U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-23163
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0494995
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)
101 Courageous Drive
League City Texas 77573-3925
(Address of principal executive offices, including zip code)
(281) 538-6000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 15, 2003, there were 102,228,968 shares of common stock outstanding.
EAGLE BROADBAND, INC. AND SUBSIDIARIES
INDEX
Part 1 - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at February 28, 2003, and August 31, 2002 3
Consolidated Statements of Earnings for the Three and Six
Months Ended February 28, 2003 and 2002 4
Consolidated Statements of Changes In Shareholders' Equity for the
Six Months Ended February 28, 2003, and Twelve Months Ended
August 31, 2002 5
Consolidated Statements of Cash Flows for the Six Months Ended
February 28, 2003 and 2002 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures
Part 2 - Other Information
Item 1. Legal Proceedings 29
Item 2. Recent Sales of Unregistered Securities or Changes
in Securities and Use of Proceeds. 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 29
2
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
February 28, August 31,
2003 2002
-------- --------
(Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 1,653 $ 3,421
Accounts Receivable 4,167 5,028
Inventories 6,523 6,059
Prepaid Expenses 882 358
------------- ---------------
Total Current Assets 13,225 14,866
Property and Equipment:
Operating Equipment 37,331 34,509
Less: Accumulated Depreciation (4,227) (3,661)
------------- --------------
Total Property and Equipment 33,104 30,848
Other Assets:
Deferred Costs 870 334
Goodwill 7,916 7,916
Other Intangible Assets 80,109 79,900
Less: Accumulated Amortization (4,278) (4,278)
Other Assets 506 397
------------- --------------
Total Other Assets 85,124 84,269
------------- --------------
Total Assets $ 131,453 $ 129,983
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 5,302 $ 4,757
Accrued Expenses 1,419 2,873
Notes Payable 4,134 3,653
Capital Lease Obligations 11 48
------------- --------------
Total Current Liabilities 10,866 11,331
Long-Term Liabilities:
Capital Lease Obligations
(net of current maturities) 70 70
Long-Term Debt 1,196 1,202
------------- --------------
Total Long-Term Liabilities 1,266 1,272
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 February 28, 2003, and
August 31, 2002, 85,229,000 and 73,051,000, respectively 85 73
Paid in Capital 163,410 158,731
Retained Earnings (44,174) (41,424)
------------- --------------
Total Shareholders' Equity 119,321 117,380
------------- --------------
Total Liabilities and Shareholders' Equity $ 131,453 $ 129,983
============= ==============
See accompanying notes to consolidated financial statements.
3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
For the Three Months ended February 28 For the Six Months ended February 28
(Unaudited)
2003 2002 2003 2002
---- ---- ---- ----
Net sales:
Structured wiring 1,040 1,892 2,600 3,592
Broadband services 888 303 1,562 566
Products 151 4,746 2,195 11,213
Other 984 439 1,324 770
------------- ------------ ------------- ------------
Total sales 3,063 7,380 7,681 16,141
------------- ------------ ------------- ------------
Costs of Goods Sold:
Materials other than Cable and Wire 0 0 0 1
Direct Labor and Related Costs 402 703 748 1,438
Products and Integration Service 114 3,680 1,651 9,422
Structured Wiring Labor and Materials 429 375 658 696
Broadband Services Costs 254 204 530 375
Depreciation and Amortization 114 84 228 155
Other Manufacturing Costs 31 19 155 39
------------- ------------ ------------- ------------
Total Costs of Goods Sold 1,344 5,065 3,970 12,126
------------- ------------ ------------- ------------
Gross Profit 1,719 2,315 3,711 4,015
------------- ------------ ------------- ------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 1,355 2,192 2,863 4,349
Advertising and Promotion 19 108 56 263
Depreciation and Amortization 237 1,237 390 2,484
Other Support Costs 1,073 1,258 2,170 2,810
Research and Development 27 92 59 264
------------- ------------ ------------- ------------
Total Operating Expenses 2,711 4,887 5,538 10,170
------------- ------------ ------------- ------------
Earnings/(Loss) From Operations Before
Other Revenues/(Expenses), Income Taxes (992) (2,572) (1,827) (6,155)
and Other Comprehensive Income
Other Revenues/(Expenses):
Interest Income - net 13 63 17 275
Other Income --- --- --- ---
------------- ------------ ------------- ------------
Total Other Revenues 13 63 17 275
Earnings/(Loss) Before Minority Interest
in Affiliate, Income Taxes and Other
Comprehensive Income (979) (2,509) (1,810) (5,880)
------------- ------------ ------------- ------------
Provisions For Income Taxes --- --- --- ---
------------- ------------ ------------- ------------
Net Earnings/(Loss) (979) (2,509) (1,810) (5,880)
------------- ------------ ------------- ------------
Other Comprehensive Income, Net of Tax
Unrealized Holding Gain/(Loss) (954) (86) (941) (274)
------------- ------------ ------------- ------------
Other Comprehensive Income/(Loss) $ (1,933) $ (2,595) $ (2,751) $ (6,154)
============= ============ ============= ============
Net Earnings/(Loss) per Common Share:
Basic $ (0.01) $ (0.04) $ (0.02) $ (0.10)
Diluted $ (0.01) $ (0.04) $ (0.02) $ (0.10)
Comprehensive Income/(Loss) $ (0.02) $ (0.04) $ (0.03) $ (0.10)
See accompanying notes to consolidated financial statements.
