U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
________________________________________________________________________________
[ X ] Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended August 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-23163
Texas 76-0494995
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
101 Courageous Drive, League City, Texas 77573
(Address of Principal Executive Office) (Zip Code)
281-538-6000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b)
of the Exchange Act: Common Stock
Securities registered pursuant to Section 12(g)
of the Exchange Act: Common Stock
Check whether the issuer: (1) 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 (2) has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Issuer's revenues for its fiscal year ended August 31, 2002, were $29,817,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price of the common stock on the American Stock
Exchange on November 29, 2002, was $35,284,000. As of November 29,2002,
registrant had 78,410,000 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant is incorporating by reference in Part III of this Form 10-K
certain information contained in the registrant's proxy statement for its annual
meeting of shareholders, which proxy statement will be filed by the registrant
on or before December 29, 2002. 25
This annual report contains forward-looking statements. These statements
relate to future events or future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause Eagle's or Eagle's
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward- looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or the negative of these terms or other
comparable terminology. These statements are only predictions. 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 and working
capital to fund business operations; 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.
Although Eagle believes that the expectations reflected in the
forward-looking statements are reasonable, Eagle cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither
Eagle nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. Eagle is under no duty to
update any of the forward-looking statements after the date of this report to
conform its prior statements to actual results.
1
PART I
Item 1. Description of Business
Overview
Eagle Broadband, Inc., (the "Company" or "Eagle") 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 personal communications markets. The Company
designs, manufactures, markets and services its products under the Eagle
Broadband, Inc., and BroadbandMagic 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. Also provided is last mile cable and fiber installation services as
well as comprehensive IT products and services.
At August 31, 2002, the Company's subsidiaries are: Atlantic Pacific
Communications, Inc. (APC); Etoolz, Inc. (ETI); Eagle Wireless International,
Inc. (EWI); ClearWorks.net, Inc. (.NET); ClearWorks Communications, Inc. (COMM);
ClearWorks Home Systems, Inc. (HSI); Contact Wireless, Inc. (CWI); DSS Security,
Inc. (DSS); United Computing Group, Inc. (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.
Eagle is an integrated focused company that designs and manufactures a wide
range of broadband products and provides complete installation services for
copper, fiber, and wireless to the commercial and residential markets. The
combination of Eagle Wireless and ClearWorks gives Eagle an expanded market,
product and service synergies, the opportunity for growth and recurring
revenues. Core products offered by Eagle target end users of broadband services
and include Internet, telephone, cable television, and security monitoring
services which services we refer to as bundled digital services (or BDSSM).
Eagle designs, manufactures, markets, and services its products under the
Eagle name. These products include transmitters, receivers, controllers,
software and other equipment used in personal communications systems and radio
and telephone systems. Most of Eagle's broad line of products, covering the
messaging spectrum as well as specific personal communication systems, and
specialized mobile radio products, have been tested and approved by the Federal
Communications Commission. Eagle provides service and support for its products,
as well as consulting and research development on a contract basis. In addition,
Eagle has introduced a completely new line of multi-media and Internet products
to the telecommunications industry, including a family of digital set-top-box
products and markets these products under the name of BroadbandMagic.
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Eagle offers through ClearWorks, products targeting end users of broadband
services that include Internet, telephone, cable style television over fiber,
and security monitoring services which services we refer to as bundled digital
services (or BDSSM). Each subscriber gives the company an opportunity to create
a recurring revenue stream and to generate up-front product revenue by adding a
number of current and future hardware and software and service products, such as
the set-top-box to the existing ClearWorks contracts. This balance of near-term
and long-term recurring revenue is a combination that in the opinion of
management is highly desirable. Eagle believes hardware, installation and home
wiring for the current BDSSM contracts alone have the potential to generate
near-term revenue for the company. The combination of Eagle's convergent
hardware products, network services, wireless products, wireless network and
spectrum services, and strong manufacturing and R&D capabilities and ClearWorks'
BDSSM "last mile" cable and fiber installation should provide a well-balanced
revenue mix as the combined company provides a full complement of broadband
products and services to its customers
Eagle through its subsidiary, Atlantic Pacific Communications, Inc., is
engaged in the business of nationwide sales and installation of fiber optic and
Internet wiring to commercial customers.
Eagle was incorporated in May 1993, but did not conduct any substantive
business operations until April 1996. In August 1997 Eagle amended its articles
of incorporation and changed its name to Eagle Wireless International and then
subsequently in February 2002 to Eagle Broadband, Inc., its current name.
Eagle's principal place of business is located at 101 Courageous Drive, League
City, Texas 77573 and its telephone number is (281) 538-6000.
Product Categories
Broadband Multimedia And Internet Products
BroadbandMagic markets broadband convergence set-top-box products. These
multimedia and Internet based products provide a user with the ability to
interface their Internet connection, broadcast video source, cable or DSL
source, or satellite video source directly to their television receiver. The
marketing plan of Eagle through BroadbandMagic has been to initially focus on
the large Internet service providers or ISP's and OEM customers who typically
bundle set-top-boxes with their service as their own marketing strategy.
Host Pro
Service providers, such as hotels, broadcasters, DSL providers, and
healthcare facilities can take advantage of Host Pro Web Flyer's unique ability
to bring into convergence a full complement of TV and Internet entertainment on
demand services. The Host Pro is specifically configured to allow service
providers to generate additional revenues by supplying their customers with a
variety of entertainment, education, and business applications.
Computer Plus
The Computer Plus Web Flyer is a complete home entertainment system and
full function computer. Using a television set as a monitor, the Computer Plus
Web Flyer allows users to connect to the ISP of their choice and bring their
multimedia center into the comfort of their living room. Users can access the
Internet, play the latest video games, watch TV, listen to CDs, send and receive
email, and watch DVD movies. This unit combines several entertainment appliances
into one unit.
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IP Express
The IP Express has the ability to provide either dial-up or high-speed
access to the Internet, and to be able to check e-mail, surf the web, or play
games. With the built-in TV tuner card, you are able to auto-tune, have
picture-in-picture capabilities, and channel preview while connected to the
Internet. This unit can be attached either to a monitor or basic TV.
Media Pro
The Media Pro's architecture provides exceptional ED graphics, MPEG 2
hardware decoder and low-power CPU makes it ideally suited for multimedia
environments such as Video-on-Demand (VOD) and Video Conferencing. This unit is
marketed to the hospitality market, hospitals, schools, and in MDU's.
VP-2100
The VP-2100 along with Eagle's Video-View software enables the consumer to
do point-to-point video conferencing, as well as have up to 8 video conferencing
feeds using our advanced video multicasting. The VP-2100 provides corporate
executives and other customers a cost effective alternative to the high cost and
risk of travel, as well as eliminating the unproductive time associated with
long distance business meetings.
ClearWorks Services
ClearWorks provides fiber-to-the-home ("FTTH") for neighborhoods and
businesses utilizing its Bundled Digital Services. These services include
high-speed Internet connectivity, home security, telephone service, and cable
like service over fiber.
ClearWorks provides up to 100 Mbps switched service per home with up to six
drops per home wired by the ClearWorks wiring standards. Connections of up to
100 Mbps are approximately 2,000 times faster than the 56K modem. The fiber
optic network that ClearWorks deploys into a residential community consists of
two parts (a) the head-end facility and, (b) the fiber optic cable installed
into the home.
ClearWorks also sells structured wiring and audio / video products to
single and multi-family units. These products and services are being made
available to both residential and commercial customers on a national basis.
United Computing Group Services
United Computing Group (or UCG) provides IT Business Integration and
Enterprise Management solutions to companies with complex computing and
communication systems. UCG helps its clients implement the latest technology
enhancements so that they can stay competitive within their industry, while
making sure that the cost of integrating these solutions is significantly
reduced so they will be able to maximize their technology investments.
4
UCG has targeted the middle market organizations as its primary client
base. These organizations tend to rely on multiple specialized IT service
providers to help implement and manage their IT systems and complex computing
environments. UCG believes these specializations will allow its clients to
address all or selected parts of the full life cycle management, including
network management and monitoring, network design, product fulfillment,
configuration, implementation, fault diagnosis, fault resolution, reporting,
upgrading and documentation. UCG accomplishes this through its different service
offerings that are managed by its Client Care Center that is operated 24 hours
per day, seven days per week in Houston, Texas.
UCG focuses on the following three lines of business:
Enterprise Solutions
UCG's Enterprise Solutions are designed to scale and support small, medium,
and large corporate, education, and government users in the client's
environment. These high-performance cost-saving solutions provide reliable and
flexible service sourcing solutions for networking services, applications
development services, managed outsourcing services and telecommunications
services.
Netmanage247 Solutions
These services are designed to remotely monitor or manage the small,
medium, and large corporate, education, or government client's networks and
network resources 24 hours a day, seven days a week, 365 days a year. UCG has
established its own fully redundant and controlled Client Care Center, which
houses its product suite systems and support personnel.
Product Fulfillment
UCG's Product Fulfillment Solutions are designed to scale and support users
in any client environment. These high-performance, cost-saving solutions provide
reliable and flexible product sourcing, distribution, and configuration.
UCG provides its clients with the ability to place orders for IT products
and services through its Product Support Center. Each client is assigned an
account executive who is the single point of contact and a client support
representative to assist them in the sourcing of IT products and services.
Product fulfillment is also offered to clients via the web with the
e-Product Manager solution. This solution is integrated into client's Intranet
or Extranet and gives clients the ability to place IT product orders, check
order status, shipping dates, verify pricing, view a list of available products
and to manage their accounts payables through secure web-based connections.
UCG has developed and expanded its web-site and e-commerce
business-to-business application, to enable clients and other third parties to
purchase personal computers, printers, communication hardware and other
peripheral devices directly from UCG using the Internet. UCG believes providing
its clients access to direct hardware purchases will be a valuable feature in
providing its existing client base the convenience of buying on-line with the
personalized customer service provided by UCG. UCG believes it can use its
web-site as a means of attracting a broader base of clients who initially may be
interested in purchasing hardware but will also become aware of UCG's ability to
provide specialized IT services.
5
Subsequent to the fiscal year ended August 31, 2002, UCG entered into an
Exclusive Strategic Alliance Agreement with a major competitor and designated
them as its Exclusive Product Fulfillment Partner. The agreement, among other
things, entitles UCG to a fee structure on all product fulfillment referrals and
further designates UCG as the exclusive Service Provider and designee with
respect to Services including but not limited to configuration solutions,
network services, network application services, repair and warranty services and
professional support services including Client Help Desk, Deskside Support,
Professional and Managed Services for all customer relationships provided by
UCG. The agreement further designates UCG as a Service Partner within the
competitors' customer base and exclusively appoints UCG as its Service Partner
within the competitors' customer base for all of UCG's RemoteManage247
offerings.
Atlantic Pacific Communications Services
Atlantic Pacific Communications provides data, telephony and fiber optic
installations, and project management services from initial concept through
engineering to completion and documentation. Atlantic Pacific resells and
installs fiber and cabling to commercial and industrial clients throughout the
United States. Services include:
- Multi-site rollout installation
- SOW/RFQ preparation
- Installation supervision
- Structured wiring design
- Comprehensive project management
- Copper wiring configuration
- Fiber optic acceptance testing
- Aerial and underground OSP
- Fiber optic and copper cable
Contact Wireless Services.
Eagle acquired Contact Wireless, Inc., in January 2001. Contact Wireless
provides customers with paging and mobile telephone products and related monthly
services in San Antonio and Houston areas. Currently, Contact Wireless has over
4,000 customers.
DSS Security Services
DSS Security, Inc., principal business activity is the providing of monthly
security monitoring service to both commercial and residential customers.
Currently DSS Security is providing services to over 5,000 customers.
Link Two Communications Services
Link Two Communications is a common carrier of exclusively wholesale
one-way messaging and two-way messaging network services. Its customers purchase
messaging network services as an aggregator and resell Link Two Communication's
network services to individual subscribers and other communications providers.
Link Two Communications has been classified as an incumbent carrier by the FCC
and has secured the rights to use or options to purchase spectrum in all of the
major metropolitan U.S. cities on five PCP frequencies. Link Two Communications
has also secured several exclusive RCC frequencies providing regional coverage
in two of the top ten markets. Link Two Communications has secured an exclusive
block of FCC spectrum covering a majority of the population centers in the
southern and western United States in a successful bidding at the FCC auction.
6
Link Two Communications competes with many established companies in the
nationwide one- and two-way messaging services area. The paging industry has
declined over the past year and several major paging companies have undergone
significant beneficial financial restructurings. These companies are able to
offer products and related services at more favorable rates than Link Two.
Because the paging industry and related financial credit availability from banks
for financing emerging nationwide networks has been declining over the last
year, Link Two has been unable to obtain significant funding to expand and
provide cost effective service to its customers. Accordingly, Link Two has had
to curtail its development on a nationwide basis and restricted its operations
to serve the Houston and Dallas, Texas, markets. The equipment servicing the
nationwide network is inactive and has been impaired as well as well as the
value of the related FCC licenses. At August 31, 2002, management estimated
through recent sales of equipment and industry pricing of FCC licenses that an
impairment charge of $27,100,000 was necessary to reflect the ongoing value of
its assets and licenses.
