U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT No. 2 to
FORM 10-K/A
_______________________________________________________________________________
[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended August 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-23163
Texas 76-0494995
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 Courageous Drive, League City, Texas 77573
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(Address of Principal Executive Office) (Zip Code)
281-538-6000
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: Common
Stock
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form
10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
Issuer's revenues for its fiscal year ended August 31, 2003, were $11,593,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price of the common stock on the American
Stock Exchange on February 28, 2003, was $15,341,000. As of April 28, 2004,
registrant had 191,517,856 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant is incorporating by reference in Part III of this Form 10-K
certain information contained in the registrant's proxy statement for its annual
meeting of shareholders, which proxy statement was filed by the registrant
before December 29, 2003.
This annual report contains forward-looking statements. These
statements relate to future events or future financial performance and involve
known and unknown risks, uncertainties and other factors that may cause
Eagle's or Eagle's industry's actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or the
negative of these terms or other comparable terminology. These statements are
only predictions. Actual results in future periods may differ materially from
the forward-looking statements due to a number of risks and uncertainties,
including but not limited to fluctuations in the construction, technology,
communication and industrial sectors; the success of the Company's
restructuring and cost reduction plans; the success of the Company's
competitive pricing; the Company's relationship with its suppliers;
relations with the Company's employees; the Company's ability to manage its
operating costs; the continued availability of financing and working capital to
fund business operations; governmental regulations; risks associated with
regional, national, and world economies; and consummation of the merger and
asset purchase transactions. Any forward-looking statements should be considered
in light of these factors.
Although Eagle believes that the expectations reflected in the
forward-looking statements are reasonable, Eagle cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither
Eagle nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. Eagle is under no duty
to update any of the forward-looking statements after the date of this
report to conform its prior statements to actual results.
PART I
Item 1. Description of Business
Overview
Eagle Broadband, Inc., (the "Company" or "Eagle") is a supplier of
broadband, communications, project management and enterprise management products
and services. Eagle's exclusive "four-play" suite of very high-speed Internet,
cable-style television, voice and security monitoring Bundled Digital Services
(BDS), HDTV-ready multimedia set-top boxes, and turnkey suite of financing,
design, deployment and operational services enables municipalities, real estate
developers, hotels, multi-tenant owners and service providers to deliver
exceptional value, state-of-the-art entertainment and communications choices and
single-bill convenience to their residential and business customers. Eagle has
extensive "last mile" cable and fiber installation capabilities and provides
complete IT business integration, project management and enterprise management
solutions including network security, intrusion detection, anti-virus, managed
firewall and content filtering to Fortune 1000 companies. Eagle also markets the
Orb'Phone Exchange non-line-of-sight communications system that provides true,
"total" global voice, data and Internet communications services through the
Iridium Satellite network to Fortune 1000 enterprises, commercial aviation,
government, the military and homeland security customers.
As of August 31, 2003, the Company's active subsidiaries were: Eagle
Broadband Services, Inc. (EBS) - operating as Eagle BDS; DSS Security, Inc.
(DSS) - operating as Eagle Security Services; Atlantic Pacific Communications,
Inc. (APC) - operating as Eagle Communications Services; Etoolz, Inc. (ETI) -
Eagle's research and development subsidiary; Eagle Wireless International, Inc.
(EWI); and Contact Wireless, Inc. (CWI) - operated as Eagle Paging Services.
Additionally, Eagle has a number of inactive subsidiaries that had results in
one or more of the periods included in the financial statements covered by this
report. These inactive subsidiaries include: ClearWorks Communications, Inc.
(COMM) - formerly operated as BDS; ClearWorks.net, Inc. (.NET); ClearWorks Home
Systems, Inc. (HSI) - operated as Eagle Residential Structured Wiring; United
Computing Group, Inc. (UCG) - operated as Eagle Technology Services; and Link
Two Communications, Inc. (LINK II) - operated as Eagle Messaging Services. Eagle
has incorporated certain ongoing operations of the inactive subsidiaries into
the active subsidiaries listed above. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
inter-company transactions and balances have been eliminated in consolidation.
Eagle designs and manufactures a wide range of broadband products
and provides complete installation services for copper, fiber, and wireless to
commercial and residential markets. Core products offered by Eagle target end
users of broadband services and include Internet, telephone, cable television,
and security monitoring services, which services we refer to as bundled digital
services (or BDS). Each subscriber provides the company with the opportunity to
create a recurring revenue stream as well as the opportunity to sell additional
products, such as Eagle's set-top-boxes to existing customers. This balance of
near-term and long-term recurring revenue is a combination that in the opinion
of management is highly desirable. The combination of Eagle's convergent
hardware products, network services, wireless products, wireless network and
spectrum services, strong manufacturing and R&D capabilities and the BDS "last
mile" cable and fiber installation should provide a well-balanced revenue mix as
the combined company offers a full complement of broadband products and services
to its customers.
1
Eagle designs, manufactures, markets, and services its products
under the Eagle name. These products include transmitters, receivers,
controllers, software and other equipment used in personal communications
systems and radio and telephone systems. Most of Eagle's broad line of products,
covering the messaging spectrum as well as specific personal communication
systems, and specialized mobile radio products are certified by the Federal
Communications Commission. Eagle provides service and support for its products,
as well as consulting and research development on a contract basis. In addition,
Eagle has introduced a completely new line of multi-media and Internet products
to the telecommunications industry, including a family of digital set-top-box
products and markets these products under the name of BroadbandMagic.
Eagle through its subsidiary, Atlantic Pacific Communications,
Inc., is engaged in the business of project management of professional quality
data, voice, and fiber optic cable installations and services for both
re-sellers and end-users.
Eagle was incorporated in May 1993 and changed its name in February
2002 to Eagle Broadband, Inc., its current name. Eagle's principal place of
business is located at 101 Courageous Drive, League City, Texas 77573 and its
telephone number is (281) 538-6000.
Product and Service Categories
Eagle BDS Services
Eagle provides fiber-to-the-user ("FTTU") network services for
neighborhoods and businesses utilizing its Bundled Digital Services. These
services include high-speed Internet connectivity, home security, telephone
service, and cable-style TV service over fiber. Eagle's exclusive "four-play"
suite of very high-speed Internet, video/cable TV, voice and security monitoring
Bundled Digital Services, HDTV-ready multimedia set-top boxes, and turnkey suite
of financing, network design, deployment and operational services enables
municipalities, real-estate developers, hotels, multi-tenant owners and service
providers to deliver exceptional value, state-of-the-art entertainment and
communication choices and single-bill convenience to their residential and
business customers.
Eagle provides up to 100 Mbps switched service per home with up to
six drops per home wired by Eagle's wiring standards. Connections of up to 100
Mbps are approximately 2,000 times faster than a 56K modem. The fiber optic
networks that Eagle deploys into residential communities and businesses consist
of two parts: (a) the headend facility and (b) the fiber optic cable installed
into the home.
Eagle also sells structured wiring and audio/video products to
single and multi-family units. These products and services are being made
available to both residential and commercial customers on a national basis.
Eagle's BDS Services revenues are reported under the category of
Broadband Services on the Company'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 Security Services
Eagle, through its subsidiary, DSS Security, Inc., markets
security-monitoring services. DSS Security's principal business activity is the
providing of monthly security monitoring service to both commercial and
residential customers. Currently DSS Security is providing services to over
6,000 customers.
Eagle's Security Services revenues are reported under the
category of Broadband Services on the Company'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 Satellite-Based Voice and Data Communications Services
The Orb'Phone Exchange
The Orb'Phone Exchange represents innovative and proprietary
non-line-of-sight communications technology that enables users of the Iridium(R)
satellite network to quickly and easily establish highly reliable voice and data
communications to and from any location where the user is unable to gain line of
sight to an orbiting Iridium Satellite such as onboard in-flight aircraft,
within buildings, under ground or from obstructed areas. The technology enables
truly global communications that enhance user productivity, mobility, problem
solving, field-to-headquarters collaboration and emergency backup/response for a
wide range of mission-critical and everyday communications needs. By extending
coverage indoors to areas not traditionally served by satellite networks, the
Orb'Phone Exchange extends customers' usage area, while enhancing the utility
and overall value for both new and existing Iridium aviation, government,
2
military, homeland security and commercial/enterprise customers. The company has
received certification by both the Federal Communications Commission (FCC
Certification Identifier # LOKJHJLBT05A00021) and Iridium Satellite LLC for the
Orb' Phone Exchange.
Subsequent to the fiscal year ending August 31, 2003, the Company
announced that General Dynamics Decision Systems, a business unit of General
Dynamics, signed a distribution agreement to sell and support Eagle's Orb'Phone
Exchange to customers in the U.S. Department of Defense (DOD), General Services
Administration (GSA), Defense Information Systems Agency (DISA), and other U.S.
and foreign government agencies.
Revenues for Eagle's Orb' Phone Exchange were not applicable in the
fiscal year ended August 31, 2003, as the product was released subsequent to
year end and in future periods will be reported under the category of Products
on the Company's Consolidated Statements of Operations included as page F-4 of
this report and also under the category Eagle within Note 22 - Industry
Segments.
Broadband Multimedia and Internet Products
Eagle, under the brand BroadbandMagic, markets broadband
multi-media set-top-box products. These multimedia and Internet based products
provide users the ability to interface their Internet connection, broadcast
video, cable or DSL, or satellite video source directly to their television
receiver. Eagle's BroadbandMagic markets the set-top boxes to Internet service
providers or ISP's, systems integrators and OEM customers who typically bundle
set-top-boxes with their own products and/or services.
Host Pro
Service providers, such as hotels, broadcasters, DSL providers,
and healthcare facilities can take advantage of the Host Pro Web Flyer's full
complement of on-demand TV, Internet and entertainment services. The Host Pro is
specifically designed to allow service providers to generate additional revenues
by supplying their customers with a variety of entertainment, educational, and
business applications.
Computer Plus
The Computer Plus Web Flyer is a complete home entertainment system
and full function computer. Using a television set as a monitor, the Computer
Plus Web Flyer allows users to connect to the ISP of their choice and bring
their multimedia center into the comfort of their living room. Users can access
the Internet, play the latest video games, watch TV, listen to CDs, send and
receive email, and watch DVD movies. This unit combines several entertainment
appliances into a single, integrated unit.
IP Express
The IP Express provides users with either dial-up or high-speed
Internet access, the ability to check e-mail, surf the web, or play games. With
the built-in TV tuner card, users can auto-tune, have picture-in-picture
capabilities, and channel preview while connected to the Internet. This unit can
be attached either to a monitor or basic TV.
Media Pro
The Media Pro's architecture, which includes exceptional ED
graphics, MPEG 2 hardware decoder and low-power CPU, makes it ideally suited for
multimedia environments such as Video-on-Demand (VOD) and Video Conferencing.
This unit is marketed to the hospitality market, hospitals, schools, and in
Multiple Dwelling Units (i.e. apartments, etc.).
The VP-2100 along with Eagle's Video-View software enables the
consumer to do point-to-point video conferencing, as well as have up to eight
video conferencing feeds using our advanced video multicasting. The VP-2100
provides corporate executives and other customers a cost effective alternative
to the high cost and risk of travel, as well as eliminating the unproductive
time associated with long distance business meetings.
EZMagic-HD
EZMagic-HD is a software-based middleware platform capable of
delivering Eagle's complete "four-play" of voice, video, data, and security
services over a wide variety of standard hardware systems. EZMagic-HD expands
Eagle Broadband's advanced EZMagic middleware software platform to include a
range of new multi-media capabilities. The advanced capabilities made possible
by EZMagic-HD enable hotel and casino owners, municipalities, real estate
developers, schools and health care facilities to deliver enhanced high-demand
multimedia services that can improve the satisfaction of residents and guests,
increase revenues, maximize occupancy rates and improve brand loyalty.
3
EZMagic-HD features include high definition streaming video, improved
digital audio and Internet capabilities, easier navigation of hotel and
community services (e.g. concierge, local restaurants and events, etc.),
increased content and system security, and additional operating system support.
EZMagic-HD is designed for a range of higher margin applications and services
including (i) high-end hospitality systems requiring sophisticated secure video,
(ii) data and gaming services, (iii) educational distance learning systems to
improve both teacher and student education, (iv) on-demand entertainment
including concerts, movies, music videos, etc. with superior visual clarity, (v)
internet access, video programming and other patient services for health care
facilities, and (vi) Fiber-to-the-User IP-based entertainment terminals/media
centers.
Eagle's Broadband Multimedia and Internet Products revenues are
reported under the category of Products on the Company'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 Communications Services
Eagle, through its Atlantic Pacific Communications, Inc., subsidiary,
provides data, telephony and fiber optic installation, project management and
support services from initial concept through engineering to completion and
documentation. Atlantic Pacific installs fiber and cabling to commercial and
industrial clients throughout the United States. Services include:
o Multi-site rollout installation
o Statement of Work/Request For Quotation preparation
o Installation supervision
o Structured wiring design
o Comprehensive project management
o Copper wiring configuration
o Fiber optic acceptance testing
o Aerial and underground OSP
o Fiber optic and copper cable
o Field service and support
Eagle's Communications Services revenues are reported under the
category of Structured Wiring on the Company'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 Technology Services
Eagle, through its United Computing Group, Inc., subsidiary, sells
computer hardware and provides IT Business Integration and Enterprise Management
solutions to companies with complex computing and communication systems and
needs. Eagle helps its clients integrate and deploy the latest technologies to
help ensure they remain competitive within their industry, while reducing the
cost of integrating these solutions in order to maximize the return on their
technology investments.
Eagle has historically targeted medium-sized businesses and
organizations as its primary client base but has recently expanded its focus to
include Fortune 1000 enterprises. Medium-sized businesses tend to rely on
specialized IT service providers to help implement and manage their IT systems
and complex computing environments. Eagle believes its expertise will allow its
clients to address all or selected parts of the full, IT life cycle management,
including network management and monitoring, network design, security,
anti-virus protection, product fulfillment, configuration, implementation, fault
diagnosis, fault resolution, reporting, upgrading and documentation. Eagle
accomplishes this through its different service offerings that are managed by
its Client Care Center that is operated 24 hours per day, seven days per week in
League City, Texas.
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.
Eagle Consulting Services
Eagle routinely provides consulting services on a contract basis to
support the sale of its main product lines. Examples of these consulting
services include the design and installation of radio messaging systems and
technology and engineering support for fiber-to-the-user (FTTU) headend and
optical network integration. Eagle also performs research and development on a
contract basis.
4
Eagle's Consulting Services revenues are reported under the
category of Other on the Company'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 Service and Support
Eagle provides service and support to customers on an on-going basis
including installation, project management of turnkey systems, training, service
or extended warranty contracts with Eagle. Eagle believes that it is essential
to provide reliable service to customers in order to solidify customer
relationships and be the vendor of choice when a customer seeks new services or
system expansions. This relationship is further developed as customers come to
depend upon Eagle for installation, system optimization, warranty and
post-warranty services.
Eagle has a warranty and maintenance program for both its hardware
and software products and maintains customer service facilities. Eagle's
standard warranty provides its customers with repair or replacement of any
defective Eagle manufactured equipment. The warranty is valid on all products
for the period of one year from the later of the date of shipment or the
installation by an Eagle qualified technician.
Eagle's Service and Support Services revenues are reported under the
category of Other on the Company'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 Paging Services.
Eagle, through its subsidiary Contact Wireless, Inc., markets
paging and mobile telephone solutions. Eagle acquired Contact Wireless in
January 2002. Contact Wireless provides customers with paging and mobile
telephone products and related monthly services in San Antonio and Houston
areas. Subsequent to the fiscal year ended August 31, 2003, Eagle intends to
divest this operating subsidiary in a related-party transaction.
Eagle's Paging Services revenues are reported under the category of
Other on the Company'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 Messaging Services
Eagle, through its subsidiary Link Two Communications, Inc., markets
messaging network services. Eagle is a common carrier of exclusively wholesale
one-way messaging and two-way messaging network services. Its customers purchase
messaging network services as an aggregator and resell Link Two Communication's
network services to individual subscribers and other communications providers.
Link Two Communications has been classified as an incumbent carrier by the FCC
and has secured the rights to use or options to purchase spectrum in all of the
major metropolitan U.S. cities on five PCP frequencies. Link Two Communications
has also secured several exclusive RCC frequencies providing regional coverage
in two of the top ten markets. Link Two Communications has secured an exclusive
block of FCC spectrum covering a majority of the population centers in the
southern and western United States in a successful bidding at the FCC auction.
Link Two Communications competes with many established companies
in the nationwide one- and two-way messaging services area. The paging industry
has declined over the past year and several major paging companies have
undergone significant beneficial financial restructurings. These companies are
able to offer products and related services at more favorable rates than Link
Two. Because the paging industry and related financial credit availability from
banks for financing emerging nationwide networks has been declining over the
last year, Link Two has been unable to obtain significant funding to expand and
provide cost effective service to its customers. Accordingly, Link Two has had
to curtail its development on a nationwide basis and restricted its operations
to serve the Houston and Dallas, Texas, markets. The equipment servicing the
nationwide network is inactive and has been impaired as well as the value of the
related FCC licenses. At August 31, 2002, management estimated through recent
sales of equipment and industry pricing of FCC licenses that an impairment
charge of $27,100,000 was necessary to reflect the ongoing value of its assets
and licenses.
Eagle's Messaging Services revenues are reported under the
category of Other on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category Eagle within
Note 22 - Industry Segments.
5
Eagle Wireless International
Wireless Messaging Hardware
Messaging is a method of wireless communications, which uses an
assigned radio frequency to contact a messaging subscriber anywhere within a
service area. A messaging system is generally operated by a service provider
that incurs the cost of building and operating the system. Each service provider
in the United States licenses spectrum from the FCC and elsewhere from the
authorized government body to operate a messaging frequency within either a
local, regional, or national geographical area. Each messaging subscriber is
assigned a distinct telephone number that a caller dials to activate the
subscriber's pager, a pocket-sized radio receiver carried by the subscriber. A
messaging switch receives telephone calls by the subscriber. The transmitters
manufactured by Eagle are specifically designed to simulcast, which is the
transmission of the same signal over two or more transmitters on the same
channel at the same time in an overlap area, resulting in superior voice and
data quality and coverage area. The radio signal causes the messaging device to
emit a beep or to vibrate, and to provide the subscriber with information from
the caller in the form of a voice, tone, numeric, or alphanumeric message.
