U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________
Amendment No. 2 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 [ X ] No [ ]
As of April 28,, 2004, there were 191,517,856 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 27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Item 4. Controls and Procedures 35
Part 2 - Other Information
Item 1. Legal Proceedings 36
Item 2. Recent Sales of Unregistered Securities or Changes
in Securities and Use of Proceeds. 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
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 Available for Sale 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.
5
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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)
(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:
EagleBroadband, 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.
The Company also has securities available for sale that 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 available
for sale 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:
7
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
November 30, August 31,
2003 2003
----------- ----------
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 did not have a material effect to Eagle's results
of operations. Eagle's contracts that contain multiple elements as of
February 29, 2004, or prior were immaterial. 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 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.
8
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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:
10
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
At August 31, 2002, 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.
11
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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 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
Eagle holds minority equity investments in companies having operations
or technology in areas within Eagle's strategic focus. Eagle applies
the equity method of accounting for minority investments when Eagle
has the ability to exert significant influence over the operating and
financial policies of an investment. In the absence of such ability,
Eagle accounts for these minority investments under the cost method.
Certain investments carry restrictions on immediate disposition.
Investments in public companies (excluding those accounted for under
the equity method) with restrictions of less than one year are
classified as available-for-sale and are adjusted to their fair market
value with unrealized gains and losses, net of tax, recorded as a
component of accumulated other comprehensive income. Upon disposition
of these investments, the specific identification method is used to
determine the cost basis in computing realized gains or losses, which
are reported in other income and expense. Declines in value that are
judged to be other than temporary are reported in other income and
expense.
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.
12
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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 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.
13
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 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...
14
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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):
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 30, August 31,
Rate Due Date 2003 2003
------------------------------------------------------------
Vehicles Various Various $ 4 $ 4
5% Convertible Debenture (Note 9) 5.0% Demand --- 1,200
Tail Wind Convertible Debenture 2.0% Demand 1,595 1,595
Notes Payable - Investor Group 10.0% October --- 900
2003
Notes Payable - Q Series Bonds 12.0% Various 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.
15
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 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, 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 available for sale 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 Available for Sale 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
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)
16
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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 3,354
Other Assets
----------------
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.
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.
17
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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 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.
18
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
The warrants outstanding are segregated into two categories (issued
and outstanding and exercisable):
Warrants Issued & Outstanding Warrants Exercisable
Class of November 30, August 31, November 30, August 31,
Warrants 2003 2003 2003 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.
20
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
Except as otherwise noted, all sales of the Company's securities were
made by officers of the Company who received no 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
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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 and consequently,
$1,320,000 was charged to operations in the Company's fiscal 2003
financial statements..
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 and consequently, $3,000,000 was charged to operations
in the Company's fiscal 2003 financial statements.
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 . Eagle has asserted counterclaims against
Cornell for fraud and breach of contract. The Company has not accrued
any expenses against this lawsuit, as the outcome cannot be predicted
at this time.
.
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 The Company has not accrued any expenses
against this lawsuit, as the outcome cannot be predicted at this time.
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 The Company has accrued $100,000 in its fiscal 2003
financial statements for litigation expenses but has not accrued any
settlement costs against this lawsuit as the outcome cannot be
predicted at this time.
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 The Company has accrued $100,000 in its
fiscal 2003 financial statements for litigation expenses but has not
accrued any settlement costs against this lawsuit as the outcome
cannot be predicted at this time.
22
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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 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:
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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).
23
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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
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)
24
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
Option activity was as follows for the three months ended November 30,
2003:
2003
Weighted-Average
Shares 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
---------------------------------------- -------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in Years) Price Exercisable Price
- ------------ ----------- ---------------------------- ------------- ----------
$0-$1.00 261,412 5.0 $0.55 264,865 $0.55
$1.01-$2.00 115,766 5.0 $1.73 115,766 $1.73
$2.01-$7.50 25,500 5.5 $6.55 25,500 $6.55
402,628 5.2 $2.32 406,131 $2.32
======= =======
NOTE 18 - Retirement Plans:
s
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.
25
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
November 30, 2003
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
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
Reconciliation of Segment Loss from Operations November 30, November 30,
to Net 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
$7,080,000 interest expense on the Company's Statement of Operations and is
shown as an adjustment to reconcile net loss to net cash on the Company's
Statement of Cash Flows.
