U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30,
2001
[ ] 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: 000-23163
EAGLE WIRELESS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0494995
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)
101 COURAGEOUS DRIVE
LEAGUE CITY TEXAS 77573-3925
(Address of principal executive offices, including zip code)
(281) 538-6000
(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 Exchange Act during the past 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 practicable date.
As of January 14, 2002, there were 63,093,474 shares of common stock
outstanding.
EAGLE WIRELESS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at November 30, 2001
and August 31, 2001 3
Consolidated Statements of Earnings for the Three
Months Ended November 30, 2001 and 2000 4
Consolidated Statements of Changes In Shareholders'
Equity for the Three Months Ended November 30, 2001
and Twelve Months Ended August 31, 2001 5
Consolidated Statements of Cash Flows for the Three
Months Ended November 30, 2001 and 2000 6
Notes to the Consolidated Financial Statements 7-30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 30-33
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 33
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Recent Sales of Unregistered Securities or Changes
in Securities and Use of Proceeds. 33
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 34
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EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
ASSETS
November 30, August 31,
2001 2001
--------------- --------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and Cash Equivalents $ 16,280 $ 23,843
Accounts Receivable 5,903 7,144
Inventories 12,034 10,637
Prepaid Expenses 993 1,025
--------- ---------
TOTAL CURRENT ASSETS 35,210 42,649
PROPERTY AND EQUIPMENT:
Operating Equipment 30,853 28,469
Less: Accumulated Depreciation (2,315) (2,005)
--------- ---------
TOTAL PROPERTY AND EQUIPMENT 28,538 26,464
OTHER ASSETS:
Security Deposits 165 134
Deferred Advertising Costs 363 363
Goodwill 5,966 5,966
Less: Accumulated Amortization (547) (472)
Other Intangible Assets 98,952 98,954
Less: Accumulated Amortization (4,340) (3,407)
Other Assets 347 16
--------- ---------
TOTAL OTHER ASSETS 100,906 101,554
--------- ---------
TOTAL ASSETS $ 164,654 $ 170,667
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 4,940 $ 4,525
Accrued Expenses 5,425 6,406
Notes Payable 5,344 5,933
Line of Credit 769 1,846
Capital Lease Obligations 35 48
Sales Taxes Payable 500 598
Deferred Taxes 15 15
--------- ---------
TOTAL CURRENT LIABILITIES 17,028 19,371
LONG-TERM LIABILITIES:
Capital Lease Obligations
(net of current maturities) 115 115
Deferred Taxes 32 32
Long-Term Debt 1,525 2,021
--------- ---------
TOTAL LONG-TERM LIABILITIES 1,672 2,168
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares -- --
Common Stock - $.001 par value
Authorized 100,000,000 shares
Issued and Outstanding at August 31, 2001,
and 2000, 61,093,000 and 60,264,000, respectively 61 60
Paid in Capital 153,810 153,426
Retained Earnings (7,917) (4,358)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 145,954 149,128
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 164,654 $ 170,667
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands)
- --------------------------------------------------------------------------------
For the Three Months ended November 30,
(Unaudited)
2001 2000
------- -------
NET SALES:
Structured wiring 1,700 --
Broadband services 263 --
Products 6,467 1,866
Other 331 --
------- -------
TOTAL SALES 8,761 1,866
------- -------
COSTS OF GOODS SOLD:
Materials other than Cable and Wire 1 --
Direct Labor and Related Costs 735 527
Products and Integration Service 5,742 503
Structured Wiring Labor and Materials 321 --
Broadband Services Costs 171 --
Depreciation and Amortization 71 44
Other Manufacturing Costs 20 8
------- -------
TOTAL COSTS OF GOODS SOLD 7,061 1,082
------- -------
GROSS PROFIT 1,700 784
------- -------
OPERATING EXPENSES:
Selling, General and Administrative:
Salaries and Related Costs 2,157 498
Advertising and Promotion 155 127
Depreciation and Amortization 1,247 159
Other Support Costs 1,552 498
Research and Development 172 167
------- -------
TOTAL OPERATING EXPENSES 5,283 1,449
------- -------
EARNINGS/(LOSS) FROM OPERATIONS BEFORE OTHER
REVENUES/(EXPENSES), INCOME TAXES AND OTHER
COMPREHENSIVE INCOME (3,583) (665)
OTHER REVENUES/(EXPENSES):
Interest Income - net 212 760
Other Income -- --
------- -------
TOTAL OTHER REVENUES 212 760
EARNINGS/(LOSS) BEFORE MINORITY INTEREST IN
AFFILIATE, INCOME TAXES & OTHER COMPREHENSIVE INCOME (3,371) 95
------- -------
Provisions For Income Taxes -- (32)
------- -------
NET EARNINGS/(LOSS) (3,371) 63
------- -------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized Holding Gain/(Loss) (188) 7
------- -------
OTHER COMPREHENSIVE INCOME/(LOSS) $(3,559) $ 70
======= =======
NET EARNINGS/(LOSS) PER COMMON SHARE:
Basic $ (0.06) $ 0.02
Diluted $ (0.06) $ 0.02
Comprehensive Income/(Loss) $ (0.06) $ 0.02
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PREFERRED PAID IN RETAINED SHAREHOLDERS'
SHARES VALUE STOCK CAPITAL EARNINGS EQUITY
TOTAL SHAREHOLDERS' EQUITY
AS OF AUGUST 31, 2000 25,609 26 -- 52,160 1,875 54,061
--------- --------- ----- --------- --------- ---------
Net Loss for Twelve Months
Ended August 31, 2001 -- -- -- -- (5,874) (5,874)
New Stock Issued to Shareholders:
For Services and Compensation 1,370 1 -- 973 -- 974
For Property and Other Assets 127 -- -- 2,837 -- 2,837
For Retirement of Debt and Liabilities 3,004 3 -- 5,693 -- 5,696
For Warrants Conversion 645 1 -- 1,078 -- 1,079
For Employee Stock Option Plan 96 -- -- 192 -- 192
For acquisition of ClearWorks, Inc. 35,287 35 -- 99,762 -- 99,797
For Licenses and Investments 1,204 1 -- 2,965 -- 2,966
Syndication Costs -- -- -- (876) -- (876)
Treasury Stock (7,078) (7) -- (11,358) -- (11,365)
Unrealized Holding Gain -- -- -- -- (359) (359)
--------- --------- ----- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY
AS OF AUGUST 31, 2001 60,264 $ 60 $ -- $ 153,426 $ (4,358) $ 149,128
========= ========= ===== ========= ========= =========
Net Loss for Three Months
Ended November 30, 2001 -- -- -- -- (3,371) (3,371)
New Stock Issued to Shareholders:
For Services and Compensation -- -- -- 39 -- 38
For Property and Other Assets -- -- -- -- -- --
For Retirement of Debt and Liabilities 1,460 2 -- 821 -- 821
For Warrants Conversion -- -- -- -- -- --
For Employee Stock Option Plan -- -- -- -- -- --
For Licenses and Investments -- -- -- -- -- --
Syndication Costs -- -- -- -- -- --
Treasury Stock (631) (1) -- (476) -- (476)
Unrealized Holding Gain -- -- -- -- (188) (188)
--------- --------- ----- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY
AS OF NOVEMBER 30, 2001 61,093 $ 61 $ -- $ 153,810 $ (7,917) $ 145,954
========= ========= ===== ========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
- --------------------------------------------------------------------------------
For the Three Months ended November 30,
2001 2000
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earning/(Loss) $ (3,371) $ 63
Adjustments To Reconcile Net Earnings to Net Cash
Used By Operating Activities:
Depreciation and Amortization 1,318 169
Stock Issued for Interest Expense 12 --
Allowance for Doubtful Accounts 138 --
Stock Issued for Services Rendered 38 --
Unrealized Holding Gain/(Loss) on Marketable Securities (188) 7
(Increase)/Decrease in Accounts Receivable 1,103 (557)
(Increase)/Decrease in Inventories (1,397) (775)
(Increase)/Decrease in Prepaid Expenses 32 64
Increase/(Decrease) in Accounts Payable 415 (191)
Increase/(Decrease) in Accrued Expenses (1,079) (194)
Increase/(Decrease) in Federal Income Taxes Payables -- 36
Increase/(Decrease) in Franchise Taxes Payables -- (15)
-------------------------
Total Adjustment 392 (1,456)
Net Cash Used by Operating Activities (2,979) (1,393)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase)/Disposal of Property and Equipment (2,384) (62)
(Increase)/Decrease in Notes Receivable Clearworks.net -- (2,000)
(Increase)/Decrease in Security Deposits (31) (16)
(Increase)/Decrease in Deferred Advertising Costs -- 11
(Increase)/Decrease in Deferred Syndication Costs -- 270
(Increase)/Decrease in Other Intangible Assets 2 (29)
(Increase)/Decrease in Other Assets (331) (713)
-------------------------
Net Cash Used by Investing Activities (2,744) (2,539)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(Decrease) in Notes Payable & Long-Term Debt (262) 380
Increase/(Decrease) in Capital Leases (13) (15)
Increase/(Decrease) in Line of Credit (1,077) (266)
Proceeds From Sale of Common Stock, Net -- 3,177
Treasury Stock (476) --
-------------------------
Net Cash Provided By Financing Activities (1,840) 3,276
-------------------------
Net Increase/(Decrease) in Cash (7,563) (656)
CASH AT THE BEGINNING OF THE YEAR 23,843 33,317
-------------------------
CASH AT THE END OF THE YEAR $ 16,280 $ 32,661
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for
Interest $ 54 $ 12
Income Taxes -- 36
Supplemental non-cash investing activities (See Note 4):
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Eagle Wireless International, Inc., (the Company), incorporated as a Texas
corporation on May 24, 1993 and commenced business in April of 1996. The
Company is a worldwide supplier of broadband products and services,
providing telecommunications equipment with related software, broadband
products, and fiber and cable as used by service providers in the paging
and other wireless personal communications markets. The Company designs,
manufactures, markets and services its products under the Eagle Wireless
International, Inc. and BroadbandMagic.com, Inc. names. These products
include transmitters, receivers, controllers, software, convergent set-top
boxes, fiber, cable, and other equipment used in commercial and personal
communications systems and radio and telephone systems. Additionally, the
Company provides cable television, telephone, security, internet
connectivity and related services under a bundled digital services
package, commonly known as "BDS", through single source billing.
A) Consolidation
At November 30, 2001 the Company's subsidiaries are: AtlanticPacific
Communications, Inc. (APC), eToolz, Inc.(ETI), BroadbandMagic.com,
Inc.(BBM), ClearWorks.Net, Inc. (.NET), ClearWorks Communication,
Inc.(COMM), ClearWorks Home Systems, Inc.(HSI), United Computing Group
(UCG) and Link-Two Communications, Inc.(LINK II). The consolidated
financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company transactions and balances have
been eliminated in consolidation.