4
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Additional Total
Common Stock Preferred Paid In Retained Shareholders'
Shares Value Stock Capital Earnings Equity
Total Shareholders' Equity
As of August 31, 2001 60,264 60 --- 153,426 (4,358) 149,128
-------- ------- --------- --------- --------- ---------
Net Loss for Twelve Months
Ended August 31, 2002 --- --- --- --- (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 Gain --- --- --- --- (279) (279)
------- ------- --------- ---------- --------- --------
Total Shareholders' Equity
As of August 31, 2002 73,051 $ 73 $ --- $ 158,731 $ (41,424) $ 117,380
======== ====== ======== ========== ========= ========
Net Loss for Six Months
Ended February 28, 2003 --- --- --- --- (1,810) (1,810)
New Stock Issued to Shareholders:
For Services and Compensation 690 --- --- 290 --- 290
For Property and Other Assets 3,426 4 --- 779 --- 783
For Retirement of Debt and
Liabilities 8,062 8 --- 3,610 --- 3,618
For Warrants Conversion --- --- --- --- --- ---
For Employee Stock Option Plan --- --- --- --- --- ---
For Licenses and Investments --- --- --- --- --- ---
Syndication Costs --- --- --- --- --- ---
Treasury Stock --- --- --- --- --- ---
Unrealized Holding Gain --- --- --- --- (941) (941)
------- ------- --------- ----------- --------- ---------
Total Shareholders' Equity
As of February 28, 2003 85,229 $ 85 $ --- $ 163,410 $ (44,174) $ 119,321
======== ====== ======== ========== ========= ========
See accompanying notes to consolidated financial statements.
5
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months ended February 28,
2003 2002
---- ----
(Unaudited)
Cash Flows From Operating Activities
Net Earning/(Loss) $(2,751) $ (5,880)
Adjustments To Reconcile Net Earnings to Net Cash
Used By Operating Activities:
Interest for Conversion Value 91 ---
Depreciation and Amortization 618 2,651
Stock Issued for Interest Expense --- 60
Allowance for Doubtful Accounts --- 138
Stock Issued for Services Rendered 201 195
(Increase)/Decrease in Accounts Receivable 861 1,270
(Increase)/Decrease in Inventories (406) 3,805
(Increase)/Decrease in Prepaid Expenses (524) 57
Increase/(Decrease) in Accounts Payable 748 (944)
Increase/(Decrease) in Accrued Expenses (40) (1,263)
------ -------
Total Adjustment 1,549 5,969
Net Cash Used by Operating Activities (1,201) 89
Cash Flows From Investing Activities:
(Purchase)/Disposal of Property and Equipment (2,336) (9,642)
(Increase)/Decrease in Acquisition Costs --- 6
(Increase)/Decrease in Deferred Costs (669) ---
(Increase)/Decrease in Other Intangible Assets --- (10)
(Increase)/Decrease in Other Assets --- (1,713)
------- -------
Net Cash Used by Investing Activities (3,005) (11,359)
Cash Flows From Financing Activities:
Increase/(Decrease) in Notes Payable & Long-Term Debt 2,438 144
Increase/(Decrease) in Capital Leases --- (37)
Increase/(Decrease) in Line of Credit --- (813)
Treasury Stock --- (676)
------ -----
Net Cash Provided By Financing Activities 2,438 (1,382)
----- -------
Net Increase/(Decrease) in Cash (1,768) (12,652)
Cash At The Beginning of Period 3,421 23,843
----- ------
Cash At the End Of Period $ 1,653 $ 11,191
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for
Interest 153 $ 54
Supplemental non-cash investing activities (See Note 4) and changes in
shareholder's equity:
See accompanying notes to consolidated financial statements.
6
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.
Manufacturing of the Eagle Wireless product line of wireless infrastructure
products was licensed to a third party company during this reporting
period.
A) Consolidation
At February 28, 2003, the Company's subsidiaries are: Atlantic Pacific
Communications, Inc. (APC); Etoolz, Inc. (ETI); Eagle Wireless
International, Inc. (EWI); Eagle Broadband Services, Inc.; 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 $1,653,000 and $3,421,000 invested in interest bearing
accounts and marketable securities (Note 9) at February 28, 2003, and
August 31, 2002, 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:
February 28, August 31,
2003 2002
----------- -----------
Raw Materials $ 4,371 $ 4,515
Work in Process 1,951 1,262
Finished Goods 201 282
-------- ------
$ 6,523 $ 6,059
======== ======
7
E) Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the Eagle Broadband, Inc.; Eagle Broadband Services, 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. Manufacturing of
the Eagle Wireless product line of wireless infrastructure products was
licensed to a third party company during this reporting period.
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.
Eagle Broadband 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.
Eagle Broadband Services, Inc.
Eagle Broadband Services, Inc. assumed the operations of ClearWorks
Communications, Inc. as of September 1, 2002, and 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.
8
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) Research and Development Costs
For the three months ended February 28, 2003, and 2002, 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 and Orb'Phone Exchange. Research and development costs of $27,000
and $92,000 were expensed for the three months ended February 28, 2003 and
2002, respectively. Research and development costs of $59,000 and $264,000
were expensed for the six months ended February 28, 2003 and 2002,
respectively.
