'
fees and interest. The Company has filed its answer and a counterclaim to the
filing by Pennington. The Company intends to dispute the claim and to raise
affirmative defenses on behalf of the Company, such as failure of a condition or
conditions to the agreement, estoppel, latches, and that Pennington's claims are
limited to claims against the escrowed shares and that Pennington's claims are
not properly asserted against the Company, but should be addressed to the former
officers, directors, and shareholders.
This lawsuit is currently in the discovery phase. The Court has ordered
that this lawsuit be mediated. Trial date is scheduled for December 11, 2000.
The Company intends to vigorously contest all claims in this case. The Company
also expects to pursue its indemnity claims in this proceeding against the
former shareholders of Southeast Tire of whom have agreed to indemnify the
Company of these claims or are otherwise legally obligated to do so. The Company
also expects to assert claims for any out of pocket expenses, attorneys' fees
and other costs of defense in this case against the former shareholders and the
proceeds of the shares of stock held in the registry of the District Court in
the proceeding identified in the Nathan lawsuit above.
We also currently are a defendant in CAUSE NO. 1999-15281; ROBERT HORN VS.
CLEAR WORKS TECHNOLOGIES, INC. Suit was filed March 25, 1999, in the 333rd
Judicial District Court of Harris County, Texas, alleging causes of action based
on breach of contract in the amount of approximately $200,000.00. The facts
underlying this lawsuit are as follows: Robert Horn entered into an employment
agreement with us effective April 1, 1998. The employment agreement contained a
condition precedent which stated: "The completion and subsequent release of
escrow money associated with the initial 504 offering of the Company's
securities on or before May 1, 1998, is a condition precedent to the obligation
of any party hereunder." The condition precedent was not met because we did not
have a 504 offering prior to May 1, 1998. On July 1, 1998, Mr. Horn tendered his
notice of resignation effective July 31, 1998. On March 25, 1999, Mr. Horn filed
a lawsuit claiming that we had terminated Mr. Horn's employment without cause.
We filed an Answer on April 16, 1999 denying the claim and asserting our
affirmative defenses. This lawsuit is currently in the discovery phase. The
parties have scheduled a mediation in this lawsuit. Trial is scheduled for the
two-week period beginning February 5, 2001. We are vigorously contesting these
claims by Robert Horn on the basis that they are without merit.
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We are a defendant CAUSE NO. 1999-62209; SHERMAN GERALD MASON, D/B/A
CASTLE DEVELOPMENTS, LTD. V. CLEARWORKS.NET, INC. FORMERLY CLEARWORKS
TECHNOLOGIES, INC.; IN THE DISTRICT COURT OF HARRIS COUNTY, TEXAS; 157TH
JUDICIAL DISTRICT. On December 17, 1999, Sherman Gerald Mason d/b/a Castle
Developments, Ltd. filed suit against the Company in the 157th Judicial District
Court of Harris County, Texas. In his Original Petition, Mr. Mason alleges the
breach of a consulting agreement with the Company and seeks recovery of 500,000
shares of stock. He also seeks recovery of alleged monthly retainer payments in
an undisclosed amount and seeks injunctive relief. The Company has filed an
answer disputing all liability, asserting that the contract was terminable and
that the contract is not enforceable because of the prior breaches of the
consulting agreement by Mr. Mason.
The Company has answered. The Company has moved to have the case submitted
to arbitration, and the Plaintiff has agreed to do so. No discovery has been
propounded and no scheduling order or trial date has been entered in connection
with the case or the arbitration.
We are a defendant in CAUSE NO. 728431; CHARTERWOOD ASSOCIATES, LTD. V.
CLEARWORKS STRUCTURED WIRING SERVICES, INC.; IN THE COUNTY CIVIL COURT AT LAW
NUMBER THREE (3), HARRIS COUNTY, TEXAS. On January 21, 2000, Charterwood
Associates, a Texas Limited Partnership, sued Clearworks Structured Wiring
Services, Inc., a subsidiary of the Company. The suit presents claims for breach
of a contract to design, operate and maintain "bundled digital services" to
Plaintiffs apartment complex. The suit seeks recovery of damages in the sum of
$78,746.69 plus interest, attorneys' fees and cost of court. The Company denies
the claims. The Company maintains its own claims for breach of contract in
connection with the same project. The Company has filed an affidavit claiming
lien against the apartment project owned by the Plaintiffs claiming that $52,800
is unpaid for services and materials provided. The Company will seek attorneys'
fees, interest and cost of court in connection with its counter-claim, when
filed.