A messaging device has an advantage over a landline telephone in that
the messaging device's reception is not restricted to a single location, and has
an advantage over a cellular portable telephone in that a messaging device is
smaller, has a much longer battery life, has excellent coverage, and is less
expensive to use. Historically, the principal disadvantage of traditional
messaging service in comparison to landline telephones or cellular portable
telephones has been that messaging provided only one-way communication
capabilities.
However, this limitation may have been overcome in the United States
as a result of the auction in 1994 by the FCC of nationwide and regional
licenses for designated narrowband personal communication services, radio
frequencies or spectrum to service providers. Many of the nationwide license
holders and many of the regional license holders are current Eagle customers,
directly or indirectly. The cost of the licenses to the narrowband personal
communication services auction winners in 1994 was approximately $1 billion. The
FCC anticipates that these narrowband personal communication services licenses
will be used to provide such new services as pager location, two-way
acknowledgment messaging, advanced voice messaging and data services.
The narrowband personal communication services radio frequencies
or spectrum are located at three separate points within the total radio
spectrum, at 902-928 MHz, 930-931 MHz and 940-941 MHz. Initially, the radio
frequencies located at 930-931 MHz and 940-941 MHz have been designated for
outbound message transmission, to the pager, and the 902-928 MHz have been
designated response channels, from the pager. This application is similar to
traditional messaging except that these license holders have been granted wider
frequency bandwidth permitting the user to transmit substantially more
information. In addition, Eagle manufactures other messaging infrastructure
products that cater to the VHF and UHF messaging frequencies in the United
States and other areas of the world as well as supporting most international
messaging brands.
The narrowband personal communication services nationwide licenses
cover all fifty states, the District of Columbia, American Samoa, Guam, the
Northern Marianas Islands, Puerto Rico and the United States Virgin Islands.
These licenses are divided into 50 kHz paired and unpaired channel categories.
Paired channels permit both outbound and inbound signals while unpaired channels
are limited to only outbound signals. The FCC has imposed infrastructure
construction or build-out requirements on all narrowband personal communication
services license holders. Each narrowband personal communication services
license holder must establish minimum service availability for at least 37.5% of
the population in its geographic region within five years after receiving the
license. After ten years, each narrowband personal communication services
license holder must make the service available to at least 75% of the area's
population. If a narrowband personal communication services license holder fails
to achieve these build-out requirements, it risks cancellation by the FCC of its
narrowband personal communication services license and a forfeiture of any
auction monies paid.
Eagle manufactures products that will enable messaging license
holders to legally put their systems into operation at a low cost, a strategy
adopted by Eagle to create a "captive" customer in terms of future build-out.
Eagle offers its customers an end-to-end solution for narrowband
personal communication services applications. Eagle has developed new technology
based products with enhanced architecture and technology from its existing
messaging systems to accommodate the advanced services available through
messaging and PCS. This system approach includes full product lines of radio
frequency network controllers, transmitters, receivers, and a special satellite
receiver system, to receive the response message from the end-user.
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The design of a messaging system is customer specific and depends on:
o The number of messaging subscribers the service provider desires to
accommodate,
o The operating radio frequency,
o The geography of the service area,
o The expected system growth, and
o Specific features desired by the customer.
Messaging equipment hardware and software developed by Eagle may
be used with all types of messaging service, including voice, tone numeric
(telephone number display) or alphanumeric messaging (words and numbers
display).
Switches
Eagle is involved at an early stage in the development of industry
wide technology standards and is familiar with developments in messaging
protocol standards throughout the world. Eagle works closely with its customers
in the design of large, complex messaging networks. Eagle believes that its
customers' purchasing decisions are based, in large part, on the quality and
technological capabilities of such networks. Eagle believes that the advanced
hardware and software features of its switches ensure high reliability and high
volume call processing.
Radio Frequency Equipment, Transmitters and Receivers
Transmitters are available in frequency ranges of 70 MHz to 960
MHz and in power levels of 2 Watts to 500 Watts. Radio link receivers are
available in frequency ranges of 70 MHz to 960 MHz. Satellite link receivers are
available for integration directly with the transmitters at both Ku- and C- band
frequencies.
Eagle's range of receivers detects the responses back from the two-way
narrowband personal communication services subscriber devices. The receivers
take advantage of Digital Sound Processing demodulation techniques that maximize
receiver performance. Depending upon frequency, antenna height, topography and
power, Eagle transmitter systems are designed to cover broadcast cells with a
diameter from 3 to 100 miles. Typical simulcast systems have broadcast cells
that vary from 3 to 15 miles in diameter. Eagle transmitters are designed
specifically for the high performance and reliability required for high speed
simulcast networks.
Controllers
Eagle currently offers products for transmitter control known as
Eagle's L20X transmitter control system, which is a medium-feature transmitter
control system used in domestic and international markets.
The principal products and enhancements currently being
manufactured and sold by Eagle relate to its wireless messaging products and
include the following:
Base Stations and Transmitters
Transmitters and full-featured transmitters called Base Stations
are used by messaging carriers to broadcast radio-frequency messages to
subscribers carrying pagers. Eagle offers a slimline Stealth and a larger
Quantum transmitter that is available in the 72MHz, VHF, UHF, and 900MHz
broadcast frequency ranges. Each unit can be equipped to provide an output power
ranging from 15 Watts up to 500 Watts on almost any domestic or international
messaging frequency.
Radio Frequency Power Amplifiers
Radio-frequency power amplifiers are a sub-component of both
messaging and SMR transmitters and base stations. The high, medium and low power
base station and link transmitter power amplifiers are designed to operate with
any FCC type accepted exciter or may be combined with an Eagle optional plug-in
base station in the same space as the power amplifier. All Eagle power
amplifiers above 100 Watts are equipped with Eagle "Heat Trap"(TM) design to
provide the user with long life and high reliability performance.
Extend-A-Page
Extend-a-Page is a compact lower-power transmitter and receiver set
designed to provide fill-in coverage in fringe locations where normal messaging
service from a wide-area messaging system is not adequate. The Extend-a-Page
receives the messaging data
7
on either a radio frequency control link or wireline link and converts this
information into low power simulcast compatible messaging transmissions on any
of the common messaging frequencies. The Extend-a-Page transmits the messaging
information at a one to two Watt level directly into hard to reach locations
such as hospitals, underground structures, large industrial plants, and many
locations near the outer coverage contour of messaging systems.
Link Products
Radio frequency and wireline communication links are needed to
connect multiple transmitters within a messaging network. Eagle provides both
Link equipment (the Link 20TX, 20RX, 20GX and 20PX) and the Link 20 software to
facilitate this interconnection. Major competitors have licensed the Eagle Link
20 software and have incorporated it as an industry standard into their
radio-messaging terminals. Customers may also purchase the same software
directly from Eagle as part of an Eagle system at a lesser cost. Management
believes that its software allows the user to mix and match the products of
different vendors on a common radio-messaging system.
In December 2002, the Company entered into a 4-year agreement,
licensing its wireless infrastructure products and service technology to DX
Radio Systems, Inc., of Sun Valley, California. The contract allows DX Radio to
manufacture and market the wireless infrastructure products and services that
Eagle Wireless International has been supplying for several years to the paging
and specialized mobile radio (SMR) markets. Eagle Wireless products covered
under this agreement include transmitters, base stations, paging terminals,
controllers, repeaters and receivers in all three major paging frequency bands.
These products are now being sold under the DX Eagle trade name. Additionally,
Eagle consigned certain inventory, sold certain trade booth assets and subleased
certain facility space as a part of the agreement. The agreement allows Eagle
Wireless to derive monthly revenue through the licensing agreement over the life
of the contract, while totally eliminating the overhead associated in its Eagle
Wireless subsidiary.
Eagle's Wireless International Products and Services revenues
are reported under the category of Products on the Company's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category Eagle within Note 22 - Industry Segments.
Customers
Eagle sells to a broad range of customers.
BroadbandMagic sells to a broad range of customers. These
customers are primarily within the hospitality industry, business-to-business
and the government sectors.
Eagle BDS Services historically sold its products and services
primarily in the Houston, San Antonio, Austin and Phoenix markets although today
markets such products and services nationwide. Eagle BDS Services markets these
products and services through direct marketing efforts and via Eagle's sales
staff and service centers. The majority of its customers historically have been
real estate developers, which required the structured wiring component in
addition to the BDS services. Today, the Company has experienced significant
success in marketing the BDS Services to municipalities, real estate developers,
hospitality operators and public utility districts with residential and
commercial customers typically subscribing to one or more bundled digital
services such as voice, video, data/Internet and security monitoring.
Eagle Technology Services markets its products and services
nationwide to a wide range of companies including small to medium sized
businesses as well as Fortune 1000 enterprises. The primary industries are oil /
gas, medical, hardware / software, real estate, staff leasing and government.
Eagle Communications Services sells its project management
services on a nationwide basis to a wide range of customers including
telecommunications, hospitality, industrial and petrochemical, oil / gas
companies and government sectors.
Eagle Messaging Services sells its messaging products and services
to both individual consumers and businesses.
Eagle markets the Orb' Phone Exchange non-line-of-sight
communications system to Fortune 1000 enterprises, commercial aviation,
government, the military and homeland security customers.
The Company did not have any customers that aggregated ten percent or
more of consolidated revenues in fiscal year 2003 and 2002; and had two
customers in fiscal year 2001 that accounted for 30% and 15% of consolidated
revenues.
8
Marketing and Sales
The majority of the company's products and services are marketed
through its employees using direct sales, channel marketing and various types of
direct marketing techniques.
Eagle BDS Services sells its products and services on a nationwide
basis through direct marketing efforts of its sales staff and service centers.
For the years ended August 31, 2003, 2002, and 2001, Eagle BDS Services,
represented 15%, 7%, and 2% of consolidated revenues, respectively.
Eagle Technology Services are marketed through direct sales staff
and through various types of direct marketing. For the years ended August 31,
2003, 2002, and 2001, Eagle Technology Services represented 21%, 54%, and 65% of
consolidated revenues, respectively.
Eagle Communications Services are marketed through Eagle's direct
sales staff. For the years ended August 31, 2003, 2002, and 2001, Eagle
Communications Services, represented 34%, 18%, and 20% of consolidated revenues,
respectively.
Eagle Messaging Services marketed through Eagle's direct sales staff
and publication advertising.
Eagle also markets the Orb'Phone Exchange non-line-of-sight
communications system directly to Fortune 1000 enterprises, commercial aviation,
government, the military and homeland security customers. Subsequent to the
fiscal year ending August 31, 2003, the Company announced that General Dynamics
Decision Systems, a business unit of General Dynamics, signed a five-year
distribution agreement to sell and support Eagle's breakthrough Orb'Phone
Exchange communications platform to customers in the U.S. Department of Defense
(DOD), General Services Administration (GSA), Defense Information Systems Agency
(DISA), and other U.S. and foreign government agencies.
Eagle Paging Services products and services are marketed through
Eagle's direct sales staff.
Eagle Security Services, are marketed through Eagle's direct sales
staff.
Eagle maintains an Internet web site at, www.eaglebroadband.com;
where information can be found on Eagle and its subsidiaries products and
services. The web site provides customers with a mechanism to request additional
information on products and allows the customer to quickly identify and obtain
contact information for their regional sales representative. Information on the
web site of Eagle or any of its subsidiaries is not part of this annual report.
Research and Development
Eagle believes that a strong commitment to research and development is
essential to the continued growth of its business. One of the key components of
Eagle's development strategy is the promotion of a close relationship between
its development staff, internally with Eagle manufacturing and marketing
personnel, and externally with Eagle customers. This strategy has allowed Eagle
to develop and bring to market customer-driven products that meet real customer
needs.
From 1999 to 2003, Eagle has focused a large portion of its new
development resources on the development of the new broadband multimedia and
Internet product line. In addition, Eagle has formed a number of strategic
relationships with other large suppliers and manufacturers that will allow the
latest in technology and techniques to be utilized in the company's convergence
set-top-box product line. Eagle will continue to incur research and development
expenses with respect to the convergence set-top-box product line during the
current fiscal year.
Eagle has extensive expertise in the technologies required to
develop wireless communications systems and products including high power, high
frequency RF design digital signal processing, real-time software, high-speed
digital logic, wireless DSL products, radio frequency and data network design.
Eagle believes that by having a research and development staff with expertise in
these key areas, it is well positioned to develop enhancements for its existing
products as well as the next generation of personal communication products.
Investment in advanced computer-aided design tools for simulation and analysis
has allowed Eagle to reduce the time for bringing new products to market.
Research and development expenditures incurred by Eagle for the fiscal years
ended August 31, 2003, 2002, and 2001 were $411,000, $404,000 and $1,276,000
respectively.
Manufacturing
Eagle currently manufactures its satellite-based communications and
wireless products at its facilities in League City, Texas. Some subassemblies
are manufactured for Eagle by subcontractors at various locations throughout the
world. Eagle's manufacturing
9
expertise resides in assembling subassemblies and final systems that are
configured to its customers' specifications. The components and assemblies used
in Eagle's products include electronic components such as resistors, capacitors,
transistors, and semiconductors such as field programmable gate arrays, digital
signal processors and microprocessors, and mechanical materials such as cabinets
in which the systems are built. Substantially all of the components and parts
used in Eagle's products are available from multiple sources. In those instances
where components are purchased from a single source, the supplier is reviewed
frequently for stability and performance. Additionally, as necessary, Eagle
purchases sufficient quantities of components that have long-lead requirements
in the world market. Eagle ensures that all products are tested, tuned and
verified prior to shipment to the customer.
Eagle has determined that the most cost effective manufacturing
method for its high volume multimedia and Internet product line is to utilize
offshore contract production facilities supplemented with high volume United
States based contract facilities. The high volume requirements of the company's
convergence set-top-box product line are well beyond the capabilities of the
current facilities and would be cost prohibitive to construct. However, in the
selection of a high volume international manufacturer, Eagle has selected EpoX,
a Taiwan Stock Exchange company with established subsidiaries in the USA,
Netherlands, China and Germany. With a strong research and development team,
EpoX is not only able to produce a wide range of products, but also has been
recognized as a pioneer in the field. EpoX is both ISO-9001 and ISO-9002
certified. The manufacturing location for the convergence set-top-box is the
EpoX facility in Taiwan.
Competition
Eagle competes with many established companies in the set-top-box
business including Scientific Atlanta, General Instrument, and many smaller
companies. Most of these companies have greater resources available than Eagle.
The markets that are currently developing for multimedia and other Internet
related products are extremely large and rapidly growing. Eagle has studied
these markets and is of the belief based on this research that it can
effectively compete in these markets with its new convergence set-top-box
product line. However, there can be no assurance that these conclusions are
correct and that the multimedia and Internet markets will continue to expand at
their current rates and that Eagle can gain significant market share in the
future.
Eagle BDS competes indirectly with many established companies and
service providers that provide fiber and cable, structured wiring, broadband
data/Internet, security monitoring, cable television and telephone services.
Most of these companies have greater resources than Eagle BDS. Eagle has studied
these markets, and is of the belief that the bundled digital services offered to
its customers as a complete package with one source billing, is a competitive
advantage for Eagle BDS. Eagle's residential customers are subject to developer
and homeowner association agreements that allow Eagle BDS to be the primary
single source provider of these services. However, there can be no assurance
that these conclusions are correct and that the bundled digital services market
will continue to expand at their current rates and that Eagle BDS can gain
significant market share in the future.
Eagle Technology Services competes with many established companies
in the enterprise integration and network management solutions markets.
Historically, this business unit also participated in product fulfillment by
reselling hardware. Most of these companies have greater resources available
than Eagle Technology Services. Eagle has studied these markets and is of the
belief that by offering enterprise and network management and product
fulfillment as a turnkey solution, to medium sized companies and Fortune 1000
enterprises with competitive pricing is a competitive advantage for Eagle
Technology Services. However, there can be no assurance that these conclusions
are correct and that the demand for these products and services will continue to
expand at their current rates and that Eagle Technology Services can gain
significant market share in the future.
Eagle Communications Services competes with many established
companies in the fiber and cable, structured wiring and project management
services areas. Most of these companies have greater resources available than
Eagle Communications Services. Eagle has studied these markets and is of the
belief that the offering of the collective services on a nationwide scale is a
competitive advantage for Eagle Communications Services. The use of the
sub-contractors located across the nation allows Eagle Communications Services
to complete large projects in an efficient manner, which is a valuable tool.
However, there can be no assurance that these conclusions are correct and that
these services will continue to expand at their current rates and that Eagle
Communications Services can gain significant market share in the future.
Eagle Messaging Services competes with many established companies
in the nationwide one and two-way messaging services area. Most of these
companies have greater resources available than Eagle Messaging Services.
Proprietary Information
Eagle attempts to protect its proprietary technology through
a combination of trade secrets, non-disclosure agreements, patent applications,
copyright filings, technical measures, and common law remedies with respect to
its proprietary technology. Eagle has not yet been issued any patents on its
products, technology or processes against such patent applications. This
protection may not preclude competitors from developing products with features
similar to Eagle's products. The laws of some foreign countries in which Eagle
10
sells or may sell its products do not protect Eagle's proprietary rights in the
products to the same extent as do the laws of the United States. Although Eagle
believes that its products and technology do not infringe on the proprietary
rights of others, there can be no assurance that third parties will not assert
infringement claims against Eagle in the future. If litigation resulted in
Eagle's inability to use technology, Eagle might be required to expend
substantial resources to develop alternative technology. There can be no
assurance that Eagle could successfully develop alternative technology on
commercially acceptable terms. Eagle has registered and trademarked the name of
BroadbandMagic for this wholly owned subsidiary. This name is thought by Eagle
to be a valuable addition to the intellectual property rights of Eagle.