No research and development services were performed for outside parties for
the three and six months ended February 28, 2003 and 2002.
9
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:
February 28, August 31,
2003 2002
----------- -----------
Weighted Average Number of Common
Shares Outstanding Including
Primary Common Stock Equivalents 76,692 64,004
Fully Dilutive Common Stock Equivalents 76,846 64,158
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.
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
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 six months ended February 28, 2003, the Company
has expensed $56,000 where $0 in costs has been deferred.
For the six months ended, February 28, 2002, the Company expensed $263,000
whereas $0 in costs has been deferred.
10
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 six months ended February 28,
2003 and 2002, the Company recorded a comprehensive loss of $941,000 and a
loss of $274,000, respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
three and six months ended February 28, 2003 to facilitate comparison to
the three and six months ended February 28, 2002.
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support cost for the six months ending February 28, 2003 and 2002,
are as follows, in thousands:
2003 2002
-----------------------
Advertising/Conventions $ --- $ ---
Auto Related 38 76
Bad Debt --- 138
Contract Labor 104 192
Delivery/Postage 66 44
Fees 190 104
Interest 259 467
Office 114 75
Other 70 166
Professional 198 326
Rent 472 729
Repairs and Maintenance 26 50
Travel 153 ---
Taxes 65 51
Telephone & Utilities 415 392
-----------------------
Total $ 2,170 $ 2,810
=======================
11
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 February 28, 2003, 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 November 30, 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.
Amortization expense related to goodwill and intangibles was approximately
$0 and $1,999,774 for the six months ended February 28, 2003, and 2002,
respectively.
NOTE 2 - Accounts Receivable:
Accounts receivable consist of the following, in thousands:
February 28, August 31,
2003 2002
----------- -----------
Accounts Receivable $ 4,409 $ 5,270
Allowance for Doubtful Accounts (242) (242)
----------- -----------
Net Accounts Receivable $ 4,167 $ 5,028
=========== ===========
12
NOTE 3 - Property, Plant & Equipment and Intangible Assets:
Components of property, plant & equipment are as follows, in thousands:
February 28, August 31,
2003 2002
----------- -----------
Automobile $ 392 $ 392
Head-End Facility and Fiber Infrastructure 29,620 27,164
Furniture & Fixtures 636 634
Leasehold Improvements 217 216
Office Equipment 1,025 1,015
Property, Manufacturing & Equipment 5,441 5,088
----------- -----------
Total Property, Plant & Equipment $ 37,331 $ 34,509
Less: Accumulated Depreciation (4,227) (3,661)
----------- -----------
Net Property, Plant & Equipment $ 33,104 $ 30,848
=========== ===========
Components of intangible assets are as follows, in thousands:
February 28, August 31,
2003 2002
----------- ------------
Goodwill $ 7,916 $ 7,916
Contract Rights 74,513 74,513
Licenses, Permits, Deferred Costs & Other Assets 6,973 6,118
----------- ------------
Total Intangible Assets $ 89,402 $ 88,547
Less: Accumulated Amortization (4,278) (4,278)
----------- ------------
Net Intangible Assets $ 85,124 $ 84,269
=========== ============
NOTE 4 - Business Combinations:
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 February 28, 2003, the
Company has an 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.
13
NOTE 5 - Notes Payable:
The following table lists the Company's note obligations as of February 28,
2003, and August 31, 2002, in thousands:
Annual
Interest February 28, August 31,
Rate Due Date 2003 2002
-----------------------------------------------------------
Vehicles Various Various $ 14 $ 27
Convertible Debentures 2%-6% Demand 4,269 4,000
Other Various Various 1,047 828
--------- ---------
Total notes payable $ 5,330 $ 4,855
Less current portion 4,134 3,653
--------- ---------
Total long-term debt $ 1,196 $ 1,202
========= =========
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 February 28, 2003,
and August 31, 2002, for each of the next five years and in the aggregate
are (in thousands):
February 28, 2003 August 31, 2002
----------------- -----------------
Total minimum lease payments $ 88 $ 128
Less : Amount representing interest 7 10
----------------- -----------------
Present value of net minimum lease payments 81 118
Less: Current maturity capital lease obligation 11 48
----------------- -----------------
Long-term capital lease obligation 70 70
================= =================
Future obligations under the lease terms are as follows (in thousands):
Period Ended Amount
-----------------
2004 41
2005 29
-----------------
Total $ 70
=================
NOTE 7 - Line of Credit:
During the Company's first fiscal quarter ended November 30, 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. As of February
28, 2003, APC reduced its accounts receivable by $167,132 to reflect the
gross sale of $196,626 to SWBT less $29,494 of reserves held by SWBT
against such purchases.
14
The Company, through its subsidiary United Computing Group, Inc. (UCG),
entered into a credit facility in July 2002 with Southwest Bank of Texas
(SWBT) to provide working capital, repay the prior 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 February
28, 2003, UCG reduced its accounts receivable by $115,517 to reflect the
gross sale of $132,844 to SWBT less $17,328 of reserves held by SWBT
against such purchases.