B) Cash and Cash Equivalents
The Company has $16,280,000 and $23,843,000 invested in interest bearing
accounts and marketable securities (Note 9) at November 30, 2001 and
August 31, 2001, respectively.
C) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated by using the straight-line method for financial
reporting and accelerated methods for income tax purposes. The recovery
classifications for these assets are listed as follows:
YEARS
-------
Head-End Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized.
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the following
items, in thousands:
November 30, August 31,
2001 2001
------------- ------------
Raw Materials $ 4,739 $ 3,537
Work in Process 5,997 6,555
Finished Goods 1,298 545
-------- ---------
$ 12,034 $ 10,637
======== =========
7
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
E) Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the Eagle Wireless International, Inc., Broadband
Magic.com, Inc., ClearWorks Communications, Inc., ClearWorks Home Systems,
Inc., Atlantic Pacific Communications, Inc., Link Two Communications, Inc.
and United Computing Group, Inc. names.
EAGLE WIRELESS INTERNATIONAL
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial
and personal communication systems, radio and telephone systems. Revenues
from these products are recognized when the product is shipped.
BROADBANDMAGIC.COM
BroadbandMagic.com, Inc. designs, manufactures and markets the convergent
set-top boxes. Products are sent principally to commercial customers for a
pre-sale test period of ninety days. Upon the end of the pre-sale test
period, the customer either returns the product or accepts the product, at
which time the Company recognizes the revenue.
Eagle Wireless International, Inc. and BroadbandMagic.com engage
independent agents for sales principally in foreign countries and certain
geographic regions in the United States. Under the terms of these one-year
agreements the distributor or sales agents provide the companies with
manufacturing business sales leads. The transactions from these
distributors and agents are subject to the companies' approval prior to
sale. The distributorship or sales agent receives commissions based on the
amount of the sales invoice from the companies to the customer. The sale
is recognized at the time of shipment to the customer. These sales agents
and distributors are not a significant portion of total sales in any of
the periods presented.
CLEARWORKS COMMUNICATIONS
ClearWorks Communications provides Bundle Digital Services to business and
residential customers, primarily in the Texas market. Revenue is derived
from fees charged for the delivery of Bundled Digital Services, which
includes telephone, long distance, internet, security monitoring and cable
services. This subsidiary recognizes revenue and the related costs at the
time the services are rendered.
CLEARWORKS HOME SYSTEMS
ClearWorks Home Systems sells and installs structured wiring, audio and
visual components to homes. This subsidiary recognizes revenue and the
related costs at the time the services are performed. Revenue is derived
from the billing of structured wiring to homes and the sale of audio and
visual components to the homebuyers.
ATLANTIC PACIFIC COMMUNICATIONS
AtlanticPacific provides project planning, installation, project
management, testing and documentation of fiber and cable to commercial and
industrial clients throughout the United States. The revenue from the
fiber and cable installation and services is recognized upon percentage of
completion of the project. Most projects are completed in less than one
month, therefore, matching revenue and expense in the period incurred.
Service, training and extended warranty contract revenues are recognized
as earned.
ETOOLZ
Etoolz, Inc. provides research and development support for all Eagle
companies and does not currently provide billable services to independent
third parties.
LINK TWO COMMUNICATIONS
Link Two provides customers with one and two way messaging systems over a
national high-speed wireless broadband network. The revenue from these
services is recognized as it is earned from the customer.
UNITED COMPUTING GROUP
United Computing Group provides business-to-business hardware and software
network solutions and a network monitoring services. The revenue from the
hardware and software sales is recognized at the time of shipment. The
monitoring services recognition policy is to record revenue as earned.
8
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
F) Research and Development Costs
For the months ended November 30, 2001, and 2000, the Company performed
research and development activities for internal projects related to its
convergent set-top boxes as well as its multi-media entertainment centers.
Research and development costs of $ 172,000 and $498,000 were expensed for
the three months ended November 30, 2001, and 2000, respectively.
No research and development services were performed for outside parties
for the three months ended November 30, 2001 and 2000.
G) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires a
change from the deferral method to assets and liability method of
accounting for income taxes. Timing differences exist between book income
and tax income, which relate primarily to depreciation methods.
H) Net Earnings Per Common Share
Net earnings per common share are shown as both basic and diluted. Basic
earnings per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average number
of shares of common stock outstanding. Diluted earnings per common share
are computed by dividing net income less any preferred stock dividends (if
applicable) by the weighted average number of shares of common stock
outstanding plus any dilutive common stock equivalents. The components
used for the computations are shown as follows, in thousands:
November 30, August 31,
2001 2001
-------------- ------------
Weighted Average Number of Common
Shares Outstanding Including
Primary Common Stock Equivalents 61,093 49,726
Fully Dilutive Common Stock
Equivalents 61,247 49,880
I) Impairment of Long Lived and Identifiable Intangible Assets
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. An impairment loss would be deemed necessary when the estimated
non-discounted future cash flows are less than the carrying net amount of
the asset. If an asset were deemed to be impaired, the asset's recorded
value would be reduced to fair market value. In determining the amount of
the charge to be recorded, the following methods would be utilized to
determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets.
3) Estimate based on valuation techniques.
As of November 30, 2001 and 2000, no impairment existed.
J) Intangible Assets
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the dates of acquisition and is being
amortized using the straight-line method over twenty (20) years for
Atlantic Pacific and Comtel and twenty-five (25) years for ClearWorks.Net.
contract rights. Other intangible assets consist of patents and licenses,
which are being amortized using the straight-line method over ten (10)
years and twenty (20) years, respectively.
9
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
K) Advertising Costs
Beginning in fiscal 2000, advertising costs have been capitalized and
amortized on the basis of contractual agreements entered into by the
Company. These contracts are amortized over the life of the individual
contracts or expensed in the period incurred. For the three months ended
November 30, 2001, the Company has expensed $155,000 where $0 in costs has
been deferred.
For the three months ended, November 30, 2000, the Company has expensed
$127,000 whereas $374,000 in costs has been deferred.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that are
directly attributable to fundraising and the collection thereto. Upon
successful collection of the funds, all expenses incurred will be
reclassified to additional paid in capital and treated as syndication
costs; netted against the funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent asset and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
N) Marketable Securities
In May 1993, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. This statement considers debt
securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that the
company does not have the positive intent and ability to hold to maturity
and all marketable equity securities are classified as available-for-sale
or trading securities and are carried at fair market value. Unrealized
holding gains and losses on securities classified as trading are reported
in earnings. Unrealized holding gains and losses on securities classified
as available-for-sale were previously carried as a separate component of
stockholders' equity. SFAS No. 115 as amended by Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130, "Other Comprehensive Income." Management determines the appropriate
classification of marketable equity and debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date.
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This
statement considers the presentation of unrealized holding gains and
losses attributable to debt and equity securities classified as
available-for-sale. As stated, any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income." For the three months ended November
30, 2001 and 2000, comprehensive loss of $188,000 and a gain of $7,000,
respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
three months ended November 30, 2000 to facilitate comparison to the three
months ended November 30, 2001.
10
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support cost for the three months ending November 30, 2001 and 2001
are as follows, in thousands:
2001 2000
------ ------
Advertising/Convention $ -- $ 38
Auto Related 53 --
Bad Debt 138 --
Contract Labor 130 --
Delivery/Postage 26 21
Fees 43 --
Insurance 10 18
Interest 291 --
Office Supplies 38 50
Other 35 25
Professional 218 108
Rent 305 99
Repairs & Maintenance 30 --
Travel -- 107
Taxes 31 7
Utilities 204 25
------ ------
Total $1,552 $ 498
====== ======
R) Recent Pronouncements
In July 2001, the FASB issued Statement No. 141, Business Combinations,
("SFAS 141") and Statement No. 142, Goodwill and Other Intangible Assets
("SFAS 142"). SFAS 141 requires that the purchase method of accounting be
used for all business combinations completed after June 30, 2001. SFAS 141
also specifies that intangible assets acquired in a purchase method
business combination must meet certain criteria to be recognized and
reported apart from goodwill. SFAS 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead they will be tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The Company is required to adopt the provisions of SFAS 141,
for acquisitions initiated after June 30, 2001, and SFAS 142 effective
September 1, 2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized
until the Company's adoption of SFAS No. 142 on September 1, 2002. In
connection with the transitional goodwill impairment evaluation, SFAS 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To the
extent an indication exists that the goodwill and intangible assets may be
impaired, the Company must measure the impairment loss, if any. Any
transitional impairment loss will be recognized as the cumulative effect
of a change in accounting principle in the Company's statement of
earnings. Based on current goodwill and intangible asset balances, the
Company will have approximately $99,652,000 of non-amortized goodwill and
intangibles as of September 1, 2002, which will be subject to the
transition provisions of SFAS 141 and SFAS 142.
Amortization expense related to goodwill and intangibles was approximately
$1,008,000 and $80,000 for the three months ended November 30, 2001 and
November 30, 2000.
The impact of the adoption of SFAS 141 and 142 is not currently known; the
company will assess the impairment of its goodwill and intangible assets
no later than May 31, 2002.
The impact of other significant matters that might result from the
adoption of SFAS 141 and 142 is not currently known, but will be assessed
prior to the issuance of the Company's May 31, 2002, 10-Q filing.
11
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
On October 3, 2001, the FASB issued the Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 addresses financial accounting and reporting
for the disposal of long-lived assets. FAS 144, becomes effective for
financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The Company does not
expect the pronouncement to have a material impact on its consolidated
financial position, consolidated results of operations or consolidated
cash flows.
NOTE 2 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following, in thousands:
November 30, August 31,
2001 2001
------------- -----------
Accounts Receivable $ 6,357 $ 7,624
Allowance for Doubtful Accounts (454) (480)
--------- ---------
Net Accounts Receivable $ 5,903 $ 7,144
========= =========
NOTE 3 - PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS:
Components of property, plant & equipment are as follows, in
thousands:
November 30, August 31,
2001 2001
-------------- -------------
Automobile $ 425 $ 548
Head-End Facility and Fiber Infrastructure 17,310 15,045
Furniture & Fixtures 517 481
Leasehold Improvements 127 84
Office Equipment 670 654
Property, Manufacturing & Equipment 11,804 11,657
--------- ---------
Total Property, Plant & Equipment $ 30,853 $ 28,469
Less: Accumulated Depreciation (2,315) (2,005)
--------- ---------
Net Property, Plant & Equipment $ 28,538 $ 26,464
========= =========
Components of intangible assets are as follows, in thousands:
November 30, August 31,
2001 2001
-------------- -------------
Goodwill $ 5,966 $ 5,966
Contract Rights 74,513 74,513
Licenses & Permits 24,439 24,441
--------- ---------
Total Intangible Assets $ 104,918 $ 104,920
Less: Accumulated Amortization (4,887) (3,879)
--------- ---------
Net Intangible Assets $ 100,031 $ 101,041
========= =========
NOTE 4 - BUSINESS COMBINATIONS:
On February 1, 2001, the Company completed the purchases of
ClearWorks.Net, Inc., ClearWorks Communication, Inc., ClearWorks
Structured Wiring Services, Inc., ClearWorks Integration Services, Inc.,
United Computing Group, Link-Two Communications, Inc. and LD Connect, Inc.
