U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________
Amendment No. 1 to
FORM 10-Q/A
___________
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 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)
_____________
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ( ) No (X)
As of March 18,, 2004, there were 191,238,584 shares of common stock
outstanding.
EAGLE BROADBAND, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended November 30, 2003
Table of Contents
Part 1 - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at November 30, 2003,
and August 31, 2003 3
Consolidated Statements of Operations for the Three
Months Ended November 30, 2003 and 2002 4
Consolidated Statements of Changes In Shareholders'
Equity for the Three Months Ended November 30, 2003,
and Twelve Months Ended August 31, 2003 5
Consolidated Statements of Cash Flows for the Three
Months Ended November 30, 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 30
Item 4. Controls and Procedures 31
Part 2 - Other Information
Item 1. Legal Proceedings 31
Item 2. Recent Sales of Unregistered Securities or Changes
in Securities and Use of Proceeds. 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
November 30, August 31,
2003 2003
------------ -----------
(Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 5,673 $ 824
Securities Held for Resale 1,877 1,714
Accounts Receivable, net 2,402 1,704
Inventories 3,855 3,199
Prepaid Expenses 651 668
------------ -----------
Total Current Assets 14,458 8,109
Property and Equipment:
Operating Equipment 36,575 36,422
Less: Accumulated Depreciation (6,302) (5,689)
------------ -----------
Total Property and Equipment 30,273 30,733
Other Assets:
Deferred Costs 334 334
Goodwill 76,273 76,273
Other Intangible Assets 5,330 5,330
Other Assets 239 227
------------ -----------
Total Other Assets 82,176 82,164
------------ -----------
Total Assets $ 126,907 $ 121,006
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 5,740 $ 5,461
Accrued Expenses 4,432 7,790
Notes Payable 7,187 5,779
Deferred Revenue 441 ---
------------ -----------
Total Current Liabilities 17,800 19,030
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 November 30, 2003, and
August 31, 2003, 185,058,000 and 147,447,000,
respectively 185 147
Paid in Capital 192,262 177,017
Retained Earnings (83,340) (75,188)
------------ -----------
Total Shareholders' Equity 109,107 101,976
Total Liabilities and Shareholders' Equity $ 126,907 $ 121,006
See accompanying notes to consolidated financial statements.
3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the Three Months ended November 30,
(Unaudited)
---------------------------------------
2003 2002
-------- -------
Net Sales:
Structured wiring $392 $1,560
Broadband services 1,564 674
Products 361 2,044
Other 80 340
-------- -------
Total Sales 2,397 4,618
-------- -------
Costs of Goods Sold:
Direct Labor and Related Costs 462 346
Products and Integration Service 137 1,537
Structured Wiring Labor and Materials 205 229
Broadband Services Costs 190 276
Depreciation and Amortization 285 114
Other Manufacturing Costs 16 124
-------- -------
Total Costs of Goods Sold 1,295 2,626
-------- -------
Gross Profit 1,102 1,992
-------- -------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 959 1,508
Advertising and Promotion 18 37
Depreciation and Amortization 319 153
Other Support Costs 1,424 934
Research and Development 119 32
-------- -------
Total Operating Expenses 2,839 2,664
-------- -------
Loss from Operations (1,737) (672)
Other Income/(Expenses)
Interest income, 4 4
Interest (expense) (7,080) (163)
Gain on Sale of Marketable Securities 352 ---
----------------
Total Other Income (Expense) (6,724) (159)
----------------
Net Loss (8,461) (831)
----------------
Other Comprehensive Loss:
Unrealized Holding Gain 309 13
-------- -------
Other Comprehensive Loss $(8,152) $(818)
-------- -------
-------- -------
Net Loss per Common Share:
Basic $(0.05) $(0.01)
Diluted $(0.05) $(0.01)
Comprehensive Loss $(0.05) $(0.01)
See accompanying notes to consolidated financial statements.
4
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Additional Total
Common Stock Preferred Paid In Retained Shareholders'
Shares Value Stock Capital Earnings Equity
------------------------------------------------------------------------
Total Shareholders' Equity
As of August 31, 2002 73,051 $73 --- $158,731 $(41,424) $117,380
========= ======== ========== ========== ============
Net Loss --- --- --- --- (33,693) (33,693)
New Stock Issued to
Shareholders
Services and Compensation 7,437 7 --- 1,813 --- 1,820
Property and Other Assets 14,938 15 --- 3,032 --- 3,047
Retirement of Debt and
Liabilities 50,816 51 --- 13,827 --- 13,878
Employee Stock Option Plan 1,647 2 --- 180 --- 182
Syndication Costs --- --- --- (368) --- (368)
Treasury Stock (442) (1) --- (198) --- (199)
Unrealized Holding Loss --- --- --- --- (71) (71)
Total Shareholders' Equity
As of August 31, 2003 147,447 147 --- 177,017 (75,188) 101,976
========= ======== ========== ========== ============
Net Loss for the Three Months
Ended November 30, 2003 --- --- --- --- (8,461) (8,461)
New Stock Issued to
Shareholders
Services and Compensation 3,354 4 --- 2,300 --- 2,304
Property and Other Assets --- ---
Retirement of Debt and
Liabilities 34,257 34 --- 6,033 --- 6,067
Interest for Beneficial
Conversion Value --- 6,912 --- 6,912
Syndication Costs --- ---
Treasury Stock --- ---
Unrealized Holding Loss --- 309 309
------------------------------------------------------------------------
Total Shareholders' Equity
As of November 30, 2003 $185,058 $185 --- $192,262 $(83,340) $109,107
========= ======== ========== ========== ============
See accompanying notes to consolidated financial statements.
For the Three Months ended November 30,
---------------------------------------
2003 2002
-------- -------
(Unaudited)
Cash Flows From Operating Activities
Net Loss $ (8,461) $ (831)
Adjustments To Reconcile Net Loss to Net Cash
Used By Operating Activities:
Interest for Beneficial Conversion Value 6,912 91
Depreciation and Amortization 614 266
Stock Issued for Services Rendered 2,304 54
(Increase)/Decrease in Accounts Receivable (390) 632
(Increase)/Decrease in Inventories (656) (428)
5
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Increase)/Decrease in Prepaid Expenses 17 (13)
Increase/(Decrease) in Accounts Payable 279 (345)
Increase/(Decrease) in Accrued Expenses (1,109) (146)
------ ------
Total Adjustment 7,971 111
------ ------
Net Cash Used by Operating Activities (490) (720)
Cash Flows From Investing Activities:
(Purchase)/Disposal of Property and Equipment (94) (1,471)
(Increase) / Decrease in Investments (163) 878
(Increase)/Decrease in Deferred Costs --- (12)
(Increase)/Decrease in Other Assets (12) ---
------ ------
Net Cash Used by Investing Activities (268) (605)
------ ------
Cash Flows From Financing Activities:
Increase/(Decrease) in Notes Payable & Long-Term Debt 5,608 1,579
Net Cash Provided By Financing Activities 5,608 1,579
------ ------
Net Increase/(Decrease) in Cash 5,012 254
------ ------
Cash At The Beginning of Period 824 1,273
------ ------
Cash At the End Of Period $ 5,673 $ 1,527
====== ======
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for
Interest $ 168 $ 72
Income Taxes --- ---
Supplemental non-cash investing activities (See Note 21) and changes in
shareholder's equity:
See accompanying notes to consolidated financial statements.
6
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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 supplier of broadband products and services, providing
telecommunications equipment with related software, broadband products, and
fiber and cable as used by service providers in the paging and other personal
communications markets. The Company designs, manufactures, markets and services
its products under the Eagle Broadband, Inc., and BroadbandMagic names. These
products include transmitters, receivers, controllers, software, convergent
set-top boxes, fiber, cable, and other equipment used in commercial and personal
communications systems and radio and telephone systems. Additionally, the
Company provides cable television, telephone, security, Internet connectivity,
and related services under a bundled digital services package, commonly known as
"BDS," through single source billing. Also provided is last mile cable and fiber
installation services as well as comprehensive IT products and services.
A) Consolidation
At November 30, 2003, the Company's subsidiaries were: Atlantic Pacific
Communications, Inc. (APC) - operated as Eagle Communication Services; Etoolz,
Inc. (ETI); Eagle Wireless International, Inc. (EWI); ClearWorks.net, Inc.
(.NET); ClearWorks Communications, Inc. (COMM) - operated as Eagle BDS Services;
ClearWorks Home Systems, Inc. (HSI) - operated as Eagle Residential Structured
Wiring; Contact Wireless, Inc. (CWI) - operating as Eagle Paging Services; DSS
Security, Inc., (DSS) - operated as Eagle Security Services; United Computing
Group, Inc. (UCG) - operated as Eagle Technology Services; and Link Two
Communications, Inc. (LINK II) - operated as Eagle Messaging Services. 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 $5,673,000 and $824,000 of cash and cash equivalents invested in
interest bearing accounts at November 30, 2003, and August 31, 2003,
respectively.
Other marketable securities include 1,095,000 shares of common stock of
Burst.com, 146,085,264 shares of Celerity Systems common stock and $350,000
Celerity Systems Bonds. These common stock and bond investments have an
aggregate cost basis of $1,075,000 and an aggregate fair market value of
$1,876,850 and are included in the cash and cash equivalents category and are
held for resale as of November 30, 2003.
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. . Eagle has acquired all of its
property and equipment with either cash or stock and has not capitalized any
interest expenses in its capital assets.
D) Inventories
Inventories are valued at the lower of cost or market. The cost is determined by
using the FIFO method. Inventories consist of the following items, in thousands:
November 30, August 31,
2003 2003
----------- -----------
7
Raw Materials $ 2,910 $ 1,826
Work in Process 810 1,237
Finished Goods 135 136
----------- -----------
$ 3,855 $ 3,199
=========== ===========
E) Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the Eagle Broadband, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle Wireless
International, Inc., Atlantic Pacific Communications, Inc.; Link Two
Communications, Inc.; United Computing Group, Inc.; Contact Wireless, Inc.; and
DSS Security, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple Deliverables," in
the fourth quarter of fiscal 2003. The impact of adopting EITF 00-21 had no
affect to Eagle's results of operations as Eagle did not have any contracts that
have multiple elements as of January 2004 or prior. When elements such as
hardware, software and consulting services are contained in a single
arrangement, or in related arrangements with the same customer, Eagle allocates
revenue to each element based on its relative fair value, provided that such
element meets the criteria for treatment as a separate unit of accounting. The
price charged when the element is sold separately generally determines fair
value. In the absence of fair value for a delivered element, Eagle allocates
revenue first to the fair value of the undelivered elements and allocates the
residual revenue to the delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a single unit of
accounting, resulting in a delay of revenue recognition for the delivered
elements until the undelivered elements are fulfilled. Eagle limits the amount
of revenue recognition for delivered elements to the amount that is not
contingent on the future delivery of products or services or subject to
customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed are deferred
until the conclusion of the period of the service for which the advance billing
relates. Deferred revenues are included on the balance sheet as a current
liability under the heading Accrued Expenses until the service is performed and
then recognized in the period in which the service is completed. Eagle's
deferred revenues primarily consist of billings in advance for cable, internet,
security and telephone services, which generally are between one and three
months of services. Eagle had deferred revenues of $442,000 and $156,000 as of
November 30, 2003 and 2002, respectively.