NOTE 8 - Convertible Debentures:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). At the
Company's option, the entire principal amount and all accrued interest
shall be either (a) paid to CCP on the third year anniversary from the date
of the debenture or (b) converted. The three-year debenture bears interest
at 5% and is repayable in stock or cash. The method of repayment is
determined by the Company. The significant conversion terms are that CCP is
entitled, at its option, to convert, and sell on the same day, at any time
and from time to time subject to the terms of the agreement, until payment
in full of the debenture, all or any part of the principal amount of the
debenture, plus accrued interest, into shares of the Company's common stock
at the price per share equal to either (a) $1.00 or (b) 90% of the average
of the four lowest closing trade prices of the common stock, for the five
trading days immediately preceding the conversion date. CCP shall not be
entitled to convert the debenture for a period of 180 days from the date of
the debenture. After 180 days, if the conversion price is below $1.00, CCP
shall be entitled, at its option, to convert, and sell on the same day up
to $50,000 every five business days. After 12 months from the date of the
debenture, if the conversion price is below $1.00, CCP shall be entitled,
at its option, to convert and sell on the same day up to $75,000 every five
business days. Notwithstanding the foregoing, after 180 days from the date
of the debenture, CCP shall be entitled, at its option, to convert and sell
on the same day without restriction if the conversion price is above $1.00.
At February 28, 2003, the Company had received $2,225,000 for the issuance
of the debenture. Additionally, the Company recorded a $91,000 charge to
interest expense and paid in capital the value assigned to the conversion
feature through February 28, 2003.
At August 31, 2002, $2,000,000 in principal plus $600,000 of accrued
interest and fees was outstanding to Candlelight Investors, LLC. In
November 2002, the Company issued 3,000,000 shares of stock to settle this
debt.
During 2001, the Company acquired 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 acquisition, 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.
15
As a result of the acquisition, Eagle the parent of Link Two, has
guaranteed the Link Two notes issued to Tail Wind and allowed Tail Wind to
convert the above mentioned debt into Eagle common stock at a rate of $1.79
per share. The agreement also permits Tail Wind to convert the Link Two
warrant into Eagle warrants to purchase shares of our common stock. Tail
Wind would have a warrant to purchase 1,396,648 shares of our common stock
at an exercise price of $1.83 per share, exercisable between August 2002
and September 2006. If Link Two requires Tail Wind to purchase the Second
and Third Note, the additional warrants it issues will also be convertible
into shares of our common stock. The number of shares that the additional
warrants may be converted into will depend on the price of our common
stock, and cannot be determined at this time. However, the exercise price
of the additional warrants may not be less than $1.83 per share.
The Company has agreed to pre-pay the notes at the rate of a minimum of
$250,000 per month and a maximum of $500,000 per month. The pre-payment may
be in cash or in shares of our common stock at the rate of 90% of the
average of the two lowest market prices of our common stock for the
applicable month. However, the Company may not issue shares of our common
stock for pre-payment purposes if the total number of shares exceeds the
aggregate trading volume of our common stock for the twelve trading days
preceding the date of payment, in which case we must pay the difference in
cash. As the number of shares to be issued for pre-payment purposes is
dependent on the price and trading volume of our common stock, there is no
way to determine the number of shares that may be issued at this time.
Eagle has filed a registration statement for the potential conversion
shares for the note and warrants exercise. 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.
16
NOTE 9 - Marketable Securities:
As discussed in Note 1, the Company adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and SFAS
No. 130, "Accounting for Other Comprehensive Income." At August 31, 2001,
all of the Company's marketable equity securities are classified as
available-for-sale; they were acquired with the intent to dispose of them
within the next year.
At February 28, 2003, the securities had an original basis of $5,576
determined by multiplying the number of shares acquired by the fair market
value of those shares. At the February 28, 2003 balance sheet date, the
fair market value of these securities was $6,128; 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 Current
Basis FMV
----------- -----------
FHLMC 42 4,180 4,408
FNMA 17 1,396 1,720
----------- -----------
Totals $ 5,576 $ 6,128
=========== ===========
Other marketable securities, Urbana and Burst.com, with an adjusted cost
basis of $750,000 and fair market value of $317,500 are included in cash
and cash equivalents category and are held for resale.
NOTE 10 - Income Taxes:
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Implementation of SFAS 109 did not have a material cumulative
effect on prior periods, nor did it result in a change to the current
year's provision.
A) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
February 28, August 31,
2003 2002
---- ----
% %
U.S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference (34) (34)
---- ----
Effective U.S. Tax Rate 0 0
Foreign Tax Valuation 0 0
- -
Effective Tax Rate 0 0
= ==
17
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)
February 28, August 31,
2003 2002
--------- ---------
Computed expected tax benefit $ (333) $ (12,508)
Increase in valuation allowance 333 12,508
--------- ---------
$ --- $ ---
========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
February 28, 2003, and August 31, 2002, are presented below, in thousands,
and include the balances of the acquired company ClearWorks.Net.
February 28, August 31,
2003 2002
--------- ---------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ --- $ ---
Net operating loss carry-forwards 24,663 24,047
Less valuation allowance (24,663) (24,047)
--------- ---------
Net deferred tax assets --- ---
Deferred tax liabilities:
Differences in depreciation --- ---
--------- ---------
Net deferred tax liabilities $ --- $ ---
========= =========
The valuation allowance for deferred tax assets of February 28, 2003, and
August 31, 2002, was $24,663,000 and $24,047,000, respectively. At February
28, 2003, the Company has net operating loss carry-forwards of $36,403,000,
which are available to offset future federal taxable income, if any, with
expirations from 2020 to 2021.