(collectively, ClearWorks) by acquiring all the outstanding common stock
for a total purchase price of approximately $99.8 million. The acquisition
was accounted for using the purchase method of accounting. ClearWorks is a
communications carrier providing broadband data, video and voice
communication services to residential and commercial customers, currently
within Houston, Texas. These services are provided over fiber-optic
networks ("Fiber-To-The-Home" or "FTTH"), which the Company designs,
constructs, owns and operated inside large residential master-planned
communities and office complexes. ClearWorks also provides information
technology staffing personnel, network engineering, vendor evaluation of
network hardware, implementation of network hardware and support of
private and enterprise networks, as well as,
12
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
developing residential, commercial and education accounts for deployment
of structured wiring solutions. The results of operation for ClearWorks
are included in the accompanying financial statements since the date of
acquisition. The Company acquired the net assets of ClearWorks for
$99,797,000 through the issuance of 29,410,000 shares of its common stock
valued at $91,172,000 and a cash total of $8,625,000. Prior to the merger,
the Company provided to ClearWorks, working capital and materials totaling
$8,625,000. During February 2001, ClearWorks repaid these advances through
the issuance of 7,346,000 shares of its common stock, which converted into
5,877,000 Eagle Wireless International, Inc. common stock shares. These
shares were converted to Treasury shares at this date. The Company
allocated (in thousands) the acquisition costs to current assets of
$11,708, property, plant and equipment of $6,570, intangible assets of
$96,920 (which consist of $74,513 in contract rights and $22,407 in
licenses), other assets of $79 and assumed liabilities of accounts payable
and accrued expenses of $10,784, banks lines of credit and notes of $4,696
for a total acquisition of $99,797. The allocation of the purchase price
is based on the fair value of assets and liabilities assumed as determined
either by independent third parties or management's estimates, based on
existing contracts, recent purchases of assets and underlying loan
documents.
On January 1, 2000, the Company acquired APC in a business combination
accounted for as a purchase. APC is primarily engaged in the nationwide
sales and installation of fiber and cable to commercial enterprises. The
Company issued 518,919 shares of common stock valued at $2,044,541 to
acquire the net assets of APC. The Company allocated (in thousands) the
acquisition costs to current assets of $395, property, plant and equipment
of $125, intangible assets of $3,663, other assets of $1 and assumed
liabilities of accounts payable and accrued expenses of $1,760, bank lines
of credit and notes of $380 for a total acquisition of $2,044. The
allocation of the purchase price is based on the fair value of assets and
liabilities assumed as determined by independent third parties or
management's estimates, based on existing contracts, recent purchases of
assets and underlying loan documents.
Concurrently with the closing of this acquisition, the Company entered
into a two-year agreement with the former principals of APC. These
principals may earn up to 3,000,000 shares of common stock based on APC
accumulated sales goals. Under the terms of the agreement, the Company
will issue an additional 500,000 shares for $10,000,000 in accumulated
sales, 1,000,000 shares for $30,000,000 in accumulated sales and 1,500,000
shares for $60,000,000 in accumulated sales. These sales have to be
achieved within a two-year period commencing January 1, 2000. In addition,
the principals must maintain a "Gross Profit Margin" of 25% and an "EBITDA
Profit" of 10%. These contingencies and attainment thereof are considered
remote and, accordingly, have been excluded from the determination of the
acquisition price.
On January 1, 2000, the Company acquired Comtel in a business combination
accounted for as a purchase. Comtel is primarily engaged in the sales and
installation of fiber and cable to commercial enterprises in Texas and
Louisiana. The Company issued 300,000 shares of common stock valued at
$1,182,000 to acquire the net assets of Comtel. The Company allocated (in
thousands) the acquisition costs to current assets of $968, property,
plant and equipment of $67, intangible assets of $1,879, and assumed
liabilities of accounts payable and accrued expenses of $1,459, bank lines
of credit and notes of $273 for a total acquisition of $1,182. The
allocation of the purchase price is based on the fair value of assets and
liabilities assumed as determined by independent third parties or
management's estimates, based on existing contracts, recent purchases of
assets and underlying loan documents.
On March 17, 2000, the Company acquired ETI in a business combination
accounted for as a purchase. ETI specializes in the development of leading
edge, innovative, commercial, industrial and military technologies. The
Company issued 50,000 shares of common stock valued at $437,500 to acquire
the net assets of ETI. The Company allocated (in thousands) the
acquisition costs to property, plant and equipment of $13, intangible
assets of $424, for a total acquisition of $437. The allocation of the
purchase price is based on the fair value of assets and liabilities
assumed as determined by independent third parties or management's
estimates, based on existing contracts, recent purchases of assets and
underlying loan documents.
13
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
NOTE 5 - NOTES PAYABLE:
The following table lists the Company's note obligations as of November
30, 2001 and August 31, 2001, in thousands:
Annual
Interest November 30, August 31,
Rate Due Date 2001 2000
-------------------------------------------------------------------
Vehicles Various Various $ 90 $ 100
6% Convertible Debenture (Note 8) 6.0% Demand 2,000 2,000
Tail Wind Convertible Debenture 2.0% May 2003 4,500 5,000
Other Various Various 279 854
-------- --------
Total notes payable $ 6,869 $ 7,954
Less current portion 5,344 5,933
-------- --------
Total long-term debt $ 1,525 $ 2,021
========= ========
NOTE 6 - CAPITAL LEASE OBLIGATIONS:
The Company leases equipment from various companies under capital leases
with varying expiration dates. The assets and liabilities under the
capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The assets are
depreciated over the estimated useful life with the value and depreciation
being included as a component of Property and Equipment under operating
equipment.
Minimum future lease payment under capital lease as of November 30, 2001
and August 31, 2001 for each of the next five years and in the aggregate
are, in thousands:
November 30, 2001 August 31, 2001
----------------- ---------------
Total minimum lease payments $ 163 $ 177
Less : Amount representing interest 13 14
------- -------
Present value of net minimum lease payments 150 163
Less: Current maturity capital lease obligation 35 48
------- -------
Long-term capital lease obligation 115 115
======= =======
Future obligations under the lease terms are as follows:
Period Ended Amount
-------
2003 95
2004 20
-------
Total $ 115
=======
NOTE 7 - LINE OF CREDIT:
On September 29, 2000, Atlantic Pacific Communications, Inc. (a wholly
owned subsidiary of the Company) entered into a one year $900,000 line of
credit agreement with Southwest Bank of Texas (SWBT). This note bears
interest at SWBT's prime rate plus .25%, which is payable monthly with
principal due September 28, 2001. Atlantic Pacific's account receivable is
pledged as collateral with Eagle Wireless the guarantor. This line of
credit was repaid to Southwest Bank of Texas in the three months ending
November 30, 2001; therefore, there is not a current balance outstanding.
The Company, through its subsidiary United Computing Group (UCG),
maintains a $3,000,000 line of credit with IBM Credit Corporation (IBM)
bearing a variable rate of interest. At November 30, 2001, a balance of
$769,331 existed. Payments are due every ten (10) days. The Company is
negotiating an additional amount of $3,000,000 to a total line of credit
of $6,000,000. As part of the agreement, UCG must maintain annual revenues
of greater than zero and equal to or less than 40.0 : 1.0; a ratio of net
profit after tax to revenues equal to or greater than 1.25 percent;
14
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
and a ratio of total liabilities to tangible net worth greater than zero
and equal to or less than 10.0 : 1.0. Additionally, UCG must maintain a
standard all-risk insurance policy in the amount of at least $300,000 with
IBM being named lender loss payee.
The subsidiaries are in compliance with all debt covenants at the date of
the balance sheet, the Company does not foresee any changes from this
status in the future.
NOTE 8 - CONVERTIBLE DEBENTURES:
On December 13, 1999, ClearWorks.Net, Inc. (ClearWorks), closed a private
placement transaction with Candlelight Investors, LLC, and ("Candlelight")
a Delaware limited liability company. In the private placement, ClearWorks
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. ClearWorks
determined the warrants to have a total value of $215,000 on the date of
issuance and recorded this amount as a discount against the convertible
debentures.
The warrants are exercisable at $3.16 per share. The debentures are
convertible at the lower of $3.30 per share or ninety-two percent (92%) of
the average of the three lowest closing bid prices for ClearWorks' 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 ClearWorks' common stock on the
date of issuance, ClearWorks has recorded as interest expense the
intrinsic value of the beneficial conversion feature. The intrinsic value
of the beneficial conversion feature was determined to be $650,000.
In connection with the private placement, ClearWorks 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 April 19, 2000, ClearWorks 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 ClearWorks' common stock on the date of
issuance, ClearWorks 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.
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. ClearWorks 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 debenture.
This debenture contained a stipulation that required ClearWorks to
register all underlying shares of common stock by May 19, 2000. This
registration did not occur resulting in a situation of default. As a
result of said default. On December 13, 2000, Candlelight served notice
that the principal and accrued interest of the 6% convertible debenture
dated April 19, 2000 to be repaid in accordance with the terms of the
debenture. As a result of this call and the subsequent lawsuit served by
Candlelight against ClearWorks, all deferred costs and penalties
associated with this debenture have been expensed.
During 2001, the Company merged with ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. At the date of
merger, Link Two Communications, Inc. also became a subsidiary of Eagle.