Eagle Wireless International
Wireless Messaging Hardware
Messaging is a method of wireless telecommunication, which uses an assigned
radio frequency to contact a messaging subscriber anywhere within a service
area. A messaging system is generally operated by a service provider incurs the
cost of building and operating the system. Each service provider in the United
States licenses spectrum from the FCC and elsewhere from the authorized
government body to operate a messaging frequency within either a local,
regional, or national geographical area. Each messaging subscriber is assigned a
distinct telephone number that a caller dials to activate the subscriber's
pager, a pocket-sized radio receiver carried by the subscriber. A messaging
switch receives telephone calls by the subscriber. The transmitters manufactured
by Eagle are specifically designed to simulcast, which is the transmission of
the same signal over two or more transmitters on the same channel at the same
time in an overlap area, resulting in superior voice and data quality and
coverage area. The radio signal causes the messaging device to emit a beep or to
vibrate, and to provide the subscriber with information from the caller in the
form of a voice, tone, numeric, or alphanumeric message.
A messaging device has an advantage over a landline telephone in that the
messaging device's reception is not restricted to a single location, and has an
advantage over a cellular portable telephone in that a messaging device is
smaller, has a much longer battery life, has excellent coverage, and is less
expensive to use. Historically, the principal disadvantage of traditional
messaging service in comparison to landline telephones or cellular portable
telephones has been that messaging provided only one-way communication
capabilities.
However, this limitation may have been overcome in the United States as a
result of the auction in 1994 by the FCC of nationwide and regional licenses for
designated narrowband personal communication services, radio frequencies or
spectrum to service providers. Many of the nationwide license holders and many
of the regional license holders are current Eagle customers, directly or
indirectly. The cost of the licenses to the narrowband personal communication
services auction winners in 1994 was approximately $1 billion. The FCC
anticipates that these narrowband personal communication services licenses will
be used to provide such new services as pager location, two-way acknowledgment
messaging, advanced voice messaging and data services.
The narrowband personal communication services radio frequencies or
spectrum are located at three separate points within the total radio spectrum,
at 902-928 MHz, 930-931 MHz and 940-941 MHz. Initially, the radio frequencies
located at 930-931 MHz and 940-941 MHz have been designated for outbound message
transmission, to the pager, and the 902-928 MHz have been designated response
channels, from the pager. This application is similar to traditional messaging
except that these license holders have been granted wider frequency bandwidth
permitting the user to transmit substantially more information. In addition,
Eagle manufactures other messaging infrastructure products that cater to the VHF
and UHF messaging frequencies in the United States and other areas of the world
as well as supporting most international messaging brands.
7
The narrowband personal communication services nationwide licenses cover
all fifty states, the District of Columbia, American Samoa, Guam, the Northern
Marianas Islands, Puerto Rico and the United States Virgin Islands. These
licenses are divided into 50 kHz paired and unpaired channel categories. Paired
channels permit both outbound and inbound signals while unpaired channels are
limited to only outbound signals. The FCC has imposed infrastructure
construction or build-out requirements on all narrowband personal communication
services license holders. Each narrowband personal communication services
license holder must establish minimum service availability for at least 37.5% of
the population in its geographic region within five years after receiving the
license. After ten years, each narrowband personal communication services
license holder must make the service available to at least 75% of the area's
population. If a narrowband personal communication services license holder fails
to achieve these build-out requirements, it risks cancellation by the FCC of its
narrowband personal communication services license and a forfeiture of any
auction monies paid.
Eagle manufactures products that will enable messaging license holders to
legally put their systems into operation at a low cost, a strategy adopted by
Eagle to create a "captive" customer in terms of future build-out.
Eagle offers its customers an end-to-end solution for narrowband personal
communication services applications. Eagle has developed new technology based
products with enhanced architecture and technology from its existing messaging
systems to accommodate the advanced services available through messaging and
PCS. This system approach includes full product lines of radio frequency network
controllers, transmitters, receivers, and a special satellite receiver system,
to receive the response message from the end-user.
The design of a messaging system is customer specific and depends on:
- The number of messaging subscribers the service provider desires to
accommodate,
- The operating radio frequency,
- The geography of the service area,
- The expected system growth, and
- Specific features desired by the customer.
Messaging equipment hardware and software developed by Eagle may be used with
all types of messaging service, including voice, tone numeric (telephone number
display) or alphanumeric messaging (words and numbers display).
Switches
Eagle is involved at an early stage in the development of industry wide
technology standards and is familiar with developments in messaging protocol
standards throughout the world. Eagle works closely with its customers in the
design of large, complex messaging networks. Eagle believes that its customers'
purchasing decisions are based, in large part, on the quality and technological
capabilities of such networks. Eagle believes that the advanced hardware and
software features of its switches ensure high reliability and high volume call
processing.
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Radio Frequency Equipment, Transmitters and Receivers
Transmitters are available in frequency ranges of 70 MHz to 960 MHz and in
power levels of 2 Watts to 500 Watts. Radio link receivers are available in
frequency ranges of 70 MHz to 960 MHz. Satellite link receivers are available
for integration directly with the transmitters at both Ku- and C- band
frequencies.
Eagle's range of receivers detects the responses back from the two-way
narrowband personal communication services subscriber devices. The receivers
take advantage of Digital Sound Processing demodulation techniques that maximize
receiver performance. Depending upon frequency, antenna height, topography and
power, Eagle transmitter systems are designed to cover broadcast cells with a
diameter from 3 to 100 miles. Typical simulcast systems have broadcast cells
that vary from 3 to 15 miles in diameter. Eagle transmitters are designed
specifically for the high performance and reliability required for high speed
simulcast networks.
Multimedia Devices
Eagle recently developed a family of Internet Set-Top-Boxes designed to
access the Internet and e-mail through a television set for individual or
commercial use. These devices use a standard TV set as a monitor, allowing the
user to connect to their chosen ISP on the Internet. The multimedia
entertainment device can at a minimum:
- Receive, write and send e-mail;
- Write a letter or work on a spreadsheet;
- Play games or use learning tools;
- Watch movies from CDs or DVDs; and
- Record on the hard drive direct from the TV, providing better quality
picture than through a VCR.
Controllers
Eagle currently offers products for transmitter control known as Eagle's
L20X transmitter control system, which is a medium-feature transmitter control
system used in domestic and international markets.
The principal products and enhancements currently being manufactured and sold by
Eagle relate to its wireless messaging products and include the following:
Base Stations and Transmitters
Transmitters and full-featured transmitters called Base Stations are used
by messaging carriers to broadcast radio-frequency messages to subscribers
carrying pagers. Eagle offers a slimline Stealth and a larger Quantum
transmitter that is available in the 72MHz, VHF, UHF, and 900MHz broadcast
frequency ranges. Each unit can be equipped to provide an output power ranging
from 15 Watts up to 500 Watts on almost any domestic or international messaging
frequency.
Radio Frequency Power Amplifiers
Radio-frequency power amplifiers are a sub-component of both messaging and
SMR transmitters and base stations. The high, medium and low power base station
and link transmitter power amplifiers are designed to operate with any FCC type
accepted exciter or may be combined with an Eagle optional plug-in base station
in the same space as the power amplifier. All Eagle power amplifiers above 100
Watts are equipped with Eagle "Heat Trap"(TM) design to provide the user with
long life and high reliability performance.
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Extend-A-Page
Extend-a-Page is a compact lower-power transmitter and receiver set
designed to provide fill-in coverage in fringe locations where normal messaging
service from a wide-area messaging system is not adequate. The Extend-a-Page
receives the messaging data on either a radio frequency control link or wireline
link and converts this information into low power simulcast compatible messaging
transmissions on any of the common messaging frequencies. The Extend-a-Page
transmits the messaging information at a one to two Watt level directly into
hard to reach locations such as hospitals, underground structures, large
industrial plants, and many locations near the outer coverage contour of
messaging systems.
Link Products
Radio frequency and wireline communication links are needed to connect
multiple transmitters within a messaging network. Eagle provides both Link
equipment (the Link 20TX, 20RX, 20GX and 20PX) and the Link 20 software to
facilitate this interconnection. Major competitors have licensed the Eagle Link
20 software and have incorporated it as an industry standard into their
radio-messaging terminals. Customers may also purchase the same software
directly from Eagle as part of an Eagle system at a lesser cost. Management
believes that its software allows the user to mix and match the products of
different vendors on a common radio-messaging system.
Consulting Services
Eagle routinely provides consulting services on a contract basis to support
the sale of its main product lines. Examples of these consulting services
include the design and installation of radio messaging systems. Eagle also
performs research and development on a contract basis.
Service and Support
Eagle provides service to customers on a regular basis including
installation, project management of turnkey systems, training, service or
extended warranty contracts with Eagle. Eagle believes that it is essential to
provide reliable service to customers in order to solidify customer
relationships and to be the vendor of choice when a customer seeks new services
or system expansions. This relationship is further developed as customers come
to depend upon Eagle for installation, system optimization, warranty and
post-warranty services.
Eagle has a warranty and maintenance program for both its hardware and
software products and maintains a customer service network in its operating
locations. Eagle's standard warranty provides its customers with repair or
replacement of any defective Eagle manufactured equipment. The warranty is valid
on all products for the period of one year from the later of the date of
shipment or the installation by an Eagle qualified technician.
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Customers
Eagle sells to a broad range of customers worldwide. In the United States,
customers include the regional Bell operating companies, telecommunications
companies, medical messaging operators, and public and private radio common
carriers. Internationally, customers include public telephone and telegraph
companies, as well as private telecommunication service providers.
BroadbandMagic sells to customers nationwide. These customers are primarily
of the hospitality industry, business-to-business and the government sectors.
ClearWorks sells its products and services primarily in the Houston, San
Antonio, Austin and Phoenix markets. ClearWorks markets these products and
services through direct marketing efforts of its sales employees and service
centers. The majority of the customers are builders, which require the
structured wiring component of ClearWorks. Residential customers take the
bundled digital services while, commercial customers take phone and security
services.
United Computing Group sells its products and services nationwide to medium
sized companies. The primary industries are oil / gas, medical, hardware /
software, real estate, staff leasing and government.
Atlantic Pacific Communications sells its project management services on a
nationwide basis to telecommunications, oil / gas companies and government
sectors.
Link Two Communications sells its messaging products and services to
individual consumers and businesses.
The Company did not have any customers that aggregated ten percent or more
of consolidated revenues in fiscal year 2002. The Company had two customers in
fiscal year 2001 that accounted for 30% and 15% consolidated revenues,
respectively; and had one customer in fiscal year 2000 that accounted for 12% of
consolidated revenues.
Marketing and Sales
The majority of Eagle and Broadband Magic products and services are
marketed through its employees using direct sales and various types of mail and
e-commerce techniques. For the years ended August 31, 2002, 2001, and 2000,
Eagle Broadband, Inc., represented 18%, 20%, and 65% of consolidated revenues,
respectively.
ClearWorks sells its products and services primarily in the Houston, San
Antonio, Austin and Phoenix markets. ClearWorks markets these products and
services through direct marketing efforts of its sales employees and service
centers. The majority of the customers are builders, which require the
structured wiring component of ClearWorks. Residential customers take the
bundled digital services while, commercial customers take phone and security
services. For the years ended August 31, 2002, 2001, and 2000, ClearWorks
Communications, Inc., represented 7%, 2%, and 0% of consolidated revenues,
respectively. For the same time periods, ClearWorks Home Systems, Inc.,
represented 11%, 9%, and 0% of consolidated revenues, respectively.
United Computing Group sells its products and services nationwide to medium
sized companies. These services are marketed through sales employees and through
e-commerce mailings. For the years ended August 31, 2002, 2001, and 2000, United
Computing Group represented 54%, 65%, and 0% of consolidated revenues,
respectively.
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Atlantic Pacific Communications sells its project management services on a
nationwide basis to telecommunications, oil / gas companies and government
sectors. These products and services are marketed through sales employees. For
the years ended August 31, 2002, 2001, and 2000, Atlantic Pacific
Communications, Inc., represented 18%, 20%, and 65% of consolidated revenues,
respectively.
Link Two Communications sells its messaging products and services to
individual consumers and businesses on a nationwide basis. These products and
services are marketed through sales employees and publication advertising.
Contact Wireless, Inc., sells its paging and mobile telephone products and
related monthly services to commercial and individual customers. These products
and services are marketed through sales employees.
DSS Security, Inc., sells its monthly security monitoring service to both
commercial and residential customers. These services are marketed through sales
employees.
Eagle maintains Internet web sites at, www.broadbandmagic.com,
www.atlanticpacific.com, www.eaglebroadband.com, www.etoolz.com,
www.linktwo.com, www.ucgi.com and www.clearworks.com, where information can be
found on Eagle and its subsidiaries products and services. The web sites provide
customers with a mechanism to request additional information on products and
allows the customer to quickly identify and obtain contact information for their
regional sales representative. Information on the web site of Eagle or any of
its subsidiaries is not part of this annual report.
Research and Development
Eagle believes that a strong commitment to research and development is
essential to the continued growth of its business. One of the key components of
Eagle's development strategy is the promotion of a close relationship between
its development staff, internally with Eagle manufacturing and marketing
personnel, and externally with Eagle customers. This strategy has allowed Eagle
to develop and bring to market customer-driven products.
From 1999 to 2002, Eagle has focused a large portion of its new development
resources on the development of the new broadband multimedia and Internet
product line. In addition, Eagle has formed a number of strategic relationships
with other large suppliers and manufacturers that will allow the latest in
technology and techniques to be utilized in the convergence set-top-box product
line. Eagle will continue to incur research and development expenses with
respect to the convergence set-top-box product line during the current fiscal
year.
Eagle has extensive expertise in the technologies required to develop
wireless communications systems and products including high power, high
frequency RF design digital signal processing, real-time software, high-speed
digital logic, wireless DSL products, radio frequency and data network design.