NOTE 11 - Issuance of Common Stock:
For the six months ended February 28, 2003, the Company issued shares of
common stock. The following table summarizes the shares of common stock
issued, in thousands.
Shares Outstanding August 31, 2002 73,051
---------
Shares issued for Retirement of Debt and Liabilities 8,062
Shares issued for Services, Compensation, Property and 4,116
Other Assets
---------
Shares Outstanding February 28, 2003 85,229
=========
18
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 February 28,
2003, options to purchase 416,474 are outstanding and 983,526 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
February 28, 2003:
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
were registered for resale on August 9, 2002, under the Securities Act
of 1933. As of February 28, 2003, none of these options have been
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 February 28, 2003, 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. As of February 28, 2003, 6,234 warrants have
been exercised resulting cash proceeds of $10,910 and the balance of
warrants expired unexercised.
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 November 30, 2002,
under the Securities Act of 1933. As of February 28, 2003, 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 November 30, 2002, under the Securities
Act of 1933. As of February 28, 2003, 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 February 28, 2003, none of these warrants have been
exercised.
19
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 February 28, 2003, 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 February 28, 2003, all of these warrants
have expired unexercised.
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 February 28, 2003, none of these
warrants have been registered, issued or exercised.
160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of February 28, 2003, none of these
warrants have been registered, issued or exercised.
232,000 stock purchase warrants issued to Shannon D. McLeroy expiring
April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of February 28, 2003, 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 February 28, 2003, 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 February 28, 2003, none of these warrants have been
registered, issued or exercised and have expired unexercised.
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 February 28, 2003, none
of these warrants have been exercised.
20
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 February
28, 2003, 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 February 28, 2003, 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 February 28, 2003, 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 February 28, 2003, 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 February 28, 2003, 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 February 28, 2003, 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 February 28, 2003, 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 February 28, 2003, none of these
warrants have been registered, issued or exercised.
21
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 February 28, 2003, 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 February 28, 2003, all
of these warrants have expired unexercised.
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 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
February 28, 2003, the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933. As of
February 28, 2003, 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 February 28,
2003, none of these warrants have been exercised.
350,000 stock purchase warrants issued to Sands Brothers & Co., LTD.
expiring July 13, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $14.00 per share. These warrants, however, are
not exercisable until and unless the closing price of the Common Stock
at any time during the exercise period reaches $14.00 per share. As of
November 30, 2002, the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933. As of
February 28, 2003, 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 February 28,
2003, 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
February 28, 2003, the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933. . As of
February 28, 2003, none of these warrants have been exercised.
22
The warrants outstanding are segregated into four categories (exercisable,
non-exercisable, non-registered, and expired).
Warrants Issued Warrants Exercisable Warrants
Class of February 28, February 28, Non- Non-
Warrants 2003 2002 2003 2002 Exercisable Registered
- -------- -------------------- ------------------------ --------------------------
1.04 - 50,000 50,000 - 50,000 50,000
1.50 - 600,000 - - - -
1.55 - 50,000 - 25,000 - -
1.75 - 20,000 - 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 - -
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 - 328,000 112,000 328,000 - 328,000
4.50 - 25,000 25,000 - - -
7.00 - 100,000 100,000 - - 100,000
7.49 - 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
12.00 - 250,000 250,000 250,000 - -
14.00 - 350,000 350,000 - - 350,000
18.00 - 250,000 250,000 250,000 - -
25.00 - 150,000 150,000 250,000 - 150,000
2.00 - Expired * - - - -
ESOP - * 416,474 * 355,170 322,125 - -
ESOP - - - - - -
------------ ------------- ---------- ----------- ----------- -----------
- 4,814,141 3,816,837 3,163,558 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 months ended February 28,
2003 and 2002, respectively.
23
NOTE 13 - Capitalization Activities:
The Company is currently offering up to $10,000,000 in "Units", each Unit
consisting of a $25,000, 12% five-year bond ("Bonds") to a limited number
of Accredited Investors. The Bonds are due and payable upon maturity at the
end of the five-year period. Interest on the Bonds is payable at the rate
of 12% per annum, and is payable semiannually. The Bondholder may require
Eagle to convert the Bond (including any unpaid interest) into shares of
the Company's common stock at any time during the first year but not
thereafter. Eagle may redeem the Bonds at any time after the first year but
not before. The issuance of the Bonds, or any share of the common stock to
be issued in payment of the Bonds, has not been registered or approved by
the Securities and Exchange Commission ("SEC") or any state securities
commission nor has the SEC or any state securities commission passed on the
accuracy of the Confidential Private Placement Memorandum under which these
Bonds are being offered. Furthermore, the Bonds may not be assigned,
transferred, sold, or otherwise hypothecated. Any representation to the
contrary is a criminal offense. The Confidential Private Placement
Memorandum does not constitute any offer in any jurisdiction in which an
offer is not authorized. The Bonds, and any share of common stock to be
issued in payment of the Bonds, are "restricted securities" as that term is
defined in Rule 144 of the Securities Act of 1933, and may not be sold or
otherwise disposed of except in transactions that are subsequently
registered under applicable federal and state securities laws, or in
transactions exempt from such registration Eagle received $43,750 in
proceeds from this private placement of securities in the quarter ended
February 28, 2003.