Regulation
Many of Eagle's products operate on radio frequencies. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States and internationally. Regulatory approvals
generally must be obtained by Eagle in connection with the manufacture and sale
of its products, and by customers to operate Eagle's products. There can be no
assurance that appropriate regulatory approvals will continue to be obtained, or
that approvals required with respect to products being developed for the
personal communications services market will be obtained. The enactment by
federal, state, local or international governments of new laws or regulations or
a change in the interpretation of existing regulations could affect the market
for Eagle's products. Although recent deregulation of international
telecommunications industries along with recent radio frequency spectrum
allocations made by the FCC have increased the demand for Eagle's products by
providing users of those products with opportunities to establish new messaging
and other wireless personal communications services, there can be no assurance
that the trend toward deregulation and current regulatory developments favorable
to the promotion of new and expanded personal communications services will
continue or that future regulatory changes will have a positive impact on Eagle.
Employees
As of November 14, 2003, Eagle employed approximately 73
persons and retained 4 independent contractors. Eagle believes its employee
relations to be good. Eagle enters into independent contractual relationships
with various individuals, from time to time, as needed.
Risk factors that may affect Eagle's results of operations and financial
condition.
Investing in our common stock involves a high degree of risk. You
should carefully consider the risks described below before making an investment
decision. If any of the following risks actually occur, our business could be
harmed. The value of our stock could decline, and you may lose all or part of
your investment. Further, this Form 10-K contains forward-looking statements and
actual results may differ significantly from the results contemplated by such
forward-looking statements.
We have a history of operating losses and may never achieve profitability.
From inception through February 29, 2004, we have incurred an
accumulated deficit in the amount of $92,320,000. For the fiscal year ended
August 31, 2003, and the six months ended February 29, 2004, we incurred losses
from operations in the amount of $28,267,000 and $17,859,000, respectively. We
anticipate that we will incur losses from operations for the current fiscal
year. We will need to generate significant revenues and control expenses to
achieve profitability. Our future revenues may never exceed operating expenses,
thereby making the continued viability of our company dependent upon raising
additional capital.
As we have not generated positive cash flow from operations for the past three
fiscal years, our ability to continue operations is dependent on our ability to
either begin to generate positive cash flow from operations or our ability to
raise capital from outside sources.
We have not generated positive cash flow from operations during the last three
fiscal years and we currently rely on external sources of capital to fund
operations. For the last three fiscal years, we have suffered losses from
operations of approximately $73,011,000. At February 29, 2004, we had
approximately $5,189,000 in cash, cash equivalents and securities available for
sale, and a working capital deficit of approximately $3,370,000 Our net cash
used by operations for the six month period ended February 29,, 2004 was
approximately $3,165,000.
We believe our current cash position and expected cash flow from operations will
be sufficient to fund operations during the current fiscal year. Thereafter, we
will need to raise additional funding unless our operations generate sufficient
cash flows to fund operations. 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
may not be successful in any future best efforts financing efforts. We do not
have any significant credit facilities or firm financial commitments established
as of the date hereof. If we are unable to either obtain financing from external
sources or generate internal liquidity from operations, we may need to curtail
11
operations or sell assets.
We have been named a defendant in several lawsuits, which if determined
adversely, could harm our ability to fund operations.
Eagle Broadband and its subsidiaries have been named defendants in
several lawsuits in which plaintiffs are seeking substantial damages, which may
include any of the following lawsuits:
Intratech Capital Partners, Ltd. vs. Clearworks.net, Inc. In September 2003,
Intratech sued Clearworks.net alleging breach of contract for failing to pay for
financial advice and services allegedly rendered. Intratech is seeking damages
of approximately $6.8 million plus attorney's fees and costs.
Enron Corp. vs. United Computing Group, Inc. In September 2003, Enron sued
United Computing Group seeking to avoid and recover a transfer in the amount of
approximately $1,500,000 under Section 547 and 550 of the Bankruptcy Code.
Cornell Capital Partners, LP. vs. Eagle Broadband. In July 2003, Cornell Capital
sued Eagle Broadband alleging breach of contract, fraud and negligent
misrepresentation. Cornell Capital 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. To date, we have not registered the resale of
the shares underlying Cornell Capital's convertible debenture and we are not
doing so hereby. As of November 30, 2003, the principal balance of the debenture
of approximately $1.2 million was repaid, although the suit remains outstanding.
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 any one pending
lawsuit could substantially harm our ability to fund operations.
Our revenues may decrease if recurring-revenue contracts and security monitoring
contracts are cancelled.
For the twelve months ended August 31, 2003 and the six months ended
February 29, 2004, approximately 24% and 67%, respectively, of our revenue was
generated by recurring-revenue contracts with Eagle Broadband Services and our
security monitoring contracts with DSS Security. Although to date we have not
experienced any significant interruptions or problems in our broadband or
security services, any defects or errors in our services or any failure to meet
customers' expectations could result in the cancellation of services, the refund
of customers' money, or the requirement that we provide additional services to a
client at no charge. Any of these events, could reduce the revenues or the
margins associated with this revenue segment.
We rely heavily on third party suppliers for the material components for our
products, and supply shortages could cause delays in manufacturing and
delivering products which could reduce our revenues.
We rely upon unaffiliated suppliers for the material components and parts used
to assemble our products. Most parts and components purchased from suppliers are
available from multiple sources. We have not experienced significant supply
shortages in the past and we believe that we will be able to continue to obtain
most required components and parts from a number of different suppliers.
However, the lack of availability of certain components could require a major
redesign of our products and could result in production and delivery delays,
which could reduce our revenues and impair our ability to operate profitably.
Because our industry is rapidly evolving, if we are unable to adapt or adjust
our products to new technologies, our ability to compete and operate profitably
may be significantly impaired.
The design, development, and manufacturing of personal communication
systems, specialized mobile radio products, and multimedia entertainment
products are highly competitive and characterized by rapid technology changes.
We compete with other existing products and will compete against other
technologies. Development by others of new or improved products or technologies
may make our products obsolete or less competitive. While we believe that our
products are based on established state-of-the-art technology, our products may
become obsolete in the near future or we may not be able to develop a commercial
market for our products in response to future technology advances and
developments. The inability to develop new products or adapt our current
products to new technologies will impair our ability to compete and to operate
profitably.
Approximately 60% of our total assets are comprised of goodwill, which is
subject to review on a periodic basis to determine whether an impairment on the
goodwill is required. An impairment would not only greatly diminish our assets,
but would also require us to record a significant charge against our earnings.
12
We are required under generally accepted accounting principles to
review our intangible assets for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment at least annually. At the fiscal year ended
August 31, 2003, management determined that $1.8 million of goodwill associated
with the Comtel Communications acquisition was impaired. At November 30, 2003,
our goodwill was $76.3 million. If management determines that impairment exists,
we will 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.
In the past, we have incurred significant non-cash impairment charges with
respect to some of our assets. If we decide we need to further restructure,
abandon or impair any of our operations or assets, we would incur further
charges, which would reduce our earnings.
At August 31, 2003 and 2002, management determined that significant
non-cash impairment charges were necessary. For the fiscal year ended August 31,
2002, management determined that approximately $27.1 million in assets should be
impaired in order to properly value certain assets and licenses. For the fiscal
year ended August 31, 2003, management determined to impair intangible and
long-lived assets in the amount of $7.6 million, associated with the Company's
decision to no longer pursue the sales of low margin commodity products and
unprofitable business operations. In future periods, if management determines
that impairment exists, we will be required to record a significant charge to
earnings in our financial statements during the period in which any impairment
of our long- lived assets is determined.
Our business relies on our use of proprietary technology. Asserting, defending
and maintaining intellectual property rights is difficult and costly and the
failure to do so could harm our ability to compete and to fund our operations.
We rely, to a significant extent, on trade secrets, confidentiality agreements
and other contractual provisions to protect our proprietary technology. In the
event we become involved in defending or pursuing intellectual property
litigation, such action may increase our costs and divert management's time and
attention from our business. In addition to costly litigation and diversion of
management's time, any potential intellectual property litigation could force us
to take specific actions, including:
o cease selling products that use the challenged intellectual property;
o obtain from the owner of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o redesign those products that use infringing intellectual property.
We compete with many companies that are larger and better financed than us, and
our growth and profitability are dependent on our ability to compete with these
entities.
We face competition from many entities with significantly greater
financial resources, well-established brand names, and larger customer bases. We
may become subject to severe price competition for our products and services as
companies seek to enter our industry or current competitors attempt to gain
market share. We expect competition to intensify in the future and expect
significant competition from traditional and new telecommunications companies
including, local, long distance, cable modem, Internet, digital subscriber line,
microwave, mobile and satellite data providers. If we are unable to make or keep
our products competitively priced and attain a larger market share in the
markets in which our products compete, our levels of sales and our ability to
achieve profitability may suffer.
A system failure could delay or interrupt our ability to provide products or
services and could increase our costs and reduce our revenues.
Our operations are dependant upon our ability to support a highly
complex network infrastructure. Many of our customers are particularly dependent
on an uninterrupted supply of services. Any damage or failure that causes
interruptions in our operations could result in loss of these customers. To
date, we have not experienced any significant interruptions or delays which have
effected our ability to provide products and services to our clients. Because
our headquarters and infrastructure are located in the Texas Gulf Coast area,
there is a likelihood that our operations may be effected by hurricanes or
tropical storms, tornados, or flooding. Although we maintain redundant systems
in north Houston, Texas, which allow us to operate our networks on a temporary
basis, the occurrence of a natural disaster, operational disruption or other
unanticipated problem could cause interruptions in the services we provide and
significantly impair our ability to generate revenue and achieve profitability.
Our stock price has fluctuated intensely in the past, and stockholders face the
possibility of future fluctuations in the price of our common stock.
13
The market price of our common stock may experience fluctuations that
are unrelated to our operating performance. From January 30, 2003 through
January 30, 2004, the highest sales price of our common stock was $2.08 which
occurred on January 20, 2004, and the lowest sales price was $0.12, which
occurred on March 7, 2003. The market price of our common stock has been
volatile in the last 12 months and may continue to be volatile.
Our industry is highly regulated, and new government regulation could hurt our
ability to timely introduce new products and technologies.
Our telecommunication and cable products are regulated by federal,
state, and local governments. We are generally required to obtain regulatory
approvals in connection with providing telephone and television services. For
example, the cable and satellite television industry is regulated by Congress
and the Federal Communications Commission, and various legislative and
regulatory proposals under consideration from time to time may substantially
affect the way we design our products. New laws or regulations may harm our
ability to timely introduce new products and technologies, which could decrease
our revenues by shortening the life-cycle of a product.
Item 2. Description of Property
Eagle's headquarters are located in League City, Texas and include
approximately 34,375 square feet of leased office, production, and storage
space. The lease expires in May 2004. Eagle also maintains subsidiary offices in
one other Houston area location, with the lease expiring in December 2005 and in
San Antonio, Texas, with a lease expiring in July 2006. Facilities leases are
described herein in further detail in the Note 17 to the Company's Consolidated
Financial Statements included herein.
Eagle believes that all rental rents are at market prices. Eagle
has insured its facilities in an amount that it believes is adequate and
customary in the industry. Eagle believes that it has access to available
facilities that are adequate to meet its current requirements but anticipates
the need to acquire additional space within the next two years. Eagle believes
that suitable additional space in close proximity to its existing headquarters
will be available as needed to accommodate the growth of its operations through
the foreseeable future.
Item 3. Legal Proceedings
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.
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), In the United States District Court for the District of New Jersey. The
suit presents claims for breach of contract, state and federal securities 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. As of August 31, 2003, the
principal balance of the debenture was approximately $1.2 million. During the
three month period ended November 30, 2003, the principal balance of the
debenture 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
14
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 not
accrued any expenses against this lawsuit, as the outcome cannot be predicted at
this time.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
15
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Shares of Eagle common stock are listed on the American Stock
Exchange under the symbol "EAG." On April 28,, 2004, Eagle's common stock closed
at $1.15 per share. Eagle is authorized to issue 350,000,000 shares of common
stock, 191,517,856 of which were issued and outstanding at April 28, 2004. At
April 28, 2004 there were approximately 1,077 holders of record of Eagle common
stock.
The table set forth below, for the periods indicated, lists the
reported high and low sale prices per share of Eagle common stock on the
American Stock Exchange.
Eagle Common Stock
------------------
High Low
FISCAL 2003
Quarter ended November 30, 2002 $0.54 $0.27
Quarter ended February 28, 2003 $0.53 $0.16
Quarter ended May 31, 2003 $0.37 $0.12
Quarter ended August 31, 2003 $0.63 $0.33
FISCAL 2002
Quarter ended November 30, 2001 $0.95 $0.52
Quarter ended February 28, 2002 $1.00 $0.40
Quarter ended May 31, 2002 $0.47 $0.33
Quarter ended August 31, 2002 $0.72 $0.32
Eagle has never paid any cash dividends on its common stock and
does not anticipate paying cash dividends within the next two years. Eagle
anticipates that all earnings, if any, will be retained for development of its
business. Any future dividends will be subject to the discretion of the board of
directors and will depend on, among other things, future earnings, Eagle's
operating and financial condition, Eagle's capital requirements and general
business conditions.
Recent Sales of Unregistered Securities
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 $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 $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 $0.75 per share. The Company may redeem the bonds at any time after the
first year.
These transactions were completed pursuant to Regulation D of the
Securities Act. With respect to the issuances, the Company determined that each
purchaser was an "accredited investor" as defined in Rule 501(a) under the
Securities Act.
16
Except as otherwise noted, all sales of the Company's securities
were made by officers of the Company who received no commission or other
remuneration for the solicitation of any person in connection with the
respective sales of securities described above. The recipients of securities
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions.
Item 6. Selected Financial Data
The data that follows should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in Item 8 and
"Management's Discussion and Analysis."
Year Ended August 31,
------------------------------
($ in thousands) 2003 2002 2001 2000 1999
---------------- ----------------- --------------- ---------------- ------------------
Operating Data:
Net sales $11,593 $29,817 $28,110 $5,240 $2,217
Operating expenses $29,076 $43,635 $15,924 $3,985 $1,319
Operating income (loss) $(28,267) $(36,522) $(8,222) $(1,227) $(438)
Other income (expense), net $(5,426) $(265) $2,348 $1,516 $789
Income tax provision $0 $0 $0 $96 $91
---------------- ----------------- --------------- ---------------- ------------------
Net income (loss) $(33,693) $(36,787) $(5,874) $175 $168
================ ================= =============== ================ ==================
Earnings per share (basic) $(0.35) $(0.57) $(0.12) $0.01 $0.01
Statement of Cash Flows Data:
Cash provided by operating
activities $(6,085) $ (797) $(699) $(5,299) $(1,902)
Cash used by investing $(1,276) $(13,668) $(9,721) $(2,224) $(33)
activities
Cash provided (used) by financing $6,912 $ (2,406) $(3,846) $39,681 $1,025
activities
As of August 31,
2003 2002 2001 2000 1999
---------------- ----------------- --------------- ---------------- ------------------
Balance Sheet Data:
Total assets $121,006 $129,983 $170,667 $57,641 $10,320
Long-term debt --- $1,272 $2,136 $73 $12
Total stockholders' equity $101,976 $117,380 $149,128 $54,061 $8,894
Item 7. Management's Discussion and Analysis
Overview
During the fiscal year ended August 31, 2003, we implemented cost
reductions in various operating segments. In the aggregate, the Company reduced
its overall personnel headcount by 114 or a 50% reduction for the fiscal year
ended August 31, 2003 as compared to the fiscal year ended August 31, 2002. The
predominate reduction in headcount related to the Company's Atlantic Pacific /
Homes Systems structured wiring and commercial cabling segment with headcount
reductions of nine, six and 57 personnel in the first three quarters of fiscal
2003; aggregating an overall headcount reduction of 72 or 71% of this segments
workforce. Additionally, the Company reduced its United Computing Group computer
hardware sales segment by 18, nine, and two personnel in the first three
quarters of fiscal 2003; aggregating an overall reduction of 29 or 59% of this
segment's workforce. These two operating segments accounted for 101 of the 114
headcount reductions affected in fiscal 2003. Specifically, certain components
of these operating segments, i.e., home systems structured wiring, commercial
cabling and computer hardware sales, were not expected to provide significant
long-term revenues and profitability, and therefore were reduced. Following the
series of cost reduction activities implemented during the first three quarters
of fiscal 2003, Eagle's management assessed the viability of continued financial
investment in these unprofitable segments in the fourth quarter of fiscal 2003
and into early first quarter of fiscal 2004 and made further
17
reductions. In conjunction with the appointment of Mr. Weisman as our new Chief
Executive Officer in early October 2003, the Company completed the final
consolidation of the United Computing Group segment into other Eagle operations
while further reducing the Atlantic Pacific / Home Systems operations to an
outsource commercial cabling and structured wiring operation that project
manages affiliate contractors.
Additionally, in conjunction with the appointment of Mr. Weisman as
Chief Executive Officer, the Company made certain decisions during the
preparation of its Form 10-K in our first quarter of fiscal 2004 that affected
the value of certain assets as of August 31, 2003. These decisions included:
o A revised collection assessment of certain accounts receivable from
these and other down-sized Eagle business segments.
o The decision to no longer pursue new commercial structured cabling
opportunities on a direct basis versus the outsource model;
thereby resulting in the impairment of goodwill from its Atlantic
Pacific operations.
o The decision to no longer pursue Home Systems structured wiring
opportunities on a direct standalone model basis outside its BDS
model; thereby resulting in the impairment of its Home Systems
inventory.
o The decision to withdraw from certain unprofitable BDS
projects, namely its Austin area BDS developments; thereby
impairing certain assets including property, plant and equipment.
o The decision to settle certain existing legal proceedings versus
continuing the time consuming and costly process of defending such
proceedings; thereby resulting in the accrual of numerous reserves
for such settlements.
o The decisions to consolidate its operating segments into its corporate
lease space; thereby resulting in reserves for property lease
settlements.
o The decision to negotiate the settlement of certain sales tax
liabilities that resulted from a sales tax audit of United Computing
Group operations for periods that preceded the acquisition date
of this subsidiary.