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. Eagle's Wireless International
Product revenues are reported under the category of Products on Eagle's
Consolidated Statements of Operations included as page F-4 of this report and
also under the category Eagle within Note 22 - Industry Segments.
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 Eagle recognizes the
revenue. Eagle's Broadband Multimedia and Internet Products revenues are
reported under the category of Products on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Eagle
within Note 22 - Industry Segments. Revenue from software consists of software
licensing. There is no post-contract customer support. Software revenue is
allocated to the license using vendor specific objective evidence of fair value
("VSOE") or, in the absence of VSOE, the residual method. The price charged when
the element is sold separately generally determines VSOE. In the absence of VSOE
of a delivered element, Eagle allocates revenue to the fair value of the
undelivered elements and the residual revenue to the delivered elements. Eagle
recognizes revenue allocated to software licenses at the inception of the
license.
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 Eagle'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. Eagle's
Broadband, Inc. revenues are reported under
8
the category of Products on Eagle's Consolidated Statements of Operations
included as page F-4 of this report and also under the category Eagle within
Note 22 - Industry Segments.
Eagle BDS Services - dba 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 Installation fees are recognized upon the completion and acceptance.
Eagle's BDS Services revenues are reported under the category of Broadband
Services on Eagle's Consolidated Statements of Operations included as page F-4
of this report and also under the category EBS/DSS within Note 22 - Industry
Segments.
Eagle Residential Structured Wiring - dba 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. Eagle's Residential Structured Wiring revenues are
reported under the category of Structured Wiring on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category APC/HSI within Note 22 - Industry Segments.
Eagle Communication Services - dba 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 services are completed.
Eagle's Communications Services revenues are reported under the category of
Structured Wiring on Eagle's Consolidated Statements of Operations included as
page F-4 of this report and also under the category APC/HSI within Note 22 -
Industry Segments.
Etoolz, Inc.
Etoolz, Inc., provides research and development support for all Eagle companies
and does not currently provide billable services to independent third parties.
Eagle Messaging Services - dba Link Two Communications, Inc.
Link Two Communications, Inc., provides customers with one- and two-way
messaging systems. The revenue from the sale of these products is recognized at
the time the services are provided. Eagle's Messaging Services revenues are
reported under the category of Other on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Eagle
within Note 22 - Industry Segments.
Eagle Paging Services - dba 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. Eagle's Paging Services revenues are
reported under the category of Other on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Other
within Note 22 - Industry Segments.
Eagle Security Services - dba 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. Installation fees are recognized upon
the completion and acceptance. Eagle's Security Services revenues are reported
under the category of Broadband Services on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category
EBS/DSS within Note 22 - Industry Segments.
Eagle Technology Services - dba 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 on completion..
Eagle's Technology Services product revenues are reported under the category of
"Products" while the services components are reported under the category "Other"
on Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category UCG within Note 22 - Industry Segments.
9
F) Research and Development Costs
For the three months ended November 30, 2003 and 2002, the Company
performed research and development activities for internal projects related
to its Orb'Phone Exchange, convergent set-top boxes as well as its
multi-media entertainment centers. Research and development costs of
$119,000 and $32,000 were expensed for the three months ended November 30,
2003 and 2002, respectively.
No research and development services were performed for outside parties for
the three months ended November 30, 2003 and 2002.
G) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires a
change from the deferral method to assets and liability method of
accounting for income taxes. Timing differences exist between book income
and tax income, which relate primarily to depreciation methods.
H) Net Earnings Per Common Share
Net earnings per common share are shown as both basic and diluted. Basic
earnings per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average number of
shares of common stock outstanding. Diluted earnings per common share are
computed by dividing net income less any preferred stock dividends (if
applicable) by the weighted average number of shares of common stock
outstanding plus any dilutive common stock equivalents. The components used
for the computations are shown as follows, in thousands:
November 30, August 31,
2003 2003
------------- ------------
Weighted Average Number of Common
Shares Outstanding Including
Primary Common Stock Equivalents 159,696 95,465
Fully Dilutive Common Stock Equivalents 159,696 95,465
I) Impairment of Long-Lived Assets and Goodwill
Our long-lived assets include predominantly goodwill. Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") requires that goodwill and intangible assets be tested
for impairment at the reporting unit level (operating segment or one level
below an operating segment) on an annual basis and between annual tests in
certain circumstances. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assigning assets
and liabilities to reporting units, assigning goodwill and intangible
assets to reporting units, and determining the fair value of each reporting
unit. Significant judgments required to estimate the fair value of
reporting units include estimating future cash flows, determining
appropriate discount rates and other assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair
value for each reporting unit.
The intangible assets primarily are the Company rights to deliver bundled
digital services such as, Internet, telephone, cable television and
security monitoring services to residential and business users. The Company
assessed the fair value of the intangible assets. There were a number of
significant and complex assumptions used in the calculation of the fair
value of the intangible assets. If any of these assumptions prove to be
incorrect, the Company could be required to record a material impairment to
its intangible assets. The assumptions include significant market
penetration in its current markets under contract and significant market
penetration in markets where they are currently negotiating contracts.
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
10
At August 31, 2002, Eagle determined that an impairment of Link Two paging
network equipment and nationwide licenses existed. Link Two Communications
competes with many established companies in the nationwide one and two-way
messaging services area. The paging industry has declined over the past year and
the major paging companies have undergone significant beneficial financial
restructurings. These companies are able to offer products and related services
at more favorable rates than Link Two. Because the paging industry and related
financial credit availability from banks for financing emerging nationwide
networks has been declining over the last year, Link Two has been unable to
obtain significant funding to expand and provide cost effective service to its
customers. Accordingly, Link Two has had to curtail its development on a
nationwide basis and restricted its operations to serve the Houston and Dallas,
Texas, markets. The equipment servicing the nationwide network has been inactive
and is being dismantled. The equipment servicing the nationwide network is
inactive and has been impaired as well as the value of the related FCC licenses.
At August 31, 2002, management estimated through recent sales of equipment and
industry pricing of FCC licenses that an impairment charge of $27,100,000 was
necessary to reflect the ongoing value of its assets and licenses.
At August 31, 2003, management determined that a $7,611,000 non-cash impairment
charge was necessary against realigned operations and the discontinued sale of
low margin commodity products, residential and commercial structured wiring
operations and the withdrawal from its Austin area BDS development based on the
lack of demand for BDS services resulting from a slower build out of the
development than originally projected in conjunction with local market
competition. Included in the impairment was the write down of goodwill
associated with the Comtel acquisition of $1,878,000.
As of November 30, 2003, no impairment existed.
J) Intangible Assets
Goodwill represents the excess of the cost of companies acquired over the fair
value of their net assets at the dates of acquisition and were 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
through June 30, 2001.
Other intangible assets consist of licenses and permits, which are being
amortized using the straight-line method over their estimated useful life of
twenty (20) years. Eagle's licenses include FCC licenses for designated
narrowband personal communications services, radio frequencies or spectrum to
service providers. Prior to the adoption of FAS 142, Eagle amortized these
licenses using the straight line method over twenty years. At August 31, 2002,
management estimated through recent sales of equipment and industry pricing of
FCC licenses that an impairment charge of $27,100,000 was necessary to reflect
the ongoing value of its assets and licenses; thereby leaving an unamortized
balance of licenses on its books of $1,267,365. Eagle does not maintain that
these licenses have an indefinite life, but rather has ceased amortizing the
remaining balance of $1,267,365 as management believes that this balance
represents the salvage value of such assets. Eagle, to date, has maintained all
operational requirements to keep its licenses current, and periodically assesses
both future operating requirements as well as the salvage of such assets.
Goodwill is carried at cost less accumulated amortization. Intangible assets
were amortized on a straight-line basis over the economic lives of the
respective assets, generally ten to twenty-five years. Prior to July 1, 2001,
goodwill was amortized over 20 to 25 years. The Company's adoption of SFAS 142
eliminated the requirement to amortize goodwill subsequent to the fiscal year
ending August 31, 2001. Under the provisions of SFAS 142, the Company is
required to periodically assess the carrying value of goodwill associated with
each of its distinct business units that comprise its business segments of the
Company to determine if impairment in value has occurred. Impairment tests
completed as of August 31, 2002 and August 31, 2001 concluded that the carrying
amount of goodwill for each acquired business unit did not exceed its net
realizable value based on the Company's estimate of expected future cash flows
to be generated by its business units, except as described above in Note 1, I.
The Company updated its assessment as of August 31, 2003 and concluded that
based on a valuation model incorporating expected future cash flows in
consideration of historical cash flows and results to date, no impairment charge
was necessary.
Goodwill and other intangibles of $82,176,000 net of prior impairments and
amortization were recorded under the purchase method for the purchases of
ClearWorks.net, Inc., Atlantic Pacific, Inc., DSS Security, Inc., Contact
Wireless, Inc., and Comtel, Inc. The majority of the intangibles were from the
ClearWorks acquisition. ClearWorks was in the business of selling
telecommunications services to residential neighborhoods. In fiscal 2003, Eagle
realized it had failed to successfully achieve profits using the ClearWorks
model of installing fiber optic cable to neighborhoods under the speculative
attempt to capture enough individual homeowners in each neighborhood via
individual selling methods to pay for the cable infrastructure. In early 2003,
Eagle modified its strategy to deliver the ClearWorks developed bundled digital
services approach including Internet, telephone, cable television and security
monitoring services to residential and business users by targeting
municipalities, homebuilders and residential real estate developers that finance
and install the fiber optic cable backbone in every lot and offer Eagle
exclusive rights to deliver digital bundled services to homeowners, using
pre-selling promotions and other low cost mass marketing techniques. In October
2003, Eagle hired a new Chief Executive Officer with an extensive sales and
marketing background and proven senior management and operational skills leading
high-growth technology companies to implement its modified strategy. As of
December 5, 2003, the date of the auditor's report for the fiscal year ended
August 31, 2003, Eagle had realized several initial successes in projects where
the municipalities, public
11
utility districts and developers assume the predominate capital cost
responsibility and contract with Eagle to provide the services and content;
thereby significantly limiting the Company's capital outlays on such projects.