Link Two entered an agreement with The Tail Wind Fund Ltd., under which
Tail Wind purchased from Link Two a 2% convertible note in the initial
amount of $5,000,000 (the "First Note"), and Link Two has the ability to
require Tail Wind to purchase additional convertible notes in the amount
of $4,000,000 (the "Second Note") and $3,000,000 (the "Third Note"). The
conversion terms of the convertible debentures become effective after
ninety days of the initial closing date. The maturity of the convertible
note is August 15, 2002. Link Two may require Tail Wind to purchase the
Second Note if: (a) the price of Eagle's common stock is above $5.00 per
share for 20 consecutive trading days during calendar 2001, (b) Eagle has
more than $10,000,000 in cash less payments for capital leases that will
become due within the next two years, (c) the registration statement,
registers the conversion shares are current
15
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
and effective, (d) Eagle does reflect a net loss of more than $4,000,000
during any quarter, and (e) no material adverse event has occurred. Link
Two may require Tail Wind to purchase the Third Note if the price of
Eagle's common stock is above $8.00 per share for 20 consecutive trading
days during calendar 2001, and the conditions set forth in (b) through (e)
of the preceding sentence are satisfied. In conjunction with the issuance
of the First Note, Link Two issued Tail Wind a warrant, and if Link Two
chooses to issue the Second and Third Notes, it will issue Tail Wind
additional warrants.
As a result of the merger, Eagle, the parent of Link Two, has guaranteed
the Link Two notes issued to Tail Wind and allowed Tail Wind to convert
the above mentioned debt into Eagle common stock at a rate of $1.79 per
share. The agreement also permits Tail Wind to convert the Link Two
warrant into Eagle warrants to purchase shares of our common stock. Tail
Wind would have a warrant to purchase 1,396,648 shares of our common stock
at an exercise price of $1.83 per share, exercisable between August 2002
and September 2006. If Link Two requires Tail Wind to purchase the Second
and Third Note, the additional warrants it issues will also be convertible
into shares of our common stock. The number of shares that the additional
warrants may be converted into will depend on the price of our common
stock, and cannot be determined at this time. However, the exercise price
of the additional warrants may not be less than $1.83 per share.
The Company has agreed to pre-pay the notes at the rate of a minimum of
$250,000 per month and a maximum of $500,000 per month. The pre-payment
may be in cash or in shares of our common stock at the rate of 90% of the
average of the two lowest market prices of our common stock for the
applicable month. However, the Company may not issue shares of our common
stock for pre-payment purposes if the total number of shares exceeds the
aggregate trading volume of our common stock for the twelve trading days
preceding the date of payment, in which case we must pay the difference in
cash. As the number of shares to be issued for pre-payment purposes is
dependent on the price and trading volume of our common stock, there is no
way to determine the number of shares that may be issued at this time.
Eagle has filed a registration statement for the potential conversion
shares for the note and warrants exercise, this registration statement is
not effective as of this date. As of November 30, 2001, the Company has
paid to Tail Wind $500,000 towards the reduction of debt. Until the
registration statement is effective, the Company will continue to pay each
month $250,000 towards this debt reduction. The current financial
statements have recorded as current and long-term maturities for this
debt, $3,000,000 and $1,500,000, respectively.
As part of the above agreements, the Company entered into a registration
rights agreement with Tail Wind, and the Company filed a registration
statement, in order to permit Tail Wind to resell to the public the shares
of common stock that it may acquire upon any conversion of the First Note
and exercise of the warrant associated with the First Note. The Company
has registered for resale 5,000,000 shares of common stock, which
represents 122% of the shares to be issued upon conversion of the First
Note at $1.79 per share and 100% of the exercise of the warrant associated
with the First Note at $1.83 per share. The additional shares registered
is to account for the shares that may be issued for pre-payment as
described in the above paragraph, or upon the exercise of the
anti-dilution rights provided for in the following paragraph. If Link Two
chooses to require Tail Wind to purchase the Second and Third Notes, we
will file another registration statement covering the resale of the shares
that may be issued on conversion of the Second and Third Notes and upon
the exercise of the warrants associated with the Second and Third Notes.
In our agreement with Tail Wind, the Company granted Tail Wind
anti-dilution rights. If the Company sells common stock or securities
exercisable for or convertible into shares of our common stock for less
than $1.79 per share, the Company must reduce the conversion price of the
notes and the exercise price of the warrants to the price the Company sold
the common stock or the exercise or conversion price the Company issued
the convertible securities. The Company has agreed to register for resale
any additional shares that will be issued pursuant to these anti-dilution
rights on a future registration statement, unless such additional shares
are available in the current registration statement. In addition, under
the terms of the agreement, without Tail Wind's approval, the Company may
not issue Tail Wind shares of common stock such that Tail Wind would ever
be considered to beneficially own greater than 4.99% of the outstanding
common stock. In connection with this transaction, Link Two has paid
Ladenburg Thalman & Co. a fee of 5% of the purchase price of the notes.
Additionally, the Company has valued the conversion feature of the
convertible debenture and warrants at $1,648,045 and $1,270,995,
respectively; the amounts were determined by using the Black-Scholes
calculation. These amounts have been capitalized as part of the cost of
developing the wireless infrastructure.
16
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
NOTE 9 - MARKETABLE SECURITIES:
As discussed in Note 1, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
and SFAS No. 130, "Accounting for Other Comprehensive Income." At August
31, 2001, all of the Company's marketable equity securities are classified
as available-for-sale; they were acquired with the intent to dispose of
them within the next year.
At November 30, 2001, the securities had an original basis of $1,942,065
determined by multiplying the number of shares acquired by the fair market
value of those shares. At the November 30, 2001 balance sheet date, the
fair market value of these securities was $1,954,813; determined by
multiplying the number of shares held by the fair market value of those
shares at the balance sheet date. The difference between the cost and fair
market value represents an unrealized holding gain (loss) and is included
below current earnings in "Other Comprehensive Income."
Security Name Shares Cost Basis Current FMV
---------- -----------
Bank of America 50,000 $ 49,688 $ 50,312
Bear Stearns 55,000 54,948 50,402
Citicorp 110,000 109,500 109,200
CMC Security 17,000 16,660 15,869
Credit Suisse 50,000 49,925 50,188
CWMBS 4,000 3,851 4,000
FHLMC 274,000 91,562 96,390
FNMA 690,000 105,702 108,682
GE Capital 32,000 14,101 14,691
Ginnie Mae 50,000 50,000 50,250
GNMA 194,610 179,642 177,803
Res. Accredit 25,102 2,290 2,318
SB US Government Income 19,179 202,292 199,854
SB Government Securities Fund 106,202 1,011,905 1,024,851
---------- ----------
Totals $1,942,065 $1,954,813
========== ==========
Other marketable securities, Urbana and Burst.com, with an adjusted cost
basis of $418,000 and fair market value of $217,000 are included in cash
and cash equivalents category and are held for resale.
NOTE 10 - INCOME TAXES:
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Implementation of SFAS 109 did not have a material cumulative
effect on prior periods, nor did it result in a change to the current
year's provision.
A) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
November 30, August 31,
2001 2000
----------- ----------
% %
U.S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference (34) (34)
--- ---
Effective U.S. Tax Rate 0 0
Foreign Tax Valuation 0 0
--- ---
Effective Tax Rate 0 0
=== ===
17
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S. Federal
income tax rate of 34% to pretax income from continuing operations as a
result of the following: (in thousands)
November 30, August 31,
2001 2001
------------- -----------
Computed expected tax benefit $(1,145) $(1,997)
Increase in valuation allowance 1,145 1,997
------- -------
$ --- $ ---
======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
November 30, 2001 and August 31, 2001are presented below, in thousands,
and include the balances of the merged company ClearWorks.Net.
November 30, August 31,
2001 2000
------------- -----------
DEFERRED TAX ASSETS:
Accounts receivable, principally due to
allowance for doubtful accounts $ 102 $ 102
Net operating loss carry-forwards 12,101 10,956
Less valuation allowance (12,101) (10,956)
-------- --------
Net deferred tax assets -- --
DEFERRED TAX LIABILITIES:
Differences in depreciation 47 47
-------- --------
Net deferred tax liabilities $ 47 $ 47
======== ========
The valuation allowance for deferred tax assets of November 31, 2001 and
August 31, 2001 was $12,101,000 and $10,956,000, respectively. At November
30, 2001 the Company has net operating loss carryforwards of $35,239,000,
which are available to offset future federal taxable income, if any, with
expirations from 2020 to 2021.
NOTE 11 - ISSUANCE OF COMMON STOCK:
For the three months ended November 30, 2001, the Company issued shares of
common stock. The following table summarizes the shares of common stock
issued, in thousands.
SHARES OUTSTANDING AUGUST 31, 2001 60,264
-------
Shares issued for Retirement of Debt and Liabilities 1,460
Treasury Stock (631)
-------
SHARES OUTSTANDING NOVEMBER 30, 2001 61,093
=======
NOTE 12 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
In July 1996, the Board of Directors and majority shareholders adopted an
employee stock option plan under which 400,000 shares of Common Stock have
been reserved for issuance. Since that time, the Board of Directors have
amended the July 1996, employee stock option plan under which 1,000,000
shares of Common Stock have been reserved for issuance. The options
granted for under this plan are to purchase fully paid and non-assessable
shares of the Common Stock, par value $.001 per share at a price equal to
the underlying common stock's market price at the date of issuance. These
options may be redeemed six months after issuance, expire five years from
the date of issuance and contain a cash-less exercise feature. The
underlying shares of common stock were registered for resale under the
Securities Act of 1933 on February 19, 1999. As of November 30, 2001,
416,474 options have been granted pursuant to such plan with 72,499 being
exercised and 10,350 being cancelled.
18
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
The Company has issued or has acquired through its acquisitions and
outstanding the following warrants which have not yet been exercised at
November 30, 2001:
39,998 stock purchase warrants issued to Carl A. Chase. Expiration
of warrants is 6,666 on the ending date of each month commencing on
November 30, 2001 and ending on July 31, 2002. The warrants are to
purchase fully paid and non-assessable shares of the common stock,
par value $.001 per share at a purchase price of $0.31 per share.
The shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As of
November 30, 2001, all of these warrants have been exercised.
50,000 stock purchase options issued to L.A. Delmonico Consulting,
Inc. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $1.04 per share. The shares of common stock underlying
these warrants have not been registered or issued, under the
Securities Act of 1933. As of November 30, 2001, none of these
options have been registered, issued or exercised.
600,000 stock purchase warrants issued to Paladin Associates
expiring September 1, 2001. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $1.50 per share. 166,667 warrants are
not exercisable until and unless the shares of Common Stock trade at
a minimum of $4.00 per share for twenty-one consecutive trading
days. 166,667 warrants are not exercisable until and unless the
shares of Common Stock trade at a minimum of $6.00 per share for
twenty-one consecutive trading days. 166,666 warrants are not
exercisable until and unless the shares of Common Stock trade at a
minimum of $8.00 per share for twenty-one consecutive trading days.
The shares of common stock underlying 350,000 warrants were
registered for resale on August 3, 2000, under the Securities Act of
1933. 100,000 incentive warrants will be made available and will
vest at the end of October 2000 if the first objective of $4.00 is
achieved before the end of October. As of November 30, 2001, 250,000
of the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933.