Accordingly, Eagle incurred certain asset impairments and
operating charges in the fourth quarter associated with these decisions. These
asset impairment charges, allowances, write-off's and reserves included the
following:
o Accounts receivable write-off's and reserves aggregating
$2,177,000; of which $1,348,000 was attributable to the
decisions affecting the Company's Atlantic Pacific /
Home Systems operations, $15,000 was attributable to the
decisions affecting its United Computing Group operations
and $814,000 was attributable to the Company's Eagle,
EBS and Other segment operations.
o Inventory impairment charges of $2,627,000; of which
$501,000 was attributable to the decisions affecting the
Company's Atlantic Pacific / Home Systems operations and
$74,000 attributable to the decisions affecting its
United Computing Group operations. Additionally, the
Company recorded an impairment charge of $1,125,000 for
slow-moving and obsolete inventory in its Eagle operations.
This charge primarily resulted from a major client's
decision to upgrade from a 400 MHz chip to a 500 MHz chip
for the Company's convergent set top box. The Company's
inventory that was impaired was an AMD chip K-6 III-E
400ATZ which was an AMD "end of life" product. The Company
was required to place its final order by July 1, 2002 for
this chip that was deemed "end of life" by AMD for deliveries
through the Company's fiscal year 2003. The Company took
delivery of approximately 14,000 units between the final
order date and January 2, 2004 under non-cancelable,
non-returnable and non-rescheduleable terms. During the
Company's fiscal fourth quarter of 2003, the Company had
discussions with one of its major clients regarding future
orders and volume commitments for set-top boxes. Also,
during the fourth quarter of fiscal 2004, the Company's
third party manufacturer of the set-top boxes and the
Company determined that additional components were
approaching "end of life". The Company was faced with a
decision to either complete a redesign using the remaining
chips in inventory and then to complete another redesign
to migrate to AMD's new chip along with replacement
components that were approaching "end of life". The
Company determined that it was more cost effective to
complete one redesign on the new chip and other "end of
life" components and consequently recorded an impairment
charge in the amount of $1,125,000.
o Litigation settlement costs and reserves of $3,650,000
against certain of the legal proceedings previously
discussed in Item 3. Legal Proceedings. Additionally, the
Company recorded charges aggregating $2,274,000 to settle
threatened and existing legal proceeding associated with
prior financing transactions, including the Kaufman
litigation.
o Lease settlement costs and reserves of $171,000 were
attributable to the decision to consolidate various operating
segments into its corporate lease space; thereby resulting in
reserves for early exit of such leases.
o Impairment, write-down's and restructuring costs
aggregating $7,611,000; of which $1,878,000 was
attributable to an impairment of goodwill in the
Company's Atlantic Pacific operations following the
Company's decision to no
18
longer pursue commercial cabling opportunities on a
direct basis versus an outsource model. These costs were
also comprised of $3,412,000 in impairment of property
and equipment following the Company's decision to withdraw
from certain unprofitable BDS projects, namely in the
Austin area, and $323,000 of impairment of property and
equipment from the Company's Atlantic Pacific / Home
Systems operations following the decision to no longer
pursue structured wiring opportunities on a direct
standalone basis outside of its BDS model. With respect to
the Company's $3,412,000 impairment charge related to
property and equipment, the Company's Atlantic Pacific and
Home Systems operating segment downsized unprofitable
operations including the Austin Area BDS projects during the
second and third quarters of fiscal 2003 in an effort to
reduce the operating expenses and associated cash burn.
The Company subsequently made a decision to withdraw from
certain unprofitable BDS projects and sent correspondence
to affected homeowners on September 11, 2003. Additionally,
the aggregate total included a $553,000 charge for certain
sales tax liabilities that resulted from an audit of the
Company's United Computing Group operations for time periods
that preceded the acquisition date of this operation. The
final determination from this audit was completed on June
10, 2003.
Eagle does not expect to incur any additional future period costs
associated with such restructuring activities other than those recorded in the
fourth quarter of fiscal 2003.
The Company reduced its personnel from a headcount of 228 at August
31, 2002 to 114 at August 31, 2003 and then further to 73 by November 30, 2003.
The Company's payroll is processed and paid every two weeks resulting in 26 pay
periods per annum. The Company's per pay period payroll costs was reduced from
$441,307 at August 31, 2002 to $222,528 at August 31, 2003 and then further to
$161,745 at November 30, 2003; resulting in per payroll period cost savings of
$218,779 at August 31, 2003 and $279,562 at November 30, 2003 as compared to
August 31, 2002. These respective per payroll period cost savings translate into
annualized cost savings of approximately $5,688,242 and $7,268,591 at August 31,
2003 and November 30, 2003, respectively. Of the $5,688,242 annualized cost
savings from personnel reductions at August 31, 2003, $2,955,705 relates to
"Direct Labor and Related Costs" contained in Cost of Goods Sold and $2,732,537
relates to the Company's operating expenses line item "Salaries and Related
Costs". Of the $7,268,591 annualized cost savings from personnel reductions at
November 30, 2003, $3,638,499 relates to "Direct Labor and Related Costs"
contained in Cost of Goods Sold and $3,630,092 relates to the Company's
operating expenses line item "Salaries and Related Costs
For the year ended August 31, 2003, Eagle's business operations
reflected further investment and expansion into the broadband products and
services sector; paving the way for future growth of the BDS business in
conjunction with one of Eagle's objectives of producing profitable recurring
revenues while moving away from commodity product and service sales with low
gross margins. In addition, during fiscal 2003 and 2002, Eagle conducted
extensive cost reduction and containment activities associated with such
decisions to move away from selling these commodity products. We believe that
the effects of these cost reductions will significantly reduce our fiscal 2004
operating expenses. Eagle's consolidated operations generated revenues of
$11,593,000 with a corresponding gross profit of $809,000 for the fiscal year
ended August 31, 2003. The significant decline in revenues in fiscal 2003 is
primarily attributable to the discontinued direct sales of low-margin commodity
computer products in Eagle's subsidiary United Computing Group, Inc. consistent
with their previously announced strategy of concentrating UCG's going-forward
efforts as a technology service provider versus its historical emphasis on
direct product fulfillment. Additionally, a decline in the sale of commercial
and residential home cabling occurred as a result of a deferral of
implementation of national contracts and a discontinuance of home cabling
projects in Arizona, Houston, San Antonio and Austin, Texas markets, partially
offset by increased sales of broadband products and services.
Eagle incurred a net loss of $33,693,000 for the fiscal year
ended August 31, 2003. The loss was primarily attributable to Eagle's loss from
operations that included non-cash impairment of intangible and long-lived assets
of $7,611,000 associated with impairments, write-off's and reserves,,$3,650,000
of litigation settlement charges, $2,274,000 to settle threatened and existing
legal proceedings associated with prior financing transactions, and $2,177,000
for accounts receivable write-off's and reserves discussed in detail immediately
above.. Eagle consolidated management positions and centralized financial and
administrative functions, research and development activities and marketing of
all products and services in an effort to minimize unnecessary and duplicative
expenditures, decrease net loss, and to streamline the flow of information to
senior management from such centralization and consolidation measures. To date,
senior management believes that the implementation of cost reductions has
enabled management to receive more timely information to react to changing
market conditions.
Concurrently, Eagle is expanding its' BDS model for nationwide
distribution of voice, video and data content. Eagle has increased sales efforts
in the telephone, cable, Internet, security services and wireless segments and
securing long-term relationships for its' bundled digital services 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
19
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.
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 home in new
development, which are currently under negotiation. The $143 per month BDS
charge represented the net expected average monthly proceed 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
20
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.
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
August 31, 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 August 31, 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
21
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 $230,397 and $147,696
as of August 31, 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.
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
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.
22
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 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 year ended August 31, 2003, Eagle accounts receivables
decreased to $1,704,000 from $5,028,000 at August 31, 2002. The majority of this
decrease was due to the decline in lower margin commodity computer product and
structured cabling revenues compared to the prior year combined with the write
down of $2,177,000 in accounts receivable for allowance for doubtful accounts
associated with realigned and impaired operations and the sale of a net of
$243,650 in accounts receivable to Southwest Bank
23
of Texas in conjunction with a purchase and sale agreement entered into by
Eagle's subsidiaries, United Computing Group, Inc. and Atlantic Pacific
Communications, Inc. Accounts receivable write-off's and reserves aggregated
$2,177,000; of which $1,348,000 was attributable to the decisions affecting the
Company's Atlantic Pacific / Home Systems operations, $15,000 was attributable
to the decisions affecting its United Computing Group operations and $814,000
was attributable to the Company's Eagle, EBS and Other segment operations.
During fiscal 2003, the Company's accounts receivable aging as
measured by day's sales outstanding, "DSO", increased substantially from quarter
to quarter. DSO increased from 86 days for the first quarter ended November 30,
2002 to 121 days for the second quarter ended February 28, 2003 and then to 172
days for the third quarter ended May 31, 2003. The Company's allowance for
doubtful accounts totaled $242,000, $242,000 and $284,000 for the first three
quarters, respectively. The Company believed that the customers contributing to
the increased DSO were credit worthy, notwithstanding increased receivables
aging, and had the ability to pay, although the associated aging of receivables
from certain major national home builders in the Company's Atlantic Pacific /
Home System segment had deteriorated as evidenced by the increased DSO.
Management's confidence in its ability to collect aged receivables was based on
the long-term nature of it BDS development contracts and the perceived ability
of its customers to pay. Eagle initiated certain aggressive collection measures
including filing liens on national home builders in its BDS developments during
the third quarter of fiscal 2003. Following the appointment of its new Chief
Executive Officer in October 2003 and the finalization of going-forward business
strategy by segment, the Company made decisions to no longer pursue certain
business opportunities, including the Company's Atlantic Pacific / Home Systems
and United Computing Group segments as discussed in additional detail in the
Overview section of Item 7 Following the decision to no longer pursue these
business opportunities, numerous home builders disputed receivable balances
related to these exited BDS projects and claimed offsets for having to replace
Eagle with alternative contractors. Due to the decisions reached in the fourth
quarter of fiscal 2003 regarding the decisions to no longer pursue certain
business opportunities, Eagle's management subsequently determined that certain
of its receivables, previously viewed as collectible in prior reporting periods,
had become impaired and accordingly, in conjunction with these decisions, the
Company recorded write-off's and reserves aggregating $2,177,000 against its
account receivable, thereby bringing its DSO down to 75 days at the quarter
ended August 31, 2003.
Eagle maintains allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments
or other customer disputes that Eagle's management determines might lead to
impairment. If the conditions of our customers or distribution partners were to
deteriorate or otherwise should our business strategy changes have a material
impact on such relationships, resulting in a potential impairment of their
ability or decision to make required payments, we examine our provisions for
doubtful accounts and record for such estimate losses. Earnings are charged with
a provision for doubtful accounts based on collection experience and current
review of the collectibility 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 August 31, 2003, Eagle's
inventory totaled $3,199,000 as compared to $6,059,000 at August 31, 2002. The
majority of this decrease was due to a decrease in raw materials inventory
resulting from reserves, write-downs and allowances of $2,627,000 for realigned
and impaired commodity related product lines. Inventory impairment charges
totaled $2,627,000; of which $501,000 was attributable to the decisions
affecting the Company's Atlantic Pacific / Home Systems operations and $74,000
attributable to the decisions affecting its United Computing Group operations.
Additionally, the Company recorded an impairment charge of $1,125,000 for
slow-moving and obsolete inventory in its Eagle operations. This charge
primarily resulted from the Company's determination that it was more cost
effective to complete one redesign on a new chip set and other end of life
components versus a redesign revolving around being able to use the remaining
chips in inventory following a major client's decision to upgrade from a 400 MHz
chip to a 500 MHz chip for the Company's convergent set top box.
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.
24
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.
Results of Operations
Year Ended August 31, 2003 Compared to Year Ended August 31, 2002
Net Sales. For the year ended August 31, 2003, net sales declined
to $11,593,000 from $29,817,000 during the year ended August 31, 2002. The
overall decrease of 61% was primarily attributable to the Company's decision to
no longer pursue direct sales of low-margin commodity computer products in the
Company's subsidiary United Computing Group, Inc. consistent with their
previously announced strategy of concentrating UCG's going-forward efforts as a
technology service provider versus its historical emphasis on direct product
fulfillment. Additionally, a decline in the sale of commercial and residential
home cabling occurred as a result of a deferral of implementation of national
contracts and the Company's decision to no longer pursue Atlantic Pacific / Home
Systems structuring wiring opportunities on a direct standalone model basis
outside of its BDS model, including home cabling projects in Arizona, Houston,
San Antonio and Austin, Texas markets, partially offset by increased sales of
broadband products and services.
Cost of Goods Sold. For the year ended August 31, 2003, cost of goods
sold declined to $10,784,000 from $22,704,000 during the year ended August 31,
2002. The decrease was primarily attributable to the Company's decision to no
longer pursue the direct sales of low-margin commodity computer products and
commercial structured wiring in the markets referenced above. Eagle's overall
gross profit percentage was 7% and 24% for the years ended August 31, 2003 and
August 31, 2002. This decrease is primarily attributable to write-downs of
inventory of $2.6 million in connection with impaired, slow moving and obsolete
inventory.
Eagle's Structured Wiring cost of goods sold decreased to
$1,774,000 from $2,121,000 for the period ending August 31, 2003 and 2002,
respectively on corresponding revenues for these same periods of $3,692,000 and
$8,036,000; thereby resulting in a
25
gross margin decline to $1,918,000 from $5,915,000 for the same periods. This
gross margin decline is primarily attributable to the company's decision to no
longer pursue the direct sales of commercial structured wiring and inventory
write-downs totaling $0.5 million.
Eagle's Broadband Services cost of goods sold increased to $903,000
from $763,000 for the period ending August 31, 2003 and 2002, respectively on
corresponding revenues for these same periods of $2,809,000 and $2,657,000;
thereby resulting in a gross margin increase to $1,906,000 from $1,894,000 for
the same periods. This gross margin increase is primarily attributable to the
increase in revenues for this sector.
Eagle's Products cost of goods sold decreased to $5,400,000 from
$15,250,000 for the period ending August 31, 2003 and 2002, respectively on
corresponding revenues for these same periods of $3,342,000 and $16,108,000;
thereby resulting in a gross margin decline to a deficit $2,058,000 from
$858,000 for the same periods. This gross margin decline is primarily
attributable to the decline in revenues for this sector, resulting from Eagle's
decision to no longer pursue direct sales of low-margin commodity computer
products and inventory write-downs totaling $2.1 million .
Operating Expenses. For the year ended August 31, 2003, operating
expenses decreased to $29,076,000 from $43,635,000 for the year ended August 31,
2002. The primary portions of the decrease are discussed below:
A $19,489,000 decrease in non-cash impairment charges resulting from
a $7,611,000 non-cash impairment charge for the year ended August 31,
2003 associated with the Company's decision to no longer pursue the
direct sales of low margin commodity products discussed above
compared to a $27,100,000 non-cash impairment charge for the year
ended August 31, 2002, for the impairment of licenses and equipment
in Eagle's Link Two subsidiary. At August 31, 2003, management
determined that a $7,611,000 non-cash impairment charge was
necessary for realigned, impaired and abandoned operations including
direct sales of low margin commodity products, residential and
commercial structured wiring operations and the withdrawal from
its Austin, Texas 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 Atlantic Pacific Comtel acquisition of
$1,878,000.
A $1,693,000 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 $716,000 decrease in advertising and promotion, due primarily to
extensive cost reductions measures implemented in fiscal 2003 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 $1,431,000 decrease in depreciation and amortization, due
principally to the disposal of certain assets from the Company's
Austin area BDS operations.
An $8,763,000 increase in other support costs, due to an increase
in litigation settlement costs of $3,650,000, bad debt expense of
$2,177,000 and various charges included in accrued expenses related
to costs associated with reserves for early terminations of certain
property leases totaling $171,000 and reserves for sales tax
liabilities that resulted from a sales tax audit of the Company's
United Computing Group operation for time periods that preceded the
acquisition date of this operation totaling $553,000.
Net Loss. For the year ended August 31, 2003, Eagle's net loss was
$33,693,000, compared to a net loss of $36,787,000 during the year ended August
31, 2002.
Changes in Cash Flow. Eagle's operating activities used net cash of
$6,085,000 in the year ended August 31, 2003, compared to use of net cash of
$797,000 in the year ended August 31, 2002. The increase 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. Eagle's investing activities used
net cash of $1,276,000 in the year ended August 31, 2003, compared to
$13,668,000 in the year ended August 31, 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 $6,912,000, in the year ended August 31, 2003, compared to $2,406,000 of
cash used in the year ended August 31, 2002. The increase is attributable to an
increase in notes payable aggregating $7,297,000 in conjunction with the
Company's financing activities in fiscal 2003 as compared to a net repayment
against lines of credit in the amount of $1,846,000 and purchase of treasury
stock of $918,000 in fiscal 2002.
26
Liquidity and Capital Resources. Current assets for the year ended
August 31, 2003 totaled $8,109,000 (includes cash and cash equivalents of
$824,000 and Securities held for Resale of $1,714,000) as compared to
$14,866,000 reported for the year ended August 31, 2002. During the first fiscal
quarter of 2004, Eagle has received net proceeds of $7,687,000 from private
placement offerings of stock and bonds and through the sale of marketable
securities held as short term investments and has retired or reduced certain of
its notes payable, accounts payable and other obligations including numerous
lawsuits; thereby significantly reducing the Company's current and contingent
liabilities. Additionally, the Company has $1,259,000 of Burst.com stock held in
short term investments; valued as of November 21, 2003.
The Company anticipates that it will incur significantly less
capital expenditures for broadband fiber infrastructure for the balance of the
current fiscal year 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 a fiber network. Historically, the
Company built out these networks, thereby incurring significant capital
expenditures. The Company incurred approximately $94,000 in capital expenditures
in the first fiscal quarter of 2004 ended November 30, 2003. The Company expects
to spend $1,000,000 or less on capital expenditures in fiscal 2004; an
anticipated reduction of at least $1,121,000 as compared to $2,121,000 for
fiscal 2003. However, the Company could adjust its capital expenditure plan in
the second half of the current fiscal year if future business opportunities
dictate.
The Company reduced its personnel from a headcount of 228 at August
31, 2002 to 114 at August 31, 2003 and then further to 73 by November 30, 2003.