Eagle assessed the fair value of the intangible assets as of November 30, 2003
and concluded that the goodwill valuation remains at an amount greater than the
current carrying value.
There were a number of significant and complex assumptions used in the
calculation of the fair value of the goodwill. If any of these assumptions prove
to be incorrect, Eagle could be required to record a material impairment to its
goodwill. The assumptions include significant market penetration in its current
markets under contract and significant market penetration in markets where they
are currently negotiating contracts.
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 three months ended November 30, 2003, the Company has expensed
$18,000 where $0 in costs has been deferred.
For the three months ended, November 30, 2002, the Company has expensed $37,000
whereas $0 in costs has been deferred.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that are
directly attributable to fundraising and the collection thereto. Upon successful
collection of the funds, all expenses incurred will be reclassified to
additional paid in capital and treated as syndication costs; netted against the
funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent asset and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
N) Marketable Securities
In May 1993, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective for fiscal years beginning after December
15, 1993. This statement considers debt securities that the Company has both the
positive intent and ability to hold to maturity are carried at amortized cost.
Debt securities that the company does not have the positive intent and ability
to hold to maturity and all marketable equity securities are classified as
available-for-sale or trading securities and are carried at fair market value.
Unrealized holding gains and losses on securities classified as trading are
reported in earnings. Unrealized holding gains and losses on securities
classified as available-for-sale were previously carried as a separate component
of stockholders' equity. SFAS No. 115 as amended by Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Other Comprehensive Income." Management determines the appropriate
classification of marketable equity and debt securities at the time of purchase
and re-evaluates such designation as of each balance sheet date.
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Other Comprehensive Income," effective for fiscal
years beginning after December 15, 1997. This statement considers the
presentation of unrealized holding gains and losses attributable to debt and
equity securities classified as available-for-sale. As stated, any unrealized
holding gains or losses affiliated to these securities are carried below net
income under the caption "Other Comprehensive Income." For the three months
ended November 30, 2003 and 2002, the Company recorded a comprehensive gain of
$309,000 and $13,000, respectively.
P) Beneficial Conversion Values
Beneficial conversion values are calculated at the difference
between the conversion price and the fair value of the common stock
into which the debt is convertible, multiplied by the number of shares
into which the debt is convertible. The beneficial conversion value is
charged to interest expense because the debt is convertible at the
12
date of issuance. The value is limited to the total proceeds received.
Q) Reclassification
The Company has reclassified certain assets costs and expenses for the
three months ended November 30, 2002 to facilitate comparison to the three
months ended November 30, 2003.
R) Recent Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or
Disposal Activities," which nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS 146 requires that costs associated with an exit or disposal activity
be recognized only when the liability is incurred (that is, when it meets
the definition of a liability in the FASB's conceptual framework). SFAS 146
also establishes fair value as the objective for initial measurement of
liabilities related to exit or disposal activities. SFAS 146 is effective
for exit or disposal activities that are initiated after December 31, 2002.
The Company adopted SFAS in the first quarter of fiscal 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." For certain
guarantees issued after December 31, 2002, FIN 45 requires a guarantor to
recognize, upon issuance of a guarantee, a liability for the fair value of
the obligations it assumes under the guarantee. Guarantees issued prior to
January 1, 2003, are not subject to liability recognition, but are subject
to expanded disclosure requirements. The Company does not believe that the
adoption of this Interpretation has had a material effect on its
consolidated financial position or statement of operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which requires the
Company to consolidate variable interest entities for which it is deemed to
be the primary beneficiary and disclose information about variable interest
entities in which it has a significant variable interest. FIN 46 became
effective immediately for variable interest entities formed after January
31, 2003 and effective for periods ending after December 15, 2003, for any
variable interest entities formed prior to February 1, 2003. The Company
does not believe that this Interpretation will have a material impact on
its consolidated financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," which
requires that the extinguishment of debt not be considered an extraordinary
item under APB Opinion No. 30 ("APB 30"), "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
unless the debt extinguishment meets the "unusual in nature and infrequent
of occurrence" criteria in APB 30. SFAS 145 is effective for fiscal years
beginning after May 15, 2002, and, upon adoption, companies must reclassify
prior period items that do not meet the extraordinary item classification
criteria in APB 30. The Company adopted SFAS 145 and related rules as of
August 31, 2002. The adoption of SFAS 145 had no effect on the Company's
financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). The provisions of
this Statement are effective for financial instruments entered into or
modified after May 31, 2003, and otherwise are effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of
this Statement did not have an impact on the Company's financial results of
operations and financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement is effective for contracts entered into
or modified and for hedging relationships designated after June 30, 2003.
The adoption of this statement did not have an impact on the Company's
operating results or financial position.
S) Product Warranties
The Company warrants its products against defects in design, materials and
workmanship generally for six months to a year. Other warranties from our
vendors which are incorporated in our products are passed on to the
customer at the completion of the sale. Provision for estimated warranty
costs is made in the period in which such costs
13
become probable. Historically, Eagle has not incurred any material warranty
costs and, accordingly, Eagle has not accrued for these costs at November
30, 2003 and 2002. Eagle provides for the estimated cost of product
warranties at the time it recognizes revenue. Eagle engages in product
quality programs and processes, including actively monitoring and
evaluating the quality of its component suppliers; however, ongoing product
failure rates, material usage and service delivery costs incurred in
correcting a product failure, as well as specific product class failures
outside of Eagle's baseline experience, affect the estimated warranty
obligation. If actual product failure rates, material usage or service
delivery costs differ from estimates, revisions to the estimated warranty
liability would be required.
NOTE 2 - Accounts Receivable:
-------------------
Accounts receivable consist of the following, in thousands:
November 30, August 31,
2003 2003
----------- ------------
Accounts Receivable $ 2,724 $ 2,116
Allowance for Doubtful Accounts (322) (412)
----------- ------------
Net Accounts Receivable $ 2,402 $ 1,704
=========== ============
NOTE 3 - Property, Plant & Equipment and Intangible Assets:
Components of property, plant & equipment are as follows, in thousands:
November 30, August 31,
2003 2003
--------- ----------
Automobile $ 143 $ 143
Head-End Facility and Fiber
Infrastructure 26,548 26,688
Furniture & Fixtures 560 565
Leasehold Improvements 122 122
Office Equipment 766 979
Property, Manufacturing & Equipment 8,436 7,925
--------- ----------
Total Property, Plant & Equipment 36,575 36,422
Less: Accumulated Depreciation (6,302) (5,689)
--------- ----------
Net Property, Plant & Equipment $ 30,273 $ 30,733
========= ==========
Eagle expenses repairs and maintenance against income as incurred whereas
major improvements are capitalized. Eagle defines major improvements as
those assets acquired that extend the life of the underlying base asset
while defining other improvements that do not extend the life as repairs
and maintenance. Eagle expensed repairs and maintenance of $9,000 and
$11,000 for the three years ended November 30, 2003 and 2002, respectively,
whereas it did not have any capitalized major improvements for the same
time periods.
Eagle's headend facility and fiber infrastructure consist primarily of
digital computing and telecommunications equipment that comprise Eagle's
main headend facility at it headquarters, wireless headend equipment, a
digital headend facility and a fiber backbone in the master planned
communities in which it operates and a fiber ring connecting the various
master planned communities in the Houston area. These fiber and headend
infrastructures are similar to those that would exist in a major
telecommunications or cable television provider that offers digital
services for internet, cable TV, telephone and security monitoring
services. Eagle determined that a twenty-year straight line depreciation
method is appropriate for its Headend Facility and Fiber Infrastructure
based on industry standards for these asset types...
Components of intangible assets are as follows, in thousands:
November 30, August 31,
2003 2003
--------- ----------
Goodwill, gross value $ 80,551 $ 80,551
Licenses & Permits 5,330 5,330
--------- ----------
Total Intangible Assets 85,881 85,881
Less: Accumulated Amortization (4,278) (4,278)
--------- ----------
Net Intangible Assets $ 81,603 $ 81,603
========= ==========
The changes in the carrying amount of goodwill, net of accumulated
amortization for the twelve months ended November 30, 2003 are as follows
(in thousands):
14
Eagle Other Total
Balance at August 31, 2003 $ 74,711 $ 1,562 $ 76,273
Acquisitions and other(1) 0 0 0
Balance at August 31, 2003 $ 74,711 $ 1,562 $ 76,273
NOTE 4 - Business Combinations:
Effective January 1, 2002, the Company acquired 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 in goodwill. 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 November 30, 2002, the Company had 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.
NOTE 5 - Notes Payable:
The following table lists the Company's note obligations as of November 30,
2003, and August 31, 2003, in thousands:
Annual
Interest November August 31,
30,
Rate Due Date 2003 2003
-----------------------------------------------
Vehicles Various Various $ 4 $ 4
5% Convertible Debenture Demand
(Note 9) 5.0% --- 1,200
Tail Wind Convertible Demand
Debenture 2.0% 1,595 1,595
Notes Payable - Investor October
Group 10.0% 2003 --- 900
Notes Payable - Q Series Various
Bonds 12.0% 5,275 1,363
Other Various Various 313 717
---------- ---------
Total notes payable $ 7,187 $ 5,779
---------- ---------
Less current portion 7,187 5,779
---------- ---------
Total long-term debt $ --- $ ---
========== =========
NOTE 6 - Line of Credit:
During the first quarter of fiscal 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 August 31, 2003, APC reduced its
accounts receivable by $198,851 to reflect the gross sale of $360,003 to
SWBT less $161,851 of reserves held by SWBT against such purchases. During
the first quarter of fiscal 2004, APC repaid and canceled the line of
credit in full to SWBT in September 2003.
During July 2002, UCG entered into a credit facility with Southwest Bank of
Texas (SWBT) to provide working capital, repay the IBM credit line and fund
ongoing operations. The new credit facility is a purchase and sale
agreement against accounts receivable, provides for borrowings up to
$3,000,000 based on eligible accounts receivable and is secured by UCG
accounts receivable and guaranteed by Eagle Broadband, Inc. As of August
31, 2003, UCG reduced its accounts receivable by $44,799 to reflect the
gross sale of $52,210 to SWBT less $7,832 of reserves held by SWBT against
such purchases. During the first quarter of fiscal 2004, APC repaid and
canceled the line of credit in full to SWBT in September 2003.