NOTE 14 - Risk Factors:
For the six months ended February 28, 2003 and 2002, 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 industry. Approximately, seventy-six
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 twenty-four percent remainder have been created
relatively evenly over the rest of the nation during the six months ended
February 28, 2003. Whereas approximately eighty 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 twenty percent remainder has been created relatively evenly
over the rest of the nation for the three months ended February 28, 2002.
Through the normal course of business, the Company generally does not
require its customers to post any collateral.
Although the Company had previously concentrated its efforts in the
wireless infrastructure industry and has since expanded into the fiber,
cable and broadband markets for the six months ended February 28, 2003 and
2002, it is management's belief that the Company's diversification into
other products and services reduces its credit and economic risk exposures
in the technology and manufacturing sectors.
NOTE 15 - Foreign Operations:
Although the Company is based in the United States, its product is sold on
the international market. Presently, international sales total
approximately 0% and 0% at February 28, 2003 and 2002, respectively.
24
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 six months ending February 28, 2003 and 2002, rental expenses of
approximately $472,000 and $729,000 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.
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.
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.
Atlantic Pacific also leased office space in Houston, Texas, with W L and
Deborah Miller in the amount of $4,500 per month. This non-cancelable lease
expired September 2002 and maintained a five-year renewal option. The
renewal option was waived in September 2002.
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.
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.
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.
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.
25
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.
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.
Future obligations under the non-cancelable lease terms are:
Period Ending Amount
August 31,
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 scheduled for
trial on September 16, 2003. 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.
26
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.
This agreement expired July 13, 2002.
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 six months ended February 28, 2003
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Loss $(1,810)
Basic EPS:
Income available to
common stockholders $(1,810) 76,692 $(0.02)
Effect of Dilutive Securities
Warrants 154
-------- ---------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(1,810) 76,846 $(0.02)
======== ========== ======
For the three months ended February 28, 2002
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $ (5,880)
Basic EPS:
Income available to
common stockholders (5,880) 60,707 $(0.10)
Effect of Dilutive Securities
Warrants 154
-------- ----------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $ (5,880) 60,707 $(0.10)
======== ====== ======
For the six months ended February 28, 2003 and 2002, anti-dilutive
securities existed (see Note 12).
27
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 February 28, 2003 and 2002, 416,474 and 416,474 warrants
have been issued to various employees. Of these outstanding warrants, 0 and
0 were exercised for the months ended November 30, 2002 and 2001,
respectively. Additionally, 10,350 warrants have expired as of February 28,
2003.
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:
2003 2002
-------- --------
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. The Company temporarily suspended all activity associated
with its 401(k) plan in February 2003.
NOTE 20 - Major Customer:
The Company had gross revenues of $7,681,000and $16,141,000 for the six
months ended February 28, 2003 and 2002, respectively. The following
parties individually represent a greater than ten percent of these
revenues.
February 28, 2003 February 28, 2002
Customer Amount Percentage Amount Percentage
-------- ------ ---------- ------ ----------
Customer A $ 0.00% $ 0.00%
Customer B $ 0.00% $ 0.00%
Customer C $ 0.00% $ 0.00%
During the six months ended February 28, 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.
28
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. As of September 1, 2002,
Atlantic Pacific Communications, Inc. has assumed the operations of
ClearWorks Home Systems, Inc. and for purposes of segment reporting
previously reported segment HSI has been combined with APC for comparative
purposes.
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.
Eagle Broadband Services, Inc.
Eagle Broadband Services, Inc., initiated its delivery of Bundled Digital
Services to business and residential customers as of September 1, 2002.
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., (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. As of September 1, 2002,
Atlantic Pacific Communications, Inc. has assumed the operations of
ClearWorks Home Systems, Inc. and for purposes of segment reporting
previously reported segment HSI has been combined with APC for comparative
purposes.
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.
29
For the six month period ending February 28, 2003
(in thousands) Eagle APC EBS UCG Link II .Net Contact DSS Elim. Consol.
---------- --------- -------- --------- --------- -------- --------- -------- ---------- ----------
Revenue 1,394 2,767 1,084 1,734 --- --- 225 477 --- 7,681
Segment Profit/(Loss) (1,620) (108) (332) (637) (106) --- (92) 264 --- (2,751)
Total Assets 166,837 9,587 33,870 1,010 32,091 54,369 480 829 (167,620) 131,453
Capital Expenditures --- 11 2,810 --- --- --- --- 1 --- 2,822
Dep. And Amort. 78 112 289 62 --- --- 53 19 --- 618
For the six month period ending February 28, 2002
(in thousands) Eagle APC EBS UCG Link II .Net Contact DSS Elim. Consol.
---------- --------- -------- --------- --------- -------- --------- -------- ---------- ----------
Revenue 254 3,940 987 10,758 24 --- 71 107 --- 16,141
Segment Profit/(Loss) (4,044) (168) (310) (414) (1,204) (105) 46 45 --- (6,154)
Total Assets 167,222 10,257 26,537 3,161 42,920 64,941 659 412 (152,561) 163,548
Capital Expenditures 147 41 8,654 26 --- --- --- --- --- 8,868
Dep. And Amort. 1,651 98 222 8 615 45 --- --- --- 2,639
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
segments based on income before net interest expense, income taxes,
depreciation and amortization expense, accounting changes and non-recurring
items.
Note 22 - Subsequent Events.
None.