The Company payroll is processed and paid every two weeks resulting in 26 pay
periods per annum. The Company's per pay period payroll costs was reduced from
$441,307 at August 31, 2002 to $222,528 at August 31, 2003 and then further to
$161,745 at November 30, 2003; resulting in per payroll period cost savings of
$218,779 at August 31, 2003 and $279,562 at November 30, 2003 as compared to
August 31, 2002. These respective per payroll period cost savings translates
into annualized cost savings of approximately $5,688,242 and $7,268,591 at
August 31, 2003 and November 30, 2003, respectively.
The Company expects that certain of its liabilities listed on the
balance sheet under the headings Accounts Payable, Accrued Liabilities and Notes
Payable will be retired by issuing stock versus cash during the next 12 months.
The Company has historically used stock for retirement of certain liabilities on
a negotiated basis. The Company issued stock for retirement of certain
liabilities aggregating $5,696,000, $3,586,000 and $13,878,000 for fiscal years
2001, 2002, and 2003, respectively. During the first fiscal quarter ended
November 30, 2003, the Company retired approximately $6,067,000 in liabilities
with stock versus cash Eagle Broadband expects to continue its practice of
retiring certain liabilities as may be negotiated through a combination of cash
and the issuance of shares of Eagle common stock. The Company cannot quantify
the amount of common stock expected to be issued to retire such debts at this
time and as such will report these results on a quarterly basis. In the first
quarter, the Company completed a $7.7 million financing. 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 before September 2004 or thereafter, 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 obligations Payments due by period
Total Less than 1-3 3-5 More than
1 year years years 5 years
Long-Term Debt 5,779 5,779 --- --- ---
Obligations
Operating Lease 695 521 174 --- ---
Obligations
Total 6,474 6,300 174 --- ---
27
The Company's contractual obligations consist of long-term debt as
set forth in Note 6, (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 7 -
Management's Discussion and Analysis under the heading (Off-Balance Sheet
Arrangements) and Note 17 to the Company's financial statements under the
heading (Commitments and Contingent Liabilities).
Year Ended August 31, 2002 Compared to Year Ended August 31, 2001
Net Sales. For the year ended August 31, 2002, net sales increased
to $29,817,000 from $28,110,000 during the year ended August 31, 2001. The
overall increase of 6% was primarily attributable to added sales from the
Company's broadband service offerings through its subsidiaries ClearWorks
Communications and ClearWorks Home Systems, along with revenues from its Contact
Wireless and DSS Security subsidiaries that were acquired in January 2002. These
increases were partially offset by a decline in product revenues from the
Company's United Computing Group subsidiary due to the loss of a major customer
in the energy sector and an overall decline in the IT procurement market in 2002
and a minor decrease in revenues from the Company's Atlantic Pacific
Communications subsidiary. Atlantic Pacific provides project planning,
installation, project management, testing and documentation of fiber and cable
to commercial and industrial clients throughout the United States while United
Computing Group provides business-to-business hardware and software network
solutions and network monitoring services.
Cost of Goods Sold. For the year ended August 31, 2002, cost of goods
sold increased to $22,704,000 from $20,408,000 during the year ended August 31,
2001. The increase was primarily attributable to added cost of sales comprised
of direct labor, materials and related costs for both broadband services and
Eagle's Atlantic Pacific Communications subsidiary. Atlantic Pacific provides
project planning, installation, project management, testing and documentation of
fiber and cable to commercial and industrial clients throughout the United
States. Eagle's overall gross profit percentage was 24% and 27% for the years
ended August 31, 2002 and August 31, 2001. This decrease is primarily
attributable to lower profit margins on volume sales of computers and related
equipment and increases in other manufacturing costs associated with the
production of the convergent set-top box.
Eagle's Structured Wiring cost of goods sold decreased to
$2,121,000 from $2,345,000 for the period ending August 31, 2002 and 2001,
respectively on corresponding revenues for these same periods of $8,036,000 and
$7,643,000; thereby resulting in a gross margin increase to $5,915,000 from
$5,298,000 for the same periods. This gross margin increase is primarily
attributable to the increase in revenues for this sector combined with an
increase in commercial cabling margin rates
Eagle's Broadband Services cost of goods sold increased to $763,000
from $260,000 for the period ending August 31, 2002 and 2001, respectively on
corresponding revenues for these same periods of $2,657,000 and $523,000;
thereby resulting in a gross margin increase to $1,894,000 from $263,000 for the
same periods. This gross margin increase is primarily attributable to the
increase in revenues for this sector.
Eagle's Products cost of goods sold increased to $15,250,000 from
$14,931,000 for the period ending August 31, 2003 and 2002, respectively on
corresponding revenues for these same periods of $16,108,000 and $19,342,000;
thereby resulting in a gross margin decline to $858,000 from $4,411,000 for the
same periods. This gross margin decline is primarily attributable to the decline
in revenues for this sector resulting from Eagle's loss of a major Fortune 100
customer that filed for protection under Chapter 11 of the Bankruptcy Code.
Operating Expenses. For the year ended August 31, 2002, operating
expenses increased to $43,635,000 from $15,924,000 for the year ended August 31,
2001. The primary portions of the increase are discussed below:
A $27,100,000 non-cash impairment charge was expensed at August 31,
2002, for impairment of licenses and equipment in Eagle's Link Two
operations. 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.
28
A $1,626,000 increase in salaries and related costs, as a result
of its acquisitions and expanded business.
A $363,000 increase in advertising and promotion, due primarily to
introductions and expansion of the Company's broadband services and
convergent set-top box offerings.
A $335,000 net increase in other support costs, due to an increase in
salary and related costs, rents, interest, contract labor,
professional fees and communication costs. This net increase
included an offset of $729,000 associated with a decrease in
advertising and promotion, due primarily to decreased attendance at
conventions and trade shows.
Net Earnings. For the year ended August 31, 2002, Eagle's net loss
was $36,787,000, compared to a net loss of $5,874,000 during the year ended
August 31, 2001.
Off-Balance Sheet Arrangements. The Company has no
off-balance sheet structured financing arrangements. The Company has operating
leases primarily for office space. The Company incurred office space rental
expense of $1,183,000, $436,219 and $232,195 in fiscal years ended August 31,
2003, 2002, and 2001, respectively. Future minimum rental commitments under
non-cancelable leases are $521,000, $116,000 and $58,000 for fiscal years ended
August 31, 2004, 2005 and 2006, respectively. .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Equity Market Risks
The Company is exposed both to market risk from changes in interest
rates on funded debt and changes in equity values on common stock investments it
holds in publicly traded companies. The Company also has exposure that relates
to the Company's revolving credit facility. 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 $1,714,006 in market value as of August 31, 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 which represented greater than
10% of its revenues during fiscal 2002 and, as such, does not believe that the
credit risk posed by any specific customer would have a material adverse affect
on its financial condition.
International Business Risk
Eagle generated net sales in markets outside the United States, which
amount to less than 5% of total Eagle net sales in the last three years. Sales
are subject to the customary risks associated with international transactions,
including political risks, local laws and taxes, the potential imposition of
trade or currency exchange restrictions, tariff increases, transportation
delays, difficulties or delays in collecting accounts receivable, and exchange
rate fluctuations. Pre-payments and letters of credit drawn on American or
limited foreign corresponding banks are required from international customers to
reduce the risk of non-payment.
Item 8. Consolidated Financial Statements
The financial statements commencing on page F-1 have been audited by
Malone & Bailey, PLLC as of August 31, 2003, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended and
McManus & Co., P.C., independent certified public accountants, to the extent and
for the periods set forth in their reports appearing elsewhere herein and are
included in reliance upon such reports given upon the authority of said firm as
experts in auditing and accounting.
29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This disclosure has been previously reported in the Company's Form 8-K
filed September 15, 2003.
Item 9A. Controls and Procedures
Evaluation of Disclosure 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 annual
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.
Changes In Internal Controls
There has been no change in the Company's internal control over
financial reporting that occurred during the year ended August 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain information required by this item is incorporated herein
by reference from the information provided in Eagle's Proxy Statement. Certain
information about the executive officers of Eagle is set forth below. Executive
officers of Eagle are elected to serve until they resign or are removed, or are
otherwise disqualified to serve, or until their successors are elected and
qualified.
30
EXECUTIVE OFFICERS
Our executive officers are as follows:
Name Age Office Held
---- --- -----------
David Weisman 41 Chief Executive Officer
H. Dean Cubley 62 Chief Technical Officer
Christopher W. Futer 65 Secretary
Richard Royall 57 Chief Financial Officer
MR. DAVID A. WEISMAN. Mr. Weisman, age 41, has served as director and
chief executive officer of Eagle Broadband since October 2003. Mr. Weisman was
elected chairman of the board on April 27, 2004. Prior to joining Eagle, Mr.
Weisman served as Vice President Sales and Marketing for IP Dynamics from 2002
to 2003. Mr. Weisman co-founded and served as Vice President Sales and Marketing
for Canyon Networks from 2001-2002. Mr. Weisman served as Vice President
Marketing and Customer Service for ACT Networks from 2000 to 2001 until being
acquired by Clarent Corporation.. Mr. Weisman also co-founded and served as Vice
President of Sales and Marketing for Thomson Enterprise Networks from 1996 to
1998. Following his career at Thomson and prior to joining ACT Networks, Mr.
Weisman took time off from his career during 1998-2000.
DR. H. DEAN CUBLEY. Dr. Cubley, age 62, served as chairman of the
board from March 1996 to April 27, 2004, as chief executive officer from March
1996 to October 2003, and as president from March 1996 until September 2001. Mr.
Cubley assumed the role of Chief Technical Officer in October 2003 and continues
as a director.
CHRISTOPHER W. "JAMES" FUTER. Mr. Futer, age 65, has served as a
director and company secretary of Eagle since March 1996 and served as vice
president of Eagle from 1996 to July 2002 when he retired
RICHARD R. ROYALL. Mr. Royall, age 57, has served as chief
financial officer since March 1996. Mr. Royall has been a certified public
accountant since 1971.
Item 11. Executive Compensation
The information required by this item is incorporated herein by
reference from the information provided in the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information, as of August 31, 2003,
with respect to the Company's compensation plans under which common stock is
authorized for issuance
Number of Securities
Remaining Available for
Number of Securities Weighted Average Future Issuance Under
To be Issued Upon Exercise Price of Equity Compensation
Exercise of Outstanding Outstanding Plans (Excluding
Options, Warrants and Options, Securities
Rights Warrants and Rights Reflected in Column A)
Plan Category (A) (B) (C)
- ---------------------------------------------------------------------- -------------------------
- ---------------------------------------------------------------------- -------------------------
Equity Compensation Plans 406,131 $1.27 551,370
Approved by Security Holders
Equity Compensation Plans Not
Approved by Security Holders
(1) 5,991,667 $1.47 0
----------------------------------------- ------------------------
6,397,798 $1.45 551,370
Total
(1) A description of the equity compensation not approved by the security holders is set forth in note 13 to the financial
statements contained in this Form 10-K.
31
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference from the information provided in the Company's Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by
reference from the information provided in the Company's Proxy Statement.
Item 15--Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules:
The financial statements are set forth under Item 8 of this Annual
Report on Form 10-K. 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 August 31, 2003:
A report on Form 8-K, announcing information under Item 5 of the
report, was filed on June 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 August 27, 2003 with the Securities and Exchange
Commission.
(c) Exhibit Listing
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1(a) Eagle Broadband, Inc. Articles of
Incorporation, as Amended and Restated,
dated February 13, 2002.
Exhibit 3.1(b) Eagle Broadband, Inc. Articles of
Incorporation, as Amended, dated February
17, 2004.
Exhibit 3.2 Amended and Restated Eagle Broadband, 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 of
Form S-3, file no. 333-111160).
Exhibit 4.2 Purchase Agreement by and between Eagle
Broadband and Investors dated August
23, 2003, including registration rights and
security agreement attached as an exhibit
thereto (incorporated by reference to
Exhibit 10.1 of Form S-3 file no.
333-109481)
Exhibit 4.3 Q-Series Bond Agreement (incorporated by
reference to Exhibit 10.3 of Form S-3, file
no. 333-106074)
Exhibit 4.4 Addendum to Q-Series Bond Agreement
(incorporated by reference to Exhibit 10.4
of Form S-3, file no. 333-106074)
Exhibit 4.5 Form of Subscription Agreement for Q Series
Bond, between Eagle Broadband and certain
investors (incorporated by reference to
Exhibit 10.5 of Form S-3, file no.
333-106074)
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 1996 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.1
of Form S-8 file no. 333-72645)
Exhibit 10.3 2002 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 of Form S-8 file
no. 333-97901)
32
Exhibit 10.4 2002 Stock Incentive Plan, as Amended
(incorporated by reference to Exhibit
10.1 of Form S-8 file no. 333-102506)
Exhibit 10.5 2003 Stock Incentive and Compensation Plan
(incorporated by reference to Exhibit 10.1
of Form S-8 file no. 333-103829)
Exhibit 10.6 2003 Stock Incentive and Compensation Plan,
as Amended (incorporated by reference to
Exhibit 10.1 of Form S-8 file no.
333-105074)
Exhibit 10.7 2003 Stock Incentive and Compensation Plan,
as Amended (incorporated by reference to
Exhibit 10.1 of Form S-8 file no.
333-109339)
Exhibit 10.8 2004 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 of Form S-8 file
no. 333-110309)
Exhibit 10.9 Agreement and Plan of Reorganization by and
between Eagle Wireless International, Inc.
Clearworks.net, Inc., and Eagle Acquisition
Corporation dated September 15, 2000
(incorporated by reference to Exhibit 10.1
of Form S-4 file no. 333-49688)
Exhibit 10.10 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 10.11 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 10.12 Stock Purchase Agreement between Eagle
Wireless International, Inc. and the
shareholders of Etoolz, Inc. (incorporated
by reference to Exhibit 10.6 of Form 10-KSB
for the fiscal year ended August 31, 2000,
filed December 13, 2000)
Exhibit 21.1 List of Subsidiaries (incorporated by
reference to Exhibit 21.1 of Form S-4
file no. 333-49688)
Exhibit 23.1 Consent of McManus & Co., P.C
Exhibit 23.2 Consent of Malone & Bailey, PLLC
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
33
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eagle Broadband, Inc.
By: //s// DAVID A. WEISMAN
-----------------------------
David A. Weisman
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
/S/ David A. Weisman Chairman of the Board and May 3 2004
- ----------------------------------- Chief Executive Officer
David A. Weisman (Principal Executive Officer)
/S/ Richard R. Royall Chief Financial Officer May 3, 2004
- ----------------------------------- (Principal Financial and Accounting Officer)
Richard R. Royall
/S/ H. Dean Cubley Director, Chief Technical Officer May 3, 2004
- -----------------------------------
H. Dean Cubley
/S/ Christopher W. Futer Director May 3, 2004
- -----------------------------------
Christopher W. Futer
/S/ A. L. Clifford Director May 3, 2004
- -----------------------------------
A. L. Clifford
/S/ Glenn A. Goerke Director May 3, 2004
- -----------------------------------
Glenn A. Goerke
/S/ Lorne E. Persons Director May 3, 2004
- -----------------------------------
Lorne E. Persons
/S/ Jim Reinhartsen Director May 3, 2004
- -----------------------------------
Jim Reinhartsen
34
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Eagle Broadband, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of Eagle Broadband,
Inc. as of August 31, 2003, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of Eagle Broadband, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Broadband,
Inc. as of August 31, 2003, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2, the Company restated its prior period financial
statements.
/S/ Malone & Bailey, PLLC
- ----------------------------
Malone & Bailey, PLLC
Houston, Texas
www.malone-bailey.com
December 5, 2003
F-1
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF EAGLE BROADBAND, INC.:
We have audited the accompanying consolidated balance sheets of Eagle Broadband,
Inc. and subsidiaries as of August 31, 2002, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the two
years ended August 31, 2002 and 2001. These financial statements are the
responsibility of Eagle Broadband, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Eagle Broadband, Inc. and subsidiaries as of August 31, 2002, and
the results of their earnings, shareholders' equity, and their cash flows for
each of the two years then ended are in conformity with generally accepted
accounting principles.
/S/ McManus & Co., P.C.
- ----------------------------
McMANUS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
ROCKAWAY, NEW JERSEY
December 13, 2002
F-2
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
August 31,
2003 2002
(Restated)
Current Assets
Cash and Cash Equivalents $ 824 $ 1,273
Securities Available for Sale 1,714 2,148
Accounts Receivable, net 1,704 5,028
Inventories 3,199 6,059
Prepaid Expenses 668 358
------------- -------------
Total Current Assets 8,109 14,866
Property and Equipment
Operating Equipment 36,422 34,509
Less: Accumulated Depreciation (5,689) (3,661)
------------- -------------
Total Property and Equipment 30,733 30,848
Other Assets:
Deferred Costs 334 334
Goodwill 76,273 78,151
Other Intangible assets 5,330 5,387
Other Assets 227 397
------------- -------------
Total Other Assets 82,164 84,269
Total Assets $ 121,006 $ 129,983
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 5,461 $ 4,757
Accrued Expenses 7,790 2,873
Notes Payable 5,779 3,653
Capital Lease Obligation -- 48
------------- -------------
Total Current Liabilities 19,030 11,331
Long-Term Liabilities:
Capital Lease Obligations
(net of current maturities) -- 70
Long-Term Debt -- 1,202
------------- -------------
Total Long-Term Liabilities -- 1,272
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares -- --
Common Stock - $.001 par value
Authorized 200,000,000 shares
Issued and Outstanding at August 31, 2003
and 2002, 147,447,000 and 73,051,000, respectively 147 73
Paid in Capital 177,017 158,731
Accumulated Deficit (75,188) (41,424)
------------- -------------
Total Shareholders' Equity 101,976 117,380
------------- -------------
Total Liabilities and Shareholders' Equity $ 121,006 $ 129,983
============= =============
See accompanying notes to consolidated financial statements.