50,000 stock purchase warrants issued to Weed & Co. L.P. expiring
December 10, 2002. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $1.55 per share. The shares of common stock
underlying the warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of November 30, 2001,
25,000 warrants have been exercised resulting in cash proceeds of
$38,750.
20,000 stock purchase warrants issued to Kason, Inc. expiring
October 7, 2002. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $1.75 per share. The shares of common stock
underlying these warrants were registered for resale on November 30,
2000, under the Securities Act of 1933. November 30, 2001, 6,234
warrants have been exercised resulting in cash proceeds of $10,910.
25,000 stock purchase warrants issued to Synchton, Inc. expiring
January 1, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $2.00 per share. The shares of common stock
underlying these have not been registered under the Securities Act
of 1933. As of November 30, 2001, none of these warrants have been
exercised.
41,667 stock purchase warrants issued to Peter Miles expiring July
20, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.00 per share. The shares of common stock underlying
these have not been registered under the Securities Act of 1933. As
of November 30, 2001, none of these warrants have been exercised.
19
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
41,667 stock purchase warrants issued to Peter Miles expiring July
20, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.25 per share. The shares of common stock underlying
these warrants have not been registered or issued, under the
Securities Act of 1933. As of November 30, 2001, none of these
warrants have been exercised.
58,333 stock purchase warrants issued to Peter Miles expiring July
20, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $3.00 per share. The shares of common stock underlying
these warrants have not been registered or issued, under the
Securities Act of 1933. As of November 30, 2001, none of these
warrants have been exercised.
50,000 stock purchase warrants issued to Weed & Co. L.P. expiring
June 10, 2002. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.00 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of November 30, 2001,
none of these warrants have been exercised.
40,000 stock purchase warrants issued to Rachel McClere 1998 Trust
expiring April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of November 30, 2001, none of these
warrants have been registered, issued or exercised.
160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of November 30, 2001, none of these
warrants have been registered, issued or exercised.
232,000 stock purchase warrants issued to Shannon D. McLeroy
expiring April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of November 30, 2001, none of these
warrants have been registered, issued or exercised.
176,000 stock purchase warrants issued to Tech Technologies
Services, LLC expiring April 24, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $3.75 per share. The shares
of common stock underlying these warrants have not been registered
or issued, under the Securities Act of 1933. As of November 30,
2001, none of these warrants have been registered, issued or
exercised.
328,000 stock purchase warrants issued to Candlelight Investors,
LLC. Expiration of warrants is as follows: 104,000 on December 31,
2002, 112,000 on February 15, 2003 and the remaining 112,000 on
April 19, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.95 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of November 30, 2001, none of these
warrants have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc. expiring
October 1, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $4.50 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of November 30, 2001,
none of these warrants have been exercised.
20
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
100,000 stock purchase warrants issued to National Financial
Communications Corp. expiring June 2003. The warrants are to
purchase fully paid and non-assessable shares of the common stock,
par value $.001 per share at a purchase price of $7.00 per share. As
of November 30, 2001, the underlying shares of common stock have not
yet been registered for resale under the Securities Act of 1933.
250,000 stock purchase warrants issued to Sands Brothers & Co., LTD.
expiring July 13, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.49 per share. As of November 30, 2001, the
underlying shares of common stock have not yet been registered for
resale under the Securities Act of 1933.
25,000 stock purchase warrants issued to Synchton, Inc. expiring
July 1, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of November 30, 2001,
none of these warrants have been exercised.
192,000 stock purchase warrants issued to Tech Technologies
Services, LLC. expiring April 24, 2008. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $7.50 per share. The shares
of common stock underlying these warrants have not been registered
or issued, under the Securities Act of 1933. As of November 30,
2001, none of these warrants have been registered, issued or
exercised.
240,000 stock purchase warrants issued to Shannon D. McLeroy
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of November 30, 2001, none of these
warrants have been registered, issued or exercised.
168,000 stock purchase warrants issued to Michael T. McClere
expiring April, 24, 2008. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $7.50 per share. The shares of common
stock underlying these warrants have not been registered or issued,
under the Securities Act of 1933. As of November 30, 2001, none of
these warrants have been registered, issued or exercised.
40,000 stock purchase warrants issued to Rachel McClere 1998 Trust
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of November 30, 2001, none of these
warrants have been registered, issued or exercised.
160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As November 30, 2001, none of these
warrants have been registered, issued or exercised.
50,000 stock purchase warrants issued to Weed & Co. L.P. expiring
June 10, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $9.68 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of November 30, 2001,
none of these warrants have been exercised.
21
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
25,000 stock purchase warrants issued to Synchton, Inc. expiring
April 1, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $10.00 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of November 30, 2001,
none of these warrants have been exercised.
250,000 stock purchase warrants issued to Sands Brothers & Co., LTD.
expiring July 13, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $10.00 per share. These warrants, however are
not exercisable until and unless the closing price of Common Stock
at any time during the exercise period reaches $10.00 per share. As
of November 30, 2001, the underlying shares of common stock have not
yet been registered for resale under the Securities Act of 1933.
250,000 stock purchase warrants issued to Hampton-Porter Investment
Bankers LLC expiring June 27, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $12.00 per share. The shares
of common stock underlying these warrants were registered for resale
on August 3, 2000, under the Securities Act of 1933. As of November
30, 2001, none of these warrants have been exercised.
350,000 stock purchase warrants issued to Sands Brothers & Co., LTD.
expiring July 13, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $14.00 per share. These warrants, however,
are not exercisable until and unless the closing price of the Common
Stock at any time during the exercise period reaches $14.00 per
share. As of November 30, 2001, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933.
250,000 stock purchase warrants issued to Hampton-Porter Investment
Bankers LLC expiring June 27, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $18.00 per share. The shares
of common stock underlying these warrants were registered for resale
on August 3, 2000, under the Securities Act of 1933. As of November
30, 2001, none of these warrants have been exercised.
150,000 stock purchase warrants issued to Sands Brothers & Co., LTD.
expiring July 13, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $25.00 per share. These warrants, however,
are not exercisable until and unless the closing price of the Common
Stock at any time during the exercise period reaches $25.00 per
share. As of November 30, 2001, the underlying shares of common
stock have not yet been registered for resale under the Securities
Act of 1933.
The warrants outstanding are segregated into four categories (exercisable,
non-exercisable, non-registered, and expired).
22
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
Warrants Issued Warrants Exercisable Warrants Warrants Expired
Class of November 30, November 30, Non- Non- November 30,
Warrants 2001 2000 2001 2000 Exercisable Registered 2001 2000
- --------- -------------------------- --------------------------- ------------------------------ --------------------
1.04 50,000 - - - 50,000 50,000 - -
1.50 600,000 - - - 350,000 250,000 - -
1.55 50,000 - 25,000 - - - - -
1.75 20,000 - 13,766 - - - - -
2.00 25,000 - 25,000 - - - - -
2.00 41,667 - 41,667 - - - - -
2.25 41,667 - 41,667 - - - -
3.00 50,000 - 50,000 - - - - -
3.00 58,333 - 58,333 - - - - -
3.75 40,000 - 40,000 - - 40,000 - -
3.75 160,000 - 160,000 - - 160,000 - -
3.75 232,000 - 232,000 - - 232,000 - -
3.75 176,000 - 176,000 - - 176,000 - -
3.95 328,000 - 328,000 - - 328,000
4.50 25,000 - - - - - - -
7.00 100,000 - - - - 100,000 - -
7.49 250,000 - - - - 250,000 - -
7.50 25,000 - 25,000 - - - - -
7.50 192,000 - 192,000 - - 192,000 - -
7.50 240,000 - 240,000 - - 240,000 - -
7.50 168,000 - 168,000 - - 168,000 - -
7.50 40,000 - 40,000 - - 40,000 - -
7.50 160,000 - 160,000 - - 160,000 - -
9.68 50,000 - 50,000 - - - - -
10.00 25,000 - 25,000 - - - - -
10.00 250,000 - - - - 250,000 - -
12.00 250,000 - 250,000 - - - - -
14.00 350,000 - - - - 350,000 - -
18.00 250,000 - 250,000 - - - - -
25.00 150,000 - 250,000 - - 150,000 - -
2.00 Expired - * - - - - 50,000 -
ESOP 416,474 * 51,700 * 322,125 35,700.00 11,500 - 10,350 10,350
ESOP - 228,207 - 114,908 - -
----------- --------- ------------------------- ------------------------- -----------------
4,814,141 279,907 3,163,558 150,608 411,500 3,136,000 60,350 10,350
======================== ========================= ========================= =================
AN ASTERISK (*) DENOTES WARRANTS WHICH WOULD HAVE AN ANTI-DILUTIVE EFFECT IF
CURRENTLY USED TO CALCULATE EARNINGS PER SHARE FOR THE MONTHS ENDED NOVEMBER 30,
2001 AND 2000, RESPECTIVELY.
NOTE 13 - CAPITALIZATION ACTIVITIES:
On July 10, 2000, Atlantic Pacific Communications, Inc. (a wholly owned
subsidiary) initiated a stock offering in accordance with Regulation D
promulgated under the Securities Act of 1933. Atlantic Pacific is offering
units at $25,000 per unit. Each unit consists of 10,000 shares of common
stock and 10,000 Class A warrants to purchase Atlantic Pacific common
stock at a price of $6.00 per share with one warrant being issued as a
unit with each common share sold. Atlantic Pacific will sell up to
4,000,000 shares of common stock and up to 4,000,000 Class A warrants; 400
units. As of November 30, 2001, 1,325 units have been sold totaling
132,500 shares and resulting in proceeds of $331,250.
NOTE 14 - RISK FACTORS:
For the three months ended November 30, 2001 and 2000, substantially all
of the Company's business activities have remained within the United
States and have been extended to the wireless infrastructure, fiber,
cabling and broadband industry. Approximately, seventy-two percent of the
Company's revenues and receivables have been created solely in the state
of Texas, two percent have been created in the international market, and
the approximate twenty-six percent remainder have been created relatively
evenly over the rest of the nation during the three months ended November
30, 2001. Whereas approximately seventy percent of the Company's revenues
and receivables have been created solely in the state of Texas, two
percent have been created in the international market, and the approximate
twenty-eight percent remainder has been created relatively evenly over the
rest of the nation for the
23
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
three months ended November 30, 2000. Through the normal course of
business, the Company generally does not require its customers to post any
collateral.
Although the Company had previously concentrated its efforts in the
wireless infrastructure industry and has since expanded into the fiber,
cable and broadband markets for the three months ended November 30, 2001
and 2000, it is management's belief that the Company's diversification
into other products and services reduces its credit and economic risk
exposures in the technology and manufacturing sectors.