No discovery has been taken. The Court has scheduled a trial date
beginning the week of March 5, 2001.
The Company intends to vigorously contest all claims in this case. The
Company also expects to vigorously pursue collection of its claims for services
rendered and materials provided.
We are a defendant in CAUSE NO. 2000-30394; MERGER COMMUNICATIONS, INC.
VS. CLEARWORKS TECHNOLOGIES, INC.; IN THE 281ST JUDICIAL DISTRICT COURT OF
HARRIS COUNTY, TEXAS. On June 16, 2000, Merger Communications, Inc. sued the
Company. The suit presents claims for breach of a contract to provide Company
public relations services. The suit seeks recovery of damages in the sum of
$7,797.92, the value of 106,667 restricted shares of Company common stock as of
the date of the alleged breach plus interest, attorneys' fees and cost of court.
The Company denies the claims and has filed an answer.
No discovery has been taken. The Court has not scheduled a trial date. The
Company intends to vigorously contest all claims in this case.
We are a defendant in CASE NO. CV2000015051; VALLEY FIRST COMMUNITY BANK
VS. CLEARWORKS.NET, INC. AND CLEARWORKS HOME SYSTEMS, INC.; IN THE SUPERIOR
COURT OF ARIZONA, MARICOPA COUNTY. On August 16, 2000, Valley First Community
Bank. sued the Company and its subsidiary ClearWorks Home Systems, Inc. The
facts underlying the lawsuit are as follows: On or about June 21, 2000,
ClearWorks Home Systems, Inc. executed a binding letter of intent to purchase
from Valley First certain assets, which Valley First represented to ClearWorks
Home System that it held a first lien. The purchase price for such assets was
set at $150,000.00. Subsequently, ClearWorks Home Systems, Inc. discovered that
Valley First did not in fact hold a first lien on such assets. Moreover,
ClearWorks Home Systems discovered that such assets were sold in a landlord's
auction. As a result, ClearWorks Home Systems, Inc. did not pay Valley First
$150,000. Valley First filed its lawsuit and such suit presents claims for
breach of contract, breach of implied duty of good faith and fair dealing,
conversion, intentional interference with contract, and promissory
estoppel/detrimental reliance. The suit seeks recovery of an unspecified amount
of damages not less than $150,000, attorneys' fees and cost of court. The
Company denies the claims and has filed an answer, including affirmative
defenses.
No discovery has been taken. The Court has not scheduled a trial date. The
Company intends to vigorously contest all claims in this case.
We are a defendant in CIVIL NO. 00-K-1982; CARL THOMPSON ASSOCIATES, INC.
VS. CLEARWORKS.NET, INC.; IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT
OF COLORADO. On October 4, 2000, Carl Thompson Associates, Inc. sued the
Company. The facts underlying the lawsuit are as follows: On or about January
13, 2000, ClearWorks.net, Inc. executed a letter agreement for investor
relations services for a term of one year. During the month of March, a dispute
arose regarding Carl Thompson's hourly billing rates for answering shareholder's
telephone inquiries, which billing rates were not initially disclosed to the
Company. Thereafter, the Company ceased using Carl Thomson's services, and Carl
Thompson ceased providing services. Carl Thomson filed its lawsuit presenting
claims for breach of contract, unjust enrichment, action on account, quantum
meruit, and breach of contract-implied covenant of good faith and fair dealing.
The suit seeks recovery of damages in the sum of $521,415.00, attorneys' fees
and cost of court. The Company denies the claims and will be filing an answer
and affirmative defenses.
The Company intends to vigorously contest all claims in this case.