F-3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the years ended August 31,
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net Sales:
Structured wiring $3,692 $8,036 $7,643
Broadband services 2,809 2,657 523
Products 3,342 16,108 19,342
Other 1,750 3,016 602
-------------- -------------- --------------
Total Sales 11,593 29,817 28,110
-------------- -------------- --------------
Costs of Goods Sold:
Direct Labor and Related Costs 2,195 3,160 1,638
Products and Integration Service 5,400 15,250 14,931
Structured Wiring Labor and Materials 1,774 2,121 2,345
Broadband Services Costs 903 763 260
Depreciation and Amortization 456 377 1,053
Other Manufacturing Costs 56 1,033 181
-------------- -------------- --------------
Total Costs of Goods Sold 10,784 22,704 20,408
-------------- -------------- --------------
Gross Profit 809 7,113 7,702
-------------- -------------- --------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 6,102 7,795 6,169
Advertising and Promotion 247 963 600
Depreciation and Amortization 1,968 3,399 3,615
Other Support Costs 12,737 3,974 4,264
Research and Development 411 404 1,276
Impairment, write-downs & restructuring
costs 7,611 27,100 ---
-------------- -------------- --------------
Total Operating Expenses 29,076 43,635 15,924
-------------- -------------- --------------
Loss from Operations (28,267) (36,522) (8,222)
Other Income/(Expenses)
Interest income, 68 360 2,348
Interest expense (5,494) (625) ---
-------------- -------------- --------------
Total Other Income (Expense) (5,426) (265) 2,348
-------------- -------------- --------------
Net Loss (33,693) (36,787) (5,874)
Other Comprehensive Loss:
Unrealized Holding Loss (71) (279) (359)
-------------- -------------- --------------
Other Comprehensive Loss $(33,764) $(37,066) $(6,233)
-------------- -------------- --------------
-------------- -------------- --------------
Net Loss per Common Share:
Basic $(0.35) $(0.57) $(0.12)
Diluted $(0.35) $(0.57) $(0.12)
Comprehensive Loss $(0.35) $(0.58) $(0.13)
See accompanying notes to consolidated financial statements.
F-4
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Additional Total
Common Stock Preferred Paid in Retained Shareholders'
Shares Value Stock Capital Earnings Equity
Total Shareholders' Equity
As of August 31, 2000 25,609 $26 $--- $52,160 $1,875 $54,061
Net Earnings --- --- --- --- (5,874) (5,874)
New Stock Issued to Shareholders
For Services and Compensation 1,370 1 --- 973 --- 974
For Property and Other Assets 127 --- --- 2,837 --- 2,837
For Retirement of Debt and
Liabilities 3,004 3 --- 5,693 --- 5,696
For Warrants Conversion 645 1 --- 1,078 --- 1,079
For Employee Stock Option Plan 96 --- --- 192 --- 192
For Acquisition of ClearWorks,
Inc. 35,287 35 --- 99,762 --- 99,797
For Licenses and Investments 1,204 1 --- 2,965 --- 2,966
Syndication Costs --- --- --- (876) --- (876)
Treasury Stock (7,078) (7) --- (11,358) --- (11,365)
Unrealized Holding Loss --- --- --- --- (359) (359)
---------------------------------------------------------------------------
Total Shareholders' Equity
As of August 31, 2001 60,264 60 --- 153,426 (4,358) 149,128
Net Loss --- --- --- --- (36,787) (36,787)
New Stock Issued to Shareholders
For Services and Compensation 1,648 2 --- 880 --- 882
For Property and Other Assets 2,867 2 --- 591 --- 593
For Retirement of Debt and
Liabilities 7,846 9 --- 3,577 --- 3,586
For Warrants Conversion --- --- --- --- --- ---
For Employee Stock Option Plan --- --- --- --- --- ---
For Acquisitions 2,002 2 --- 1,079 --- 1,081
For Licenses and Investments --- --- --- 100 --- 100
Syndication Costs --- --- --- --- --- ---
Treasury Stock (1,576) (2) --- (922) --- (924)
Unrealized Holding Loss --- --- --- --- (279) (279)
---------------------------------------------------------------------------
Total Shareholders' Equity
As of August 31, 2002 73,051 73 --- 158,731 (41,424) 117,380
Net Loss --- --- --- --- (33,693) (33,693)
New Stock Issued to Shareholders
For Services and Compensation 7,437 7 --- 1,813 --- 1,820
For Property and Other Assets 14,938 15 --- 3,032 --- 3,047
For Retirement of Debt and
Liabilities 50,816 51 --- 13,827 --- 13,878
For Warrants Conversion --- --- --- --- --- ---
For 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
========== ========= ========== ========== ================
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-5
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
For the years ended August 31,
-----------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
Cash Flows from Operating Activities
Net Loss $(33,693) $(36,787) $(5,874)
Adjustments to Reconcile Net Loss to Net
Cash
Used by Operating Activities:
Impairment, write-downs & restructuring
costs 7,611 27,100 ---
Interest for conversion value 91 --- ---
Depreciation and Amortization 2,424 3,776 4,667
Stock Issed for Services Rendered 1,820 882 974
Stock Issued for Interest Expense 2,477 100 ---
Changes in Assets and Liabilities
(Increase)/Decrease in Accounts
Receivable 724 2,479 (462)
(Increase)/Decrease in Inventories 1,717 4,578 515
(Increase)/Decrease in Prepaid Expenses (311) 386 516
Increase/(Decrease) in Accounts Payable 921 232 (1,793)
Increase/(Decrease) in Accrued Expenses 8,557 (3,180) 1,494
Increase/(Decrease) in Expense Allowable
for Doubtful Acccounts 2,177 (363) ---
Increase/(Decrease) in Federal Income
Taxes Payables --- --- (736)
-------------- -------------------------------
Total Adjustment 27,608 35,990 5,175
-------------- -------------- ---------------
Net Cash Used by Operating Activities (6,085) (797) (699)
-------------- -------------- ---------------
Cash Flows from Investing Activities
(Purchase)/Disposal of Property and
Equipment (2,121) (12,886) (16,394)
(Purchase)/Disposal of Contact Wireless &
DSS Security, Net of Cash Acquired --- (869) ---
(Increase)/Decrease in Security Deposits --- --- (102)
(Increase)/Decrease in Investments 434 87 (3,189)
(Increase)/Decrease in Notes Receivable --- --- 8,655
(Increase)/Decrease in Deferred
Advertising Costs --- --- 21
(Increase)/Decrease in Deferred
Syndication Costs --- --- 270
(Increase)/Decrease in Other Intangible
Assets --- --- 1,009
(Increase)/Decrease in Other Assets 411 --- 9
-------------- -------------- ---------------
Net Cash Used by Investing Activities (1,276) (13,668) (9,721)
Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable 7,297 387 6,148
Increase/(Decrease) in Capital Leases -- 3 63
Increase/(Decrease) in Line of Credit --- (1,846) 230
Increase/(Decrease) in Deferred Taxes --- (32) ---
Proceeds from Sale of Common Stock, Net 182 --- 1,078
Retirement of ESOP Shares --- --- (2,740)
Syndication costs (368) --- ---
Treasury Stock (199) (918) (8,625)
-------------- -------------- ---------------
Net Cash Provided by Financing Activities 6,912 (2,406) (3,846)
-------------- -------------- ---------------
Net Increase/(Decrease) in Cash (449) (16,807) (14,266)
Cash at the Beginning of the Year 1,273 18,080 32,346
-------------- -------------- ---------------
Cash at the End of the Year $824 $1,273 $18,080
-------------- -------------- ---------------
-------------- -------------- ---------------
Supplemental Disclosure of Cash Flow
Information:
Net Cash Paid During the Year for:
Interest $3,288 $165 $112
Income Taxes --- --- ---
Supplemental non-cash investing activities (See Notes 5 & Note 12)
See accompanying notes to consolidated financial statements.
F-6
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 1 - Basis of Presentation and Significant Accounting Policies:
Eagle Broadband, Inc., (the Company or Eagle) incorporated as a Texas
corporation on May 24, 1993, and commenced business in April of 1996.
The Company is a supplier of broadband products and services,
providing telecommunications equipment with related software,
broadband products, and fiber and cable as used by service providers
in the paging and other personal communications markets. The Company
designs, manufactures, markets and services its products under the
Eagle Broadband, Inc., and BroadbandMagic names. These products
include transmitters, receivers, controllers, software, convergent
set-top boxes, fiber, cable, and other equipment used in commercial
and personal communications systems and radio and telephone systems.
Additionally, the Company provides cable television, telephone,
security, Internet connectivity, and related services under a bundled
digital services package, commonly known as "BDS," through single
source billing. Also provided is last mile cable and fiber
installation services as well as comprehensive IT products and
services.
A) Consolidation
At August 31, 2003, 2002 and 2001, 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 $824,000 and $1,273,000 of cash and cash equivalents
invested in interest bearing accounts at August 31, 2003, and August
31, 2002, respectively.
The Company also has Securities available for sale that include
1,480,000 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 $1,714,006 and are
included in the Balance Sheet category of Securities available for
sale as of August 31, 2003 and 2002. See (Note 10).
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
Headend 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:
August 31,
2003 2002
Raw Materials $ 1,826 $ 4,515
Work in Process 1,237 1,262
Finished Goods 136 282
$3,199 $ 6,059
F-7
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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 $230,397 and
$147,696 as of August 31, 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.
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 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.
F-8
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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 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.
F) Research and Development Costs
For the years ended August 31, 2003, 2002 and 2001, 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 $ 411,000, $404,000, and $1,276,000 were expensed for the years
ended August 31, 2003, 2002, and 2001, respectively.
No research and development services were performed for outside
parties for the year ended August 31, 2003, 2002 and 2001.
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:
F-9
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
August 31,
------------------------------------------
2003 2002 2001
---------- ----------- -----------
Weighted Average Number of Common
Shares Outstanding Including
Basic Common Stock Equivalents 95,465 64,004 49,726
Fully Diluted Common Stock Equivalents 95,465 64,158 49,880
I) Impairment of Long-Lived Assets and Goodwill
Our long-lived assets include predominantly goodwill. Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") requires that goodwill and intangible assets be
tested for impairment at the reporting unit level (operating segment
or one level below an operating segment) on an annual basis and
between annual tests in certain circumstances. Application of the
goodwill impairment test requires judgment, including the
identification of reporting units, assigning assets and liabilities to
reporting units, assigning goodwill and intangible assets to reporting
units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting
units include estimating future cash flows, determining appropriate
discount rates and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair value
for each reporting unit.
The intangible assets primarily are the Company rights to deliver
bundled digital services such as, Internet, telephone, cable
television and security monitoring services to residential and
business users. The Company assessed the fair value of the intangible
assets. There were a number of significant and complex assumptions
used in the calculation of the fair value of the intangible assets. If
any of these assumptions prove to be incorrect, the Company could be
required to record a material impairment to its intangible assets. The
assumptions include significant market penetration in its current
markets under contract and significant market penetration in markets
where they are currently negotiating contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. An impairment loss would be deemed necessary when the estimated
non-discounted future cash flows are less than the carrying net amount
of the asset. If an asset were deemed to be impaired, the asset's
recorded value would be reduced to fair market value. In determining
the amount of the charge to be recorded, the following methods would
be utilized to determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
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.
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.
F-10
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Goodwill is carried at cost less accumulated amortization. Intangible
assets were amortized on a straight-line basis over the economic lives
of the respective assets, generally ten to twenty-five years. Prior to
July 1, 2001, goodwill was amortized over 20 to 25 years. The
Company's adoption of SFAS 142 eliminated the requirement to amortize
goodwill subsequent to the fiscal year ending August 31, 2001. Under
the provisions of SFAS 142, the Company is required to periodically
assess the carrying value of goodwill associated with each of its
distinct business units that comprise its business segments of the
Company to determine if impairment in value has occurred. Impairment
tests completed as of August 31, 2002 and August 31, 2001 concluded
that the carrying amount of goodwill for each acquired business unit
did not exceed its net realizable value based on the Company's
estimate of expected future cash flows to be generated by its business
units, except as described above in Note 1, I. The Company updated its
assessment as of August 31, 2003 and concluded that based on a
valuation model incorporating expected future cash flows in
consideration of historical cash flows and results to date, no
impairment charge was necessary.
Goodwill and other intangibles of $82,164,000 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. In fiscal 2003, Eagle realized it had
failed to successfully achieve profits using the ClearWorks model of
installing fiber optic cable to neighborhoods under the speculative
attempt to capture enough individual homeowners in each neighborhood
via individual selling methods to pay for the cable infrastructure. In
early 2003, Eagle modified its strategy to deliver the ClearWorks
developed bundled digital services approach including Internet,
telephone, cable television and security monitoring services to
residential and business users by targeting municipalities,
homebuilders and residential real estate developers that finance and
install the fiber optic cable backbone in every lot and offer Eagle
exclusive rights to deliver digital bundled services to homeowners,
using pre-selling promotions and other low cost mass marketing
techniques. In October 2003, Eagle hired a new Chief Executive Officer
with an extensive sales and marketing background and proven senior
management and operational skills leading high-growth technology
companies to implement its modified strategy. As of December 5, 2003,
the date of the auditor's report, Eagle had realized several initial
successes in projects where the municipalities, public utility
districts and developers assume the predominate capital cost
responsibility and contract with Eagle to provide the services and
content; thereby significantly limiting the Company's capital outlays
on such projects.
Eagle assessed the fair value of the intangible assets as of August
31, 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
In fiscal 2003, 2002, and 2001, advertising costs have been
capitalized and amortized on the basis of contractual agreements
entered into by the Company. These contracts are amortized over the
life of the individual contracts or expensed in the period incurred.
For the year ended August 31, 2003, 2002, and 2001, the Company
expensed $247,000, $963,000 and $600,000 respectively.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that
are directly attributable to fundraising and the collection thereto.
Upon successful collection of the funds, all expenses incurred will be
reclassified to additional paid in capital and treated as syndication
costs; netted against the funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent asset and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
N) Marketable Securities
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.
F-11
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This
statement considers the presentation of unrealized holding gains and
losses attributable to debt and equity securities classified as
available-for-sale. As stated, any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income." For the fiscal year ended August
31, 2003, 2002, and 2001 comprehensive loss was ($71,000), ($279,000)
and ($359,000), respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
year ended August 31, 2002, and 2001, to facilitate comparisons.
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support cost for the twelve months ended August 31, 2003, 2002,
and 2001 are as follows, in thousands: -
2003 2002 2001
------------------------------------------
Advertising/Conventions $ --- 8 $ 737
Auto Related 66 174
Bad debt 2,177 --- ---
Contract Labor 907 100 ---
Delivery/Postage 95 162 178
Fees 418 --- ---
Insurance 437 181 263
Office & telephone 675 880 482
Other 291 21 17
Professional 5,222 424 831
Rent 1,183 1,052 791
Travel 377 459 437
Taxes 170 53 90
Utilities 719 460 438
---------- ---------- ----------
Total $ 12,737 3,974 $ 4,264
========== ========== ===========
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.
F-12
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an
asset in some circumstances). The provisions of this Statement are
effective for financial instruments entered into or modified after May
31, 2003, and otherwise are effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this
Statement did not have an impact on the Company's financial results of
operations and financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends
and clarifies financial accounting and reporting derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified and for
hedging relationships designated after June 30, 2003. The adoption of
this statement did not have an impact on the Company's operating
results or financial position.
S) Product Warranties
The Company warrants its products against defects in design, materials
and workmanship generally for six months to a year. Other warranties
from our vendors which are incorporated in our products are passed on
to the customer at the completion of the sale. Provision for estimated
warranty costs is made in the period in which such costs become
probable. Historically, Eagle has not incurred any material warranty
costs and, accordingly, Eagle has not accrued for these costs at
August 31, 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.
T) 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.
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS
In August 2003, the Company reclassified certain of its intangible
assets from "contract rights" to goodwill. There was no effect on cash
or cash flows or on the net loss. The accompanying consolidated
financial statements as of August 31, 2002 have been restated for the
correction.
A comparison of the Company's consolidated financial position as of
August 31, 2002 prior to and following the restatement follows:
As Restated As Reported
Goodwill $ 82,429 $ 7,916
Contract rights $ - $ 74,513
NOTE 3 - Accounts Receivable:
Accounts receivable consist of the following, in thousands:
August 31,
2003 2002
----------- ------------
Accounts Receivable $ 2,116 $ 5,270
Allowance for Doubtful Accounts (412) (242)
----------- ------------
Net Accounts Receivable $ 1,704 $ 5,028
=========== ============
F-13
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 4 - Property, Plant & Equipment and Intangible Assets:
Components of property, plant & equipment are as follows, in
thousands:
August 31,
2003 2002
---------- ----------
Automobile $ 143 $ 392
Headend Facility and Fiber Infrastructure 26,688 20,090
Construction in progress --- 7,074
Furniture & Fixtures 565 634
Leasehold Improvements 122 216
Office Equipment 979 1,015
Property, Manufacturing & Equipment 7,925 5,088
---------- ----------
Total Property, Plant & Equipment $ 36,422 $ 34,509
Less: Accumulated Depreciation (5,689) (3,661)
---------- ----------
Net Property, Plant & Equipment $ 30,733 $ 30,848
========== ==========
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 $47,000, $63,000, and $47,354 for the three years ended
August 31, 2003, 2002 and 2001, respectively, whereas it did not have
any capitalized major improvements for the same time periods.
Eagle's headend facility and fiber infrastructure consist primarily of
digital computing and telecommunications equipment that comprise
Eagle's main headend facility at it headquarters, wireless headend
equipment, a digital headend facility and a fiber backbone in the
master planned communities in which it operates and a fiber ring
connecting the various master planned communities in the Houston area.
These fiber and headend infrastructures are similar to those that
would exist in a major telecommunications or cable television provider
that offers digital services for internet, cable TV, telephone and
security monitoring services. Eagle determined that a twenty-year
straight line depreciation method is appropriate for its Headend
Facility and Fiber Infrastructure based on industry standards for
these asset types...
