U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Amendment No. 2 to
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-23163
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0494995
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)
101 Courageous Drive
League City Texas 77573-3925
(Address of principal executive offices, including zip code)
(281) 538-6000
(Registrant's telephone number, including area code)
-------------
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X]] No [ ]
As of May 21, 2004, there were 191,439,049 shares of common stock outstanding.
EAGLE BROADBAND, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended February 29, 2004
Table of Contents
Part 1 - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at February 29, 2004, and August 31, 2003 3
Consolidated Statements of Operations for the Three Months and
Six Months Ended February 29, 2004, and February 28, 2003 4
Consolidated Statements of Changes In Shareholders' Equity for the
Six Months Ended February 29, 2004, and Twelve Months Ended
August 31, 2003 5
Consolidated Statements of Cash Flows for the Six Months Ended
February 29, 2004, and February 28, 2003 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Item 4. Controls and Procedures 35
Part 2 - Other Information
Item 1. Legal Proceedings 36
Item 2. Recent Sales of Unregistered Securities or Changes
in Securities and Use of Proceeds. 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
February 29, August 31,
2004 2003
---- ----
(Unaudited) (Audited)
Restated Restated
Current Assets:
Cash and Cash Equivalents $ 3,615 $ 824
Securities Available for Sale 1,574 1,714
Accounts Receivable, Net 3,974 1,704
Inventories 4,072 3,199
Prepaid Expenses 403 668
------------- ---------------
Total Current Assets 13,638 8,109
Property and Equipment:
Operating Equipment 35,900 36,422
Less: Accumulated Depreciation (6,688) (5,689)
------------- --------------
Total Property and Equipment 29,212 30,733
Other Assets:
Deferred Costs --- 334
Goodwill, net 79,597 79,597
Other Intangible Assets, net 2,006 2,006
Other Assets 94 227
------------- --------------
Total Other Assets 81,697 82,164
------------- --------------
Total Assets $ 124,547 $ 121,006
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 7,184 $ 5,461
Accrued Expenses 3,825 7,560
Notes Payable 5,547 5,779
Deferred Revenue 452 230
------------- --------------
Total Current Liabilities 17,008 19,030
Commitments and Contingent Liabilities --- ---
Shareholders' Equity:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares --- ---
Common Stock - $.001 par value
Authorized Shares at February 29, 2004, and
August 31, 2003 -- 350,000,000 and 200,000,000, respectively
Issued and Outstanding Shares at February 29, 2004, and
August 31, 2003 -- 188,097,000 and 147,447,000, respectively 188 147
Paid in Capital 200,344 177,017
Retained Earnings (92,320) (74,461)
Accumulated Comprehensive Income (Loss) (673) (727)
------------- --------------
Total Shareholders' Equity 107,539 101,976
------------- --------------
Total Liabilities and Shareholders' Equity $ 124,547 $ 121,006
============= ==============
See accompanying notes to consolidated financial statements.
3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
For the Three Months ended February 29 For the Six Months ended February 29
(or February 28, as appropriate) (or February 28, as appropriate)
2004 2003 2004 2003
------------- ------------ ------------ -------------
Net Sales:
Structured Wiring $ 125 $ 1,040 $ 517 $ 2,600
Broadband Services 2,533 888 4,096 1,562
Products 1,086 151 1,447 2,195
Other --- 984 81 1,324
------------- ------------ ------------ -------------