NOTE 7 - Convertible Debentures:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). During the
three month period ended November 30, 2003, the principal balance of the
debenture was repaid,
15
although a lawsuit remains outstanding - see Legal Proceedings.
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. 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. 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 and warrants at various rates. At
August 31, 2002, Eagle and Tail Wind were renegotiating the terms of this
note. At November 30, 2003, the Company owes Tail Wind $1,595,000 plus
accrued interest. The Company is currently negotiating the settlement of
this debt and has recorded the entire debt as a current note payable.
NOTE 8 - Securities Held for Resale:
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 November 30, 2003,
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.
Securities held for resale include 1,095,000 shares of common stock of
Burst.com, 146,085,264 shares of Celerity Systems common stock and $350,000
Celerity Systems Bonds. These common stock and bond investments have an
aggregate cost basis of $1,075,000 and an aggregate fair market value of
$1,876,850 and are included in the Balance Sheet Category of Securities
held for Resale as of November 30, 2003.
NOTE 9 - Income Taxes:
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Implementation of SFAS 109 did not have a material cumulative
effect on prior periods, nor did it result in a change to the current
year's provision.
A) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
November 30, August 31,
2003 2003
---- ----
% %
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
==== ====
16
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S. Federal
income tax rate of 34% to pretax income from continuing operations as a
result of the following: (in thousands)
November 30, August 31,
2003 2002
---------- -----------
Computed expected tax benefit $ (2,877) $ (11,456)
Increase in valuation
allowance 2,877 11,456
---------- -----------
$ --- $ ---
========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
November 30, 2003, and August 31, 2003, are presented below, in thousands,
and include the balances of the acquired company ClearWorks.Net.
November 30,August 31,
2003 2003
------------ ----------
Deferred tax assets:
Accounts receivable,
principally due to allowance
for doubtful accounts $ --- $ ---
Net operating loss carry-
forwards 38,380 35,503
Less valuation allowance (38,380) (35,503)
------------ ----------
Net deferred tax assets --- ---
Deferred tax liabilities:
Differences in depreciation --- ---
------------ ----------
Net deferred tax liabilities $ --- $ ---
============ ==========
The valuation allowance for deferred tax assets of November 31, 2003, and
August 31, 2003, was $38,380,000 and $35,503,000, respectively. At November
30, 2003, the Company has net operating loss carry-forwards of
$112,881,588, which are available to offset future federal taxable income,
if any, with expirations from 2020 to 2021.
NOTE 10 - Issuance of Common Stock:
For the three months ended November 30, 2003, the Company issued shares of
common stock. The following table summarizes the shares of common stock
issued, in thousands.
Shares Outstanding August 31, 2003 147,447
-------------
Shares issued for Retirement of Debt and
Liabilities 34,257
Shares issued for Services, Compensation,
Property and Other Assets 3,354
-------------
Shares Outstanding November 30, 2003 185,058
=============
NOTE 11 - 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 November 30,
2003, options to purchase 402,678 are outstanding and 551,370 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
November 30, 2003:
50,000 stock purchase options issued to L.A. Delmonico Consulting, Inc.,
expiring April 4, 2005. 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 November 30, 2003, none of these options have
been exercised.
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. As of November 30, 2003, none of these warrants have been
exercised.
17
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
November 30, 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 November
30, 2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring April 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 $1.10
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 November 30, 2003, none of these warrants have been exercised.
58,333 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of $3.00
per share. The shares of common stock underlying these warrants have not
been registered or issued, under the Securities Act of 1933. As of November
30, 2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July 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 $1.35
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 November 30, 2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring October
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 $0.69
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
2003 none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring January
1, 2005. The warrants are to purchase fully paid and non-assessable shares
of the common stock, par value $.001 per share at a purchase price of $0.61
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring April 1,
2005. The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of $0.38
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
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 November 30, 2003, none of these warrants have been
registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July 1,
2005. The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of $0.39
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
2003, none of these warrants have been 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 November
30, 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 November
30, 2003, none of these warrants have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring October
1, 2005. The warrants are to purchase fully paid and non-assessable shares
of the common stock, par value $.001 per share at a purchase price of $0.35
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
2003, none of these warrants have been exercised.
40,000 stock purchase warrants issued to Rachel McClere 1998 Trust expiring
April 24, 2008. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase price
of $7.50 per share. The shares of common stock underlying these warrants
have not been registered or issued, under the Securities Act of 1933. As of
November 30, 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
18
stock underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As November 30, 2003, none of these warrants
have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring January
1, 2006. The warrants are to purchase fully paid and non-assessable shares
of the common stock, par value $.001 per share at a purchase price of $0.28
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring April 1,
2006. The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of $0.26
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July 1,
2006. The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of $0.38
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November
30August 31, 2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring October
1, 2006. The warrants are to purchase fully paid and non-assessable shares
of the common stock, par value $.001 per share at a purchase price of $0.45
per share. The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of November 30,
2003, none of these warrants have been exercised.
3,800,000 stock purchase warrants issued to Eagle Broadband employees under
incentive clauses of employment contracts expiring September 1, 2008. The
warrants vest based on market performance of Eagle's common stock at market
capitalization between $50 million and $200 million. The warrants are to
purchase fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $0.41 per share. The shares of
common stock underlying these warrants were not registered for resale under
the Securities Act of 1933. As of November 30, 2003, none of these warrants
have been exercised.
400,000 stock purchase warrants issued to Eagle Broadband employee under
incentive clauses of employment contracts expiring September 1, 2008. The
warrants vest based on market performance of Eagle's common stock at market
capitalization between $50 million and $200 million. The warrants are to
purchase fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $0.60 per share. The shares of
common stock underlying these warrants were not registered for resale under
the Securities Act of 1933. As of November 30, 2003, none of these warrants
have been exercised.
500,000 stock purchase warrants issued to Eagle Broadband employee under
incentive clauses of employment contracts expiring September 1, 2008. The
warrants vest based on market performance of Eagle's common stock at market
capitalization between $50 million and $200 million. The warrants are to
purchase fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $0.75 per share. The shares of
common stock underlying these warrants were not registered for resale under
the Securities Act of 1933. As of November 30, 2003, none of these warrants
have been exercised.
19
The warrants outstanding are segregated into two categories (issued and
outstanding and exercisable):
Warrants Issued & Warrants Exercisable
Outstanding
Class of
Warrants November 30,2003 August 31,2003 November August
30,2003 31,2003
- --------- -------------------------------------------------------
0.26 25,000 25,000 25,000 25,000
0.28 25,000 25,000 25,000 25,000
0.35 25,000 25,000 25,000 25,000
0.38 50,000 50,000 50,000 50,000
0.39 25,000 25,000 25,000 25,000
0.41 3,800,000 3,800,000 3,800,000 1,550,000
0.45 25,000 25,000 25,000 25,000
0.60 400,000 400,000 400,000 -
0.61 25,000 25,000 25,000 25,000
0.69 25,000 25,000 25,000 25,000
0.75 500,000 500,000 500,000 -
1.04 50,000 50,000 50,000 50,000
1.10 25,000 25,000 25,000 25,000
1.35 25,000 25,000 25,000 25,000
2.00 25,000 25,000 25,000 25,000
2.00 41,667 41,667 41,667 41,667
2.25 41,667 41,667 41,667 41,667
3.00 58,333 58,333 58,333 58,333
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
7.50 200,000 200,000 200,000 200,000
ESOP 402,678 * 406,131 * 402,678 406,131
------------- ---------- -----------------------
6,394,345 ** 6,397,798 ** 6,394,345 3,247,798
============= ========== =======================
*Denotes warrants which would have an anti-dilutive effect if currently used to
calculate earnings per share for the period ended November 30, 2003 and 2002.
**Denotes 12,700,000 warrants for shares that have been excluded from this table
that are subject to issuance to certain employees under incentive clauses of
employment contracts expiring 5 years from the date of issuance. The warrants
vest based on accumulated revenue targets ranging from $50 million to $500
million and on market performance of Eagle's common stock at market
capitalization between $450 million and $1 billion. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value $0.001 per
share at purchase prices ranging from $0.41 to $1.50 per share. The Company has
determined that the probability of the achievement of such targets is remote as
of the date of the issuance of the Company's financial statements and thus has
not included them in the outstanding warrant table above. The shares of common
stock underlying these warrants were not registered for resale under the
Securities Act of 1933. As of November 30, 2003, none of these warrants have
been exercised.
NOTE 12 - Capitalization Activities:
Between November 25, 2002 and June 9, 2003, the Company sold approximately
$6.5 million of convertible debt securities to 45 accredited investors. The
securities consisted of a $25,000, 12% five-year bonds. 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 the Company 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. The conversion rates
vary from $0.16 to $0.34 per share. The Company may redeem the bonds at any
time after the first year.
Between October 30, 2003 and November 5, 2003, the Company sold
approximately $4.1 million of convertible debt securities to 36 accredited
investors. The securities consisted of a $25,000, 12% five-year bonds. 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 the Company 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. The conversion
rates vary from $0.50 to $0.75 per share. The Company may redeem the bonds
at any time after the first year.
The following transactions were completed pursuant to Regulation D of the
Securities Act. With respect to the issuances, the Company determined that
each purchaser was an "accredited investor" as defined in Rule 501(a) under
the Securities Act.
Except as otherwise noted, all sales of the Company's securities were made
by officers of the Company who received no
20
commission or other remuneration for the solicitation of any person in
connection with the respective sales of securities described above. The
recipients of securities represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were
affixed to the share certificates and other instruments issued in such
transactions.
NOTE 13 - Risk Factors:
For the three months ended November 30, 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, ninety-four
percent of the Company's revenues and receivables have been created solely
in the state of Texas, zero percent have been created in the international
market, and the approximate six percent remainder have been created
relatively evenly over the rest of the nation during the three months ended
November 30, 2002. 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 November 30, 2002.
Through the normal course of business, the Company generally does not
require its customers to post any collateral.
NOTE 14 - 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 November 30, 2003 and 2002, respectively.
NOTE 15 - 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 three months ending November 30, 2003 and 2002, rental expenses of
approximately $137,000 and $228,000 respectively, were incurred.
The Company also leased 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 $9,030
per month.