Item 2. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q. Information included herein relating to projected growth and future
results and events constitutes forward-looking statements. Actual results
in future periods may differ materially from the forward-looking statements
due to a number of risks and uncertainties, including but not limited to
fluctuations in the construction, technology, communication and industrial
sectors; the success of the Company's restructuring and cost reduction
plans; the success of the Company's competitive pricing; the Company's
relationship with its suppliers; relations with the Company's employees;
the Company's ability to manage its operating costs; the continued
availability of financing; governmental regulations; risks associated with
regional, national, and world economies; and consummation of the merger and
asset purchase transactions. Any forward-looking statements should be
considered in light of these factors.
Overview
For the quarter and six month period ended February 28, 2003, Eagle's
business operations reflected Eagle's business objective of moving toward
profitability through further expansion into the broadband products and
services that generate recurring revenues while migration away from the
lower gross margin product fulfillment line of business. In addition,
during the first six months of fiscal 2003, the Company conducted extensive
cost reduction activities. We believe that the effects of these cost
reduction measures will significantly reduce our fiscal 2003 ongoing
expenses as evidenced by a $4,632,000 or 46% decline in operating expenses
in the first six months ended February 28, 2003, as compared to the same
six month period in 2002. The Company's consolidated operations generated
revenues of $3,063,000 and $7,681,000 while achieving corresponding gross
profits of $1,719,000 or 56% and $3,711,000 or 48%; respectively for the
quarter and six-month period ended February 28, 2003. The decline in
revenues in the second fiscal quarter and six-month period ending February
28,2003 is primarily attributable to the discontinuance of direct sales of
low-margin computer products in the Company's subsidiary United Computing
Group, Inc. consistent with their previously announced strategy of
concentrating UCG's going-forward efforts as a Service Provider 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, and Professional and
Managed Services versus its historical emphasis on direct product
fulfillment.
30
During the quarter ended February 28, 2003, 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
third 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 negotiating and preparing to enter 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.
During the six month period ended February 28, 2003, we began shipments of
our set-top box product line for installation in hospitality properties
under our ongoing relationship with General Dynamics. We expect these
shipments to continue throughout the remaining quarters of 2003.
Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the Eagle Broadband, Inc.; BroadbandMagic; Atlantic Pacific
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. Manufacturing of
the Eagle Wireless product line of wireless infrastructure products was
licensed to a third part company during this reporting period.
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.
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.
31
Eagle Broadband Services, Inc.
Eagle Broadband Services, Inc. assumed the operations of ClearWorks
Communications, Inc. as of September 1, 2002, and 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.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivable deemed uncollectable are charged against
the allowance for doubtful accounts.
32
Receivables
For the six months ended February 28, 2003, Eagle accounts receivables
decreased to $4,167,000 from $5,028,000 at August 31, 2002. The majority of
this decrease is due to the corresponding revenue decrease of lower margin
product fulfillment sales and the shift to more "recurring revenue" type of
business.
Marketable Securities
Eagle has adopted the provisions of SFA No. 115, as amended by SFAS No.
130, which provides that all marketable equity securities be classified as
available-for-sale or trading securities, and be carried on the balance
sheet at fair market value. Any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income," net of tax.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At February 28, 2003,
Eagle's inventory total of $6,523,000 as compared to $6,059,000 at August
31, 2002. The additional inventory is primarily attributable to the
purchase of components for increased demand of the Company's digital
set-top boxes.
Results Of Operations
For the Three Months and Six Months Ended February 28, 2003 and 2002
Net Sales. For the three months ended February 28, 2003, net sales
decreased to $3,063,000 from $7,380,000 as compared to the three months
ended February 28, 2002. For the six months ended February 28, 2003, net
sales decreased to $7,681,000 from $16,141,000 as compared to the six
months ended February 28, 2002. The corresponding declines in revenues for
these periods is primarily attributable to a decrease in sales of computer
products in the Company's subsidiary United Computing Group, Inc.
consistent with their previously announced strategy of concentrating on
service offerings, a decrease in sales of structured wiring in the
Company's Atlantic Pacific Communications subsidiary with partial offset by
continued increase in the Company's broadband services.
Cost Of Goods Sold. For the three months ended February 28, 2003, cost of
goods sold decreased to $1,344,000 from $5,065,000 for the comparable three
months ended February 28, 2002. For the six months ended February 28, 2003,
cost of goods sold decreased to $3,970,000 from $12,126,000 for the six
months ended February 28, 2002. These declines were primarily associated
with the decrease in lower gross margin product fulfillment sales. As a
result of the Company's shift in strategy away from such lower margin
product fulfillment, the Company's gross profit percentage increased to 56%
and 48%, respectively for the three and six months ended February 28, 2003
from 31% and 25%, respectively during the three and six months ended
February 28, 2002.
Operating Expenses. For the three months ended February 28, 2003, operating
expenses decreased to $2,711,000 from $4,887,000 as compared to the three
months ended February 28, 2002. For the six months ended February 28, 2003,
operating expenses decreased to $5,538,000 from $10,170,000 as compared to
the six months ended February 28, 2002. The primary portions of the
increase are discussed below:
33
An $837,000 and $1,486,000 decrease in salaries, as a result of the
personnel reductions completed as a component of the extensive cost
reduction activities for the three and six months ended February 28, 2003
and 2002, respectively.