Total Sales 3,744 3,063 6,141 7,681
------------- ------------ ------------ -------------
Costs of Goods Sold:
Direct Labor and Related Costs
Products and Integration Service 391 402 852 748
Structured Wiring Labor and 301 114 438 1,651
Materials 56 429 261 658
Broadband Services Costs 2,057 254 2,246 530
Depreciation and Amortization 285 114 571 228
Other Manufacturing Costs 9 31 26 155
------------- ------------ ------------ -------------
Total Costs of Goods Sold 3,099 1,344 4,394 3,970
------------- ------------ ------------ -------------
Gross Profit 645 1,719 1,747 3,711
------------- ------------ ------------ -------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 5,844 1,355 6,802 2,863
Advertising and Promotion 2 19 21 56
Depreciation and Amortization 293 237 612 390
Other Support Costs 2,666 977 4,091 1,911
Research and Development 147 27 266 59
------------- ------------ ------------ -------------
Total Operating Expenses 8,952 2,615 11,792 5,279
------------- ------------ ------------ -------------
Loss from Operations (8,307) (896) (10,045) (1,568)
Other Income / (Expenses):
Interest Income - Net 6 13 11 17
Interest (Expense) (569) (96) (7,649) (259)
Loss on Sale of Assets (642) --- (642) ---
Gain on Sale of Marketable
Securities 114 --- 466 ---
------------- ------------ ------------ -------------
Total Other Income (Expense) (1,091) (83) (7,814) (242)
Net Loss (9,398) (979) (17,859) (1,810)
------------- ------------ ------------ -------------
Other Comprehensive Loss
Unrealized Holding Gain/(Loss) (255) (954) 54 (941)
------------- ------------ ------------ -------------
Other Comprehensive Loss $(9,653) $(1,933) $(17,805) $(2,751)
============= ============ ============ =============
Net Loss per Common Share:
Basic $ (0.05) $ (0.01) $ (0.10) $ (0.10)
Diluted $ (0.05) $ (0.01) $ (0.10) $ (0.10)
Comprehensive Loss $(0.05) $(0.01) $(0.10) $(0.10)
See accompanying notes to consolidated financial statements.
4
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Additional Accumulated Total
Preferred Paid in Retained Comprehensive Shareholders'
Shares Value Stock Capital Earnings Income Equity
-------- ------------------------ ---------------------------------------
Total Shareholders' Equity As of August 31,
2002 73,051 $73 --- $158,731 $(40,768) $(656) $117,380
======== ===== ====== ========== ========= ============== ==============
Net Loss --- --- --- --- (33,693) (33,693)
New Stock Issued to Shareholders
Services and Compensation 7,437 7 --- 1,813 --- 1,820
Property and Other Assets 14,938 15 --- 3,032 --- 3,047
Retirement of Debt and Liabilities 50,816 51 --- 13,827 --- 13,878
Employee Stock Option Plan 1,647 2 --- 180 --- 182
Syndication Costs --- --- --- (368) --- (368)
Treasury Stock (442) (1) --- (198) --- (199)
Unrealized Holding Loss --- --- --- --- --- (71) (71)
Total Shareholders' Equity
As of August 31, 2003 147,447 147 --- 177,017 (74,461) (727) 101,976
======== ===== ====== ========== ========= ============== ==============
Net Loss for the Six Months Ended February 29,
2004 --- --- --- --- (17,859) (17,859)
New Stock Issued to Shareholders
Services and Compensation 4,729 5 --- 3,924 --- 3,929
Property and Other Assets --- ---
Retirement of Debt and Liabilities 35,921 36 --- 7,998 --- 8,034
Interest for Beneficial Conversion Value --- 6,912 --- 6,912
Retirements / Issuance of Warrants 4,493 4,493
Syndication Costs --- ---
Treasury Stock --- ---
Unrealized Holding Gain --- 54 54
Total Shareholders' Equity
As of February 29, 2004 188,097 $188 --- $200,344 $(92,320) $(673) $107,539
======== ===== ====== ========== ========= ============== ==============
See accompanying notes to consolidated financial statements.