NOTE 15 - FOREIGN OPERATIONS:
Although the Company is based in the United States, its product is sold on
the international market. Presently, international sales total
approximately 2% and 2% at November 30, 2001 and 2000, respectively.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES:
LEASES
The Company leases its primary office space in League City, Texas for
$30,824 per month with Gateway Park Joint Venture through November 30,
2001. This non-cancelable lease commenced on June 1, 2001 and expires on
May 31, 2004. For the months ended November 30, 2001 and 2000, rental
expenses of approximately $92,472 and $64,548 respectively, were incurred.
A new three-year non-cancelable lease commenced June 1, 2001 and expires
May 31, 2004. Under the terms of the new lease, monthly payments will be
$36,352 over the course of the lease. The monthly payment amount includes
tax escrow payments, insurance escrow payments and common area
maintenance. The Company has retained the original 23,195 square feet of
space, plus an additional 11,180 square feet for office space and storage
of materials used in subdivision infrastructure development for the
southern region of Houston.
The Company also leases office space in Oxnard, California with Tiger
Ventura County, L.P. This three-year non-cancelable lease commenced August
1, 2000 and expires July 31, 2003. Under the terms of the lease, monthly
payments will be $2,130 for the first twelve months whereat the monthly
payments will increase by 3.5% at the beginning of both the second and
third years. For the periods ended November 30, 2001 and 2000, rental
expense of $6,614 and $6,390, respectively were incurred.
The Company's wholly owned subsidiary, AtlanticPacific, leases office
space in Houston, Texas with Houston Industrial Partners, Ltd. This
non-cancelable lease expires October 2001. The monthly payments through
October 2000 are $1,420 whereat they will increase to $1,498 for the
remaining twelve months. Additionally, AtlanticPacific is responsible for
monthly common area maintenance fees of approximately $450. For the
periods ended November 30, 2000 and 2001, rental expense of $4,494 and
$4,338, respectively were incurred.
AtlanticPacific also leases office space in Chicago, Illinois with Lasalle
Bank National Association. This twenty-nine month lease commenced on
October 1, 2000 and expires February 28, 2003. Under the terms of the
lease, monthly payments will be $2,220 for the first twelve months whereat
they will increase by 3.2% at the thirteenth and twenty-fifth months. For
the periods ended November 30, 2001 and 2000, rental expense of $6,802 and
$0, respectively were incurred.
AtlanticPacific also leases office space in Houston, Texas with WL and
Deborah Miller in the amount of $4,500 per month. This non-cancelable
lease expiring September 2002 maintains a five-year renewal option. Rental
expense for the period ended November 30, 2001 and 2000 of $13,500 and
$13,500 were incurred.
The Company's subsidiary, ClearWorks.Net, Inc., leases office space in
Houston, Texas with 2000 North Loop. This non-cancelable lease expires on
April 30, 2003. The monthly payments will increase from $7,306 to $11,091
on April 30, 2000 and again on May 1, 2002 to $11,217 for the remaining
twelve months. For the period ended November 30, 2001 and 2000, rental
expense of $33,273 and $0 were incurred.
Also, ClearWorks.Net, Inc., leases office space in Phoenix, Arizona with
Airpark Holdings. This non-cancelable lease expires on July 31, 2003. The
monthly payments are variable. For the period ended November 30, 2001 and
2000, rental expense of $17,091 and $0 were incurred.
24
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
Also, ClearWorks.Net, Inc., leases office space in San Antonio, Texas with
Wade Holdings. This is a month-to-month lease. The monthly payments are
$2,000. For the period ended November 30, 2001 and 2000, rental expense of
$6,000 and $0 was incurred.
The Company's subsidiary, United Computing Group, leases office space in
Houston, Texas with Techdyne, Inc. This non-cancelable lease expires on
August 31, 2002. The monthly payments will increase from $6,000 to $6,100
on September 1, 2000 and again on September 1, 2001 to $6,300 for the
remaining twelve months. For the period ended November 30, 2001 and 2000,
rental expense of $18,900and $0 was incurred.
The Company's subsidiary, ClearWorks Home Systems, leases office space in
Austin, Texas with Ditto Communications Technologies, Inc. This
non-cancelable lease commenced on August 1, 2001 and expires August 30,
2002. The monthly payments are $4,732. For the period ended November 30,
2001 and 2000, rental expense of $14,196 and $0 was incurred.
The Company's subsidiary, United Computing Group, leases office space in
Dallas, Texas with AMB Property II, LP. This non-cancelable lease
commenced on June 19, 2000 and expires June 30, 2002. The monthly payments
are $2,179. For the period ended November 30, 2001 and 2000, rental
expense of $6,537 and $0 was incurred.
Future obligations under the non-cancelable lease terms are:
Period Ending
AUGUST 31, AMOUNT
----------- -----------
2002 $ 677,427
2003 634,386
2004 327,164
-----------
Total $ 1,638,977
===========
LEGAL PROCEEDINGS
ClearWorks.Net "Clearworks" is subject to legal proceedings and claims
that arise in the ordinary course of business. Management does not expect
that the results in any of these legal proceedings will have a material
adverse effect on the Company's financial condition or results of
operations. Coinciding with the reverse merger with Southeast, the former
management of Southeast established a trust to provide for the orderly
liquidation of any alleged claims existing as of the date of acquisition.
Certain stockholders of Southeast have contributed 86,000 shares of the
ClearWorks common stock to the trust to satisfy approximately $150,000 of
alleged claims. Due to the resignation of the trustee, the trust shares
have been deposited in the registry of the Harris County Texas District
Court, and the Company has been named a nominal defendant in an
Interpleader action. ClearWorks intends to vigorously defend its position
by requesting the court release the stock for payment of all alleged
claims as was originally intended. Management does not expect that the
results of this legal proceeding will have a material adverse effect on
the ClearWorks financial condition or results of operations.
ClearWorks also currently is a defendant in Robert Horn vs. ClearWorks
Technologies, Inc. The suit was filed March 25, 1999, alleging causes of
action based on breach of contract in the amount of approximately
$250,000; 100,000 shares of ClearWorks common stock; alleged lost
commissions and attorney fees. ClearWorks filed an answer on April 16,
1999, denying the claim and asserting its affirmative defenses. This suit
is scheduled for March 11, 2002 two week trial docket. ClearWorks
continues to vigorously contest these claims by Robert Horn on the basis
that they are without merit.
ClearWorks is a defendant in Valley First Community Bank vs.
ClearWorks.net, Inc. and ClearWorks Home Systems, Inc. On August 16, 2000,
Valley First Community Bank (Valley) filed suit alleging a breach of
contract, breach of implied duty of good faith and fair dealing,
conversion, intentional interference with contract, and promissory
estoppel/detrimental reliance. This suit arose when ClearWorks Home
Systems, Inc. (CHS) executed a binding letter of intent to purchase from
Valley certain assets, which Valley represented to CHS that it held first
lien for a purchase price of $150,000. Subsequently, CHS learned Valley
did not in fact hold a first lien on such assets, rather such assets were
sold in a landlord's auction. As a result, CHS did not remit $150,000 to
Valley for payment (see Note 2). This suit is currently in the discovery
phase. The Company intends to vigorously contest all claims in this case.
25
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
ClearWorks is a defendant in STATE OF FLORIDA DEPARTMENT OF ENVIRONMENTAL
PROTECTION VS. RECO TRICOTE, INC. AND SOUTHEAST TIRE RECYCLING, INC. A/K/A
CLEARWORK.NET, INC.; IN THE CIRCUIT COURT OF THE TENTH JUDICIAL CIRCUIT IN
AND FOR POLK COUNTY, FLORIDA. On December 13, 2000, Florida EPA sued the
Company presenting claims for recovery costs and penalties for a waste
tire processing facility. The suit seeks recovery of costs and penalties
in a sum in excess of $1,000,000, attorneys' fees and cost of court. The
Company immediately filed a Motion to Strike Portions of the Complaint/or
for a More Definite Statement and a Motion to Dismiss. The Florida EPA is
amending the petition. ClearWorks denies the claims and intends to
vigorously contest all claims in this case and to enforce its
indemnification rights against the principals of Southeast Tire Recycling.
ClearWorks Structured Wiring Services is a defendant in CHARTERWOOD
ASSOCIATES, LTD. V. CLEARWORKS STRUCTURED WIRING SERVICES, INC.; IN THE
COUNTY CIVIL COURT AT LAW NUMBER THREE (3), HARRIS COUNTY, TEXAS. On
January 21, 2000, Charterwood Associates, a Texas Limited Partnership,
sued ClearWorks Structured Wiring Services, Inc., a subsidiary of
ClearWorks. The suit presents claims for breach of a contract to design,
operate and maintain "bundled digital services" to Plaintiff's apartment
complex. The suit seeks recovery of damages in the sum of $78,746.69 plus
interest, attorneys' fees and court costs. ClearWorks denies the claims.
ClearWorks maintains its own claims for breach of contract in connection
with the same project. ClearWorks has filed an affidavit claiming a lien
against the apartment project owned by the Plaintiffs, claiming that
$52,800 is unpaid for services and materials provided. ClearWorks will
seek attorneys' fees, interest and cost of court in connection with its
counter-claim, when filed. This suit is currently in discovery phase and
is scheduled for the February 25, 2002 two-week trial docket. ClearWorks
intends to vigorously contest all claims in this case. ClearWorks also
expects to vigorously pursue collection of its claims for services
rendered and materials provided.
ClearWorks is a defendant in Candlelight Investors LLC v. Clearworks.net,
Inc. et al which is pending in the Supreme Court of the State of New York,
County of New York. Plaintiff seeks a judgment against ClearWorks arising
out of the alleged failure of Clearworks.net, Inc. to convert certain
debentures of the Company into common stock of ClearWorks, to register
stock to permit such conversion, and for other alleged breaches relating
to agreements between plaintiff and ClearWorks. Plaintiff seeks
compensatory damages exceeding $2,763,998, injunctive relief, specific
performance, punitive damages and other relief. The Plaintiff has obtained
a judgement in the amount of $3,200,000, against ClearWorks. Plaintiffs
will be conducting jurisdictional discovery on Eagle and Dr. H. Dean
Cubley. The defendants deny the allegations of the complaint.
ClearWorks is defendant in Kaufman Bros., LLP v. Clearworks.Net, Inc., et
al, (Index No. 600939/01), which is pending in the Supreme Court of the
State of New York, County of New York. In this action, plaintiff alleges
that defendants have breached an agreement with ClearWorks to pay
plaintiff a fee for financial advice and services allegedly rendered by
plaintiff. The complaint seeks compensatory damages of $4,000,000, plus
attorneys' fees and costs. This suit is currently in the discovery phase.