Atlantic Pacific also leased office space in Chicago, Illinois with LaSalle
Bank National Association. This twenty-nine month lease commenced on
October 1, 2000,and expired 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 WL and
Deborah Miller in the amount of $4,500 per month. This non-cancelable lease
expired September 2002 and maintains a five-year renewal option. The
renewal option was waived in September 2002.
The Company's subsidiary, ClearWorks.net, Inc., leased office space in
Houston, Texas with 2000 North Loop. This non-cancelable lease expired on
April 30, 2003. The monthly payments increased 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., leased office space in Phoenix, Arizona with
Airpark Holdings. This non-cancelable lease expired on July 31, 2003. The
monthly payments are variable.
Also, ClearWorks.net, Inc., leased office space in San Antonio, Texas with
Wade Holdings. This is a month-to-month lease. The monthly payments were
$3,300.
The Company's subsidiary, United Computing Group, leased office space in
Houston, Texas with Eastgroup Properties, L.P. This non-cancelable lease
expired on August 31, 2003. The monthly payments were $8,570. UCG
previously leased office space with Techdyne, Inc., that expired August 31,
2002.
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.
21
The Company's subsidiary, United Computing Group, leased 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 areas follows:
Period Ending August 31, Amount
---------- -------
2004 $521,000
2005 116,000
2006 58,000
-------
Total $695,000
=======
Legal Proceedings
On February 23, 2001, ClearWorks and Eagle became defendants in Kaufman Bros.,
LLP v. Clearworks.Net, Inc. and Eagle Wireless, Inc., Index No. 600939/01,
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. The Company settled this lawsuit on November 4,
2003 by issuing cash and stock totaling a fair market value of $1,320,000 as of
the settlement date.
On December 17, 2001, Kevan Casey and Tommy Allen sued ClearWorks.net, Inc.,
ClearWorks Integration, Inc., and Eagle Wireless International, Inc. for breach
of contract and other related matters in Cause No. 2001-64056; in the 281st
Judicial District Court of Harris County, Texas. This lawsuit is scheduled for
the two-week docket beginning December 1, 2003. The Company denies the claims
and intends to vigorously defend this lawsuit and claims against it. The Company
settled this lawsuit on November 26, 2003 for cash and stock to be paid and
issued totaling a fair market value of $3,000,000 as of the settlement date.
On July 10, 2003, Eagle became a defendant in Cornell Capital Partners, L.P. vs.
Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), and In the United
States District Court for the District of New Jersey. The suit presents claims
for breach of contract, fraud and negligent misrepresentation. Plaintiff has
also alleged that Eagle has defaulted on a convertible debenture for failing to
timely register the shares of common stock underlying the convertible debenture
and is seeking to accelerate the maturity date of the debenture. During the
three month period ended November 30, 2003, the principal balance of the
debenture was approximately $1.2 million was repaid, although the suit remains
outstanding. The Company denies the claims and intends to vigorously defend this
lawsuit and the claims against it.
On December 14, 2000, ClearWorks became a defendant in State Of Florida
Department Of Environmental Protection vs. Reco Tricote, Inc. And Southeast Tire
Recycling, Inc. A/K/A Clearwork.net, Inc.; In The Circuit Court Of The Tenth
Judicial Circuit In And For Polk County, Florida. The Florida EPA sued
ClearWorks.net 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. 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.
On September 26, 2003 Intratech served a lawsuit on ClearWorks.net in Intratech
Capital Partners, Ltd. vs. ClearWorks.net, Inc.; Case No. CF3 20136 in the High
Court of Justice, Queen's Bench Division, Cardiff District Registry. This
lawsuit presents claims for breach of contract for failing to pay the plaintiff
for financial advice and services allegedly rendered. The complaint seeks
damages of $6,796,245.50, plus attorneys' fees and costs. ClearWorks denies the
claims and intends to vigorously defend this lawsuit and claims against it.
On or about September 2003, Enron sued United Computing Group, Inc. in Enron
Corp. (Debtors/Plaintiff) vs. United Computing Group, Inc.; Case No. 01-16034 in
the United States Bankruptcy Court for the Southern District of New York. The
suit presents claims pursuant to sections 547 and 550 of the Bankruptcy Code to
avoid and recover a transfer in the amount of approximately $1,500,000.00.
Defendant has filed an answer, denies the claims, and intends to vigorously
defend this lawsuit and claims against it.
Eagle is involved in lawsuits, claims, and proceedings, including those
identified above, consisting of, commercial, securities, employment and
environmental matters, which arise in the ordinary course of business. In
accordance with SFAS No. 5, "Accounting for Contingencies," Eagle makes a
provision for a liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Eagle believes
it has adequate provisions for any such matters. Eagle reviews these provisions
at least quarterly and adjusts these provisions to reflect the
22
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
impacts of negotiations, settlements, rulings, advice of legal counsel, and
other information and events pertaining to a particular case. Litigation is
inherently unpredictable. However, Eagle believes that it has valid defenses
with respect to legal matters pending against it. Nevertheless, it is possible
that cash flows or results of operations could be materially affected in any
particular period by the unfavorable resolution of one or more of these
contingencies.
We intend to vigorously defend these and other lawsuits and claims against
us. However, we cannot predict the outcome of these lawsuits, as well as other
legal proceedings and claims with certainty. An adverse resolution of pending
litigation could have a material adverse effect on our business, financial
condition and results of operations. 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.
NOTE 16 - Earnings Per Share:
-------------------
The following table sets forth the computation of basic and diluted
earnings per share, in thousands except Per-Share Amount:
For the three months ended November 30, 2003
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Net Loss $(8,461)
Basic EPS:
Income available to
common stockholders $(8,461) 159,696 $(0.05)
Effect of Dilutive Securities
Warrants --- --- ---
------- ------- ------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(8,461) 159,696 $(0.05)
======= ======= ======
For the three months ended November 30, 2002
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Net Loss $(831)
Basic EPS:
Income available to
common stockholders $(831) 74,493 $(0.01)
Effect of Dilutive Securities
Warrants 154 ---
----- ------ ------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(831) 74,647 $(0.01)
===== ====== ======
For the three months ended November 30, 2003 and 2002, anti-dilutive
securities existed (see Note 11).
NOTE 17 - Employee Stock Option Plan:
---------------------------
In July 1996, the Board of Directors and majority stockholders adopted a
stock option plan under which 400,000 shares of the Company's common stock have
been reserved for issuance. Since that time, the Board of Directors have amended
the July 1996, employee stock option plan under which 1,000,000 shares of Common
Stock have been reserved for issuance. Under this plan, as of November 30, 2003,
402,678 options have been issued and are outstanding to various employees
The Company has elected to follow APB 25, "Accounting for Stock Issued to
Employees." Accordingly, since employee stock options are granted at market
price on the date of grant, no compensation expense is recognized. However, SFAS
123 requires presentation of pro forma net income and earnings per share as if
the Company had accounted for its employee stock options granted under the fair
value method of that statement. The weighted average fair value of the
individual options granted during 2000 is estimated as $0.58 on the date of
grant. A meaningful weighted average fair value of the individual options
23
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a straight-line
basis over the vesting period of the stock option or purchase right was as
follows for the three month period ended November 30, 2003 and 2002:
2003 2002
------------- -------------
Net loss, as reported $ (8,461) $ (831)
Add: Stock-based employee compensation included in reported net earnings
(loss), net of related tax effects - -
Less: stock-based employee compensation expense determined under fair-value
based method for all awards, net of related tax effects (0) (0)
----------- -----------
Pro forma net earnings (loss) $ (8,461) $ (831)
=========== ===========
Net loss per share:
As reported $ (0.05) $ (0.01)
Pro forma $ (0.05) $ (0.01)
Diluted net loss per share
As reported $ (0.05) $ (0.01)
Pro forma $ (0.05) $ (0.01)
Option activity was as follows for the three months ended November 30, 2003:
2003
---------------------------
Shares Weighted-
Average
Exercise
Price
------------ --------------
- ---------------------------------------------------------------
Outstanding at beginning of year 406,131 $ 1.27
Granted -
Assumed through acquisitions - -
Exercised (3,453)- 0.60
Forfeited/Cancelled - -
------- ----
Outstanding at end of year 402,678 1.27
=======
Exercisable at year-end 402,678 $ 1.27
=======
Information about options outstanding was as follows at November 30, 2003:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------
Range of Exercise Prices Number Weighted- Weighted- Number Weighted-
Average
Remaining Average Average
Contractual Exercise Exercise
Outstanding Life in Years Price Exercisable Price
- ----------------------------------------- -------------------- -------------- --------------- -------------- ------------
$0-$1.00 261,412 5. $ 0.55 264,865 $ 0.55
$1.01-$2.00 115,766 5. $ 1.73 115,766 $ 1.73
$2.01-$7.50 25,500 5. $ 6.55 25,500 $ 6.55
402,628 5. $ 2.32 406,131 $ 2.32
======= =======
24
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
NOTE 18 - Retirement Plans:
-----------------
During October 1997, the Company initiated a 401(k) plan for its employees,
which is funded through the contributions of its participants. This plan
maintains that the Company will match up to 3% of each participant's
contribution. For the three months ended November 30, 2003 and 2002, employee
contributions were approximately $27,298 and $71,351, respectively. The Company
matched approximately $0 and $25,858, respectively for those same periods.
NOTE 19 - Major Customer:
---------------
The Company had gross sales of $2,397,000 and $4,618,000 for the three
months ended November 30, 2003 and 2002, respectively. The three month period
ended November 30, 2003 included $866,213 or 36% of the quarters total sales
from Sweetwater Security Capital, LLC in conjunction with a contract valued at
$1,082,767 that was executed with the Company's security-monitoring service
subsidiary, DSS Security, Inc. The remaining $216,553 associated with this
contract has been deferred in conjunction with a six-month holdback provision of
the contract. There were no parties individually that represented greater than
ten percent of the revenues in the three months ended November 30, 2002.
NOTE 20 - 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 five 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 supplier of broadband and
telecommunications equipment with related software and broadband products.
(Including Eagle Wireless International, Inc., BroadbandMagic and Etoolz, Inc.,
for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in providing
professional data and voice cable and fiber optic installations through project
management services on a nationwide basis for multiple site-cabling
installations for end users and re-sellers.
ClearWorks Communications, Inc., (COMM) provides solutions to consumers by
implementing technology both within the residential community and home. This is
accomplished through the installation of fiber optic backbones to deliver voice,
video and data solutions directly to consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber optic
and copper based structured wiring solutions and audio and visual equipment to
single family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and computer
hardware and software reseller. UCG / INT maintains a national market presence.