5
Eagle Wireless International. Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2001
For the Six Months Ended February 29,
(or February 28, as appropriate)
------------------------------------------------
2004 2003
------------- -------------
Cash Flows from Operating Activities:
Net Loss $ (17,859) $ (1,810)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Gain (Loss) on Sale of Assets 611 ---
Interest for Beneficial Conversion Value 6,912 91
Depreciation and Amortization 1,183 618
Stock Issued for Interest Expense 108 ---
Stock Issued for Services Rendered 8,423 201
Allowance for Doubtful Accounts 196 ---
(Increase)/Decrease in Accounts Receivable (2,412) (80)
(Increase)/Decrease in Inventories (873) (406)
(Increase)/Decrease in Prepaid Expenses 265 (524)
Increase/(Decrease) in Accounts Payable 1,723 748
Increase/(Decrease) in Accrued Expenses (1,442) (40)
------------- -------------
Total Adjustment 14,694 608
------------- -------------
Net Cash Used by Operating Activities (3,165) (1,201)
Cash Flows from Investing Activities:
(Purchase)/Disposal of Property and Equipment (214) (2,336)
(Increase)/Decrease in Deferred Costs 334 (669)
(Increase)/Decrease in Marketable Securities 140 1,831
(Increase)/Decrease in Other Assets 133 ---
------------- -------------
Net Cash Used by Investing Activities 393 (1,174)
------------- -------------
Cash Flows from Financing Activities:
Increase/(Decrease) in Notes Payable & Long-Term Debt 5,563 2,438
------------- -------------
Net Cash Provided by Financing Activities 5,563 2,438
------------- -------------
Net Increase/(Decrease) in Cash 2,791 63
------------- -------------
Cash at the Beginning of Period 824 1,273
Cash at the End of Period $3,615 $1,336
============= =============
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for
Interest $312 $ 153
Income Taxes --- ---
Supplemental non-cash investing activities (See Note 21) and changes in
shareholder's equity.
See accompanying notes to consolidated financial statements.
6
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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 February 29, 2004, 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 $3,615,000 and $824,000 of cash invested in interest
bearing accounts and cash equivalents at February 29, 2004, and August
31, 2003, respectively.
The Company also has securities available for sale that include 967,500
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 $867,650 and
an aggregate fair market value of $1,573,925 and are included in the
Balance Sheet category of Securities Available for Sale as of February
29, 2004. See (Note 8).
C) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated by using the straight-line
method for financial reporting and accelerated methods for income tax
purposes. The recovery classifications for these assets are listed as
follows:
Years
Head-End Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized. Eagle has acquired
all of its property and equipment with either cash or stock and has not
capitalized any interest expenses in its capital assets.
7
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the
following items, in thousands:
February 29, August 31,
2004 2003
------------ ---------
Raw Materials $ 2,878 $ 1,826
Work in Process 1,018 1,237
Finished Goods 176 136
-------- ------
$ 4,072 $ 3,199
======== ======
E) Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; BroadbandMagic;
ClearWorks Communications, Inc.; ClearWorks Home Systems, Inc.;
Eagle Wireless International, Inc., Atlantic Pacific
Communications, Inc.; Link Two Communications, Inc.; United
Computing Group, Inc.; Contact Wireless, Inc.; and DSS Security,
Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of
adopting EITF 00-21 did not have a material effect to Eagle's results
of operations. Eagle's contracts that contain multiple elements as of
February 29, 2004, or prior were immaterial. When elements such as
hardware, software and consulting services are contained in a single
arrangement, or in related arrangements with the same customer, Eagle
allocates revenue to each element based on its relative fair value,
provided that such element meets the criteria for treatment as a
separate unit of accounting. The price charged when the element is sold
separately generally determines fair value. In the absence of fair
value for a delivered element, Eagle allocates revenue first to the
fair value of the undelivered elements and allocates the residual
revenue to the delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a single unit
of accounting, resulting in a delay of revenue recognition for the
delivered elements until the undelivered elements are fulfilled. Eagle
limits the amount of revenue recognition for delivered elements to the
amount that is not contingent on the future delivery of products or
services or subject to customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed are
deferred until the conclusion of the period of the service for which
the advance billing relates. Deferred revenues are included on the
balance sheet as a current liability 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 $452,008 and $230,397 as of February 29, 2004, and August 31, 2003,
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 20 - 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 20 - 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
8
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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
20 - 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
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
20 - Industry Segments.
Eagle Residential Structured Wiring - dba ClearWorks Home Systems, Inc.
ClearWorks Home Systems, Inc., sells and installs structured wiring and
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 20 - 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 20 - 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 20 - 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 20 -
Industry Segments.
Eagle Security Services - dba DSS Security, Inc.
DSS Security, Inc., provides security monitoring services to
residential and commercial customers, purchases and resells and bundles
and sells contracts from its own portfolio to independent third party
companies. Security monitoring 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. Revenues from the sale of security monitoring contracts,
both purchased and owned, are recognized upon contract execution except
for reserves, hold backs or retentions, which are deferred until the
contract provisions are fulfilled. Eagle's Security Services revenues
9
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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 20 - 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 20 - Industry Segments.