Eagle believes that by having a research and development staff with expertise in
these key areas, it is well positioned to develop enhancements for its existing
products as well as the next generation of personal communication products.
Investment in advanced computer-aided design tools for simulation and analysis
has allowed Eagle to reduce the time for bringing new products to market.
Research and development expenditures incurred by Eagle for the fiscal years
ended August 31, 2002, 2001, and 2000,were $403,000, $1,276,000 and $371,000
respectively.
12
Manufacturing
Eagle currently manufactures its wireless products at its facilities in
League City, Texas. Some subassemblies are manufactured for Eagle by
subcontractors at various locations throughout the world. Eagle's manufacturing
expertise resides in assembling subassemblies and final systems that are
configured to its customers' specifications. The components and assemblies used
in Eagle's products include electronic components such as resistors, capacitors,
transistors, and semiconductors such as field programmable gate arrays, digital
signal processors and microprocessors, and mechanical materials such as cabinets
in which the systems are built. Substantially all of the components and parts
used in Eagle's products are available from multiple sources. In those instances
where components are purchased from a single source, the supplier is reviewed
frequently for stability and performance. Additionally, as necessary, Eagle
purchases sufficient quantities of components that have long-lead requirements
in the world market. Eagle ensures that all products are tested, tuned and
verified prior to shipment to the customer.
Eagle has determined that the most cost effective manufacturing method for
its high volume multimedia and Internet product line is to utilize offshore
contract production facilities supplemented with high volume United States based
contract facilities. The high volume requirements of convergence set-top-box
product line are well beyond the capabilities of the current facilities and
would be cost prohibitive to construct. However, in the selection of a high
volume international manufacturer, Eagle has selected EpoX, a Taiwan Stock
Exchange company with established subsidiaries in the USA, Netherlands, China
and Germany. With a strong research and development team, EpoX is not only able
to produce a wide range of products, but also has been recognized as a pioneer
in the field. EpoX is both ISO-9001 and ISO-9002 certified. The manufacturing
location for the convergence set-top-box is the EpoX facility in Taiwan.
Competition
Eagle supplies transmitters, receivers, controllers and software used in
messaging, voice messaging and message management systems. While the services
from the foregoing products represent a significant portion of the wireless
personal communications industry today, the industry is expanding to include new
services and new markets. The wireless personal communications industry includes
equipment manufacturers that serve many of the same PCS markets served by Eagle.
Many Eagle competitors, and all competitors that have publicly tradable
securities, have significantly greater resources than Eagle, and there can be no
assurance that Eagle will be able to compete successfully in the future. In
addition, manufacturers of wireless telecommunications equipment, including
those in the cellular telephone industry, some of which are larger and have
significantly greater resources than Eagle, could elect to enter into Eagle's
markets and compete with Eagle's products. There can be no assurance that Eagle
will be able to increase its market share in the future.
Eagle competes with many established companies in the set-top-box business
including Scientific Atlanta, General Instrument, and many smaller companies.
Most of these companies have greater resources available than Eagle does. The
markets that are currently developing for multimedia and other Internet related
products are extremely large and growing daily. Eagle has studied these markets
and is of the belief based on this research that it can effectively compete in
these markets with its new convergence set-top-box product line. However, there
can be no assurance that these conclusions are correct and that the multimedia
and Internet markets will continue to expand at their current rates and that
Eagle can gain significant market share in the future.
ClearWorks competes indirectly with many established companies in the fiber
and cable, structured wiring, broadband services, security monitoring, cable
television and telephone services. However, ClearWorks does not know of any
other direct competitor. Most of these companies have greater resources
available than ClearWorks. Eagle has studied these markets and is of the belief
that the bundled digital services offered to the residential users as a complete
package with one source billing is a competitive edge for ClearWorks. These
residential users are subject to developer and homeowner association agreements
that allows ClearWorks to be the primary single source provider of these
services. However, there can be no assurance that these conclusions are correct
and that the bundled digital services market will continue to expand at their
current rates and that ClearWorks can gain significant market share in the
future.
13
United Computing Group competes with many established companies in the
enterprise solutions, network management solutions and product fulfillment
(hardware and software) services area. Most of these companies have greater
resources available than United Computing Group. Eagle has studied these markets
and is of the belief that the offering of the enterprise and network management
and product fulfillment, as a turnkey solution, to medium sized companies at
cost effective pricing is a competitive edge for United Computing Group.
However, there can be no assurance that these conclusions are correct and that
the turnkey solution of these services will continue to expand at their current
rates and that United Computing Group can gain significant market share in the
future.
Atlantic Pacific Communications competes with many established companies in
the fiber and cable, structured wiring and project management services area.
Most of these companies have greater resources available than Atlantic Pacific
Communications. Eagle has studied these markets and is of the belief that the
offering of the collective services on a nationwide scale is a competitive edge
for Atlantic Pacific Communications. The use of the sub-contractors located
across the nation allows Atlantic Pacific Communications to complete large
projects in an efficient manner, which is a valuable tool. However, there can be
no assurance that these conclusions are correct and that the these services will
continue to expand at their current rates and that Atlantic Pacific
Communications can gain significant market share in the future.
Link Two Communications competes with many established companies in the
nationwide one and two-way messaging services area. Most of these companies have
greater resources available than Link Two Communications
Proprietary Information
Eagle attempts to protect its proprietary technology through a combination
of trade secrets, non-disclosure agreements, patent applications, copyright
filings, technical measures, and common law remedies with respect to its
proprietary technology. This protection may not preclude competitors from
developing products with features similar to Eagle's products. The laws of some
foreign countries in which Eagle sells or may sell its products do not protect
Eagle's proprietary rights in the products to the same extent as do the laws of
the United States. Although Eagle believes that its products and technology do
not infringe on the proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims against Eagle in the future.
If litigation resulted in Eagle's inability to use technology, Eagle might be
required to expend substantial resources to develop alternative technology.
There can be no assurance that Eagle could successfully develop alternative
technology on commercially reasonable terms. More recently, Eagle has registered
and trademarked the name of BroadbandMagic for its new wholly owned subsidiary.
This name is thought by Eagle to be a valuable addition to the intellectual
property rights of Eagle.
Regulation
Many of Eagle's products operate on radio frequencies. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States and internationally. Regulatory approvals
generally must be obtained by Eagle in connection with the manufacture and sale
of its products, and by customers to operate Eagle's products. There can be no
assurance that appropriate regulatory approvals will continue to be obtained, or
that approvals required with respect to products being developed for the
personal communications services market will be obtained. The enactment by
federal, state, local or international governments of new laws or regulations or
a change in the interpretation of existing regulations could affect the market
for Eagle's products. Although recent deregulation of international
telecommunications industries along with recent radio frequency spectrum
allocations made by the FCC have increased the demand for Eagle's products by
providing users of those products with opportunities to establish new messaging
and other wireless personal communications services, there can be no assurance
that the trend toward deregulation and current regulatory developments favorable
to the promotion of new and expanded personal communications services will
continue or that future regulatory changes will have a positive impact on Eagle.
14
Employees
At October 31, 2002, Eagle employed approximately 212 persons and retained
10 independent contractors. Eagle believes its employee relations to be good.
Eagle enters into independent contractual relationships with various
individuals, from time to time, as needed.
Risk factors that may affect Eagle's results of operations and financial
condition.
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing the company. Additional risks and uncertainties not presently
known to or that are currently deem immaterial also may impair Eagle's business
operations. If any of the following risks actually occur, Eagle's business could
be harmed.
Eagle will need additional working capital.
At August 31, 2002, the Company had $3.4 million of cash and cash
equivalents. During the first fiscal quarter of 2003, Eagle entered into a debt
funding arrangement with an investment bank to initially provide up to
$3,000,000 in working capital. This debt is unsecured and bears interest at 5%
per annum. Eagle has received $1,500,000 in cash during the quarter ended
November 30, 2002, against this funding arrangement.
Eagle believes that its working capital of $3,535,000 as of August 31,
2002, plus the additional funds raised and committed during the first fiscal
quarter of 2003 should be sufficient to fund operations through the end of
August 31, 2003. Historically, Eagle has financed its operations through the
sale of debt and equity securities. As of August 31, 2002, Eagle has a limited
amount of cash and cash equivalents. As such, if its current cash is
insufficient to fund its operating and long-term capital needs, Eagle will rely
on future bests-efforts financing for capital. The Company will need to raise
additional capital to fund ongoing operations and long-term capital needs. While
Eagle is pursuing several best efforts debt and equity capital raises, there can
be no assurance that Eagle will raise sufficient capital to fund operations
during this coming fiscal year. If the company is not successful in raising
additional capital, it may have to curtail or suspend certain operations. As
more fully described in Note 7 to the financial statements, Eagle's subsidiaries
Atlantic Pacific and United Computing Group maintain an aggregate of up to
$4,000,000 in credit facilities with a bank to provide working capital based on
eligible accounts receivable. Refer to Note 7 for descriptions of lines of
credit and other immediate forms of funding the Company has available.
Eagle's products are subject to rapid technological change and an inability on
its part to adapt or adjust its technology to these developments may have a
material adverse effect on its business.
The design, development, and manufacturing of personal communication
systems, specialized mobile radio products, and multimedia entertainment
products are highly competitive and characterized by rapid technology changes.
Eagle will compete with other existing products and may compete against other
development technology. Development by others of new or improved products or
technologies may make Eagle's products obsolete or less competitive. While
management believes that Eagle's products are based on established
state-of-the-art technology, there can be no assurance that they will not be
obsolete in the near future or that Eagle will be able to develop a commercial
market for its products in response to future technology advances and
developments.
15
Eagle's success depends upon its ability to protect its proprietary
technologies.
Eagle relies on non-disclosure agreements with employees, and common law
remedies with respect to its proprietary technology and the filing of patents on
its key technology. There can be no assurance that others will not
misappropriate Eagle's proprietary technologies or develop competitive
technologies or products that could adversely affect Eagle. In addition,
although Eagle is not aware of any infringement claims against it or any
circumstances that could lead to such claims, there can be no assurance that
these claims could not be made which could adversely affect its business.
Eagle's efforts to protect its intellectual property may cause it to become
involved in costly and lengthy litigation, which could seriously harm its
business. In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Although it has
not become involved in intellectual property litigation, it may become involved
in litigation in the future to protect its intellectual property or defend
allegations of infringement asserted by others. Legal proceedings could subject
it to significant liability for damages or invalidate Eagle's proprietary
rights. Any litigation, regardless of its outcome, would likely be time
consuming and expensive to resolve and would divert management's time and
attention. Any potential intellectual property litigation also could force Eagle
to take specific actions, including:
- Cease selling its products that use the challenged intellectual
property;
- Obtain from the owner of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
- Redesign those products that use infringing intellectual property.
Eagle faces substantial competition from competitors with significantly greater
resources.
The wireless personal communications industry includes equipment
manufacturers that serve many of the same customers served by Eagle.
Substantially all of Eagle's competitors have significantly greater resources,
including financial, technical and marketing, than Eagle, and there can be no
assurance that Eagle will be able to compete successfully in the future.
Eagle faces competition from many entities with significantly greater
financial resources, well-established brand names, and larger customer bases.
The numerous companies that may seek to enter its industry may expose Eagle to
severe price competition for its products and services. Eagle expects
competition to intensify in the future and expects significant competition from
traditional and new telecommunications companies including, local, long
distance, cable modem, Internet, digital subscriber line, microwave, mobile and
satellite data providers.
A system failure could delay or interrupt Eagle's ability to provide products or
services and have a materially adverse effect on Eagle's business.
16
Eagle's operations are dependant upon its ability to support its highly
complex network infrastructure. Many of its customers are particularly dependent
on an uninterrupted supply of services. Any damage or failure that causes
interruptions in its operations could result in loss of these customers. Because
of the nature of the services Eagle supplies and the complexity of Eagle's
network, it is not feasible in all cases to maintain backup systems, and the
occurrence of a natural disaster, operational disruption or other unanticipated
problem could cause interruptions in the services it provides.
Additionally, the failure of a major supplier to provide the components and
parts necessary for its products and services, or of a major customer to
continue buying its goods and services, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in the
service Eagle provides and adversely affect its business prospects, financial
condition and results of operations.
Stockholders face possible volatility of stock price for Eagle stock.
The market price of the common stock may experience fluctuations that are
unrelated to the operating performance of Eagle. Eagle recently experienced a
decrease in the market price of its common stock and the market price of its
common stock has been quite volatile in the last 12 months. Eagle can provide no
assurance that the current price will be maintained.
Item 2. Description of Property
Eagle's headquarters are located in League City, Texas and include
approximately 34,000 square feet of leased office, production, and storage
space. The lease expires in May 2004. Eagle also maintains subsidiary offices in
three other Houston area locations, with leases expiring in April 2003, August
2003, and December 2005; in Dallas, Texas, with a lease expiring in June 2003;
in Phoenix, Arizona, with a lease expiring in July 2003; in San Antonio, Texas,
with a lease expiring in July 2006; in Austin, Texas, with a lease expiring in
January 2005; in Chicago, Illinois, with a lease expiring in April 2003; and in
Oxnard, California, with a lease expiring in July 2004.
Eagle believes that all rental rents are at market prices. Eagle has
insured its facilities in an amount that it believes is adequate and customary
in the industry. Eagle believes that its existing facilities are adequate to
meet its current requirements but anticipates the need to acquire additional
space within the next two years. Eagle believes that suitable additional space
in close proximity to its existing headquarters will be available as needed to
accommodate the growth of its operations through the foreseeable future.