Link Two Communications, Inc., (Link II) is in the development and delivery
of one and two way messaging systems.
DSS Security, Inc., is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt related
expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services provider
and reseller.
For the three months ending November 30, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------- ---------- --------- ---------- ---------- ---------- ----------
Revenue 392 1,564 274 87 81 --- 2,397
Segment Loss (220) 331 (68) (1,758) (23) --- (1,737)
Total Assets 1,126 30,156 123 175,253 57,704 (137,455) 126,907
Capital Expenditures --- 128 --- 25 --- 153
Depreciation 39 383 15 126 51 --- 614
25
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
For the three months ending November 30, 2002
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------- ---------- --------- ---------- ---------- ---------- ----------
Revenue 1,652 674 1,395 768 129 --- 4,618
Segment Loss 320 (102) (344) (443) (103) --- (672)
Total Assets 5,137 30,381 431 157,155 58,006 (120,468) 130,642
Capital Expenditures 8 1,419 2 42 --- --- 1,471
Dep. and Amort. 56 156 31 3 20 --- 266
Reconcilation of Segment Loss from Operations to Net November 30, November 30,
Loss: 2003 2002
Total segment loss from operations $ (1,737) $ (672)
Total Other Income (Expense) (6,724) (159)
------ ----
Net Loss $ (8,461) $ (831))
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 21 - Supplemental Non-Cash Disclosures:
----------------------------------
During the quarter ended November 30, 2003, the Company issued $3,000,000
of convertible debt which was retired through the issuance of 2,000,000 shares
of Series A Preferred Stock which was concurrently converted into 29,500,000
shares of the Company's Common Stock. Additionally, the Company received
proceeds of $3,912,000 from the sale of convertible Q-Series Bonds - see "Note
12 - Capitalization Activities".
The beneficial conversion values associated with these financings
aggregating $6,912,000 are calculated at the difference between the conversion
price and the fair value of the common stock into which the debt is convertible,
multiplied by the number of shares into which the debt is convertible. Since the
beneficial conversion value exceeded the $6,912,000 raised on these convertible
instruments, the value charged to interest expense during the quarter was
limited to $6,912,000. This non-cash charge comprises $6,912,000 of the
$7,080,000 interest expense on the Company's Statement of Operations and is
shown as an adjustment to reconcile net loss to net cash on the Company's
Statement of Cash Flows.
26
Item 2. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q. Information included herein relating to projected growth and future
results and events constitutes forward-looking statements. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's competitive pricing; the Company's relationship with its
suppliers; relations with the Company's employees; the Company's ability to
manage its operating costs; the continued availability of financing;
governmental regulations; risks associated with regional, national, and world
economies. Any forward-looking statements should be considered in light of these
factors.
Results of Operations
Three Months Ended November 30, 2003 Compared to the Three Months Ended
November 30, 2002
The following table sets forth summarized consolidated financial
information for the three months ended November 30, 2003 and 2002.
Condensed Financial Information
Three Months Ended
November 30,
--------------------------------------------------
($ in thousands) 2003 2002 $ Change % Change
---- ---- -------- --------
Total Sales 2,397 4,618 (2,221) -48%
Cost of Goods Sold 1,295 2,626 (1,331) -51%
--------------------------------------------------
Gross Profit 1,102 1,992 (890) -45%
--------------------------------------------------
% of Total Sales 46% 43% 3% 7%
Operating Expenses 2,839 2,664 175 7%
--------------------------------------------------
Loss from Operations (1,737) (672) (1,065) 158%
--------------------------------------------------
Other Income (Expense) (6,724) (159) (6,565) 4129%
--------------------------------------------------
Net Loss (8,461) (831) (7,630) 918%
==================================================
Overview
For the three month period ended November 30, 2003, Eagle's business
operations reflected further investment and expansion into higher margin
business segments including Eagle's broadband Bundled Digital Services
(Internet, video, voice and security) for residential and business customers
while shifting focus away from low-margin commodity computer products and
services. The Company's consolidated operations generated revenues of $2,397,000
with a corresponding gross profit of $1,102,000 for the three-month period ended
November 30, 2003. The significant decline in revenues in the first fiscal
quarter of 2004 as compared to the corresponding period of 2003 was primarily
attributable to the Company's decision to no longer pursue direct sales of
low-margin commodity computer products and a decline in structured wiring sales
as the Company continues its previously announced strategy to shift its focus to
higher-margin product sales (i.e., set-top boxes, Orb'Phone Exchange, etc) and
recurring services sales (i.e., broadband services, network monitoring /
security, IT managed services, etc.).
The Company incurred a net loss of $8,461,000 for the three-month period
ended November 30, 2003. The loss was primarily attributable to $6,912,000 of
non-cash interest expenses associated with the beneficial conversion feature of
certain convertible bonds and notes issued against certain financing activities
completed during the quarter and a $1,737,000 loss from operations. The
Company's loss from operations included some $614,000 in depreciation and
amortization expenses along with some $313,000 of legal expenses; primarily
associated with the settlement of numerous previously disclosed lawsuits.
The Company is continuing the development and expansion of the Company's
BDS model for distribution on a nationwide basis of voice, video and data
content; increased sales efforts in the telephone, cable, internet, security
services and wireless segments; securing of long-term relationships for content
for the bundled digital services activities; and marketing/sales agreements with
other companies for the sale of broadband products and services. On a nationwide
basis, we are entering into business relationships with financial and technology
companies to provide bundled digital services (digital content) to cities and
municipalities that currently have or are in the process of completing
construction of their own fiber infrastructure to the home. We believe that our
companies have the technology, products and capabilities to provide these
fiber-ready cities with digital content set-top boxes and structured wiring
services.
27
The following table breaks out other support costs information for the
three months ended November 30, 2003 and 2002.
Sales Information
Three Months Ended
November 30,
--------------------------------------------------
($ in thousands) 2003 % of Total 2002 % of Total $ Change % Change
---- ---------- ---- ----------- --------- --------
Structured Wiring 392 16% 1,560 34% (1,168) -75%
Broadband Services 1,564 65% 674 15% 890 132%
Products 361 15% 2,044 44% (1,683) -82%
Other 80 3% 340 7% (260) -76%
---------------------------------------------------------------------------
Total Sales 2,397 100% 4,618 100% (2,221) -48%
---------------------------------------------------------------------------
Net Sales. For the three-month period ended November 30, 2003, net sales
declined to $2,397,000 from $4,618,000 during the three-month period ended
November 30, 2002. The overall decrease of 48% was primarily attributable to the
Company's decision to no longer pursue direct sales of low-margin commodity
computer products and a decline in structured wiring sales as the Company
continues its previously announced strategy to shift its focus to higher-margin
product sales (i.e., set-top boxes, Orb'Phone Exchange, etc) and recurring
services sales (i.e., broadband services, network monitoring / security, IT
managed services, etc.). The $890,000 increase in sales of the Company's
broadband services was primarily attributable to a contract valued at $1,082,767
executed by the Company's security-monitoring subsidiary, DSS Security, Inc.;
against which the Company realized sales of $866,213 during the quarter.
The following table sets forth summarized cost of goods sold information
for the three months ended November 30, 2003 and 2002.
Three Months Ended
November 30,
--------------------------------------------------
($ in thousands) 2003 2002 $ Change % Change
---- ---- -------- --------
Direct Labor and Related Costs 462 346 116 34%
Products and Integration Service 137 1,537 (1,400) -91%
Structured wiring labor and materials 205 229 (24) -10%
Broadband Services costs 190 276 (86) -31%
Depreciation and amortization 285 114 171 150%
Other manufacturing costs 16 124 (108) -87%
--------------------------------------------------
Total Operating Expenses 1,295 2,626 (1,331) -51%
--------------------------------------------------
Cost Of Goods Sold. For the three-month period ended November 30, 2003,
cost of goods sold decreased by 51% to $1,295,000 from $2,626,000 during the
three-month period ended November 30, 2002. The decrease was primarily
attributable to the Company's decision to no longer pursue direct sales of
low-margin commodity computer products referenced above. The Company's overall
gross profit percentage was 46% and 43% for the three-month periods ended
November 30, 2003 and November 30, 2002. This increase is primarily attributable
to a shift away from lower margin commodity products and services to higher
margin BDS and security-monitoring sales; partially offset by an increase in
depreciation expenses associated with the build-out of the company's BDS
infrastructure.
28
The following table sets forth summarized operating expense information for
the three months ended November 30, 2003 and 2002.
Operating Expenses:
Three Months Ended
November 30,
--------------------------------------------------
($ in thousands) 2003 2002 $ Change % Change
---- ---- -------- --------
Salaries and Related Costs 959 1,508 (549) -36%
Advertising and Promotion 18 37 (19) -51%
Depreciation and Amortization 319 153 166 108%
Other Support Costs 1,424 934 490 52%
Research and Development 119 32 87 272%
--------------------------------------------------
Total Operating Expenses 2,839 2,664 175 7%
--------------------------------------------------
The following table breaks out other support costs information for the
three months ended November 30, 2003 and 2002.
Other Support Costs:
- -------------------- Three Months Ended
November 30,
- ------------------------------------------------------------------------------------------------
($ in thousands) 2003 2002 $ Change % Change
---- ---- -------- -------
Advertising and conventions 0 0 0 NA
Auto related 9 11 (2) -18%
Bad debt 104 0 104 NA
Contract labor 0 24 (24) -100%
Delivery and postage 16 61 (45) -74%
Fees 62 108 (46) -43%
Insurance 111 5 106 2120%
Office and telephone 79 63 16 25%
Other 12 29 (17) -59%
Professional and legal 733 84 649 773%
Rent 137 228 (91) -40%
Travel 56 75 (19) -25%
Taxes 3 17 (14) -82%
Utilities 102 229 (127) -55%
--------------------------------------------------
Total Other Support Costs 1,424 934 490 52%
--------------------------------------------------
Operating Expenses. For the three-month period ended November 30, 2003,
operating expenses increased by 7% to $2,839,000 as compared to $2,664,000 for
the three-month period ended November 30, 2002. Additionally, the mix of
expenses changed significantly during the reporting period. The primary
fluctuations that occurred as evidenced by the two preceding tables immediately
above are discussed below:
o A $549,000 decrease in salaries and related costs, as a result of overall
staffing reductions across all business units; the majority of which
occurred in Atlantic Pacific / Home Systems and United Computing Group
operations.
o A $19,000 decrease in advertising and promotion as the Company placed more
emphasis on directly marketing its products and services to its customers
as well as entering into business relationships with financial and
technology companies to provide BDS services to cities and municipalities
and decreased attendance at conventions and tradeshows.
o A $166,000 increase in depreciation and amortization, due principally to
the additional build-out of the Company's BDS infrastructure in fiscal
2003.
o A $490,000 increase in other support costs; the components of which are set
forth on the table included immediately above. Included in this increase
was a $313,000 in legal expenses associated with the settlement of various
lawsuits.