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Our subsidiary is a defendant in CAUSE NO. 741287; INTERNATIONAL
INTEGRATED SOLUTIONS VS. CLEARWORKS INTEGRATION SERVICES, INC. AKA AND DBA
CLEARWORKS INTEGRATION SVCS AND ARCHER MICKELSON TECHNOLOGIES; IN THE COUNTY
CIVIL COURT AT LAW NUMBER 4 OF HARRIS COUNTY, TEXAS. On September 22, 2000,
International Integrated Solutions sued ClearWorks Integration Services
presenting claims for an action on account. The suit seeks recovery of damages
in the sum of $29,890.20, attorneys' fees and cost of court. The Company filed
an answer denying all claims. The Company is currently in settlement
negotiations.
The Company is a defendant in CAUSE NO. 740809; CONSECO FINANCED VENDOR
SERVICES CORPORATION FORMERLY DOING BUSINESS AS GREEN TREE VENDOR SERVICES
CORPORATION VS. CLEARWORK.NET, INC. FORMERLY DBA CLEARWORKS TECHNOLOGIES, INC.
AND MICHAEL T. MCCLERE; IN THE COUNTY CIVIL COURT AT LAW NUMBER 1 OF HARRIS
COUNTY, TEXAS. On October 3, 2000, Conseco Financed Vendor Services sued the
Company presenting claims for breach of lease, and sued Michael T. McClere as
guarantor under the contract. The suit seeks recovery of damages in the sum of
$19,785.84, attorneys' fees and cost of court. The Company filed an answer
denying all claims. The Company is currently in settlement negotiations.
The Company is a defendant in CAUSE NO. 00-361-C; BUCKALEW EMPLOYMENT
SERVICES, INC. VS. CLEARWORK.NET, INC. DBA CLEARWORKS TECHNOLOGIES, INC.; IN THE
DISTRICT COURT OF KLEBERG COUNTY, TEXAS. On July 14, 2000, Buckalew sued the
Company presenting claims for payment of an account. The suit seeks recovery of
damages in the sum of $13,832.96, attorneys' fees and cost of court. Buckalew
filed a motion for substitute service and the company was served on September
27, 2000 by posting the petition to the door at 2450 Fondren, Suite 200,
Houston, Texas 77063. The Company, however, never became aware of such lawsuit,
and Buckalew made no attempt to contact the Company's general counsel. The
Company became aware of such lawsuit on October 25, 2000 and immediately
contacted Buckalew's counsel. Upon receiving a copy of the lawsuit via fax, the
Company immediately filed an answer denying all claims.
United Consulting Group, Inc. and United Computing Group, Inc., each of
which became a wholly owned subsidiary of our ClearWorks Integration subsidiary
on December 30, 1999, are defendants and counter-plaintiffs in SALES CONSULTANTS
OF HOUSTON'S. UNITED CONSULTING GROUP, INC. AND UNITED COMPUTING GROUP, INC.; In
the County Civil Court at Law Number 1 of Harris County, Texas; Cause No.
720200. Plaintiffs filed their lawsuit on August 24, 1999 alleging causes of
action based on breach of contract and fraud. The facts underlying the lawsuit
are as follows: On or about March 16, 1999, Sales Consultants of Houston ("Sales
Consultants"), which is in the personnel placement business, entered into an
agreement with United Consulting Group, Inc. in which United Consulting agreed
to pay Sales Consultants a finder's fee for placing an employee with United
Consulting. United Consulting agreed to pay a finder's fee in the amount of 30%
of the new employee's base salary. Shortly thereafter, a dispute arose regarding
the amount of the new employee's base salary. United Consulting claims that the
base salary was $8,000 because the new employee was offered $4,000 per month for
only two months plus commissions. Sales Consultants claims that the new
employee's base salary is calculated by multiplying $4,000 (the first two
month's base salary) by 12 months and arrives at a base salary of $48,000.
Consequently, the finder's fee was not paid. This suit was an uninsured claim in
the amount of approximately $5,000. United Consulting filed an Answer on August
30, 1999 denying Sales Consultants' claims and also filed a Counterclaim for
Declaratory Judgement on October 21, 1999. We are vigorously contesting the
claims by Sales Consultants on the basis that they are without merit.
Item 2. CHANGES IN SECURITIES
The following sales of unregistered securities occurred during the quarter ended
September 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
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(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).
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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
No current filings at this time.
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
November 17, 2000 Michael T. McClere
Chief Financial Officer
(duly authorized officer)
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