Item 3. Legal Proceedings
ClearWorks is a defendant in State Of Florida Department Of Environmental
Protection Vs. Reco Tricote, Inc. And Southeast Tire Recycling, Inc. A/K/A
ClearWorks.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 has amended 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. No discovery has been conducted in this lawsuit.
17
ClearWorks was a defendant in Candlelight Investors LLC v. ClearWorks.net,
Inc., Eagle Wireless International, Inc., and H. Dean Cubley. Subsequent to
August 31, 2002, Eagle settled the lawsuit with Candlelight Investors LLC for
$2,600,000.
ClearWorks is a defendant in Kaufman Bros., LLP v. ClearWorks.net, Inc.,
and Eagle Wireless, Inc., (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.
On December 17, 2001, Kevan Casey and Tommy Allen sued ClearWorks.net,
Inc., ClearWorks Integration, Inc., and Eagle Wireless International, Inc., (the
petition was later amended to include the following defendants: Michael T.
McClere, H. Dean Cubley, Link Two Communications, Inc., A. L. Clifford, Jim
Futer and McManus & Company, P.C. d/b/a E. McManus & Co., P.L.L.C.) for breach
of contract and other related matters in Cause No. 2001-64056; In the 281st
Judicial District Court of Harris County, Texas. 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. This lawsuit is
currently in the discovery phase. The defendants deny the allegations of the
complaint.
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 adverse affect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Shares of Eagle common stock are listed on the American Stock Exchange
under the symbol "EAG." On November 29, 2002, Eagle's common stock closed at
$0.41 per share. Eagle is authorized to issue 200,000,000 shares of common
stock, 78,410,000 of which were issued and outstanding at November 29, 2002. At
November 29, 2002, there were approximately 990 holders of record of Eagle
common stock.
The table set forth below, for the periods indicated, lists the reported
high and low sale prices per share of Eagle common stock on the American Stock
Exchange.
Eagle Common Stock
--------------------
High Low
FISCAL 2002
Quarter ended November 30, 2001 $0.95 $0.52
Quarter ended February 28, 2002 $1.00 $0.40
Quarter ended May 31, 2002 $0.47 $0.33
Quarter ended August 31, 2002 $0.72 $0.32
FISCAL 2001
Quarter ended November 30, 2000 $6.75 $2.50
Quarter ended February 29, 2001 $3.40 $1.35
Quarter ended May 31, 2001 $2.49 $0.99
Quarter ended August 31, 2001 $1.89 $0.80
Eagle has never paid any cash dividends on its common stock and does not
anticipate paying cash dividends within the next two years. Eagle anticipates
that all earnings, if any, will be retained for development of its business. Any
future dividends will be subject to the discretion of the board of directors and
will depend on, among other things, future earnings, Eagle's operating and
financial condition, Eagle's capital requirements and general business
conditions.
Recent Sales of Unregistered Securities
During the fourth quarter of fiscal 2002 Eagle issued 2,471,094 shares of
common stock, without registration under the Securities Act, to The Tail Wind
Fund, Ltd. The above transaction was completed pursuant to Section 4(2) of the
Securities Act. The transaction did not involve any public offering and was with
a single investor. The recipient received adequate information about the
Company, and the Company determined that the recipient had such knowledge and
experience in financial and business matters that it was able to evaluate the
merits and risks of an investment in the Company. The sale was made by officers
of the Company who received no commission or other remuneration for the
solicitation in connection with the sale. The recipient of securities
represented its intention to acquire the securities for investment only and not
with a view to or sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transaction.
19
Item 6. Selected Financial Data
The data that follows should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in Item 8 and
"Management's Discussion and Analysis."
Year Ended August 31,
------------------------------------
($ in thousands) 2002 2001 2000 1999 1998
-------------- ---------------- ------------------ --------------- ----------------
Operating Data:
Net revenue $29,817 $28,110 $5,240 $2,217 $4,827
Operating expenses $44,260 $15,925 $3,985 $1,319 $2,107
-------------- ---------------- ------------------ --------------- ----------------
Operating income (loss) $(37,147) $(8,222) $(1,227) $(438) $755
Other income, net $360 $2,348 $1,516 $789 $422
Income tax provision $0 $0 $96 $91 $377
-------------- ---------------- ------------------ --------------- ----------------
Net income (loss) $(37,066) $(6,233) $175 $168 $771
============== ================ ================== =============== ================
Earnings per share from continuing $(0.57) $(0.13) $0.01 $0.01 $0.07
operations (basic)
Statement of Cash Flows Data:
Cash provided by operating
activities $(1,076) $ (1,609) $(5,299) $(1,902) $(1,470)
Cash used by investing $(16,940) $(6,512) $(2,224) $(33) $(373)
activities
Cash provided (used) by financing $(2,406) $ (3,846) $39,681 $1,025 $46
activities
As of August 31,
------------------------
2002 2001 2000 1999 1998
-------------- ---------------- ----------------- ---------------- ----------------
Balance Sheet Data:
Total assets $129,984 $170,667 $57,641 $10,320 $8,550
Long-term debt $1,272 $2,136 $73 $12 $15
Total stockholders' equity $117,380 $149,128 $54,061 $8,894 $7,516
Item 7. Management's Discussion and Analysis
Overview
For the year ended August 31, 2002, Eagle's business operations reflected
further expansion into the broadband products and services sector through the
growth of bundled digital services business lines obtained in the merger with
ClearWorks.net and subsidiaries on January 31, 2001. In addition, during fiscal
2002, the Company conducted extensive cost containment activities. We believe
that the effects of these containment measures will significantly reduce or
fiscal 2003 ongoing expenses. The Company's consolidated operations generated
increased revenues of $29,817,000 with a corresponding gross profit of
$7,113,000 for the fiscal year ended August 31, 2002. The improvement in
revenues in fiscal 2002 is a result of increased sales of broadband products,
wireless infrastructure equipment and service, set-top boxes and structured
wiring products. Revenues from the sale of computer products and related
engineering services declined due to the loss of a significant customer in
fiscal year 2002 and an overall decline in the market for these products.
20
The Company incurred a net loss of $37,066,000 for the fiscal year ended
August 31, 2002. The loss was primarily attributable to a non-cash impairment
charge of $27,100,000 against FCC licenses and equipment. The loss was also
attributable to increases in professional costs, merger integration costs and
related amortization, system costs for a uniform system wide accounting and
reporting system and increases in sales and marketing costs for market expansion
of bundled digital services and set-top boxes. The Company is continuing to
consolidate management positions and centralize financial and administrative
functions, research and development activities and marketing of all products and
services in an effort to minimize unnecessary expenditures, increase
profitability, and provide management with timely information to react to
changing market conditions in the broadband industry.
During the quarter ended August 31, 2002, we continued the implementation
of cost reductions in various operating segments that were not expected to
provide significant long-term revenues and profitability. These reductions will
impact the expense categories of salaries and benefits, rents, travel, research
and development and other support expenses on a run-rate basis. We anticipate
that additional cost reduction efforts will continue into the second fiscal
quarter of 2003. Also, the company is continuing the development of the
"technology center" for distribution on a nationwide basis of voice, video and
data content; increased sales efforts in the telephone, cable, internet,
security services and wireless segments; and securing of long-term relationships
for content for the bundled digital services activities; and marketing/sales
agreements with other companies for the sale of broadband products and services.
On a nationwide basis, we are entering into business relationships with
financial and technology companies to provide bundled digital services (digital
content) to cities and municipalities that currently have constructed their own
fiber infrastructure to the home. We believe that our companies have the
technology, products and capabilities to provide these fiber-ready cities with
digital content set-top boxes and structured wiring services.
Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the Eagle Wireless International, Inc.; BroadbandMagic;
ClearWorks Communications, Inc.; ClearWorks Home Systems, Inc.; Atlantic Pacific
Communications, Inc.; Contact Wireless, Inc.; DSS Security, 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
BroadbandMagic 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.
21
Eagle Wireless International and BroadbandMagic 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 Bundled 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
Atlantic Pacific 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. The
revenue from these services is recognized as it is earned from the customer.
Contact Wireless
Contact Wireless, Inc., provides customers with paging and mobile telephone
products and related monthly services. Revenue from product sales is recorded at
the time of shipment. Revenue for the mobile phone and paging service is billed
monthly as the service is provided.
22
DSS Security
DSS Security, Inc., provides monthly security monitoring services to
residential customers. The customers are billed three months in advance of
service usage. The revenues are deferred at the time of billing and ratably
recognized over the prepayment period as service is provided.
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.
Receivables
For the year ended August 31, 2002, Eagle accounts receivables decreased to
$5,028,479 from $7,144,000 at August 31, 2001. The majority of this decrease was
due to the decline in lower margin computer product revenues compared to the
prior year combined with the sale of a net of $817,401 in accounts receivable to
Southwest Bank of Texas in conjunction with a purchase and sale agreement
entered into by the Company's subsidiary, United Computing Group, Inc., in July
2002.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivables deemed uncollectable are charged against the
allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At August 31, 2002, Eagle's
inventory totaled $6,059,185 as compared to $10,637,000 at August 31, 2001. The
majority of this decrease was due to a decrease in Work in Process inventory.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, which is effective for the Company in the first quarter of fiscal year
2003 and for purchase business combinations consummated after June 30, 2001.
These standards change the accounting for business combinations by, among other
things, eliminating pooling-of-interests accounting and requiring a change in
the method of expensing goodwill and certain intangible assets with an
indefinite useful life. Goodwill and intangible assets deemed to have an
indefinite useful life will be subject to an annual review for impairment rather
than periodic amortization. Finite lived intangibles will continue to be
amortized over their useful lives.
At August 31,2002, the Company evaluated its existing goodwill and
intangible assets acquired in purchase business combinations completed prior to
July 1, 2001. The carrying amount of recognized intangible assets that meet the
criteria for recognition apart from goodwill or any identifiable intangible
assets that are presented with goodwill and other intangible assets for
financial reporting purposes have been reclassified and reported separately from
goodwill. The unamortized balance of any negative goodwill will be recognized as
the cumulative effect of a change in accounting principle.
23
In October 2001, the FASB issued SFAS No. 144, Impairment of Long-Lived
Assets, SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144
retains the requirements of SFAS No. 121 to (a) recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flow and (b) measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS No. 144
removes goodwill from its scope. SFAS No. 144 is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The
Company has also tested goodwill for impairment at August 31, 2002, using the
two-step process prescribed in SFAS No. 142. The first step is a screen for
potential impairment, while the second step measures the amount of impairment,
if any. The adoption of SFAS No. 144 had a material impact on the financial
position of the Company.
At August 31, 2002, the Company determined that an impairment of Link Two
paging network equipment and nationwide licenses existed. Link Two
Communications competes with many established companies in the nationwide one-
and two-way messaging services area. The paging industry has declined over the
past year and several major paging companies have undergone significant
beneficial financial restructurings. These companies are able to offer products
and related services at more favorable rates than Link Two. Because the paging
industry and related financial credit availability from banks for financing
emerging nationwide networks has been declining over the last year, Link Two has
been unable to obtain significant funding to expand and provide cost effective
service to its customers. Accordingly, Link Two has had to curtail its
development on a nationwide basis and restrict its operations to serve the
Houston and Dallas, Texas, markets. The equipment servicing the nationwide
network is inactive and has been impaired as well as well as the value of the
related FCC licenses. At August 31, 2002, management estimated through recent
sales of equipment and industry pricing of FCC licenses that an impairment
charge of $27,100,000 was necessary to reflect the ongoing value of its assets
and licenses.
Eagle has adopted the provisions of SFAS 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.
Other marketable securities, 4,560,000 shares of common stock of Urbana and
1,500,000 shares of common stock of Burst.com, with an aggregate cost basis of
$750,000 and an aggregate fair market value of $1,258,200 are included in cash
and cash equivalents category and are held for resale as of August 31, 2002.
Results Of Operations
Year Ended August 31, 2002 Compared to Year Ended August 31, 2001
Net Sales. For the year ended August 31, 2002, net sales increased to
$29,817,000 from $28,110,000 during the year ended August 31, 2001. The overall
increase of 6% was primarily attributable to added sales from the Company's
broadband service offerings through its subsidiaries ClearWorks Communications
and ClearWorks Home Systems, along with revenues from its Contact Wireless and
DSS Security subsidiaries that were acquired in January 2002. These increases
were partially offset by a decline in product revenues from the Company's United
Computing Group subsidiary due to the loss of a major customer in the energy
sector and an overall decline in the IT procurement market in 2002 and a minor
decrease in revenues from the Company's Atlantic Pacific Communications
subsidiary. Atlantic Pacific provides project planning, installation, project
management, testing and documentation of fiber and cable to commercial and
industrial clients throughout the United States while United Computing Group
provides business-to-business hardware and software network solutions and
network monitoring services.
24
Cost Of Goods Sold. For the year ended August 31, 2002, cost of goods sold
increased to $22,703,000 from $20,408,000 during the year ended August 31, 2001.
The increase was primarily attributable to added cost of sales comprised of
direct labor, materials and related costs for both broadband services and the
Company's Atlantic Pacific Communications subsidiary. Atlantic Pacific provides
project planning, installation, project management, testing and documentation of
fiber and cable to commercial and industrial clients throughout the United
States. The Company's overall gross profit percentage was 24% and 27% for the
years ended August 31, 2002 and August 31, 2001. This decrease is primarily
attributable to lower profit margins on volume sales of computers and related
equipment and increases in other manufacturing costs associated with the
production of the convergent set-top box.