29
o An $87,000 increase in research and development expenses, primarily
consisting of the Company's continued investment in HDTV-ready multimedia
set-top boxes for hospitality and broadband customers and the Orb'Phone
Exchange satellite voice and data communications products for military,
government and commercial customers.
Net Loss. For the three months ended November 30, 2003, Eagle's net loss
was $8,461,000, compared to a net loss of $831,000 during the three month period
ended November 30, 2002.
Changes in Cash Flow. Eagle's operating activities used net cash of
$490,000 in the three-month period ended November 30, 2003, compared to use of
net cash of $720,000 in the three-month period ended November 30, 2002. The
decrease in net cash used by operating activities was primarily attributable to
an increase in the Company's net operating loss, net of non-cash charges, offset
by stock issued for services rendered combined with cash used in retiring
numerous accrued liabilities for legal and restructuring costs and cash used in
working capital increases for inventory and accounts receivable. Eagle's
investing activities used net cash of $268,000 in the three-month period ended
November 30, 2003, compared to $1,355,000 in the three-month period ended
November 30, 2002. The decrease was due primarily to a significant decline in
investment activities and purchase of equipment associated with the prior years
build out of Eagle's network and infrastructure for the delivery of broadband
services. Eagle's financing activities provided cash of $5,608,000, in the three
month period ended November 30, 2003, compared to $1,577,000 of cash provided in
the three month ended November 30, 2002. The increase is attributable to an
increase in convertible notes aggregating a net of $5,608,000 in conjunction
with the Company's financing activities in the first fiscal quarter of 2004.
Liquidity and Capital Resources. Current assets for the three-month period
ended November 30, 2003 totaled $14,458,000 (includes cash and cash equivalents
of $5,673,000) as compared to $8,109,000 reported for the year ended August 31,
2003. During the first fiscal quarter of 2004, Eagle received net proceeds of
$5,993,000 from the sale of convertible bonds and notes and through the sale of
marketable securities held as short term investments and has retired or reduced
certain of its notes payable and accrued expenses including numerous lawsuits;
thereby reducing the Company's current and contingent liabilities.
The Company anticipates that it will incur significantly less capital
expenditures for broadband fiber infrastructure on a going forward basis as a
result of an emphasis of the sale of its BDS services to municipalities, real
estate developers, hotels, multi-tenant units and service providers that own or
will build out their own fiber networks versus the Company's history of building
out and owning these networks. The Company's management believes it has
sufficient capital to fund operations for the next twelve months based on: (i)
the Company's reduced capital expenditure requirements for fiscal 2004, (ii) the
Company's annualized cost savings expected from personnel and operating expense
reductions, and (iii) the Company's current cash and cash equivalents, including
recent net financing proceeds and sale of marketable securities received during
the first fiscal quarter 2004.
Historically, we have financed operations through the sale of debt and
equity securities. We do not have any significant credit facilities available
with financial institutions or other third parties and historically, we have
relied upon best efforts third-party funding from individual accredited
investors. Though we have been successful at raising additional capital on a
best efforts basis in the past, we can provide no assurance that we will be
successful in any future best efforts financing efforts. If we are unable to
either obtain financing from external sources or generate internal liquidity
from operations in the future, we may need to curtail operations or sell assets.
Our ability to raise capital through further equity offerings is limited because
nearly all shares of common stock have either been issued or reserved for
issuance.
Contractual Obligations
Contractual Payments due by period
obligations
Total Less than 1-3 3-5 More than 5
1 year years years years
Long-Term Debt 7,187 7,187 --- --- ---
Obligations
Operating Lease 695 521 174 --- ---
Obligations
Total 7,882 7,708 174 --- ---
The Company's contractual obligations consist of long-term debt as set
forth in Note 5, (Notes Payable), to the Company's financial statements and
certain off-balance sheet obligations for office space operating leases
requiring future minimal commitments under non-cancelable leases. - See Item 2 -
Management's Discussion and Analysis under non-cancelable leases as described in
Note 15 to the Company's financial statements under the heading (Commitments and
Contingent Liabilities).
30
CRITICAL ACCOUNTING POLICIES
The Company has identified the following policies as critical to its
business and the understanding of its results of operations. The Company
believes it is improbable that materially different amounts would be reported
relating to the accounting policies described below if other acceptable
approaches were adopted. However, the application of these accounting policies,
as described below, involve the exercise of judgment and use of assumptions as
to future uncertainties; therefore, actual results could differ from estimates
generated from their use.
Impairment of Long-Lived Assets and Goodwill
Background:
Goodwill and other intangibles of $82,164,000 net of prior impairments and
amortization were recorded under the purchase method for the purchases of
ClearWorks.net, Inc., Atlantic Pacific, Inc., DSS Security, Inc., Contact
Wireless, Inc., and Comtel, Inc. The majority of the intangibles were from the
ClearWorks acquisition. ClearWorks was in the business of selling
telecommunications services to residential neighborhoods.
ClearWorks.net, prior to the acquisition by Eagle, was still early in the
development of solutions focused on delivering fiber-to-the-home services in
pursuit of capturing future revenues from service offerings including digital
cable, high speed internet and telephone services. ClearWorks.net anticipated
that significant capital investments would be required to generate recurring
revenues from such services. The ClearWorks.net business model expected future
profitability and contemplated that the financing for such infrastructure
investments would be available in the public markets.
Eagle acquired ClearWorks.net at a point when raising additional capital
became difficult for ClearWorks.net and continued the build out of the fiber
network post-acquisition. Eagle was confronted with a number of business and
market factors in the pursuit of building out the digital-based
fiber-to-the-home system. These included, a higher cost than anticipated to
implement the fiber-to-the-home model, lower than expected market penetration
during the early stages of the build-out and an extremely poor public equities
market for raising additional capital to finance expansion of the network.
Throughout this expansion period, Eagle added content and related services to
enhance the distribution system. Through technology enhancements to the original
ClearWorks.net headend and content delivery system, Eagle was able to expand
delivery of these services to a larger national customer base including
developers and municipalities who were financing and building out their own
systems.
Strategy Change:
Given the obstacles discussed immediately above and Eagle's enhancement to
the digital-based fiber-to the-home system, Eagle's board of directors and
management began reassessing it long-term strategy in early 2003 and made a
strategic decision to focus its fiber-to-the-home activities on being a service
and content provider to developers and municipalities who were financing and
building out their own fiber infrastructures. In fiscal 2003, Eagle realized it
had failed to successfully achieve profits using the ClearWorks model of
installing fiber optic cable to neighborhoods under the speculative attempt to
capture enough individual homeowners in each neighborhood via individual selling
methods to pay for the cable infrastructure. In early 2003, Eagle modified its
strategy to deliver the ClearWorks developed bundled digital services approach
including Internet, telephone, cable television and security monitoring services
to residential and business users by targeting municipalities, homebuilders and
residential real estate developers that finance and install the fiber optic
cable backbone in every lot and offer Eagle exclusive rights to deliver digital
bundled services to homeowners, using pre-selling promotions and other low cost
mass marketing techniques. In October 2003, Eagle hired a new Chief Executive
Officer with an extensive sales and marketing background and proven senior
management and operational skills leading high-growth technology companies to
implement its modified strategy. As of December 5, 2003, the date of the
auditor's report, Eagle had realized several initial successes in projects where
the municipalities, public utility districts and developers assume the
predominate capital cost responsibility and contract with Eagle to provide the
services and content; thereby significantly limiting the Company's capital
outlays on such projects.
Eagle's strategy change had the distinct advantage of minimizing the front
end capital outlays while improving the time to profitability on such projects.
Most importantly, this change in strategy allows Eagle to market its services to
an existing customer base without investing significant capital. The bundled
digital services provided to the customers under the new developer and municipal
financed model are essentially identical to those previously provided under the
ClearWorks.net model. Though the Company has realized several initial successes
since implementing this strategy change, there can be no assurances that we will
be successful in the future. In the event that the Company fails to achieve
sales sufficient to recover the carrying value of these assets, we would be
required to record a significant charge to earnings in our financial statements
during the period in which any impairment of our goodwill is determined. At
Novembert 30, 2003, our goodwill was $76.3 million.
Impairment Assessment:
Our long-lived assets predominantly include goodwill. Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142") requires that goodwill and intangible assets be tested for
31
impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis and between annual tests in certain
circumstances. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill and intangible assets to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.
Goodwill is primarily the Company rights to deliver bundled digital
services such as Internet, telephone, cable television and security monitoring
services to residential and business users. The Company obtained an independent
appraisal to assess the fair value of the intangible assets. There were a number
of significant and complex assumptions used in the calculation of the fair value
of the intangible assets. If any of these assumptions prove to be incorrect, the
Company could be required to record a material impairment to its intangible
assets. The assumptions included significant market penetration in its current
markets under contract and significant market penetration in markets where they
are currently negotiating contracts.
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 (i) quoted
market prices in active markets, (ii) estimate based on prices of similar assets
and (iii) estimate based on valuation techniques. The Company tested the fair
value of its goodwill and intangibles as of November 30, 2003 and determined
that these assets totaling $81.6 million were not impaired.
Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under its principal subsidiaries and operating business units
including; Eagle Wireless International, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Atlantic Pacific
Communications, Inc.; Contact Wireless, Inc.; DSS Security, Inc.; Link Two
Communications, Inc.; and United Computing Group, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of adopting EITF
00-21 had no affect to Eagle's results of operations as Eagle did not have any
contracts that have multiple elements as of January 2004 or prior. When elements
such as hardware, software and consulting services are contained in a single
arrangement, or in related arrangements with the same customer, Eagle allocates
revenue to each element based on its relative fair value, provided that such
element meets the criteria for treatment as a separate unit of accounting. The
price charged when the element is sold separately generally determines fair
value. In the absence of fair value for a delivered element, Eagle allocates
revenue first to the fair value of the undelivered elements and allocates the
residual revenue to the delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a single unit of
accounting, resulting in a delay of revenue recognition for the delivered
elements until the undelivered elements are fulfilled. Eagle limits the amount
of revenue recognition for delivered elements to the amount that is not
contingent on the future delivery of products or services or subject to
customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed are
deferred until the conclusion of the period of the service for which the advance
billing relates. Deferred revenues are included on the balance sheet as a
current liability under the heading Accrued Expenses until the service is
performed and then recognized in the period in which the service is completed.