F) Research and Development Costs
For the three months ended February 29, 2004, and February 28, 2003,
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 $147,000 and $27,000 were expensed for the three months ended
February 29, 2004, and February 28, 2003, respectively. Research and
development costs of $266,000 and $59,000 were expensed for the six
months ended February 29, 2004, and February 28, 2003, respectively.
No research and development services were performed for outside parties
for the three months ended February 29, 2004 and February 28, 2003.
G) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires
a change from the deferral method to assets and liability method of
accounting for income taxes. Timing differences exist between book
income and tax income, which relate primarily to depreciation methods.
H) Net Earnings Per Common Share
Net earnings per common share are shown as both basic and diluted.
Basic earnings per common share are computed by dividing net income
less any preferred stock dividends (if applicable) by the weighted
average number of shares of common stock outstanding. Diluted earnings
per common share are computed by dividing net income less any preferred
stock dividends (if applicable) by the weighted average number of
shares of common stock outstanding plus any dilutive common stock
equivalents. The components used for the computations are shown as
follows, in thousands:
February 29, August 31,
2004 2003
----------- -----------
Weighted Average Number of Common
Shares Outstanding Including
Primary Common Stock Equivalents 174,614 95,465
Fully Dilutive Common Stock Equivalents 174,614 95,465
I) Impairment of Long-Lived Assets and Goodwill
Our long-lived assets include predominantly goodwill. Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") requires that goodwill and intangible assets be
tested for impairment at the reporting unit level (operating segment or
one level below an operating segment) on an annual basis and between
annual tests in certain circumstances. Application of the goodwill
impairment test requires judgment, including the identification of
reporting units, assigning assets and liabilities to reporting units,
assigning goodwill and intangible assets to reporting units, and
determining the fair value of each reporting unit. Significant
judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount
rates and other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value for each
reporting unit.
The intangible assets primarily are the Company rights to deliver
bundled digital services such as, Internet, telephone, cable television
and security monitoring services to residential and business users. The
Company assessed the fair value of the intangible assets. There were a
number of significant and complex assumptions used in the calculation
of the fair value of the intangible assets. If any of these assumptions
10
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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
As of February 29, 2004, no impairment existed.
J) Intangible Assets
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at the dates of acquisition.
Other intangible assets consist of licenses and permits, which were
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. Eagle does not maintain
that these licenses have an indefinite life, but rather has ceased
amortizing the remaining balance of $1,562,000 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.
Eagle is required to periodically assess the carrying value of goodwill
and licenses associated with each of its distinct business units that
comprise its business segments of the Company to determine if
impairment in value has occurred. 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 $81,603,000 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 it's modified strategy.
Eagle assessed the fair value of the intangible assets as of August 31,
2003, and February 29, 2004, and concluded that the goodwill valuation
remains at an amount greater than the current carrying value.
There were a number of significant and complex assumptions used in the
calculation of the fair value of the goodwill. If any of these
assumptions prove to be incorrect, Eagle could be required to record a
material impairment to its goodwill. The assumptions include
significant market penetration in its current markets under contract
and significant market penetration in markets where they are currently
negotiating contracts.
K) Advertising Costs
Advertising costs have been capitalized and amortized on the basis of
contractual agreements entered into by the Company. These contracts are
amortized over the life of the individual contracts or expensed in the
period incurred. For the three and six months ended February 29, 2004,
the Company has expensed $2,000 and $20,000. For the three and six
months ended February 28, 2003, the Company has expensed $19,000 and
$56,000.
11
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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 investee. In the absence of such ability,
Eagle accounts for these minority investments under the cost method.
Certain investments carry restrictions on immediate disposition.
Investments in public companies (excluding those accounted for under
the equity method) with restrictions of less than one year are
classified as available-for-sale and are adjusted to their fair market
value with unrealized gains and losses, net of tax, recorded as a
component of accumulated other comprehensive income. Upon disposition
of these investments, the specific identification method is used to
determine the cost basis in computing realized gains or losses, which
are reported in other income and expense. Declines in value that are
judged to be other than temporary are reported in other income and
expense.