Operating Expenses. For the year ended August 31, 2002, operating expenses
increased to $44,260,000 from $15,925,000 for the year ended August 31, 2001.
The primary portions of the increase are discussed below:
A $27,100,000 non-cash impairment charge was expensed at August 31, 2002,
for impairment of licenses and equipment in the Company's Link Two
subsidiary.
A $1,625,000 increase in salaries and related costs, as a result of its
acquisitions and expanded business.
A $363,000 increase in advertising and promotion, due primarily to
introductions and expansion of the Company's broadband services and
convergent set-top box offerings.
A $335,000 net increase in other support costs, due to an increase in
salary and related costs, rents, interest, contract labor, professional
fees and communication costs. This net increase included an offset of
$729,000 associated with a decrease in advertising and promotion, due
primarily to decreased attendance at conventions and trade shows on a
worldwide basis
Net Earnings. For the year ended August 31, 2002, Eagle's net loss was
$37,066,000, compared to a net loss of $6,233,000 during the year ended August
31, 2001.
Changes In Cash Flow. Eagle's operating activities used net cash of
$1,076,000 in the year ended August 31, 2002, compared to use of net cash of
$1,609,000 in the year ended August 31, 2001. The decrease in net cash used by
operating activities was primarily attributable to decreases of inventory,
accounts receivable and accrued expenses. Eagle's investing activities used net
cash of $16,940,000 in the year ended August 31, 2002, compared to $6,512,000 in
the year ended August 31, 2001. The increase was due primarily to investment
activities and purchase of equipment associated with the build out of Eagle's
network and infrastructure for the delivery of broadband services. Eagle's
financing activities used cash of $2,406,000, in the year ended August 31, 2002,
compared to $3,846,000 used in the year ended August 31, 2001. The decrease is
attributable to the repurchase of common stock, repayment against lines of
credit and no significant fund raising activities for the year ending August 31,
2002 compared to August 31, 2001.
25
Liquidity And Capital Resources. Current assets for the year ended August
31, 2002 totaled $14,866,000 (includes cash and cash equivalents of $3,421,000)
as compared to $42,649,000 reported for the year ended August 31, 2001. During
the first fiscal quarter of 2003, Eagle entered into a debt funding arrangement
with an investment bank to provide up to $3,000,000 in working capital. This
debt is unsecured and bears interest at 5% per annum maturing in one year from
the initial funding. Eagle has received $1,500,000 in cash during the quarter
ended November 30, 2002, against this funding arrangement. In addition, Eagle
has engaged an investment banking firm to provide a $20,000,000 equity line of
credit. This line of credit will be activated upon Eagle filing a registration
statement that complies with the terms and conditions of the agreement.
Eagle believes that its working capital of $3,535,000 as of August 31, 2002
plus the additional funds raised and committed during the first fiscal quarter
of 2003 should be sufficient to fund operations through the end of August 31,
2003. Historically, Eagle has financed its operations through the sale of debt
and equity securities. As of August 31, 2002, Eagle has a limited amount of cash
and cash equivalents. As such, if its current cash is insufficient to fund its
operating and long-term capital needs, Eagle will rely on future bests-efforts
financing for capital. The Company will need to raise additional capital to fund
ongoing operations and long-term capital needs. If the company is not successful
in raising additional capital, it may have to curtail or suspend certain
operations. As more fully described in Note 7 to the financial statements,
Eagle's subsidiaries Atlantic Pacific and United Computing Group maintain an
aggregate of up to $4,000,000 in credit facilities with a bank to provide
working capital based on eligible accounts receivable. Refer to Note 7 for
descriptions of lines of credit and other immediate forms of funding the Company
has available.
Year Ended August 31, 2001, Compared to Year Ended August 31, 2000
Net Sales. For the year ended August 31, 2001, net sales increased to
$28,110,000 from $5,240,000 during the year ended August 31, 2000. The increase
was primarily attributable to added sales from Atlantic Pacific and the
ClearWorks companies (Home Systems, 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
network monitoring services.
Cost Of Goods Sold. For the year ended August 31, 2001, cost of goods sold
increased to $20,408,000 from $2,482,000 during the year ended August 31, 2000.
The increase was primarily attributable to added cost of sales from Atlantic
Pacific and the ClearWorks companies (Home Systems, 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. The Company's gross profit
percentage for products sold was 27% and 53% for the years ended August 31,
2001, and August 31, 2000. This decrease is primarily attributable to lower
profit margins on volume sales of computers and related equipment and increases
in salaries and depreciation of equipment utilized in head-end facilities.
26
Operating Expenses. For the year ended August 31, 2001, operating expenses
increased to $15,925,000 from $3,985,000 for the year ended August 31, 2000. The
primary portions of the increase are discussed below:
A $4,746,000 increase in salaries, as a result of its acquisitions and
expanded business.
A $261,000 increase in advertising and promotion, due primarily to
increased attendance at conventions and trade shows on a worldwide basis.
A $3,111,000 increase in depreciation and amortization, due to an increase
in amortization of goodwill and purchase of additional assets.
A $2,918,000 increase in other support costs, due to an increase in rents,
travel, utilities and communication costs.
Net Earnings. For the year ended August 31, 2001, Eagle's net loss was
$5,874,000, compared to net earnings of $193,000 during the year ended August
31, 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Equity Market Risks
The Company is exposed both to market risk from changes in interest rates
on funded debt and changes in equity values on common stock investments it holds
in publicly traded companies. The Company also has exposure that relates to the
Company's revolving credit facility. Borrowings under the credit facility bear
interest at variable rates based on the bank prime rate. The extent of this risk
with respect to interest rates on funded debt is not quantifiable or predictable
due to the variability of future interest rates; however, the Company does not
believe a change in these rates would have a material adverse effect on the
Company's operating results, financial condition, and cash flows.
The Company's cash and cash equivalents are invested in mortgage and asset
backed securities, mutual funds, money market accounts and common stock.
Accordingly, the Company is subject to both changes in market interest rates and
the equity market fluctuations and risk. There is an inherent roll over risk on
these funds as they accrue interest at current market rates. The extent of this
risk is not quantifiable or predictable due to the variability of future
interest rates. The Company does not believe a change in these rates would have
a material adverse effect on the Company's operating results, financial
condition, and cash flows with respect to invested funds in mortgage and asset
backed securities, mutual funds and money market accounts, however; the company
does have both cash and liquidity risks associated with its common stock
investments aggregating $1,258,200 in market value as of August 31, 2002.
Credit Risks
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, but does not require collateral from these
parties. The company did not have any customers which represented greater than
10% of its revenues during fiscal 2002 and, as such, does not believe that the
credit risk posed by any specific customer would have a material adverse affect
on its financial condition.
27
International Business Risk
Eagle generated net sales in markets outside the United States, which
amount to less than 5% of total Eagle net sales in the last three years. Sales
are subject to the customary risks associated with international transactions,
including political risks, local laws and taxes, the potential imposition of
trade or currency exchange restrictions, tariff increases, transportation
delays, difficulties or delays in collecting accounts receivable, and exchange
rate fluctuations. Pre-payments and letters of credit drawn on American or
limited foreign corresponding banks are required from international customers to
reduce the risk of non-payment.
Item 8. Consolidated Financial Statements
The financial statements commencing on page F-1 have been audited by
McManus & Co., P.C., independent certified public accountants, to the extent and
for the periods set forth in their reports appearing elsewhere herein and are
included in reliance upon such reports given upon the authority of said firm as
experts in auditing and accounting.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to the directors and
compliance with Section 16(a) of the Exchange Act is incorporated by reference
from the information provided under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance," respectively,
contained in the Company's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
information provided under the heading "Executive Compensation" of the Company's
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
28
Equity Compensation Plan Information
The following table sets forth information, as of August 31, 2002, with
respect to the Company's compensation plans under which common stock is
authorized for issuance
Number of Securities
Number of Securities Remaining Available for
To be Issued Upon Weighted Average Future Issuance Under
Exercise of Outstanding Exercise Price of Equity Compensation
Options, Warrants and Outstanding Options, Plans (Excluding Securities
Rights Warrants and Rights Reflected in Column A)
Plan Category (A) (B) (C)
- ------------------------------------ ----------------------------------- ------------------------ -------------------------------
Equity Compensation Plans Approved 355,170 $2.33 602,331
by Security Holders
Equity Compensation Plans Not
Approved by Security Holders (1) 3,766,433 $8.63 0
----------------------------------- ------------------------ -------------------------------
Total 4,121,603 $8.09 602,331
(1) A description of the equity compensation not approved by the security
holders is set forth in note 12 to the financial statements contained in this
Form 10-K.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
from the information provided in the Company's Proxy Statement.
Item 14. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses, and therefore
there were no corrective actions taken.
29
Item 15. Exhibits and Reports on Form 8-K -
The following exhibits are to be filed as part of the annual report:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Eagle Wireless International, Inc. Articles of Incorporation, as Amended (incorporated by reference to Exhibit 3.1
of Form SB-2 file no. 333-20011)
Exhibit 3.2 Amended and Restated Eagle Wireless International, Inc. Bylaws (Incorporated by reference to Exhibit 3.2 of Form
10-KSB for the fiscal year ended August 31, 2001, filed November 16, 2001)
Exhibit 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Form SB-2 file no. 333-20011)
Exhibit 10.1 Asset Purchase Agreement between Eagle Telecom International, Inc., a Delaware corporation and Eagle Telecom
International, Inc., a Texas corporation (incorporated by reference to Exhibit 10.1 of Form SB-2 file no. 333-20011)
Exhibit 10.2 Stock Option Plan (incorporated by reference to Exhibit 10.2 of Form SB-2 file no. 333-20011)
Exhibit 10.3 Agreement and Plan of Reorganization dated September 15, 2000 (incorporated by reference to Exhibit 10.1 of Form
S-4 file no. 333-49688)
Exhibit 10.4 Stock Purchase Agreement between Eagle Wireless International, Inc. and the shareholders of Comtel Communications,
Inc. (incorporated by reference to Exhibit 10.4 of Form 10-KSB for the fiscal year ended August 31, 2000, filed
December 13, 2000)
Exhibit 10.5 Stock Purchase Agreement between Eagle Wireless International, Inc. and the shareholders of Atlantic Pacific
Communications, Inc. (incorporated by reference to Exhibit 10.5 of Form 10-KSB for the fiscal year ended August 31,
2000, filed December 13, 2000)
Exhibit 10.6 Stock Purchase Agreement between Eagle Wireless International, Inc. and the shareholders of Etoolz, Inc.
(incorporated by reference to Exhibit 10.6 of Form 10-KSB for the fiscal year ended August 31, 2000, filed December
13, 2000)
Exhibit 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 of Form S-4 file no. 333-49688)
Exhibit 23.1 Consent of McManus & Co., P.C
Exhibit 99.1 Certification Pursuant to the 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 99.2 Certification Pursuant to the 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(a) None.
30
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eagle Broadband, Inc.
By: /S/__________________________
Dr. H. Dean Cubley,
Chief Executive Officer and Chariman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/S/____________________ Chairman of the Board and December 16, 2002
H. Dean Cubley Chief Executive Officer
/S/____________________ Chief Financial Officer December 16, 2002
Richard R. Royall
/S/____________________ Director December 16, 2002
Christopher W. Futer
/S/____________________ Director December 16, 2002
Glenn A. Goerke
/S/____________________ Director, President and December 16, 2002
Manny M. Carter Chief Operating Officer
31
CERTIFICATIONS
I, H. Dean Cubley, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Eagle Broadband, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 16, 2002
/S/_______________________
H. Dean Cubley,
Chief Executive Officer
32
I, Richard R. Royall, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Eagle Broadband, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 16, 2002
/S/_______________________
Richard R. Royall,
Chief Financial Officer
33
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF EAGLE BROADBAND, INC.:
We have audited the accompanying consolidated balance sheets of Eagle Broadband,
Inc. and subsidiaries as of August 31, 2002 and 2001, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the years ended August 31, 2002, 2001 and 2000. These financial statements are
the responsibility of Eagle Broadband, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Eagle Broadband, Inc. and subsidiaries as of August 31, 2002 and
2001,and the results of their earnings, shareholders' equity, and their cash
flows for the years then ended are in conformity with generally accepted
accounting principles.
McMANUS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
ROCKAWAY, NEW JERSEY
December 13, 2002
F-1
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
August 31,
2002 2001
-------- --------
Current Assets
Cash and Cash Equivalents $ 3,421 $ 23,843
Accounts Receivable 5,028 7,144
Inventories 6,059 10,637
Prepaid Expenses 358 1,025
----------------- ----------------
Total Current Assets 14,866 42,649
Property and Equipment
Operating Equipment 34,509 28,469
Less: Accumulated Depreciation (3,661) (2,005)
----------------- ----------------
Total Property and Equipment 30,848 26,464
Other Assets:
Deferred Costs 334 497
Goodwill 7,916 5,966
Other Intangible Assets 79,900 98,954
Less: Accumulated Amortization (4,278) (3,879)
Other Assets 397 16
----------------- ----------------
Total Other Assets 84,269 101,554
----------------- ----------------
Total Assets $ 129,983 $ 170,667
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 4,757 $ 4,525
Accrued Expenses 2,873 7,067
Notes Payable 3,653 5,933
Line of Credit -- 1,846
Capital Lease Obligation 48 48
---------------- ---------------
Total Current Liabilities 11,331 19,419
Long-Term Liabilities:
Capital Lease Obligations
(net of current maturities) 70 67
Deferred Taxes -- 32
Long-Term Debt 1,202 2,021
---------------- ---------------
Total Long-Term Liabilities 1,272 2,120
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 200,000,000 shares
Issued and Outstanding at August 31, 2002
and 2001, 73,051,000 and 60,264,000, respectively 73 60
Paid in Capital 158,731 153,426
Retained Earnings (41,424) (4,358)
---------------- ---------------
Total Shareholders' Equity 117,380 149,128
---------------- ---------------
Total Liabilities and Shareholders' Equity $ 129,983 $ 170,667
================ ===============
See accompanying notes to consolidated financial statements.