An $89,000 and $207,000 decrease in advertising and promotion, due
primarily to decreases in product introductions for the three and six
months ended February 28, 2003 and 2002, respectively.
A $1,000,000 and $2,094,000 decrease in depreciation and amortization for
the three and six months ended February 28, 2003 and 2002, respectively,
due to the non-cash impairment charge against FCC licenses and equipment
taken in the fourth fiscal quarter of fiscal 2002.
A $185,000 and $640,000 decrease in other support costs for the three and
six months ended February 28, 2003 and 2002, respectively, due to decreases
in contract labor, interest, professional fees, rents and bad debt costs.
A $65,000 and $205,000 decrease in research and development expenses for
the three and six months ended February 28, 2003 and 2002, respectively,
due to the timing of previously released products and projects with
capitalization activities.
Net Earnings. For the three and six months ended February 28, 2003, Eagle's
net loss was $979,000 and $1,810,000, respectively, compared to a net loss
of $2,509,000 and $5,880,000 for the three and six months ended February
28,2002.
Changes In Cash Flow. Eagle's operating activities used net cash of
$1,201,000 in the six months ended February 28, 2003, compared to $89,000
of cash provided in the six months ended February 28, 2002. The increase in
net cash used by operating activities was primarily attributable to a
significant decline in net loss, an increase in inventory and accounts
payable, offset by reductions in account receivable, and depreciation and
amortization. Eagle's investing activities used net cash of $3,005,000 in
the six months ended February 28, 2003, compared to $11,359,000 in the six
months ended February 28, 2002. The decrease was due primarily attributable
to decreases of purchase of equipment for building out the bundled digital
services infrastructure. Eagle's financing activities provided cash of
$2,438,000, in the six months ended February 28, 2003, compared to cash
used of $1,382,000 in the six months ended February 28, 2002. The increase
in cash flows from financing activities at February 28, 2003, is
attributable to cash raised from convertible debenture funding agreements
with an investment bank for general working capital purposes and proceeds
from borrowings against short-term notes as compared to a pay off of the
Atlantic Pacific's line of credit, pay down on United Computing Group's
line of credit and continued repurchase of shares in the open market for
retirement in the quarter ended February 28, 2002.
Liquidity And Capital Resources.
Current assets for the period ended February 28, 2003, totaled $13,225,000
(includes cash and cash equivalents of $1,653,000) as compared to
$14,866,000 (including cash and cash equivalents of $3,421,000) reported
for the year ended August 31, 2002. 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 and is fully repayable in stock at Eagle's option. Eagle received
$1,500,000 in cash during the first quarter ended November 30, 2002 and
$725,000 in the second quarter ended February 28, 2003, against this
funding arrangement. Additionally, Eagle received $300,000 in proceeds
against a short-term note in February 2003. Lastly, Eagle received $43,750
in proceeds from a private placement of securities structured as a Q-Series
Five-year Bond discussed in detail in Note 13 herein. Eagle engaged an
investment-banking firm to provide a $20,000,000 equity line of credit.
This line of credit can be activated upon Eagle filing a registration
statement that complies with the terms and conditions of the agreement.
Additionally, Eagle has a commitment to fund up to $2,000,000 for its
operations through a corporation that provides long-term funding of
security contracts. The funding is subject to verification and audit of
Eagle's 6,000 security-monitoring contracts.
34
Working capital for the period ended February 28, 2003, totaled $2,359,000
as compared to $3,535,000 reported for the year ended August 31,2003. Eagle
believes that its working capital of $2,359,000 as of February 28, 2003,
plus additional funds anticipated from commitments in various stages of
negotiations as of the date of this report 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 February 28, 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.
The Company is currently in final negotiations with three different sources
of long term financing that could provide a minimum of $9,000,000 and a
maximum of $20,000,000 if successful. If the company is not successful in
raising additional capital, it may have to curtail or suspend or sell
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
Item 3. 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 significant cash
and liquidity risks associated with its common stock investments
aggregating $317,500 in market value as of February 28, 2003.
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 that represented
greater than 10% of its revenues during the first fiscal quarter of 2003
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.
35
Item 4. Controls and Procedures
Based on the Company's most recent evaluation, which was completed within
90 days of the filing of the Company's Form 10-K, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as amended) are
effective. There have been no significant changes in internal controls or
in other factors that could significantly affect these controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Part 2. - Other Information
Item 1 - Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. The Company's management does not expect that
the results in any of these legal proceedings will have a material adverse
effect on the Company's financial condition or results of operations (Note
16).
Item 2 - Recent Sales of Unregistered Securities or Changes in Securities and
Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit
99.1 CEO Certification
99.2 CFO Certification
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EAGLE WIRELESS INTERNATIONAL, INC.
Date: April 18, 2003 By: /s/ H. Dean Cubley
--------------------------
Dr. H. Dean Cubley
Chief Executive Officer
/s/ Richard R. Royall
--------------------------
Richard R. Royall
Chief Financial Officer
36
CERTIFICATIONS
I, H. Dean Cubley, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Broadband, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 the annual
report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: April 18, 2003
/S/_______________________
H. Dean Cubley,
Chief Executive Officer
37
CERTIFICATIONS
I, Richard R. Royall, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Broadband, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 the annual
report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: April 18, 2003
/S/_______________________
Richard R. Royall,
Chief Financial Officer
38