Eagle's deferred revenues primarily consist of billings in advance for cable,
internet, security and telephone services, which generally are between one and
three months of services. Eagle had deferred revenues of $442,000 and $156,000
as of November 30, 2003 and 2002, respectively.
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. Eagle's Wireless
International Product revenues are reported under the category of Products on
Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category Eagle within Note 22 - Industry Segments.
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 Eagle
recognizes the revenue. Eagle's Broadband Multimedia and Internet Products
32
revenues are reported under the category of Products on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category Eagle within Note 22 - Industry Segments. Revenue from software
consists of software licensing. There is no post-contract customer support.
Software revenue is allocated to the license using vendor specific objective
evidence of fair value ("VSOE") or, in the absence of VSOE, the residual method.
The price charged when the element is sold separately generally determines VSOE.
In the absence of VSOE of a delivered element, Eagle allocates revenue to the
fair value of the undelivered elements and the residual revenue to the delivered
elements. Eagle recognizes revenue allocated to software licenses at the
inception of the license.
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 Eagle'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. Eagle's
Broadband, Inc. revenues are reported under the category of Products on Eagle's
Consolidated Statements of Operations included as page F-4 of this report and
also under the category Eagle within Note 22 - Industry Segments.
Eagle BDS Services - dba 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. Installation fees are recognized upon the completion
and acceptance. Eagle's BDS Services revenues are reported under the category of
Broadband Services on Eagle's Consolidated Statements of Operations included as
page F-4 of this report and also under the category EBS/DSS within Note 22 -
Industry Segments.
Eagle Residential Structured Wiring - dba 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. Eagle's Residential Structured Wiring revenues are
reported under the category of Structured Wiring on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category APC/HSI within Note 22 - Industry Segments.
Eagle Communication Services - dba 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 services are
completed. Eagle's Communications Services revenues are reported under the
category of Structured Wiring on Eagle's Consolidated Statements of Operations
included as page F-4 of this report and also under the category APC/HSI within
Note 22 - Industry Segments.
Etoolz, Inc.
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to independent third
parties.
Eagle Messaging Services - dba Link Two Communications, Inc.
Link Two Communications, Inc., provides customers with one- and two-way
messaging systems. The revenue from the sale of these products is recognized at
the time the services are provided. Eagle's Messaging Services revenues are
reported under the category of Other on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Eagle
within Note 22 - Industry Segments.
Eagle Paging Services - dba 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
33
monthly as the service is provided. Eagle's Paging Services revenues are
reported under the category of Other on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Other
within Note 22 - Industry Segments.
Eagle Security Services - dba 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. Installation fees
are recognized upon the completion and acceptance. Eagle's Security Services
revenues are reported under the category of Broadband Services on Eagle's
Consolidated Statements of Operations included as page F-4 of this report and
also under the category EBS/DSS within Note 22 - Industry Segments.
Eagle Technology Services - dba 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 on completion..
Eagle's Technology Services product revenues are reported under the category of
"Products" while the services components are reported under the category "Other"
on Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category UCG within Note 22 - Industry Segments.
Receivables
For the three month period ended November 30, 2003, Eagle accounts
receivables increased to $2,402,000 from $1,704,000 at August 31, 2003. The
majority of this increase was due to the increased sales in the Company's
security-monitoring subsidiary, DSS Security, Inc. discussed earlier herein.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivables deemed uncollectible are charged against the
allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At November 30, 2003, Eagle's
inventory totaled $3,855,000 as compared to $3,199,000 at August 31, 2003. The
majority of this increase was due to an increase in raw materials inventory
associated with in process set-top box manufacturing.
Recent Accounting Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that
costs associated with an exit or disposal activity be recognized only when the
liability is incurred (that is, when it meets the definition of a liability in
the FASB's conceptual framework). SFAS 146 also establishes fair value as the
objective for initial measurement of liabilities related to exit or disposal
activities. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted SFAS in the first quarter
of fiscal 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." For certain guarantees issued
after December 31, 2002, FIN 45 requires a guarantor to recognize, upon issuance
of a guarantee, a liability for the fair value of the obligations it assumes
under the guarantee. Guarantees issued prior to January 1, 2003, are not subject
to liability recognition, but are subject to expanded disclosure requirements.
The Company does not believe that the adoption of this Interpretation has had a
material effect on its consolidated financial position or statement of
operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which requires the
Company to consolidate variable interest entities for which it is deemed to be
the primary beneficiary and disclose information about variable interest
entities in which it has a significant variable interest. FIN 46 became
effective immediately for variable interest entities formed after January 31,
2003 and effective for periods ending after December 15, 2003, for any variable
interest entities formed prior to February 1, 2003. The Company does not believe
that this Interpretation will have a material impact on its consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," which requires that the
extinguishment of debt not be considered an extraordinary item under APB Opinion
No. 30 ("APB 30"), "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," unless the debt extinguishment meets the
34
"unusual in nature and infrequent of occurrence" criteria in APB 30. SFAS 145 is
effective for fiscal years beginning after May 15, 2002, and, upon adoption,
companies must reclassify prior period items that do not meet the extraordinary
item classification criteria in APB 30. The Company adopted SFAS 145 and related
rules as of August 31, 2002. The adoption of SFAS 145 had no effect on the
Company's financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). The provisions of this Statement
are effective for financial instruments entered into or modified after May 31,
2003, and otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this Statement did not have an
impact on the Company's financial results of operations and financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The adoption of
this statement did not have an impact on the Company's operating results or
financial position.
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 previously had exposure that
related to the Company's revolving credit facility. The Company fully retired
its revolving credit facility in September 2003 and thus no longer has such
exposure related to interest rate risk. Borrowings under the credit facility
bear interest at variable rates based on the bank prime rate. The extent of this
risk with respect to interest rates on funded debt is not quantifiable or
predictable due to the variability of future interest rates; however, the
Company does not believe a change in these rates would have a material adverse
effect on the Company's operating results, financial condition, and cash flows.
The Company's cash and cash equivalents are invested in mortgage and asset
backed securities, mutual funds, money market accounts and common stock.
Accordingly, the Company is subject to both changes in market interest rates and
the equity market fluctuations and risk. There is an inherent roll over risk on
these funds as they accrue interest at current market rates. The extent of this
risk is not quantifiable or predictable due to the variability of future
interest rates. The Company does not believe a change in these rates would have
a material adverse effect on the Company's operating results, financial
condition, and cash flows with respect to invested funds in mortgage and asset
backed securities, mutual funds and money market accounts, however; the company
does have both cash and liquidity risks associated with its common stock
investments aggregating $1,876,850 in market value as of November 30, 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 2004 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.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-15(b) under the Securities Exchange Act of
1934, as amended (the Exchange Act)) as of the end of the period covered by this
quarterly report. Based on such evaluation, such officers have concluded that
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
There were no changes in Eagle's internal control over financial reporting
that occurred during the quarter ended November 30, 2003 that have materially
affected, or reasonably likely to materially affect, Eagle's internal control
over financial reporting.
Eagle's disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching Eagle's desired disclosure control
objectives and are effective in reaching that level of reasonable assurance.
35
Part 2. - Other Information
Item 1 - Legal Proceedings
For a description of certain legal matters, refer to Note 15. "Commitments
and Contingent Liabilities" under the heading Legal Proceedings in Part 1, Item
1. "Consolidated Financial Statements."
The Company is also 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 15).
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, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules:
The financial statements are set forth under Item 1 of this Quarterly
Report on Form 10-Q. Financial statement schedules have been omitted since they
are either not required, not applicable, or the information is otherwise
included.
(b) Reports on Form 8-K
The following reports were furnished on Form 8-K during the three months
ended November 30, 2003:
A report on Form 8-K, announcing information under Item 4 of the report,
was filed on September 11, 2003 with the Securities and Exchange Commission.
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on September 30, 2003 with the Securities and Exchange Commission.
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on October 3, 2003 with the Securities and Exchange Commission.
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on October 28, 2003 with the Securities and Exchange Commission.
(c) Exhibit Listing
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Eagle Wireless International, Inc. Articles of Incorporation, as Amended
(incorporated by reference to Exhibit 3.1 of Form SB-2 file no. 333-20011)
Exhibit 3.2 Amended and Restated Eagle Wireless International, Inc. Bylaws (Incorporated
by reference to Exhibit 3.2 of Form 10-KSB for the fiscal year ended August
31, 2001, filed November 16, 2001)
Exhibit 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of
Form SB-2 file no. 333-20011)
36
Exhibit 10.1 Asset Purchase Agreement between Eagle Telecom International, Inc., a Delaware
corporation and Eagle Telecom International, Inc., a Texas corporation
(incorporated by reference to Exhibit 10.1 of Form SB-2 file no. 333-20011)
Exhibit 10.2 Stock Option Plan (incorporated by reference to Exhibit 10.2 of Form SB-2 file
no. 333-20011)
Exhibit 10.3 Agreement and Plan of Reorganization dated September 15, 2000 (incorporated by
reference to Exhibit 10.1 of Form S-4 file no. 333-49688)
Exhibit 10.4 Stock Purchase Agreement between Eagle Wireless International, Inc. and the
shareholders of Comtel Communications, Inc. (incorporated by reference to
Exhibit 10.4 of Form 10-KSB for the fiscal year ended August 31, 2000, filed
December 13, 2000)
Exhibit 10.5 Stock Purchase Agreement between Eagle Wireless International, Inc. and the
shareholders of Atlantic Pacific Communications, Inc. (incorporated by
reference to Exhibit 10.5 of Form 10-KSB for the fiscal year ended August 31,
2000, filed December 13, 2000)
Exhibit 10.6 Stock Purchase Agreement between Eagle Wireless International, Inc. and the
shareholders of Etoolz, Inc. (incorporated by reference to Exhibit 10.6 of Form 10-KSB
for the fiscal year ended August 31, 2000, filed December 13, 2000)
Exhibit 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 of Form S-4
file no. 333-49688)
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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 BROADBAND, INC.
Date: March 30, 2004 By: /s/David A.Weisman
-------------------
David Weisman
Chief Executive Officer
/s/ Richard R. Royall
---------------------
Richard R. Royall
Chief Financial Officer
37