F-2
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
For the years ended August 31,
-------------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- -------------------
Net Sales:
Structured wiring $ 8,036 $ 7,643 $ ---
Broadband services 2,657 523 ---
Products 16,108 19,342 5,240
Other 3,016 602 ---
-------------------- ------------------- -------------------
Total Sales 29,817 28,110 5,240
-------------------- ------------------- -------------------
Costs of Goods Sold:
Direct Labor and Related Costs 3,160 1,638 1,119
Products and Integration Service 15,250 14,931 1,064
Structured Wiring Labor and Materials 2,121 2,345 ---
Broadband Services Costs 763 260 ---
Depreciation and Amortization 377 1,053 73
Other Manufacturing Costs 1,033 181 226
-------------------- ------------------- -------------------
Total Costs of Goods Sold 22,704 20,408 2,482
-------------------- ------------------- -------------------
Gross Profit 7,113 7,702 2,758
-------------------- ------------------- -------------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 7,795 6,169 1,424
Advertising and Promotion 963 600 340
Depreciation and Amortization 3,399 3,615 504
Other Support Costs 4,599 4,264 1.346
Research and Development 404 1,276 371
Impairment Charge for Licenses and Equipment 27,100 --- ---
-------------------- ------------------- -------------------
Total Operatiang Expenses 44,260 15,924 3,985
-------------------- ------------------- -------------------
Earnings/(Loss) from Operations before Other Revenues/
(Expenses), Income Taxes and Other Comprehensive Income (37,147) (8,222) (1,227)
Other Revenues/(Expenses)
Interest income, net 360 2,348 1,506
Other income --- --- 9
-------------------- ------------------- -------------------
Total Other Revenues 360 2,348 1,516
Earnings/(Loss Before Income Taxes and Other Coprehensive
Income (36,787) (5,874) 289
Provisions for Income Taxes --- --- 96
Net Earnings / (Loss) (36,787) (5,874) 193
-------------------- ------------------- -------------------
Other Comprehensive Income, Net of Tax
Unrealized Holding Gain / (Loss) (279) (359) (18)
-------------------- ------------------- -------------------
Other Comprehensive Income/ (Loss) $ (37,066) $ (6,233) $ 175
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
Net Earnings / (Loss) per Common Share:
Basic $ (0.57) $ (0.12) $ 0.01
Diluted $ (0.57) $ (0.12) $ 0.01
Comprehensive Income/ (Loss) $ (0.58) $ (0.13) $ 0.01
See accompanying notes to consolidated financial statements.
F-3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Additional
Common Stock Preferred Paid in Retained Shareholders'
Shares Value Stock Capital Earnings Equity
----------- -------- ----------- --------------- --------------- ------------------
Total Shareholders' Equity 13,480 $ 13 $ --- $ 7,181 $ 1,700 $ 8,894
As of August 31, 1999
Net Earnings --- --- --- --- 193 193
New Stock Issued to Shareholders
Issuance of Common Stock
For Acquisitions 869 1 --- 3,661 --- 3,662
For Services and Compensation 980 1 --- 1,642 --- 1,643
For Warrants Conversion 9,411 10 --- 38,559 --- 38,569
For Debt Conversion 828 1 --- 1,612 --- 1,613
For Employee Stock Option Plan 41 --- --- 158 --- 158
Syndication Costs --- --- --- (653) --- (653)
Unrealized Holding Loss --- --- --- --- (18) (18)
----------- -------- ----------- --------------- --------------- ------------------
Total Shareholders' Equity
As of August 31, 2000 25,609 $ 26 $ --- $ 52,160 $ 1,875 $ 54,061
----------- -------- ----------- --------------- --------------- ------------------
Net Earnings --- --- --- --- (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 Loss --- --- --- --- (359) (359)
----------- -------- ----------- --------------- --------------- ------------------
Total Shareholders' Equity
As of August 31, 2001 60,264 60 --- 153,426 (4,358) 149,128
----------- -------- ----------- --------------- --------------- ------------------
Net Loss --- --- --- --- (36,787) (36,787)
New Stock Issued to Shareholders
For Services and Compensation 1,648 2 --- 880 --- 882
For Property and Other Assets 2,867 2 --- 591 --- 593
For Retirement of Debt and Liabilities 7,846 9 --- 3,577 --- 3,586
For Warrants Conversion --- --- --- --- --- ---
For Employee Stock Option Plan --- --- --- --- --- ---
For Acquisitions 2,002 2 --- 1,079 --- 1,081
For Licenses and Investments --- --- --- 100 --- 100
Syndication Costs --- --- --- --- --- ---
Treasury Stock (1,576) (2) --- (922) --- (924)
Unrealized Holding Loss --- --- --- --- (279) (279)
----------- -------- ----------- --------------- -------------- ------------------
Total Shareholders' Equity
As of August 31, 2002 73,051 $ 73 --- $ 158,731 $(41,423) $117,380
----------- -------- ----------- --------------- --------------- ------------------
----------- -------- ----------- --------------- --------------- ------------------
See accompanying notes to consolidated financial statements.
F-4
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended August 31,
-------------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Cash Flows from Operating Activities
Net Earnings/Loss $ (37,066) $ (5,874) $ 193
Adjustments to Reconcile Net Earnings to Net Cash
Used by Operating Activities:
Impairment Charge for Licenses and Equipment 27,100 --- ---
Depreciation and Amortization 3,776 4,667 577
Stock Issed for Services Rendered 882 974 ---
Stock Issued for Interest Expense 100 --- ---
Changes in Assets and Liabilities
(Increase)/Decrease in Marketable Securities --- (910) (989)
(Increase)/Decrease in Accounts Receivable 2,479 (462) (87)
(Increase)/Decrease in Other Receivables --- --- (2,013)
(Increase)/Decrease in Inventories 4,578 515 (3,083)
(Increase)/Decrease in Prepaid Expenses 386 516 (75)
Increase/(Decrease) in Accounts Payable 232 (1,793) 540
Increase/(Decrease) in Accrued Expenses (3,180) 1,494 (125)
Increase/(Decrease) in Expense Allowable for Doubtful
Acccounts (363) --- 34
Increase/(Decrease) in Deferred Revenues --- --- (533)
Increase/(Decrease) in Sales Tax Payable --- --- (10)
Increase/(Decrease) in Federal Income Taxes Payables --- (736) 268
Increase/(Decrease) in Franchise Taxes Payables --- --- 4
------------------- ------------------- --- -------------------
Total Adjustment 35,990 4,265 (5,492)
Net Cash Used by Operating Activities (1,076) (1,609) (5,299)
Cash Flows from Investing Activities
(Purchase)/Disposal of Property and Equipment (16,071) (16,394) (1,358)
(Purchase)/Disposal of Contact Wireless & DSS Security, Net
of Cash Acquired (869) --- ---
(Increase)/Decrease in Security Deposits --- (102) (14)
(Increase)/Decrease in Investments --- 20 ---
(Increase)/Decrease in Notes Receivable --- 8,655 ---
(Increase)/Decrease in Deferred Advertising Costs --- 21 (384)
(Increase)/Decrease in Deferred Syndication Costs --- 270 (270)
(Increase)/Decrease in Other Intangible Assets --- 1,009 (171)
(Increase)/Decrease in Other Assets --- 9 (27)
------------------- ------------------- -------------------
Net Cash Used by Investing Activities (16,940) (6,512) (2,224)
Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable 387 6,148 1,287
Increase/(Decrease) in Capital Leases 3 63 51
Increase/(Decrease) in Line of Credit (1,846) 230 (7)
Increase/(Decrease) in Deferred Taxes (32) --- ---
Proceeds from Sale of Common Stock, Net --- 1,078 38,350
Retirement of ESOP Shares --- (2,740) ---
Treasury Stock (918) (8,625) ---
------------------- ------------------- -------------------
Net Cash Provided by Financing Activities (2,406) (3,846) 39,681
------------------- ------------------- -------------------
Net Increase/(Decrease) in Cash (20,422) (11,967) 32,158
Cash at the Beginning of the Year 23,843 32,346 188
------------------- ------------------- -------------------
Cash at the End of the Year $ 3,421 $ 20,379 $ 32,346
------------------- ------------------- -------------------
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for:
Interest $ 165 $ 112 $ 94
Income Taxes --- --- 24
Supplemental non-cash investing activities (See Notes 4 & Note 11)
See accompanying notes to consolidated financial statements.
F-5
Notes to Consolidated Financial Statements
August 31, 2002
NOTE 1 - Basis of Presentation and Significant Accounting Policies:
Eagle Broadband, Inc., (the Company or Eagle) 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 personal communications markets. The Company designs,
manufactures, markets and services its products under the Eagle Broadband,
Inc., and BroadbandMagic 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. Also provided is last mile cable and fiber
installation services as well as comprehensive IT products and services.
A) Consolidation
At August 31, 2002, the Company's subsidiaries are: Atlantic Pacific
Communications, Inc. (APC); Etoolz, Inc. (ETI); Eagle Wireless
International, Inc. (EWI); ClearWorks.net, Inc. (.NET); ClearWorks
Communications, Inc. (COMM); ClearWorks Home Systems, Inc. (HSI); Contact
Wireless, Inc. (CWI); DSS Security, Inc. (DSS); United Computing Group,
Inc. (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 $3,420,853 and $23,843,000 invested in interest bearing
accounts and marketable securities (Note 9) at August 31, 2002, 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:
August 31,
2002 2001,
--------- --------
Raw Materials $ 4,515 $ 3,537
Work in Process 1,262 6,555
Finished Goods 282 545
--------- --------
$6,059 $ 10,637
F-6
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
E) Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the Eagle Broadband, Inc.; BroadbandMagic,; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle Wireless
International, Inc., Atlantic Pacific Communications, Inc.; Link Two
Communications, Inc.; United Computing Group, Inc.; Contact Wireless, Inc.;
and DSS Security, Inc., names.
Eagle Wireless International, Inc.
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
BroadbandMagic 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 Broadband, Inc., engages 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
Company's 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, Inc.
ClearWorks Communications, Inc., provides Bundled 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, Inc.
ClearWorks Home Systems, Inc., 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, Inc.
Atlantic Pacific Communications, Inc., 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, Inc.
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, Inc.
Link Two Communications, Inc., provides customers with one- and two-way
messaging systems. The revenue from these services is recognized as it is
earned from the customer.
Contact Wireless, Inc.
Contact Wireless, Inc., provides customers with paging and mobile telephone
products and related monthly services. Revenue from product sales is
recorded at the time of shipment. Revenue for the mobile phone and paging
service is billed monthly as the service is provided.
DSS Security, Inc.
DSS Security, Inc., provides monthly security monitoring services to
residential customers. The customers are billed three months in advance of
service usage. The revenues are deferred at the time of billing and ratably
recognized over the prepayment period as service is provided.
United Computing Group, Inc.
United Computing Group, Inc., provides business-to-business hardware and
software network solutions and 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.
F-7
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
F) Research and Development Costs
For the years ended August 31, 2002, 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 $ 404,000, $1,276,000, and $371,000 were
expensed for the years ended August 31, 2002, 2001, and 2000, respectively.
No research and development services were performed for outside parties for
the year ended August 31, 2002, 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:
August 31,
-------------------------------------------------
2002 2001 2000
------------ ------------ ---- -------------
Weighted Average Number of Common
Shares Outstanding Including
Basic Common Stock Equivalents 64,004 49,726 19,073
Fully Diluted Common Stock Equivalents 64,158 49,880 22,378
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
At August 31, 2002, the Company determined that an impairment of Link Two
paging network equipment and nationwide licenses existed. Link Two
Communications competes with many established companies in the nationwide
one- and two-way messaging services area. The paging industry has declined
over the past year and the major paging companies have undergone
significant beneficial financial restructurings. These companies are able
to offer products and related services at more favorable rates than Link
Two. Because the paging industry and related financial credit availability
from banks for financing emerging nationwide networks has been declining
over the last year, Link Two has been unable to obtain significant funding
to expand and provide cost effective service to its customers. Accordingly,
Link Two has had to curtail its development on a nationwide basis and
restricted its operations to serve the Houston and Dallas, Texas, markets.
The equipment servicing the nationwide network has been inactive and is
being dismantled. The equipment servicing the nationwide network is
inactive and has been impaired as well as well as the value of the related
FCC licenses. At August 31, 2002, management estimated through recent sales
of equipment and industry pricing of FCC licenses that an impairment charge
of $27,100,000 was necessary to reflect the ongoing value of its assets and
licenses.
F-8
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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 Communications, Inc., and twenty-five (25) years for
Bundled Digital Services 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.
K) Advertising Costs
In fiscal 2002, 2001, and 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 year ended August 31,
2002, 2001, and 2000, the Company expensed $963,000, $600,000 and $340,000
respectively.
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 fiscal year ended August 31,
2002, 2001, and 200 comprehensive loss was ($279,000), ($359,000) and
(18,000), respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the year
ended August 31, 2002, 2001, and 2000,to facilitate comparisons.