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This
statement considers the presentation of unrealized holding gains and
losses attributable to debt and equity securities classified as
available-for-sale. As stated, any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income." For the three months ended
February 29, 2004, and February 28, 2003, the Company recorded a
comprehensive loss of $255,000 and $954,000, respectively. For the six
months ended February 29, 2004, and February 28, 2003, the Company
recorded a comprehensive gain of $54,000 and a comprehensive loss of
$941,000, respectively.
P) Beneficial Conversion Values
Beneficial conversion values are calculated at the difference between
the conversion price and the fair value of the common stock into which
the debt is convertible, multiplied by the number of shares into which
the debt is convertible. The beneficial conversion value is charged to
interest expense because the debt is convertible at the date of
issuance. The value is limited to the total proceeds received.
Q) Reclassification
The Company has reclassified certain assets, costs and expenses for the
three and six months ended February 29, 2004, and February 28, 2003, to
facilitate comparisons.
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
12
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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 Statement of Financial Accounting
Standards No. 149 (SFAS 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
February 29, 2004, and February 28, 2003. Eagle provides for the
estimated cost of product warranties at the time it recognizes revenue.
Eagle engages in product quality programs and processes, including
actively monitoring and evaluating the quality of its component
suppliers; however, ongoing product failure rates, material usage and
service delivery costs incurred in correcting a product failure, as
well as specific product class failures outside of Eagle's baseline
experience, affect the estimated warranty obligation. If actual product
failure rates, material usage or service delivery costs differ from
estimates, revisions to the estimated warranty liability would be
required.
NOTE 2 - Accounts Receivable:
Accounts receivable consist of the following, in thousands:
February 29, August 31,
2004 2003
----------- ------------
Accounts Receivable $ 4,395 $ 2,116
Allowance for Doubtful Accounts (421) (412)
----------- ------------
Net Accounts Receivable $ 3,974 $ 1,704
=========== ============
13
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
NOTE 3 - Property, Plant and Equipment and Intangible Assets:
Components of property, plant and equipment are as follows, in
thousands:
February 29, August 31,
2004 2003
----------- ------------
Automobile $ 143 $ 143
Headend Facility & Fiber Infrastructure 26,653 26,688
Furniture, Fixtures & Equipment 1,285 1,544
Leasehold Improvements 122 122
Property, Manufacturing & Equipment 7,697 7,925
----------- ------------
Total Property, Plant & Equipment 35,900 36,422
Less: Accumulated Depreciation (6,688) (5,689)
----------- ------------
Net Property, Plant & Equipment $ 29,212 $ 30,733
=========== ============
Eagle expenses repairs and maintenance against income as incurred
whereas major improvements are capitalized. Eagle defines major
improvements as those assets acquired that extend the life of the
underlying base asset while defining other improvements that do not
extend the life as repairs and maintenance. Eagle expensed repairs and
maintenance of $10,673 and $15,000 for the three months ended February
29, 2004, and February 28, 2003, respectively, whereas it did not have
any capitalized major improvements for the same time periods. Eagle
expensed repairs and maintenance of $19,573 and $26,000 for the six
months ended February 29, 2004, and February 28, 2003, 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 20-year straight-line
depreciation method is appropriate for its Headend Facility and Fiber
Infrastructure based on industry standards for these asset types.
The Company has also reclassified the accumulated amortization relating
to goodwill and intangible assets.