The defendants deny the allegations of the complaint.
ClearWorks is a defendant in Merger Communications Inc. vs.
Clearworks.Net, Inc; in the 281st Judicial District Court of Harris
County, Texas. On June 16, 2000, Merger Communications sued Clearworks.
The suit presents claims for breach of contract to provide Clearworks
public relation services. The suit seeks recovery of damages in the sum of
$7,798, the value of 106,667 restricted shares of Clearworks common stock
as of the date of the alleged breach plus interest, attorney fees, and
court costs. Clearworks denies the claims and has filed an answer. This
suit is scheduled for the February 2, 2002 two-week trial docket.
Clearworks intends to vigorously contest all claims in this case.
On October 2, 2001, Metro Networks sued ClearWorks. The suit presents
claims for breach of contract to provide ClearWorks radio advertisement.
The suit seeks recovery of damages in the sum of $146,750 plus interest,
attorney's fees and court costs. ClearWorks denies the claims and will
file an answer. This suit is currently in the discovery phase. ClearWorks
intends to vigorously contest all claims in this case.
26
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
OTHER COMMITMENTS
On July 13, 2000, the Company entered into an agreement with Sands
Brothers & Co., LTD. (Sands) whereby Sands will perform financial advisory
services and assist the Company with mergers and acquisitions, corporate
finances and other related matters for a period of two years. As
compensation for these services, the Company will immediately pay Sands
$50,000 and issue them 10,000 shares of the Company's common stock. As an
additional inducement, the Company has issued Sands 1,000,000 stock
purchase warrants to be exercisable for a three year period expiring July
13, 2003. These warrants shall vest and be exercisable as follows: 25% of
such warrants shall vest upon execution of this agreement and shall have
an exercise price per share of $7.49; an additional 25% shall vest when
and if the closing price of the common stock at any time during the
exercise period reaches $10.00 per share and shall be exercisable at
$10.00 per share; an additional 35% shall vest when and if the closing
price of the common stock at any time during the exercise period reaches
$14.00 per share and shall be exercisable at $14.00 per share; an
additional 15% shall vest at any time during the exercise period when the
closing price of the common stock at any time reaches $25.00 per share and
shall be exercisable at $25.00 per share. Additionally, Sands shall
receive further compensation for other activities such as fund raising
based upon a percent of all monies raised.
On April 1, 2000, the Company entered a one-year agreement with Synchton,
Inc. whereby Synchton, Inc. will provide professional business services.
As compensation for these services, the Company will pay $10,000 per month
as well as issue 100,000 stock purchase warrants. These warrants shall be
issued in 25,000 increments on the first day of each quarter of the
agreement with an exercise price equal to the closing price of the
Company's common stock of the prior day to issuance. Additionally, these
warrants are not exercisable until six months after issuance and expire
three years after said issuance. Although this agreement shall
automatically renew on an annual basis, it is terminable by the Company
prior to the annual renewal by providing Synchton, Inc. with ninety days
advance written notice.
On September 1, 1999, the Company entered into an agreement with Paladin
Associates (Paladin) whereby Paladin will assist the Company with general
financial related services. These services shall include, but not be
limited to, assistance in writing news releases, stockholder
communications, communications with retail brokers and brokerage firms,
consulting to large shareholders and general image and public relations
issues. As compensation for the services to be rendered under this
twelve-month contract, the Company will pay $3,500 and issue 2,000 free
trading shares of the Company's common stock per month. This agreement
also contains incentive based bonuses tied to the consecutive twenty-one
day average closing bid price of the Company's common stock. This
incentive will consist of 500,000 two-year options for the purchase of the
Company's common stock at $1.50. These options will be vested in three
equal portions based upon the Company's performance in the stock market.
One-third will vest when the closing bid price reaches $4.00 and remains
above this level for a minimum of twenty-one consecutive trading days. The
second one-third will vest when the closing bid price reaches $6.00 and
remains above this level for a minimum of twenty-one consecutive trading
days. The remaining one-third shall vest when the closing bid price
reaches $8.00 and remains above this level for a minimum of twenty-one
consecutive trading days. This agreement is cancelable by either party
without cause given ten days written notice.
27
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
NOTE 17 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share, in thousands except Per-Share Amount:
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001
-----------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -------------
Net Loss $(3,371)
Basic EPS:
Income available to
common stockholders $(3,371) 61,093 $ (0.06)
Effect of Dilutive Securities
Warrants 154
------- ------
Diluted EPS:
Income available to
common stockholders
and assumed conversions $(3,371) 61,247 $ (0.06)
======= ======= =======
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000
-----------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -------------
Net Income $ 63
Basic EPS:
Income available to
common stockholders 63 26,317 $ 0.002
Effect of Dilutive Securities
Warrants 154
------- ------
Diluted EPS:
Income available to
common stockholders
and assumed conversions $ 63 26,471 $ 0.002
======= ======= =======
For the three months ended November 30, 2001 and 2000, anti-dilutive
securities existed (see Note 12).
NOTE 18 - EMPLOYEE STOCK OPTION PLAN:
In July 1996, the Board of Directors and majority stockholders adopted a
stock option plan under which 400,000 shares of the Company's common stock
have been reserved for issuance. Since that time, the Board of Directors
have amended the July 1996, employee stock option plan under which
1,000,000 shares of Common Stock have been reserved for issuance. Under
this plan, as of November 30, 2001 and 2000, 416,474 and 279,907 warrants
have been issued to various employees. Of these outstanding warrants, 0
and 500 were exercised for the months ended November 30, 2001 and 2000,
respectively. Additionally, 10,350 warrants have expired as of November
30, 2001.
The Company has elected to follow APB 25, "Accounting for Stock Issued to
Employees." Accordingly, since employee stock options are granted at
market price on the date of grant, no compensation expense is recognized.
However, SFAS 123 requires presentation of pro forma net income and
earnings per share as if the Company had accounted for its employee stock
options granted under the fair value method of that statement. The
weighted average fair value of the individual options granted during 2000
is estimated as $0.58 on the date of grant. A meaningful weighted average
fair value of the individual options granted during 2000 using the method
prescribed by SFAS 123 could not be determined due to the volatility of
the share price during the measurement period.
28
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
Management estimates the average fair value for options granted during
2001 to be comparable to those granted in 2000. The impact on net income
is minimal; therefore, the pro forma disclosure requirements prescribed by
SFAS 123 are not significant to the Company. The fair values were
determined using a Black-Scholes option-pricing model with the following
assumptions:
2001 2000
-------- --------
Dividend Yield 0.00% 0.00%
Volatility 0.91 15.14
Risk-free Interest Rate 7.00% 7.00%
Expected Life 5 5
NOTE 19 - RETIREMENT PLANS:
During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its participants.
This plan maintains that the Company will match up to 3% of each
participant's contribution. For the three months ended November 30, 2001
and 2000, employee contributions were approximately $34,505 and $26,461,
respectively. The Company matched approximately $12,038 and $9,082,
respectively for those same periods.
NOTE 20 - MAJOR CUSTOMER:
The Company had gross revenues of $8,761,000 and $1,866,000 for the three
months ended November 30, 2001 and 2000, respectively. The following
parties individually represent a greater than ten percent of these
revenues.
NOVEMBER 30, 2001 NOVEMBER 30, 2000
CUSTOMER AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ------ ---------- ------ ----------
Customer A $ 1,463,000 16.70% $ --- 0.00%
Customer B $ --- 0.00% $ 206,000 11.02%
Customer C $ --- 0.00% $ 388,000 20.75%
Subsequent to the three months ended November 30, 2001, the Company had
outstanding accounts receivable with Enron Corporation and many of its'
subsidiaries. The exposure from the bankruptcy totals approximately
$205,000, which has been accounted for through allowance of doubtful
accounts in these financials.
NOTE 21 - INDUSTRY SEGMENTS:
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". At November 30, 2001,
the Company's seven business units have separate management teams and
infrastructures that offer different products and services. The business
units have been aggregated into two reportable segments (as described
below) since the long-term financial performance of these reportable
segments is affected by similar economic conditions.
Eagle Wireless International, Inc. (Eagle) is a worldwide supplier of
broadband and telecommunications equipment with related software and
broadband products. (Including Eagle Wireless, Broadband Magic and etoolz
for this summary).
AtlanticPacific Communications, Inc. (APC) specializes in providing
professional data and voice cable and fiber optic installations through
project management services on a nationwide basis for multiple
site-cabling installations for end users and re-sellers.
ClearWorks Communications, Inc. (COMM) provides solutions to consumers by
implementing technology both within the residential community and home.
This is accomplished through the installation of fiber optic backbones to
deliver voice, video and data solutions directly to consumers.
ClearWorks Home Systems, Inc. (HSI) specializes in providing fiber optic
and copper based structured wiring solutions and audio and visual
equipment to single family and multi-family dwelling units.
29
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
United Computing Group, Inc. (UCG) is an accelerator company and computer
hardware and software reseller. UCG / INT maintains a national market
presence.
Link Two Communications, Inc. (Link II) is in the development and delivery
of one and two way messaging systems over a national high-speed wireless
broadband network. Link II continues to add to the paging customer base.
ClearWorks.Net, Inc. (.NET) is inactive with exception of debt related
expenses.
FOR THE THREE MONTHS ENDING NOVEMBER 30, 2001
(in thousands) Eagle APC COMM HSI UCG Link II .Net Elim. Consol.
-----------------------------------------------------------------------------------------------------
Revenue 101 832 514 948 6,360 6 --- --- 8,761
Segment Profit / (Loss) (2,296) (232) (140) (16) (268) (577) (30) --- (2,559)
Total Assets 154,096 1,533 15,788 3,019 4,287 30,125 1,257 (45,451) 164,654
Capital Expenditures 99 2 2,267 7 2 --- --- --- 2,377
Dep. And Amort. 818 34 127 21 6 312 --- --- 1,318
FOR THE THREE MONTHS ENDING NOVEMBER 30, 2000
(in thousands) Eagle APC Elim. Consol.
----------------------------------------------------------
Revenue 527 1,339 --- 1,866
Segment Profit / (Loss) 106 (11) --- 95
Total Assets 58,816 2,572 (765) 60,623
Capital Expenditures 47 15 --- 62
Dep. And Amort. 179 24 --- 203
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its
operating segments based on income before net interest expense, income
taxes, depreciation and amortization expense, accounting changes and
non-recurring items.
NOTE 22 - SUBSEQUENT EVENTS.
Subsequent to the November 30, 2001 quarter end, the Company acquired a
paging and messaging company for cash approximately $580,000. This
transaction is immaterial and does not require pro-forma disclosure
information.