F-9
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support cost for the twelve months ended August 31, 2002, 2001, and
2000 are as follows, in thousands: -
2002 2001 2000
---------- ------------- -------------
Advertising/Conventions $ 8 $ 737 $ 64
Auto Related 174
Contract Labor 100 --- ---
Delivery/Postage 162 178 30
Insurance 181 263 68
Interest 625 ---
Office 880 482 97
Other 21 17 6
Professional 424 831 190
Rent 1,052 791 386
Travel 459 437 326
Taxes 53 90 22
Utilities 460 438 157
---------- ------------- -------------
Total $ 4,599 $ 4,264 $ 1,346
========== ============= =============
R) Recent Pronouncements
In July 2001, the Financial Accounting Standards Board "FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets, which is effective for the Company in the first quarter
of fiscal year 2003 and for purchase business combinations consummated
after June 30, 2001. These standards change the accounting for business
combinations by, among other things, eliminating pooling-of-interests
accounting and requiring a change in the method of expensing goodwill and
certain intangible assets with an indefinite useful life. Goodwill and
intangible assets deemed to have an indefinite useful life will be subject
to an annual review for impairment rather than periodic amortization.
Finite lived intangibles will continue to be amortized over their useful
lives.
At August 31,2002 the Company evaluated its existing goodwill and
intangible assets acquired in purchase business combinations completed
prior to July 1, 2001. The carrying amount of recognized intangible assets
that meet the criteria for recognition apart from goodwill or any
identifiable intangible assets that are presented with goodwill and other
intangible assets for financial reporting purposes have been reclassified
and reported separately from goodwill. The unamortized balance of any
negative goodwill will be recognized as the cumulative effect of a change
in accounting principle.
The Company has also tested goodwill for impairment at August 31, 2002,
using the two-step process prescribed in SFAS No. 142. The first step is a
screen for potential impairment, while the second step measures the amount
of impairment, if any.
In October 2001, the FASB issued SFAS No. 144, Impairment of Long-Lived
Assets, SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No.
144 retains the requirements of SFAS No. 121 to (a) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable
from its undiscounted cash flow and (b) measure an impairment loss as the
difference between the carrying amount and the fair value of the asset.
SFAS No. 144 removes goodwill from its scope. SFAS No. 144 is applicable to
financial statements issued for fiscal years beginning after December 15,
2001. The adoption of SFAS No. 144 had a material impact on the financial
position of the Company.
F-10
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
At August 31, 2002, the Company determined that an impairment of Link Two
paging network equipment and nationwide licenses existed. Link Two
Communications competes with many established companies in the nationwide
one- and two-way messaging services area. The paging industry has declined
over the past year and the major paging companies have undergone
significant beneficial financial restructurings. These companies are able
to offer products and related services at more favorable rates than Link
Two. Because the paging industry and related financial credit availability
from banks for financing emerging nationwide networks has been declining
over the last year, Link Two has been unable to obtain significant funding
to expand and provide cost effective service to its customers. Accordingly,
Link Two has had to curtail its development on a nationwide basis and
restricted its operations to serve the Houston and Dallas, Texas, markets.
The equipment servicing the nationwide network is inactive and has been
impaired as well as well as the value of the related FCC licenses. At
August 31, 2002, management estimated through recent sales of equipment and
industry pricing of FCC licenses that an impairment charge of $27,100,000
was necessary to reflect the ongoing value of its assets and licenses.
NOTE 2 - Accounts Receivable:
Accounts receivable consist of the following, in thousands:
August 31,
2002 2001
------------- -------------
Accounts Receivable $ 5,270 $ 7,624
Allowance for Doubtful Accounts (242) (480)
------------- -------------
Net Accounts Receivable $ 5,028 $ 7,144
============= =============
NOTE 3 - Property, Plant & Equipment and Intangible Assets:
Components of property, plant & equipment are as follows, in thousands:
August 31,
2002 2001
------------- -------------
Automobile $ 392 $ 548
Head-End Facility and Fiber Infrastructure 27,164 15,045
Furniture & Fixtures 634 481
Leasehold Improvements 216 84
Office Equipment 1,015 654
Property, Manufacturing & Equipment 5,088 11,657
------------- -------------
Total Property, Plant & Equipment $ 34,509 $ 28,469
Less: Accumulated Depreciation (3,661) (2,005)
------------- -------------
Net Property, Plant & Equipment $ 30,848 $ 26,464
============= =============
Components of intangible assets are as follows, in thousands:
August 31,
2002 2001
------------- -------------
Goodwill $ 7,916 $ 5,966
Contract Rights 74,513 74,513
Licenses & Permits 5,387 24,441
------------- -------------
Total Intangible Assets $ 87,816 $ 104,920
Less: Accumulated Amortization (4,278) (3,879)
------------- -------------
Net Intangible Assets $ 83,538 $ 101,041
============= =============
F-11
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
NOTE 4 - Business Combinations:
On February 1, 2001, the Company completed the purchase of ClearWorks.net,
Inc., and its subsidiaries, 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, 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.
Effective January 1, 2002, the Company acquired the assets of DSS Security,
Inc., and Contact Wireless in a business combination accounted for as a
purchase. DSS Security, Inc., provides security monitoring to business and
residential customers. Contact Wireless sells and services mobile phones
and one- and two-way messaging devices. The Company paid cash of $450,000
and issued a short-term note payable of $130,000 for the assets of Contact
Wireless for a total purchase price of $580,000. Additionally, the Company
acquired DSS Security, Inc., for $2,002,147. In this transaction, the
Company issued 2,002,147 shares of its common stock with a guaranteed value
of $1 per share. The Company allocated $51,595 to the fair value of the
property and equipment and $1,950,552 to intangible assets. The intangible
assets include, among other things, approximately 4,000 current customers
being billed monthly for wireless messaging services. The allocation of the
purchase price is based on the fair value of the assets acquired based on
management's estimates and existing contracts. At August 31, 2002, the
Company has accrual for $921,000 for the portion of the purchase that
represents the difference between purchase price and market value of the
Company's common stock on the date of purchase.
F-12
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
NOTE 5 - Notes Payable:
The following table lists the Company's note obligations as of August 31,
2002 and 2001, in thousands:
Annual
Interest Amount
Rate Due Date 2002 2001
------------------- ------------------ ------------ -----------
Vehicles Various Various $ 27 $ 100
6% Convertible Debenture (Note8) 6.0% Demand 2,000 2,000
Tail Wind Convertible Debenture 2.0% May 2003 2,000 5,000
Other Various Various 828 854
----------- -----------
Total notes payable $ 4,855 $ 7,954
Less current portion 3,653 5,933
----------- -----------
Total long-term debt $ 1,202 $ 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 August 31, 2002, for
each of the next five years and in the aggregate are, in thousands:
August 31, 2002
---------------------
Total minimum lease payments $ 128
Less : Amount representing interest 10
---------------------
Present value of net minimum lease payments 118
Less: Current maturity capital lease obligation 48
---------------------
Long-term capital lease obligation 70
=====================
Future obligations under the lease terms are as follows:
Period Ended Amount
---------------------
2004 41
2005 29
---------------------
Total 70
=====================
F-13
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
NOTE 7 - Lines of Credit:
On September 29, 2000, Atlantic Pacific Communications, Inc., "(APC", 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 was payable monthly
with principal due September 28, 2001. APC's accounts receivable are
pledged as collateral with Eagle Wireless International, Inc., the
guarantor. This line of credit was repaid to Southwest Bank of Texas in the
six months ended February 28, 2002; therefore, there was not a balance
outstanding as of August 31, 2002. Subsequent to the fiscal year ended
August 31, 2002, APC entered into a new credit facility with SWBT to
provide working capital and fund ongoing operations. The new credit
facility is a purchase and sale agreement against accounts receivable,
provides for borrowings up to $1,000,000 based on eligible accounts
receivable and is secured by APC accounts receivable and guaranteed by
Eagle Broadband, Inc.
The Company, through its subsidiary United Computing Group, Inc. (UCG),
maintained $3,000,000 line of credit with IBM Credit Corporation (IBM)
bearing a variable rate of interest. At May 31, 2002, a balance of
$1,012,000 existed. During July 2002, UCG entered into a credit facility
with Southwest Bank of Texas (SWBT) to provide working capital, repay the
IBM credit line and fund ongoing operations. The new credit facility is a
purchase and sale agreement against accounts receivable, provides for
borrowings up to $3,000,000 based on eligible accounts receivable and is
secured by UCG accounts receivable and guaranteed by Eagle Broadband, Inc.
As of August 31, 2002, UCG reduced its accounts receivable by $817,401 to
reflect the gross sale of $961,649 to SWBT less $144,247 of reserves held
by SWBT against such purchases.
NOTE 8 - Convertible Debentures:
At August 31, 2002, $2,000,000 in principal plus $600,000 of accrued
interest and fees of were outstanding to Candlelight Investors, LLC. In
November 2002, the Company issued 2,600,000 shares of stock to settle this
debt.
During 2001, the Company merged with ClearWorks.net, Inc., and as a result,
ClearWorks is a wholly owned subsidiary of Eagle. Link Two Communications,
Inc., is a subsidiary of ClearWorks, and as a result of the merger, is now
a secondary 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 note balance will be due in fiscal 2003. 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,and other various terms are met. 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
agreed upon covenants are met. 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.
F-14
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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. As of May 31, 2002, the Company
has paid to Tail Wind $2,000,000 towards the reduction of debt. The current
financial statements have recorded as current maturity for this debt,
$2,000,000.
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
have 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 Communications, Inc.,
has paid Ladenburg Thalman and 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. At August 31, 2002, Eagle and Tail
Wind were renegotiating the terms of this note. During the renegotiation
period, the Company has agreed to pay interest until all new terms and
conditions have been resolved.
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, 2002,
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.
F-15
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
At August 31, 2002, the Company had investments in mortgage and asset
backed securities, mutual funds and money market accounts with an original
basis of $865,049 determined by multiplying the number of shares acquired
by the fair market value of those shares. At the August 31, 2002, balance
sheet date, the fair market value of these securities was $889,655;
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
------------ -------------
FNMA 228 21,463 23,041
FHLMC 83 7,809 8,485
SB Gov. Income Fund 31,501 330,063 330,447
SSB Gov. Securities Fund 53,087 505,714 527,682
------------ -------------
Totals $ 865,049 $ 889,655
============ =============
Other marketable securities include, 4,560,000 shares of common stock of
Urbana and 1,500,000 shares of common stock of Burst.com, These common
stock investments have an aggregate cost basis of $750,000 and an aggregate
fair market value of $1,258,200 and are included in the cash and cash
equivalents category and are held for resale as of August 31, 2002.
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:
August 31,
2002 2001
------ ------
% %
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
F-16
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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)
August 31,
2002 2001 2000
----------- --------- -----------
Computed expected tax benefit $ (12,508) $ (1,997) $ 96
Increase in valuation allowance 12,508 1,997 ---
----------- --------- -----------
$ --- $ ---__ $ 96
=========== ========= ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August
31, 2002 and 2001, are presented below, in thousands and include the
balances of the merged company ClearWorks.net.
2002 2001 2000
---------- ------------ -------------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 0 $ 102 $ ---
Net operating loss carry-forwards 24,047 10,956 ---
Less valuation allowance (24,047) (10,956) ---
---------- ------------ -------------
Net deferred tax assets --- --- ---
Deferred tax liabilities:
Differences in depreciation 0 47 47
---------- ------------ -------------
Net deferred tax liabilities $ 0 $ 47 $ 47
========== ============ =============
The valuation allowance for deferred tax assets of August 31, 2002, 2001,
and 2000, was $24,047,000, $10,956,000, and 0, respectively. At August 31,
2002 and 2001, the Company has net operating loss carry-forwards of
$70,727,000 and $31,869,000, respectively, which are available to offset
future federal taxable income, if any, with expirations from 2020 to 2021.
NOTE 11 - Issuance of Common Stock:
During the fiscal year ended August 31, 2002, 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 Services and Compensation 1,648
Shares issued for Property and Other Assets 2,867
Shares issued for Retirement of Debt and Liabilities 7,846
Shares issued for Warrant Conversions ---
Shares issued for ESOP ---
Share issued for Acquisitions 2,002
Shares issued for Licenses and Investments ---
Treasury Stock (1,576)
-------------------
Shares Outstanding August 31, 2002 73,051
===================
F-17
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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. As of August 31,
2002, options to purchase 355,170 are outstanding and 602,331 are available
to be issued.
The Company has issued or has acquired through its acquisitions and has
outstanding the following warrants which have not yet been exercised at
August 31, 2002:
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 August 31, 2002, none of these options have been registered,
issued or exercised
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 August 31, 2001, 25,000
warrants have been exercised resulting in cash proceeds of $38,750 and
the balance of the warrants expired unexercised.
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. August 31, 2001, 6,234 warrants have been
exercised resulting 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 as of August 31, 2002, under
the Securities Act of 1933. As of August 31, 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 as of August 31, 2001, under the Securities
Act of 1933. As of August 31, 2002, 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 $2.25 per share. The shares of common stock underlying these
warrants have not been registered or issued, under the Securities Act
of 1933. As of August 31, 2002, none of these warrants have been
exercised.
F-18
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, none of
these warrants have been exercised.
F-19
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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 August
31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, 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 August 31, 2002, none of these warrants
have been registered, issued or exercised.
F-20
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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 August 31, 2002, none of these warrants
have been exercised.