26
Item 2. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q. Information included herein relating to projected growth and future
results and events constitutes forward-looking statements. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's competitive pricing; the Company's relationship with its
suppliers; relations with the Company's employees; the Company's ability to
manage its operating costs; the continued availability of financing;
governmental regulations; risks associated with regional, national, and world
economies. Any forward-looking statements should be considered in light of these
factors.
Results of Operations
Three Months Ended November 30, 2003 Compared to the Three Months Ended November
30, 2002
The following table sets forth summarized consolidated financial information for
the three months ended November 30, 2003 and 2002.
Eagle Broadband, Inc.
SEC 10-Q - MD& A Tables
Period ended November 30, 2003
Condensed Financial Information
-------------------------------
Three Months Ended
November 30,
-----------------------------------------------------------------
($ 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 $313,000 of legal
expenses; primarily associated with the settlement of numerous previously
disclosed lawsuits.
The Company is continuing the development and expansion of the Company's BDS
model for distribution on a nationwide basis of voice, video and data content;
increased sales efforts in the telephone, cable, internet, security services and
wireless segments; securing of long-term relationships for content for the
bundled digital services activities; and marketing/sales agreements with other
companies for the sale of broadband products and services. On a nationwide
basis, we are entering into business relationships with financial and technology
companies to provide bundled digital services (digital content) to cities and
municipalities that currently have or are in the process of completing
construction of their own fiber infrastructure to the home. We believe that our
companies have the technology, products and capabilities to provide these
fiber-ready cities with digital content set-top boxes and structured wiring
services.
27
The follow table sets forth summarized sales information for the three months
ended November 30, 2003 and 2002.
Sales Information
-----------------
Three Months Ended
November 30,
----------------------------------------------------------------
($ in thousands) 2003 % of Total 2,002 % 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 $866,213 during the quarter.
The following table sets forth summarized cost of goods sold information for the
three months ended November 30, 2003 and 2002.
Costs of Goods Sold:
--------------------
Three Months Ended
November 30,
--------------- ---------------------- ----------- --------------
($ 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 NA
conventions 0 0 0
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 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:
-- 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.
-- 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.
-- A $166,000 increase in depreciation and amortization, due
principally to the additional build-out of the Company's BDS
infrastructure in fiscal 2003.
--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
- 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 CompanyVs 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. Eagle does
not expect to incur any upfront costs associated with being granted exclusive
rights to deliver BDS to homeowners in the developer financed model, although
the developer participates in the revenue stream from the BDS proceeds. In
testing the fair value of goodwill at August 31, 2003, the Company's BDS revenue
projections included a bundled basic charge for digital TV, Internet, security
and telephone services of $143 per month against 30,060 homes in existing
developments being brought on over the next four years and 35,500 homes in new
development, which are currently under negotiation. The $143 per month BDS
charge represented the net expected average monthly proceeds expected for
purposes of testing the fair value of its goodwill, after deducting the
developers participation. The Company assumed a 36% EBITDA result for the BDS
projections used in testing the fair value of goodwill at August 31, 2003,
comprised of 68% gross margin less a 32% allocation for selling, general and
administrative expenses. The Company's change in strategy did not result in the
sale or cancellation of customer contracts, restructuring costs, impairment,
sale or abandonment of assets. 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 Namely, the Company announced being selected to
video content and BDS to Lake Las Vegas, broadband technology, services and
content to a Phoenix-based luxury condominium development by North Peak
Construction and broadband technology, services and content to the Truckee
Donner Public Utility District in Truckee, California. Revenues from these
contracts will be reflected in the Company's BDS category in future operating
periods, following build-out and implementation.
31
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. The Company is not aware of any known
uncertainties that could adversely impact our ability to recover the carrying
value of its assets. 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
November 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
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 did not have a material effect to Eagle's results of operations. Eagle's
contracts that contain multiple elements as of February 29, 2004, or prior were
immaterial. 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.
32
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 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.
33
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.
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.
34
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.
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.
35
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.
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.
36
(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)
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: May 3, 2004
By: /s/David A. Weisman
David A Weisman
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/Richard R. Royall
Chief Financial Officer
(Principal Financial &
Accounting Officer)
37