Components of intangible assets are as follows, in thousands:
August 31,
2003 2002
----------- ----------
Goodwill, gross value $ 80,551 $ 82,429
Licenses & Permits 5,330 5,387
----------- ----------
Total Intangible Assets $ 85,881 $ 87,816
Less: Accumulated Amortization (4,278) (4,278)
----------- ----------
Net Intangible Assets $ 81,603 $ 83,538
=========== ==========
The changes in the carrying amount of goodwill, net of accumulated
amortization for the twelve months ended August 31, 2003 are as
follows (in thousands):
Eagle Other Total
Balance at August 31, 2002 $ 76,589 $ 1,562 $ 78,151
Acquisitions and other (1) (1,878) 0 (1,878)(1)
---------------------------------------------------
Balance at August 31, 2003 $ 74,711 $ 1,562 $ 76,273
===================================================
(1) Other primarily includes the $1,878,000 of impairment recorded against the
Comtel goodwill as discussed in Note 1 (J) to the Company's Consolidated
Financial Statements.
NOTE 5 - Business Combinations:
On February 1, 2001, the Company completed the purchase of
ClearWorks.net, Inc., and its subsidiaries, ClearWorks Communication,
Inc., ClearWorks Structured Wiring Services, Inc., ClearWorks
Integration Services, Inc., United Computing Group, Link Two
Communications, Inc., and LD Connect, Inc., (collectively, ClearWorks)
by acquiring all the outstanding common stock for a total purchase
price of approximately $99.8 million. The acquisition was accounted
for using the purchase method of accounting. ClearWorks is a
communications carrier providing broadband data, video and voice
communication services to residential and commercial customers,
currently within Houston, Texas. These services are provided over
fiber-optic networks ("Fiber-To-The-Home" or "FTTH"), which the
Company designed, constructed, owned and operated inside large
residential master-planned communities and office complexes.
ClearWorks also provides information technology staffing personnel,
network engineering, vendor evaluation of network hardware,
implementation of network hardware and support of private and
enterprise networks, as well as, developing residential, commercial
and education accounts for deployment of structured wiring solutions.
The results of operation for ClearWorks are included in the
accompanying financial statements since the date of acquisition. The
Company acquired the net assets of ClearWorks for $99,797,000 through
the issuance of 29,410,000 shares of its common stock valued at
$91,172,000 and a cash total of $8,625,000. Prior to the acquisition,
the Company provided to ClearWorks, working capital and materials
totaling $8,625,000. During February 2001, ClearWorks repaid these
advances through the issuance of 7,346,000 shares of its common stock,
which converted into 5,877,000 Eagle Wireless International, Inc.,
common stock shares. These shares were converted to Treasury shares at
this date. The Company allocated (in thousands) the acquisition costs
to current assets of $11,708, property, plant and equipment of $6,570,
intangible assets of $96,920 (which consist of $74,513 in goodwill and
$22,407 in licenses), other assets of $79 and assumed liabilities of
accounts payable and accrued expenses of $10,784, banks lines of
credit and notes of $4,696 for a total acquisition of $99,797,000. The
allocation of the purchase price is based on the fair value of assets
and liabilities assumed as determined either by independent third
parties or management's estimates, based on existing contracts, recent
purchases of assets and underlying loan documents.
F-14
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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 August 31, 2003 and 2002, the Company has
accruals for $573,000 and $921,000; respectively 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 6 - Notes Payable:
The following table lists the Company's note obligations as of August
31, 2003 and 2002, in thousands:
Annual
Interest Amount
Rate Due Date 2003 2002
-----------------------------------------------
Vehicles Various Various $ 4 $ 27
5% Convertible
Debenture
(Note 9)
Tail Wind 5.0% Demand 1,200 2,000
Convertible
Debenture 2.0% Demand 1,595 2,000
Notes Payable
- Investor 10.0% October 900 ---
Group 2003
Notes Payable
- Q Series
Bonds 12.0% Various 1,363 ---
Other Various Various 717 828
-------- --------
Total notes
payable $ 5,779 $ 4,855
-------- --------
Less current
portion 5,779 3,653
-------- --------
Total long-term
debt $ --- $ 1,202
======== ========
NOTE 7 - Capital Lease Obligations:
The Company historically has leased equipment from various companies
under capital leases. The assets and liabilities under the capital
lease are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are
depreciated over the estimated useful life with the value and
depreciation being included as a component of Property and Equipment
under operating equipment.
NOTE 8 - Lines of Credit:
On September 29, 2000, Atlantic Pacific Communications, Inc., "(APC",
a wholly owned subsidiary of the Company) entered into a one year
$900,000 line of credit agreement with Southwest Bank of Texas,
("SWBT"). This note bears interest at SWBT's prime rate plus .25%,
which was payable monthly with principal due September 28, 2001. APC's
accounts receivable are pledged as collateral with Eagle Wireless
International, Inc., the guarantor. This line of credit was repaid to
Southwest Bank of Texas in the six months ended February 28, 2002;
therefore, there was not a balance outstanding as of August 31, 2002.
Subsequent to the fiscal year ended August 31, 2002, APC entered into
a new credit facility with SWBT to provide working capital and fund
ongoing operations. The new credit facility is a purchase and sale
agreement against accounts receivable, provides for borrowings up to
$1,000,000 based on eligible accounts receivable and is secured by APC
accounts receivable and guaranteed by Eagle Broadband, Inc. 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. Subsequent to the fiscal year
ended August 31, 2003, APC repaid and canceled the line of credit in
full to SWBT in September 2003.
F-15
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
The Company, through its subsidiary United Computing Group, Inc.
(UCG), maintained $3,000,000 line of credit with IBM Credit
Corporation (IBM) bearing a variable rate of interest. At May 31,
2002, a balance of $1,012,000 existed. During July 2002, UCG entered
into a credit facility with Southwest Bank of Texas (SWBT) to provide
working capital, repay the IBM credit line and fund ongoing
operations. The new credit facility is a purchase and sale agreement
against accounts receivable, provides for borrowings up to $3,000,000
based on eligible accounts receivable and is secured by UCG accounts
receivable and guaranteed by Eagle Broadband, Inc. As of August 31,
2002, UCG reduced its accounts receivable by $817,401 to reflect the
gross sale of $961,649 to SWBT less $144,247 of reserves held by SWBT
against such purchases. 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.
Subsequent to the fiscal year ended August 31, 2003, APC repaid and
canceled the line of credit in full to SWBT in September 2003.
On July 16, 2002_, the Company entered into a $20,000,000 line of
credit with Cornell Capital Partners, LP (CCP). The Company has not
drawn on the line of credit and currently has no plans to do so. One
of the issues in the litigation between CCP and the Company (see Legal
Proceedings below) is whether the Company owes CCP a commitment fee
for this line of credit. Cornell contends that the Company owes
$395,000 of stock; the Company denies the liability
NOTE 9 - Convertible Debentures:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). At CCP's
option, the entire principal amount and all accrued interest shall be
either (a) paid to CCP on the third year anniversary from the date of
the debenture or (b) converted into Company common stock according to
a schedule set forth in the debenture, or (c) partially repaid and
partially converted into Company common stock. The significant
conversion terms are that CCP is entitled, at its option, to convert,
and sell on the same day, at any time and from time to time subject to
the terms of the agreement, until payment in full of the debenture,
all or any part of the principal amount of the debenture, plus accrued
interest, into shares of the Company's common stock at the price per
share equal to either (a) $1.00 or (b) 90% of the average of the four
lowest closing trade prices of the common stock, for the five trading
days immediately preceding the conversion date. Eagle determined that
the conversion value of this note to be $91,000. This value has been
accounted for as interest expense. CCP shall not be entitled to
convert the debenture for a period of 180 days from the date of the
debenture. After 180 days, if the conversion price is below $1.00, CCP
shall be entitled, at its option, to convert, and sell on the same day
up to $50,000 every five business days. After 12 months from the date
of the debenture, if the conversion price is below $1.00, CCP shall be
entitled, at its option, to convert and sell on the same day up to
$75,000 every five business days. Notwithstanding the foregoing, after
180 days from the date of the debenture, CCP shall be entitled, at its
option, to convert and sell on the same day without restriction if the
conversion price is above $1.00. Under the terms of this agreement
Eagle received $2,500,000 in cash and a $500,000 secured convertible
debenture from Celerity Systems, Inc., (CCI) bearing interest at ten
percent due September 19, 2007. Eagle is entitled, at its option, to
convert, and sell on the same day, at any time, until payment in full
of this debenture, all or any part of the principal amount of the
debenture, plus accrued interest, into CCI shares. The conversion
price is equal to either $.06 or eighty-seven and one-half percent
(87.5%) of the lowest bid price of the common stock for the preceding
five trading days. At August 31, 2003, Eagle has converted $150,000 of
the bond into 146,085,264 shares of CCI. Eagle intends to liquidate
the bond into cash through the conversion process and immediate sale
of CCI shares. This investment is recorded at a cost of $500,000 until
the debenture or converted shares are sold. At August 31, 2003, the
underlying value of this debenture is approximately $520,000. Eagle is
in discussions with CCP to amend certain provisions of the debenture
as it relates to shares currently issued and stock payments for
accrued interest. Subsequent to the fiscal year ended August 31, 2003,
the Company entered into discussions with CCP regarding the retirement
of the convertible debenture and settlement of CCP commitment fees in
connection to a $20,000,000 Equity Line of Credit. 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. Subsequent to the fiscal year ended August 31,
2003, the Company entered into discussions with CCP regarding the
retirement of the convertible debenture and settlement of CCP
commitment fees in connection to a $20,000,000 Equity Line of Credit.
At August 31, 2003, the Company issued $1,363,000 five-year Q-Series
Bonds as more fully described in Note 14. Subsequent to August 31,
2003, the bondholders have elected to be repaid in Common Stock as
defined in the bond agreement. Accordingly, these bonds have been
classified as a current liability in Notes Payable. The Company
determined that no significant conversion value existed at the date of
bond issuance.
At August 31, 2002, $2,000,000 in principal plus $600,000 of accrued
interest and fees were outstanding to Candlelight Investors, LLC. In
November 2002, the Company issued 2,600,000 shares of stock to settle
this debt.
During 2001, the Company acquired ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. Link Two
Communications, Inc., is a subsidiary of ClearWorks, and as a result
of the merger, is now a secondary subsidiary of Eagle. Link Two
entered an agreement with The Tail Wind Fund Ltd., under which Tail
Wind purchased from Link Two a 2% convertible note in the initial
amount of $5,000,000 (the "First Note"), and Link Two has the ability
to require Tail Wind to purchase additional convertible notes in the
amount of $4,000,000 (the "Second Note") and $3,000,000 (the "Third
Note"). The conversion terms of the convertible debentures become
effective after ninety days of the initial closing date. The note
balance will be due in fiscal 2003. Link Two may require Tail Wind to
purchase the Second Note if: (a) the price of Eagle's common stock is
above $5.00 per share for 20 consecutive trading days during calendar
2001,and other various terms are met. Link Two may require Tail Wind
to purchase the Third Note if the price of Eagle's common stock is
above $8.00 per share for 20 consecutive trading days during calendar
2001, and the agreed upon covenants are met. In conjunction with the
issuance of the First Note, Link Two issued Tail Wind a warrant, and
if Link Two chooses to issue the Second and Third Notes, it will issue
Tail Wind additional warrants.
As a result of the merger, Eagle the parent of Link Two, has
guaranteed the Link Two notes issued to Tail Wind and allowed Tail
Wind to convert the above mentioned debt into Eagle common stock at a
rate of $1.79 per share. The agreement also permits Tail Wind to
convert the Link Two warrant into Eagle warrants to purchase shares of
our common stock. Tail Wind would have a warrant to purchase 1,396,648
shares of our common stock at an exercise price of $1.83 per share,
exercisable between August 2002 and September 2006. If Link Two
requires Tail Wind to purchase the Second and Third Note, the
additional warrants it issues will also be convertible into shares of
our common stock. The number of shares that the additional warrants
may be converted into will depend on the price of our common stock,
and cannot be determined at this time. However, the exercise price of
the additional warrants may not be less than $1.83 per share.
F-16
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
The Company has agreed to pre-pay the notes at the rate of a minimum
of $250,000 per month and a maximum of $500,000 per month. The
pre-payment may be in cash or in shares of our common stock at the
rate of 90% of the average of the two lowest market prices of our
common stock for the applicable month. However, the Company may not
issue shares of our common stock for pre-payment purposes if the total
number of shares exceeds the aggregate trading volume of our common
stock for the twelve trading days preceding the date of payment, in
which case we must pay the difference in cash. As the number of shares
to be issued for pre-payment purposes is dependent on the price and
trading volume of our common stock, there is no way to determine the
number of shares that may be issued at this time. Eagle has filed a
registration statement for the potential conversion shares for the
note and warrants exercise. As of May 31, 2002, the Company has paid
to Tail Wind $2,000,000 towards the reduction of debt. The current
financial statements have recorded as current maturity for this debt,
$1,595,000.
As part of the above agreements, the Company entered into a
registration rights agreement with Tail Wind, and the Company filed a
registration statement, in order to permit Tail Wind to resell to the
public the shares of common stock that it may acquire upon any
conversion of the First Note and exercise of the warrant associated
with the First Note. The Company have registered for resale 5,000,000
shares of common stock, which represents 122% of the shares to be
issued upon conversion of the First Note at $1.79 per share and 100%
of the exercise of the warrant associated with the First Note at $1.83
per share. The additional shares registered is to account for the
shares that may be issued for pre-payment as described in the above
paragraph, or upon the exercise of the anti-dilution rights provided
for in the following paragraph. If Link Two chooses to require Tail
Wind to purchase the Second and Third Notes, we will file another
registration statement covering the resale of the shares that may be
issued on conversion of the Second and Third Notes and upon the
exercise of the warrants associated with the Second and Third Notes.
In our agreement with Tail Wind, the Company granted Tail Wind
anti-dilution rights. If the Company sells common stock or securities
exercisable for or convertible into shares of our common stock for
less than $1.79 per share, the Company must reduce the conversion
price of the notes and the exercise price of the warrants to the price
the Company sold the common stock or the exercise or conversion price
the Company issued the convertible securities. The Company has agreed
to register for resale any additional shares that will be issued
pursuant to these anti-dilution rights on a future registration
statement, unless such additional shares are available in the current
registration statement. In addition, under the terms of the agreement,
without Tail Wind's approval, the Company may not issue Tail Wind
shares of common stock such that Tail Wind would ever be considered to
beneficially own greater than 4.99% of the outstanding common stock.
In connection with this transaction, Link Two Communications, Inc. has
paid Ladenburg Thalman and Co. a fee of 5% of the purchase price of
the notes. Additionally, the Company has valued the conversion feature
of the convertible debenture and warrants at $1,648,045 and
$1,270,995, respectively; the amounts were determined by using the
Black-Scholes calculation. These amounts have been capitalized as part
of the cost of developing the wireless infrastructure. At August 31,
2003, Eagle and Tail Wind were renegotiating the terms of this note.
During the renegotiation period, the Company has agreed to pay
interest until all new terms and conditions have been resolved.
NOTE 10 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 August 31, 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 1,480,000 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 $1,714,006 and are included in the
Balance Sheet category of Securities available for sale as of August
31, 2003.
NOTE 11 - 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.
The effective tax rate for the Company is reconcilable to statutory
tax rates as follows:
August 31,
2003 2002 2001
% % %
U.S. Federal Statutory Tax Rate 34 34 34
U.S. Valuation Difference (34) (34) (34)
Effective U.S. Tax Rate 0 0 0
Foreign Tax Valuation 0 0 0
Effective Tax Rate 0 0 0
F-17
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S.
Federal income tax rate of 34% to pretax income from continuing
operations as a result of the following: (in thousands)
August 31,
2003 2002 2001
------------ ----------- -----------
Computed expected tax benefit $ (11,456) $ (12,508) $ (1,997)
Increase in valuation allowance 11,456 12,508 1997
------------ ----------- -----------
$ --- $ --- $ ---
============ =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
August 31, 2003 and 2002, are presented below, in thousands and
include the balances of the merged company ClearWorks.net.
2003 2002
--------- ---------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 0 $ 0
Net operating loss carry-forwards 35,503 24,047
Less valuation allowance (35,503) (24,047)
--------- ----------
Net deferred tax assets --- ---
Deferred tax liabilities:
Differences in depreciation 0 0
--------- ----------
Net deferred tax liabilities $ 0 $ 0
========= ==========
The valuation allowance for deferred tax assets of August 31, 2003,
2002, and 2001, was $35,503,000, $24,047,000, and $10,956,000,
respectively. At August 31, 2003 and 2002, the Company has net
operating loss carry-forwards of $104,420,588 and $70,727,000,
respectively, which are available to offset future federal taxable
income, if any, with expirations from 2020 to 2021.
NOTE 12 - Issuance of Common Stock:
During the fiscal year ended August 31, 2003, the Company issued
shares of common stock. The following table summarizes the shares of
common stock issued, in thousands.
Shares Outstanding August 31, 2002 73,051
Shares issued for Services and Compensation 7,437
Shares issued for Property and Other Assets 14,938
Shares issued for Retirement of Debt and Liabilities 50,816
Shares issued for Stock Option exercise 1,647
Treasury Stock (442)
----------------
Shares Outstanding August 31, 2003 147,447
================
NOTE 13 - Preferred Stock, Stock Options and Warrants:
In July 1996, the Board of Directors and majority shareholders adopted
an employee stock option plan under which 400,000 shares of Common
Stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for
issuance. As of August 31, 2003, options to purchase 406,131 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 August 31, 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 August 31, 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 August 31, 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 August 31, 2003, none of these warrants have been
exercised.
F-18
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 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 August 31, 2003, none of these warrants have been
exercised. s
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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 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 August 31, 2003, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
April 1, 2006. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.26 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 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 August 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 August 31, 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
August 31, 2003, none of these warrants have been exercised.
F-19
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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
August 31, 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
August 31, 2003, none of these warrants have been exercised.