On December 17, 2001, certain former employees of ClearWorks sued Eagle
and ClearWorks for breach of contract and other related matters. The suit
seeks recovery of damages in excess of $10,000,000 plus attorney's fees
and court costs. The court granted ClearWorks a temporary restraining
order, wherein the Court enforced a covenant against competition provision
found in the individual's employment contracts with the Company. Such
order restrains these individuals from competing against ClearWorks for a
period of six months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this
Form 10-Q. Information included herein relating to projected growth and
future results and events constitutes forward-looking statements. Actual
results in future periods may differ materially from the forward-looking
statements due to a number of risks and uncertainties, including but not
limited to fluctuations in the construction, technology, communication and
industrial sectors; the success of the Company's restructuring and cost
reduction plans; the success of the Company's competitive pricing; the
Company's relationship with its suppliers; relations with the Company's
employees; the Company's ability to manage its operating costs; the
continued availability of financing; governmental regulations; risks
associated with regional, national, and world economies; and consummation
of the merger and asset purchase transactions. Any forward-looking
statements should be considered in light of these factors.
30
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
OVERVIEW
During the quarter ended November 30, 2001, Eagle's operations were
concentrated in the continued development and expansion of its bundled
digital services network in the Houston and Austin, Texas areas; expansion
of its nationwide customer care center for technology solutions and
network monitoring on a seven day by twenty four hour operation; reduction
of duplicate overhead resulting from the merger with Clearworks.net;
entered into acquisition agreements with a security and a messaging
company; and, settled numerous lawsuits . Eagle's consolidated revenues,
gross profit and net loss for the quarter ended November 30, 2001 totaled
$8,761,000, $1,700,000 and $(3,371,000), respectfully. The increase in
revenues is directly related to increases in computer and fiber sales to
residential and commercial customers. The net loss is attributable to the
expenses associated with the development of the digital set-top box and
related customers, expenses incurred with the postponement of commercial
fiber contracts with nationwide customers, continued development of our
customer care centers and messaging network. We believe that the
acquisition of existing security and messaging companies, reduction of
personnel costs, consolidation of facilities, and expanded sales
activities in our product and service businesses will build a near and
long-term solution to an improved financial condition.
REVENUE RECOGNITION
The Company designs, manufactures, markets and services its products and
services under the Eagle Wireless International, Inc., Broadband
Magic.com, Inc., ClearWorks Communications, Inc., ClearWorks Home Systems,
Inc., AtlanticPacific Communications, Inc., Link Two Communications, Inc.
and United Computing Group, Inc. names.
EAGLE WIRELESS INTERNATIONAL
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial
and personal communication systems, radio and telephone systems. Revenues
from these products are recognized when the product is shipped.
BROADBAND MAGIC.COM
Broadband Magic.com, Inc. designs, manufactures and markets the convergent
set-top boxes. Products are sent principally to commercial customers for a
pre-sale test period of 90-days. Upon the end of the pre-sale test period,
the customer either returns the product or accepts the product, at which
time the Company recognizes the revenue.
Eagle Wireless International and Broadband Magic.com engage independent
agents for sales principally in foreign countries and certain geographic
regions in the United States. Under the terms of these one-year agreements
the distributor or sales agents provide the companies with manufacturing
business sales leads. The transactions from these distributors and agents
are subject to the companies' approval prior to sale. The distributorship
or sales agent receives commissions based on the amount of the sales
invoice from the companies to the customer. The sale is recognized at the
time of shipment to the customer. These sales agents and distributors are
not a significant portion of total sales in any of the periods presented.
CLEARWORKS COMMUNICATIONS
ClearWorks Communications provides Bundle Digital Services to business and
residential customers, primarily in the Texas market. Revenue is derived
from fees charged for the delivery of Bundled Digital Services, which
includes telephone, long distance, internet, security monitoring and cable
services. This subsidiary recognizes revenue and the related costs at the
time the services are rendered.
CLEARWORKS HOME SYSTEMS
ClearWorks Home Systems provides structured wiring to homes, audio and
visual components. This subsidiary recognizes revenue and the related
costs at the time the services are performed. Revenue is derived from the
billing of structured wiring to homes and the sale of audio and visual
components to the homebuyers.
ATLANTIC PACIFIC COMMUNICATIONS
AtlanticPacific provides project planning, installation, project
management, testing and documentation of fiber and cable to commercial and
industrial clients throughout the United States. The revenue from the
fiber and cable installation and services is recognized upon percentage of
completion of the project. Most projects are completed in less than one
month, therefore, matching revenue and expense in the period incurred.
Service, training and extended warranty contract revenues are recognized
as earned.
31
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
ETOOLZ
Etoolz, Inc. provides research and development support for all Eagle
companies and does not currently provide billable services to independent
third parties.
LINK TWO COMMUNICATIONS
Link Two provides customers with one and two way messaging systems over a
national high-speed wireless broadband network. The revenue from these
services is recognized as it is earned from the customer and incurs
expense in the current period.
UNITED COMPUTING GROUP
United Computing Group provides business-to-business hardware and software
network solutions and a network monitoring services. The revenue from the
hardware and software sales is recognized at the time of shipment. The
monitoring services recognition policy is to record revenue as earned.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivable deemed uncollectable are charged against
the allowance for doubtful accounts.
RECEIVABLES
For the three months ended November 30, 2001, Eagle accounts receivables
decreased to $5,903,000 from $7,144,000 at August 31, 2001. The majority
of this decrease is due to outstanding receivable collection efforts and a
slow down in customer purchases in the commercial fiber sector.
MARKETABLE SECURITIES
Eagle has adopted the provisions of SFA No. 115, as amended by SFAS No.
130, which provides that all marketable equity securities be classified as
available-for-sale or trading securities, and be carried on the balance
sheet at fair market value. Any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income," net of tax.
INVENTORY
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At November 30, 2001,
Eagle's inventory total of $12,034,000 as compared to $10,637,000 at
August 31, 2001. The additional inventory is primarily attributable to the
purchase of fiber, cabling and computer products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 2000
NET SALES. For the three months ended November 30, 2001, net sales
increased to $8,761,000 from $1,866,000 during the three months ended
November 30, 2000. The increase was primarily attributable to added sales
from Atlanticpacific, ClearWorks Home Systems, ClearWorks Communications
and United Computing Group. Atlantic Pacific provides project planning,
installation, project management, testing and documentation of fiber and
cable to commercial and industrial clients throughout the United States.
ClearWorks Home Systems provides structured wiring solutions and audio /
visual equipment to single and multi-family dwellings. ClearWorks
Communications provides solutions to consumers by implementing technology
both within the residential community and home. This is accomplished
through the installation of fiber optic backbones to deliver voice, video
and data solutions directly to consumers. United Computing Group provides
business-to-business hardware and software network solutions and a network
monitoring services.
COST OF GOODS SOLD. For the three months ended November 30, 2001, cost of
goods sold increased to $7,061,000 from $1,082,000 during the three months
ended November 30, 2000. This is primarily associated with the cable,
fiber and hardware products. Although the cost of sales increased, the
Company's gross profit percentage for products sold decreased to 19% from
42% during the three months ended November 30, 2001.
32
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
OPERATING EXPENSES. For the three months ended November 30, 2001,
operating expenses increased to $5,283,000 from $1,449,000 during the
three months ended November 30, 2000. The primary portions of the increase
are discussed below:
A $1,659,000 increase in salaries, as a result of its acquisitions and
expanded business.
A $28,000 increase in advertising and promotion, due primarily to
increased attendance at conventions and trade shows on a worldwide basis.
A $1,088,000 increase in depreciation and amortization, due to an increase
in amortization of goodwill and purchase of additional assets.
A $1,054,000 increase in other support costs, due to an increase in rents,
travel, utilities and communication costs.
NET EARNINGS. For the three months ended November 30, 2001, Eagle's net
loss was $3,370,000, compared to net earnings of $63,000 during the three
months ended November 30,2000.
CHANGES IN CASH FLOW. Eagle's operating activities used net cash of
$2,979,000 in the three months ended November 30, 2001, compared to
$1,393,000 in the three months ended November 30, 2000. The decrease in
net cash used by operating activities was primarily attributable to
increases in inventory and reductions in accounts payable. Eagle's
investing activities used net cash of $2,744,000 in the three months ended
November 30, 2001, compared to $2,539,000 in the three months ended
November 30, 2000. The increase was due primarily to investment activities
and purchase of equipment. Eagle's financing activities used cash of
$1,840,000, in the three months ended November 30, 2001, compared to cash
provided of $3,276,000 in the three months ended November 30, 2000. The
decrease at November 30, 2001 is attributable to pay off of the Atlantic
Pacific's line of credit, pay down on United Computing Group's line of
credit and purchase of shares in the open market for retirement.
LIQUIDITY AND CAPITAL RESOURCES.
Current assets for the three months ended November 30, 2001 totaled
$35,210,000 as compared to $49,306,000 reported for the three months ended
November 30, 2000. Of this amount, $16,280,000 consisted of cash. Eagle
believes that its working capital of $18,182,000 as of November 30, 2001
should be sufficient to fund operations through the end of the fiscal year
2002. Historically, Eagle has financed its operations through the sale of
debt and equity securities. As such, if its current cash is insufficient
to fund its long-term capital needs, Eagle will rely on future
best-efforts financings for capital. Refer to Note 7 and Note 8 for
descriptions of lines of credit and other immediate forms of funding the
Company has available. As of November 30, 2001, Eagle had no material
capital commitments other than its federal income and state franchise tax
liabilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's bank line of credit bears interest, payable monthly, at a
floating rate equal to the lending bank's prime rate plus 1.0%, which
floating rate was 6.0% on November 30, 2001. A 1% increase in interest
rates would reduce the Company's annual earnings by $210,000 if the full
balance of the line of credit were outstanding over the entire year. As of
November 30, 2001, the outstanding balance was $769,331. The Company
believes that it does not have any other material market risk sensitive
instruments.
PART 2. - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. The Company's management does not expect that
the results in any of these legal proceedings will have a material adverse
effect on the Company's financial condition or results of operations (Note
16).
ITEM 2 - RECENT SALES OF UNREGISTERED SECURITIES OR CHANGES IN SECURITIES
AND USE OF PROCEEDS
None
33
EAGLE WIRELESS INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
None
(b) Reports on Form 8-K
None
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.
EAGLE WIRELESS INTERNATIONAL, INC.
Date: January 14, 2002 By: /s/ H. Dean Cubley
Dr. H. Dean Cubley
President
/s/ Richard R. Royall
Richard R. Royall
Chief Financial Officer
34