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 August 31, 2002, 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
August 31, 2002, the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933. As of
August 31, 2002, none of these warrants have been exercised.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 August 31, 2002, 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
August 31, 2002, the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933. As of
August 31, 2002, none of these warrants have been exercised.
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 August 31,
2002, 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
August 31, 2002, the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933. . As of
August 31, 2002, none of these warrants have been exercised.
F-21
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
The warrants outstanding are segregated into four categories (exercisable,
non-exercisable, non-registered, and expired).
Warrants Issued Warrants Exercisable Warrants
Class of August 31, August 31, Non- Non-
Warrants 2002 2001 2002 2001 Exercisable Registered
- -------- --------------------- ------------------------ ------------------------------
1.04 - 50,000 50,000 50,000 50,000 50,000
1.50 600,000 600,000
1.55 - 50,000 25,000 50,000 - -
1.75 - 20,000 13,766 13,766 - -
2.00 - 25,000 25,000 25,000 - -
2.00 - 41,667 41,667 41,667 - -
2.25 - 41,667 41,667 41,667 -
3.00 - 50,000 50,000 50,000 - -
3.00 - 58,333 58,333 58,333 - -
3.75 - 40,000 40,000 40,000 - 40,000
3.75 - 160,000 160,000 160,000 - 160,000
3.75 - 232,000 232,000 232,000 - 232,000
3.75 - 176,000 176,000 176,000 - 176,000
3.95 328,000 328,000 328,000 - 328,000
4.50 - 25,000 25,000 25,000 - -
7.00 - 100,000 100,000 100,000 - 100,000
7.49 - 250,000 250,000 250,000 - 250,000
7.50 - 25,000 25,000 25,000 - -
7.50 - 192,000 192,000 192,000 - 192,000
7.50 - 240,000 240,000 240,000 - 240,000
7.50 - 168,000 168,000 168,000 - 168,000
7.50 - 40,000 40,000 40,000 - 40,000
7.50 - 160,000 160,000 160,000 - 160,000
9.68 - 50,000 50,000 50,000 - -
10.00 - 25,000 25,000 25,000 - -
10.00 - 250,000 250,000 250,000 - 250,000
12.00 - 250,000 250,000 250,000 - -
14.00 - 350,000 350,000 350,000 - 350,000
18.00 - 250,000 250,000 250,000 - -
25.00 - 150,000 150,000 150,000 - 150,000
ESOP 355,170 * 355,170 355,170 - -
---- --------- --------- --------- ------- ---------
- 4,752,837 4,121,603 4,746,603 50,000 2,886,000
An asterisk (*) denotes warrants which would have an anti-dilutive effect if
currently used to calculate earnings per share for the years ended August 31,
2002 and 2001, respectively.
F-22
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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
August 31, 2001, 1,325 units were sold totaling 132,500 shares and
resulting in proceeds of $331,250.
NOTE 14 - Risk Factors:
For the years ended August 31, 2002, 2002, 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
computer services and broadband industries. Approximately, eighty four
percent of the Company's revenues and receivables have been created solely
in the state of Texas, zero percent have been created in the international
market, and the approximate sixteen percent remainder have been created
relatively evenly over the rest of the nation during the year ended August
31, 2002. Approximately, eighty seven 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 eleven
percent remainder have been created relatively evenly over the rest of the
nation during the year ended August 31, 2001. Whereas approximately forty
six percent of the Company's revenues and receivables have been created
solely in the state of Texas, five percent have been created in the
international market, and the approximate forty nine percent remainder has
been created relatively evenly over the rest of the nation for the year
ended August 31, 2000. Through the normal course of business, the Company
generally does not require its customers to post any collateral.
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 0%, 2% and 4.8% at August 31, 2002, 2001,and 2000,
respectively.
NOTE 16 - Commitments and Contingent Liabilities:
Leases
The Company leases its primary office space in League City, Texas, for
$36,352 per month with Gateway Park Joint Venture. This non-cancelable
lease commenced on January 1, 2002, and expires on May 31, 2004.
For the years ending August 31, 2002 and 2001, rental expenses of
approximately $436,219 and $232,195 respectively, were incurred.
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, 2004. Under the terms of the lease, monthly
payments will be $2,130 for the first twelve months whereas the monthly
payments will increase by 3.5% at the beginning of both the second and
third years. For the periods ended August 31, 2002 and 2001, rental expense
of $27,319 and $25,634, respectively were incurred.
F-23
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
The Company's wholly owned subsidiary, Atlantic Pacific, leases office
space in Houston, Texas with Houston Industrial Partners, Ltd. This
non-cancelable lease expires December 2005. The monthly payments are $6,345
per month. . For the periods ended August 31, 2002 and 2001, rental expense
of $23,376 and $25,272 respectively were incurred.
Atlantic Pacific 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 whereas
they will increase by 3.2% at the thirteenth and twenty-fifth months. For
the periods ended August 31, 2002 and 2001, rental expense of $28,416 and
$26,640 respectively were incurred.
Atlantic Pacific 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 The renewal
option was waived in September 2002. Rental expense for the period ended
August 31, 2002 and 2001, of $54,000 and $54,000 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 August 31, 2002 and 2001, rental
expense of $133,596 and $133,092 respectively 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 August 31, 2002 and
2001, rental expense of $68,365 and $54,614 was incurred.
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
$3,300. For the period ended August 31, 2002 and 2001, rental expense of
$39,600 and $26,600 was incurred.
The Company's subsidiary, United Computing Group, leases office space in
Houston, Texas with Eastgroup Properties, L.P. This non-cancelable lease
expires on August 31, 2003. The current monthly payments are $8,570. UCG
previously leased office space with Techdyne, Inc., that expired August 31,
2002. For the period ended August 31, 2002 and 2001, rental expense of
$75,600 and $73,200 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 September 1, 2002, and expires January
31, 2005. The monthly payments are $5,876. For the period ended August 31,
2002 and 2001, rental expense of $23,505 and $4,732 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, expired on June 30, 2002, and was extended to expire on
June 30, 2003. The monthly payments are $2,794. For the period ended August
31, 2002 and 2001, rental expense of $37,968 and $26,148 was incurred.
F-24
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
Future obligations under the non-cancelable lease terms are:
Period Ending
August 31, Amount
2003 $ 980,454
2004 570,888
2005 146,021
2006 36,000
-------------------------- ----------------------
Total $ 1,733,363
Legal Proceedings
ClearWorks is a defendant in State Of Florida Department Of Environmental
Protection Vs. Reco Tricote, Inc. And Southeast Tire Recycling, Inc., A/K/A
ClearWorks.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 has
amended 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.
No discovery has been conducted in this lawsuit.
ClearWorks was a defendant in Candlelight Investors LLC v. ClearWorks.net,
Inc., Eagle Wireless International, Inc., and H. Dean Cubley. Subsequent to
August 31, 2002, Eagle settled the lawsuit with Candlelight Investors LLC
for $2,600,000.
ClearWorks is a defendant in Kaufman Bros., LLP v. ClearWorks.net, Inc.,
and Eagle Wireless, Inc., (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.
On December 17, 2001, Kevan Casey and Tommy Allen sued ClearWorks.net,
Inc., ClearWorks Integration, Inc., and Eagle Wireless International, Inc.,
(the petition was later amended to include the following defendants:
Michael T. McClere, H. Dean Cubley, Link Two Communications, Inc., A. L.
Clifford, Jim Futer and McManus & Company, P.C. d/b/a E. McManus & Co.,
P.L.L.C.) for breach of contract and other related matters in Cause No.
2001-64056; In the 281st Judicial District Court of Harris County, Texas.
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. This lawsuit is currently in the discovery phase. The
defendants deny the allegations of the complaint.
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 adverse affect on
the Company's financial condition or results of operations.
F-25
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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.
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 year ended August 31, 2002
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Loss $(36,787)
Basic EPS:
Income available to
common stockholders $(36,787) 64,004 $(0.57)
Effect of Dilutive Securities
Warrants 154
-------- -------- --------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(36,787) 64,158 $(0.57)
For the year ended August 31, 2001
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $ (5,874)
Basic EPS:
Income available to
common stockholders (5,874) 49,726 $(0.12)
Effect of Dilutive Securities
Warrants 154
------- -------- --------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $ (5,874) 49,880 $(0.12)
For the year ended August 31, 2002, and August 31, 2001, anti-dilutive
securities existed. (see Note 12)
F-26
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
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 August 31, 2002, a total of 355,170 options have been
issued to various employees.
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. 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 0.91
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 year ended August 31, 2002 and 2001, employee
contributions were approximately $279,000 and $148,000, respectively. The
Company matched approximately $67,850 and $49,000, respectively for those
same periods.
NOTE 20 - Major Customer:
The Company had gross revenues of $29,817,000 and $28,110,000 for the year
ended August 31, 2002 and 2001, respectively. The following parties
individually represent a greater than ten percent of these revenues.
August 31, 2002 August 31, 2001
Customer Amount Percentage Amount Percentage
---------- ------- ----------- -------- ------------
Customer A $ --- 0.00% $7,875,000 30.00%
Customer B $ --- 0.00% $3,845,000 13.68%
Customer C $ --- 0.00% $ --- 0.00%
During the twelve months ended August 31, 2002, 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.
F-27
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
NOTE 21 - Industry Segments:
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". At August 31, 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 Broadband, Inc., (Eagle) is a worldwide supplier of broadband and
telecommunications equipment with related software and broadband products.
(Including Eagle Wireless International, Inc., BroadbandMagic and Etoolz,
Inc., for this summary).
Atlantic Pacific 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.
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.
DSS Security, Inc., is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt related
expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services provider
and reseller.
For the year ending August 31, 2002
(in thousands) Eagle APC COMM HIS UCG Link II .Net Contact DSS Elim. Consol.
-------- -------- --------- --------- --------- ---------- -------- --------- -------- ------------ ---------
Revenue 1,699 5,471 2,216 3,296 16,143 52 --- 500 441 --- 29,817
Segment Profit/(Loss) (5,819) 37 (348) (316) (1,304) (29,165) (141) 115 155 --- (36,787)
Total Assets 162,290 2,498 30,561 2,616 853 2,749 64,950 830 419 (137,782) 129,983
Capital Expenditures 562 8 14,916 117 --- 1 --- 155 323 (11) 16,071
Dep. And Amort. 1,418 123 672 85 166 1,215 --- 55 43 --- 3,776
For the year ending August 31, 2001,
(in thousands) EAG APC COMM HIS UCG Link II NET Elim. Consol.
--------- -------- ---------- ----------- ----------- ------------ ----------- ------------- ------------
Revenue 1,205 5,649 571 2,524 18,137 24 --- --- 28,110
Segment Profit/(Loss) (2,211) (308) (299) (682) (211) (1,329) (834) --- (5,874)
Total Assets 156,760 1,707 13,149 3,644 4,394 32,981 1,147 (43,114) 170,668
Capital Expenditures 198 6 3,073 145 24 6,657 14 --- 10,117
Dep. And Amort. 2,591 100 1,053 49 19 752 105 --- 4,669
For the year ending August 31, 2000
(in thousands) Eagle APC Elim. Consol.
------------- ------------ ------------ --------------
Revenue 1,826 3,413 --- 5,239
Segment Profit / (Loss) (413) 606 --- 193
Total Assets 53,471 1,820 697 55,988
Capital Expenditures 771 1,010 --- 1,781
Dep. And Amort. 407 170 --- 579
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.
F-28
Eagle Broadband, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 31, 2002
Note 22 - Quarterly Financial Data.
Nov. 30, Feb. 28, May 31, Aug. 31,
-------------------- ---------------------- ----------------------- --------------------
Year Ended August 31, 2002
Revenues 8,761 7,380 6,485 7,191
Net Earnings (loss) (3,371) (2,013) (1,824) (29,578)
Basic Loss per Share (0.06) (0.03) (0.03) (0.45)
Diluted Loss per Share (0.06) (0.03) (0.03) (0.45)
Year Ended August 31, 2001
Revenues 1,866 4,797 6,485 10,089
Net Earnings (loss) 63 (1,280) (1,715) (2,942)
Basic Loss per Share 0.02 (0.03) (0.03) (0.08)
Diluted Loss per Share 0.02 (0.03) (0.03) (0.08)
For the year ended August 31, 2002, the quarterly financial information has
been adjusted to reflect the application of Financial Accounting Standards
Pronouncements No. 142 (Goodwill and other Intangible Assets) and No. 144
(Accounting for the Impairment or Disposal of Long-Lived Assets).
Note 23 - Subsequent Events.
Subsequent to the fiscal year ended August 31, 2002, UCG entered into an
Exclusive Strategic Alliance Agreement with a major competitor and
designated them as its Exclusive Product Fulfillment Partner. The
agreement, among other things, entitles UCG to a fee structure on all
product fulfillment referrals and further designates UCG as the exclusive
Service Provider and designee with respect to Services including but not
limited to configuration solutions, network services, network application
services, repair and warranty services and professional support services
including Client Help Desk, Deskside Support, Professional and Managed
Services for all customer relationships provided by UCG. The agreement
further designates UCG as a Service Partner within the competitors'
customer base and exclusively appoints UCG as its Service Partner within
the competitor's customer base for all of UCG's RemoteManage247 offerings.
During the first fiscal quarter of 2003, Eagle entered into a debt funding
arrangement with an investment bank to provide up to $3,000,000 in working
capital. This debt is unsecured and bears interest at 5% per annum maturing
in one year from the initial funding. Eagle has received $1,500,000 in cash
during the quarter ended November 30, 2002, against this funding
arrangement.
F-29