The warrants outstanding are segregated into two categories (issued
and outstanding and exercisable):
Warrants Issued & Outstanding Warrants Exercisable
Class of August 31, August 31,
Warrants 2003 2002 2003 2002
- --------- ----------------------------- --------------------
0.26 25,000 - 25,000 -
0.28 25,000 - 25,000 -
0.35 25,000 - 25,000 -
0.38 50,000 - 50,000 -
0.39 25,000 - 25,000 -
0.41 3,800,000 - 1,550,000 -
0.45 25,000 - 25,000 -
0.60 400,000 - - -
0.61 25,000 - 25,000 -
0.69 25,000 - 25,000 -
0.75 500,000 - - -
1.04 50,000 50,000 50,000 50,000
1.10 25,000 - 25,000 -
1.35 25,000 - 25,000 -
1.55 - 25,000 - 25,000
1.75 - 13,766 - 13,766
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 - 50,000 - 50,000
3.00 58,333 58,333 58,333 58,333
3.75 - 40,000 - 40,000
3.75 - 160,000 - 160,000
3.75 - 232,000 - 232,000
3.75 - 176,000 - 176,000
3.95 - 328,000 - 328,000
4.50 - 25,000 - 25,000
7.00 - 100,000 - 100,000
7.49 - 250,000 - 250,000
7.50 - 25,000 - 25,000
7.50 192,000 192,000 192,000 192,000
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
9.68 - 50,000 - 50,000
10.00 - 275,000 - 275,000
12.00 - 250,000 - 250,000
14.00 - 350,000 - 350,000
18.00 - 250,000 - 250,000
25.00 - 150,000 - 150,000
ESOP 406,131 * 355,170 * 406,131 355,170
----------------------------- --------------------
6,397,798 ** 4,121,603 3,247,798 4,121,603
============================= ====================
*Denotes warrants which would have an anti-dilutive effect if
currently used to calculate earnings per share for the years ended
August 31, 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 August 31, 2003, none of these warrants have been
exercised.
F-20
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 14 - 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 $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 $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.
These transactions were completed pursuant to Regulation D of the
Securities Act. With respect to the issuances, the Company determined
that each purchaser was an "accredited investor" as defined in Rule
501(a) under the Securities Act.
Except as otherwise noted, all sales of the Company's securities were
made by officers of the Company who received no 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 15 - Risk Factors:
For the years ended August 31, 2003, 2002, and 2001, substantially all
of the Company's business activities have remained within the United
States and have been extended to the wireless infrastructure, fiber,
cabling computer services and broadband industries. Approximately,
seventy 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 twenty-six
percent remainder have been created relatively evenly over the rest of
the nation during the year ended August 31, 2003. Approximately,
eighty four percent of the Company's revenues and receivables have
been created solely in the state of Texas, zero percent have been
created in the international market, and the approximate sixteen
percent remainder have been created relatively evenly over the rest of
the nation during the year ended August 31, 2002. Whereas
approximately eighty seven percent of the Company's revenues and
receivables have been created solely in the state of Texas, two
percent have been created in the international market, and the
approximate eleven percent remainder has been created relatively
evenly over the rest of the nation for the year ended August 31, 2001.
Through the normal course of business, the Company generally does not
require its customers to post any collateral.
NOTE 16 - 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%, 0% and 2% at August 31, 2003, 2002, and 2001,
respectively.
NOTE 17 - Commitments and Contingent Liabilities:
Leases
The Company leases its primary office space in League City, Texas, for
$36,352 per month with Gateway Park Joint Venture. This non-cancelable
lease commenced on January 1, 2002, and expires on May 31, 2004.
For the years ending August 31, 2003and 2002, rental expenses of
approximately $1,183,000 and $436,219 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.
F-21
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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.
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), 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. As of August
31, 2003, the principal balance of the debenture was approximately
$1.2 million. During the three month period ended November 30, 2003,
the principal balance of the debenture 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. TheCompany 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.
F-22
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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 not accrued any
expenses against this lawsuit as the outcome cannot be predicted at
this time.
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.
F-23
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 18 - Earnings Per Share:
The following table sets forth the computation of basic and diluted
earnings per share, in thousands except Per-Share Amount:
For the year ended August 31, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Loss $(32,025)
Basic EPS:
Income available to
common stockholders (33,693) 95,465 $(0.35)
Effect of Dilutive Securities
Warrants -------- -------- ---------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(33,693) 95,465 $(0.35)
========= ======== =========
For the year ended August 31, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $ (36,787)
Basic EPS:
Income available to
common stockholders (36,787) 64,004 $(0.57)
Effect of Dilutive Securities
Warrants --- 154 ---
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $ (36,787) 64,158 $(0.57)
========= ======== =========
For the year ended August 31, 2002, and August 31, 2001, anti-dilutive
securities existed. (see Note 13)
NOTE 19 - Employee Stock Option Plan:
In July 1996, the Board of Directors and majority stockholders adopted
a stock option plan under which 400,000 shares of the Company's common
stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for
issuance. Under this plan, as of August 31, 2003, a total of 406,131
options have been issued to various employees.
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees." Accordingly, since employee stock options are granted
at market price on the date of grant, no compensation expense is
recognized. However, SFAS 123 requires presentation of pro forma net
income and earnings per share as if the Company had accounted for its
employee stock options granted under the fair value method of that
statement. The weighted average fair value of the individual options
issued and granted during 2003 is estimated as $0.58 on the date of
grant. Management estimates the average fair value for options granted
during 2003, to be comparable to those granted in 2002. The impact on
net loss 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 4.00% 7.00%
Expected Life 5 5
F-24
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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 years ended August 31, 2003,
2002 and 2001:
2003 2002 2001
In thousands,
except per share amounts
Net loss, as reported $(33,693) $(36,787) $(5,874)
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 (20) (50) (181)
--------- --------- ------------
Pro forma net earnings (loss) $(33,713) $(36,837) $(6,055)
========= ========= ============
Net loss per share:
As reported $(0.35) $(0.57) $(0.12)
Pro forma $(0.35) $(0.57) $(0.12)
Diluted net loss per share
As reported $(0.35) $(0.57) $(0.12)
Pro forma $(0.35) $(0.57) $(0.12)
Option activity was as follows for the years ended August 31, 2003, 2002 and
2001:
2003 2002 2001
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of
year 355,170 $2.32 355,170 $2.32 242,607 $2.93
Granted 50,961- 0.45 - - 237,809 1.83
Assumed through
acquisitions - - - - - -
Exercised - - - - - -
Forfeited/Cancelled - - - - 125,246 2.62
--------- --------- ---------
Outstanding at end of year 406,131 1.27 355,170 $2.32 355,170 2.32
Exercisable at year-end 406,131 $1.27 355,170 $2.32 355,170 $2.32
Information about options outstanding was as follows at August 31, 2003:
Options Outstanding Options Exercisable
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number Life in Exercise Number Exercise
Range of Exercise Prices Outstanding Years Price Exercisable Price
$0-$1.00 264,865 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
406,131 5.2 $2.32 406,131 $2.32
NOTE 20 - Retirement Plans:
During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its
participants. This plan maintains that the Company will match up to 3%
of each participant's contribution. For the year ended August 31, 2003
and 2002, employee contributions were approximately $279,000 and
$279,000, respectively. The Company matched approximately $67,850 and
$67,850, respectively for those same periods.
F-25
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 21 - Major Customer:
The Company had gross revenues of $11,593,000 and $29,817,000 for the
year ended August 31, 2003 and 2002, respectively. There were no
parties individually that represented a greater than ten percent of
these revenues.
NOTE 22 - Industry Segments:
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". At August
31, 2001, the Company's seven business units have separate management
teams and infrastructures that offer different products and services.
The business units have been aggregated into five reportable segments
(as described below) since the long-term financial performance of
these reportable segments is affected by similar economic conditions.
Eagle Broadband, Inc., (Eagle) is a supplier of broadband and
telecommunications equipment with related software and broadband
products. (Including Eagle Wireless International, Inc.,
BroadbandMagic and Etoolz, Inc., for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in providing
professional data and voice cable and fiber optic installations
through project management services on a nationwide basis for multiple
site-cabling installations for end users and re-sellers.
ClearWorks Communications, Inc., (COMM) provides solutions to
consumers by implementing technology both within the residential
community and home. This is accomplished through the installation of
fiber optic backbones to deliver voice, video and data solutions
directly to consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber
optic and copper based structured wiring solutions and audio and
visual equipment to single family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT maintains a
national market presence.
Link Two Communications, Inc., (Link II) is in the development and
delivery of one and two way messaging systems.
DSS Security, Inc., is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt
related expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services
provider and reseller.
For the year ending August 31, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------
Revenue 4,220 2,809 2,433 1,803 328 --- 11,593
Segment Loss (4,500) (6,083) (2,279) (15,041) (364) --- (28,267)
Total Assets 8,929 31,316 114 141,588 83,852 (144,793) 121,006
Capital Expenditures 11 6,254 1 --- 158 --- 6,424
Depreciation 372 1,351 72 376 253 --- 2,424
For the year ending August 31, 2002
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------
Revenue 8,767 2,657 16,143 1,699 551 --- 29,817
Segment Loss (279) (193) (1,304) (5,554) (29,192) --- (36,522)
Total Assets 5,114 30,980 853 162,290 68,528 (137,782) 129,983
Capital Expenditures 125 12,034 --- 562 156 (11) 12,886
Dep. and Amort. 208 715 166 1,418 1,269 --- 3,776
For the year ending August 31, 2001
(in thousands) APC/HSI EBS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------
Revenue 8,173 571 18,137 1,205 24 28,110
Segment Loss (990) (299) (211) (4,559) (2,163) (8,222)
Total Assets 5,351 13,149 4,394 156,760 34,128 (43,114) 170,668
Capital Expenditures 151 9,350 24 198 6,671 16,394
Dep. and Amort. 149 1,053 19 2,591 857 4,669
F-26
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Reconciliation of Segment Loss from August 31, August 31, August 31,
Operations to Net Loss: 2003 2002 2001
Total segment loss from operations $ (28,267) $ (36,522) $ (8,222)
Total Other Income (Expense) (5,426) (265) 2,348
Net Loss $ (33,693) $ (36,787)) $ (5,874)
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 23 - Quarterly Financial Data.
Nov. 30, Feb. 28, May 31, Aug. 31,
---------------------------------------------------
Year Ended August 31,
2003
Revenues 4,618 3,063 1,847 2,065
Net Earnings (loss) (831) (979) (2,921) (28,962)
Basic Loss per Share (0.01) (0.01) (0.04) (0.29)
Diluted Loss per Share (0.01) (0.02) (0.04) (0.29)
Year Ended August 31,
2002
Revenues 8,761 7,380 6,485 7,191
Net Earnings (loss) (3,371) (2,013) (1,824) (29,579)
Basic Loss per Share (0.06) (0.03) (0.03) (0.45)
Diluted Loss per Share (0.06) (0.03) (0.03) (0.45)
For the year ended August 31, 2002, the quarterly financial
information has been adjusted to reflect the application of Financial
Accounting Standards Pronouncements No. 142 (Goodwill and other
Intangible Assets) and No. 144 (Accounting for the Impairment or
Disposal of Long-Lived Assets).
Note 24 - Exit Activities:.
During the fiscal year ended August 31, 2003, we implemented cost
reductions in various operating segments. In the aggregate, the
Company reduced its overall personnel by 114 headcount or a 50%
reduction for the fiscal year ended August 31, 2003 as compared to the
fiscal year ended August 31, 2002. The predominate reduction in
headcount related to the Company's Atlantic Pacific / Homes Systems
structured wiring and commercial cabling segment with headcount
reductions of nine, six and 57 personnel in the first three quarters
of fiscal 2003; aggregating an overall headcount reduction of 72 or
71% of this segments workforce. Additionally, the Company reduced its
United Computing Group computer hardware sales segment by 18, nine,
and two personnel in the first three quarters of fiscal 2003;
aggregating an overall reduction of 29 or 59% of this segments
workforce. These two operating segments accounted for 101 of the 114
headcount reductions affected in fiscal 2003. Specifically, certain
components of these operating segments, i.e., home systems structured
wiring, commercial cabling and computer hardware sales, were not
expected to provide significant long-term revenues and profitability,
and therefore were reduced. Following the series of cost reduction
activities implemented during the first three quarters of fiscal 2003,
Eagle's management assessed the viability of continued financial
investment in these unprofitable segments in the fourth quarter of
fiscal 2003 and into early first quarter of fiscal 2004 and made
further reductions. In conjunction with the appointment of , Mr.
Weisman as our new Chief Executive Officer, in early October 2003, the
Company completed the final consolidation of the United Computing
Group segment into other Eagle operations while further reducing the
Atlantic Pacific / Home Systems operations to an outsource commercial
cabling and structured wiring operation that project manages affiliate
contractors.
Additionally, in conjunction with the appointment of Mr. Weisman as
Chief Executive Officer,, the Company made certain decisions during
the preparation of its Form 10-K in our first quarter of fiscal 2004
that affected the value of certain assets as of August 31, 2003. These
decisions included:
-- A revised collection assessment of certain accounts receivables
from these and other down-sized Eagle business segments.
-- The decision to no longer pursue new commercial structured
cabling opportunities on a direct basis versus the outsource
model; thereby resulting in the impairment of goodwill from its
Atlantic Pacific operations.
-- The decision to no longer pursue Home Systems structured wiring
opportunities on a direct standalone model basis outside its BDS
model; thereby resulting in the impairment of its Home Systems
inventory.
F-27
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
-- The decision to withdraw from certain unprofitable BDS projects,
namely its Austin area BDS developments; thereby impairing
certain assets including property, plant and equipment.
-- The decision to settle numerous existing and threatened legal
proceedings versus continuing the timing consuming and costly
process of defending such proceedings; thereby resulting in the
accrual of numerous reserves for such settlements.
-- The decisions to consolidate its operating segments into its
corporate lease space; thereby resulting in reserves for property
lease settlements.
-- The decision to negotiate the settlement of certain sales tax
liabilities that resulted from a sales tax audit of United
Computing Group operations for periods that preceded the
acquisition date of this subsidiary.
Accordingly, Eagle incurred certain asset impairments and operating charges
in the fourth quarter associated with these decisions. These asset
impairment charges, allowances, write-off's and reserves included the
following:
-- Accounts receivable write-off's and reserves aggregating
$2,177,000; of which $1,348,000 was attributable to the decisions
affecting the Company's Atlantic Pacific / Home Systems
operations, $15,000 attributable to the decisions affecting its
United Computing Group operations and $814,000 attributable to
the Company's Eagle, EBS and Other segment operations.
-- Inventory impairment charges of $2,627,000; of which $501,000 was
attributable to the decisions affecting the Company's Atlantic
Pacific / Home Systems operations and $74,000 attributable to the
decisions affecting its United Computing Group operations.
Additionally, the Company recorded an impairment charge of
$1,125,000 for slow-moving and obsolete inventory in its Eagle
operations. This charge primarily resulted from a major clients
decision to upgrade from a 400 MHz chip to a 500 MHz chip for the
Company's convergent set top box.
-- Litigation settlement costs and reserves of $3,650,000 against
certain of the legal proceedings previously discussed in Item 3.
Legal Proceedings. Additionally, the Company recorded charges
aggregating $2,274,000 to settle threatened and existing legal
proceeding associated with prior financing transactions,
including the Kaufman litigation.
-- Lease settlement costs and reserves of $171,000 were attributable
to the decision to consolidate various operating segments into
its corporate lease space; thereby resulting in reserves for
early exit of such leases.
-- Impairment, write-down's and restructuring costs aggregating
$7,611,000; of which $1,878,000 was attributable to an impairment
of goodwill in the Company's Atlantic Pacific operations
following the Company's decision to no longer pursue commercial
cabling opportunities on a direct basis versus an outsource
model. These costs were also comprised of $3,412,000 in
impairment of property and equipment following the Company's
decision to withdraw from certain unprofitable BDS projects,
namely in the Austin area, and $323,000 of impairment of property
and equipment from the Company's Atlantic Pacific / Home Systems
operations following the decision to no longer pursue structured
wiring opportunities on a direct standalone basis outside of its
BDS model. Additionally, the aggregate total included a $553,000
charge for certain sales tax liabilities that resulted from an
audit of the Company's United Computing Group operations for time
periods that preceded the acquisition date of this operation.
-- Eagle incurred approximately $96,000 for severance and accrued
vacation related to employees terminated in fiscal 2003. Eagle
does not expect to incur any additional future period costs
associated with such restructuring activities other than those
accrued for and recorded in the fourth quarter of fiscal 2003.
Note 25 - Subsequent Events.
Resignation/Appointment of Chief Executive Officer. In October 2003,
H. Dean Cubley resigned as chief executive officer to become the chief
technology officer, and David Weisman accepted the position of chief
executive officer.
Recent Financings. During the first fiscal quarter of 2004, Eagle has
received net proceeds of $7,687,000 from private placement offerings
of stock and bonds and through the sale of stock held as short term
investments and has retired or reduced certain of its notes payable,
accounts payable and other obligations including numerous lawsuits;
thereby significantly reducing the Company's current and contingent
liabilities.
Conversion of Outstanding Debt. During the four months ended September
30, 2003, holders of the Q-Series Bonds elected to convert bonds with
an aggregate principal balance of 6,483,158 into 31,620,049 shares of
common stock, of which 2,000,000 shares were registered in a Form S-3
Registration statement filed in October 2003.
Private Placement Offering. In October 2003, we received gross
proceeds of $3,000,000 from a private placement to accredited
investors in which we issued promissory notes in the aggregate
principal amount of $3,000,000 ("Notes") and 2,000,000 shares of
Series A Convertible Preferred Stock ("Series A Preferred"). The
Series A Preferred is convertible into 29,500,000 shares of common
stock, subject to adjustment based on certain anti-dilution
provisions. We received net proceeds from this offering of $2,915,000,
which we intend to use for general corporate purposes. Terms of the
Series A Preferred and Notes are described below under the caption
"Description of Securities." We granted registration rights to the
selling stockholders covering the resale of shares of our common
stock, which are issuable upon conversion of the Series A Preferred.
We registered the resale of 29,500,000 shares of common stock
underlying 2,000,000 shares Series A Preferred on a Form S-3
Registration Statement.
F-28
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended August 31, 2003, 2002, and 2001
Additions
Balance at Charged to Balance at
Beginning of Expenses/ End of
Description Period Revenues Deductions Period
(In thousands)
Allowance for doubtful accounts:
2003 $242 $2,177 $(2,007 ) $ 412
2002 $480 $ 125 $ (363 ) $ 242
2001 $ 89 $ 391 $ --- $ 480
F-29