Components of intangible assets are as follows, in thousands:
Goodwill and intangible assets are restated as follows:
February 29, 2003 August 31, 2003
-------------------------------------- -------------------------------------
As As As As
Reported Restated Reported Restated
---------------- ----------------- ---------------- ----------------
Goodwill $80,551 $82,138 $80,551 $82,138
Accumulated amortization (4,278) (2,541) (4,278) (2,541)
---------------- ----------------- ---------------- ----------------
$76,273 $79,597 $76,273 $79,597
================ ================= ================ ================
Intangible assets $ 5,330 $ 3,743 $ 5,330 $ 3,743
Accumulated amortization - (1,737) - (1,737)
---------------- ----------------- ---------------- ----------------
$ 5,330 $ 2,006 $ 5,330 $ 2,006
================ ================= ================ ================
$81,603 $81,603 $81,603 $81,603
================ ================= ================ ================
The changes in the carrying amount of goodwill, net of accumulated
amortization for the six months ended February 29, 2004, are as follows
(in thousands):
Eagle Other Total
------------- ------------- -------------
Balance on August 31, 2003 $79,597 $2,006 $81,603
Acquisitions and Other --- --- ---
------------- ------------- -------------
Balance at February 29, 2004 $79,597 $2,006 $81,603
============= ============= =============
NOTE 4 - Related Party Transaction - Sale of Assets:
During the fiscal second quarter ended February 29, 2004, the Company
completed a transaction with an effective date of October 1, 2003, with
eRF, Inc., to sell certain assets of its subsidiary, Contact Wireless,
Inc. eRF, Inc., is a private company engaged in providing products and
services to the wireless industry. eRF, Inc., has a board member that
is also a member of the Company's board of directors, namely, H. Dean
Cubley. The assets sold related to the Contact Wireless paging network
business and included a switch center lease and tower lease, network
equipment, network contracts, paging licenses, accounts receivable,
inventory and furniture and fixtures. The Company had downsized this
subsidiary during the course of fiscal 2003 and during the three months
ended February 29, 2004, elected to exit this business segment. The
Company recorded approximately $329,000 in revenues with a
corresponding segment loss of approximately $387,000 from this business
14
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
segment in fiscal 2003 and recorded approximately $80,000 in revenues
with a corresponding loss of $25,000 in the first quarter of fiscal
2004. The Company had no competing offers with respect to the sale of
assets and or sale of the business and the Company's board of directors
determined that the offer from eRF, Inc., represented fair value. The
Company terminated its remaining employees associated with this
subsidiary and eRF, Inc., entered into new employment arrangements with
certain of these employees. Additionally, eRF, Inc., assumed certain
liabilities and subleased certain property from the Company in Houston
and San Antonio. In conjunction with this transaction, the Company
recorded a loss of $642,000 on the sale of assets and certain other
costs incurred in the exit from this line of business.
NOTE 5 - Notes Payable:
The following table lists the Company's note obligations as of February
29, 2004, and August 31, 2003, in thousands:
Annual Due Date February 29, August 31,
Interest
Rate 2004 2003
---------------- --------------- ------------- ------------
Vehicles Various Various $ ---$ 4
5% Convertible Debenture (Note 9) 5 .0% Demand --- 1,200
Tail Wind Convertible Debenture 2.0% Demand --- 1,595
Notes Payable - Investor Group 10.0% October 2003 --- 900
Notes Payable - Q Series Bonds 12.0% Various 5,275 1,363
Other Various Various 272 717
---------- ---------
Total notes Payable $ 5,547 $ 5,779
---------- ---------
Less Current Portion 5,547 5,779
---------- ---------
Total Long-Term Debt $ ---$ ---
========== =========
NOTE 6 - Line of Credit:
APC entered into a credit facility with Southwest Bank of Texas (SWBT)
to provide working capital and fund ongoing operations. This credit
facility is a purchase and sale agreement against accounts receivable
and 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. During the first quarter of fiscal 2004, APC
repaid and canceled the line of credit.
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. During the first
quarter of fiscal 2004, APC repaid and canceled the line of credit,
NOTE 7 - Convertible Debentures:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). During the
three month period ended November 30, 2003, the principal balance of
the debenture was repaid, although a lawsuit remains outstanding - see
Legal Proceedings. 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. The
Company is currently negotiating to settle this contested liability and
the cancellation of the line of credit.
During 2001, the Company acquired ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. Link Two
Communications, Inc., is a subsidiary of ClearWorks. Link Two entered
an agreement with The Tail Wind Fund Ltd., under which Tail Wind
purchased from Link Two a 2% convertible note in the initial amount of
$5,000,000. As a result of the acquisition, Eagle the parent of Link
Two, has guaranteed the Link Two notes issued to Tail Wind and allowed
Tail Wind to convert the above mentioned debt into Eagle common stock
and warrants at various rates. During the three-month period ended
February 29, 2004, the note was repaid.
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)
15
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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.
NOTE 8 - Securities Available for Sale:
At February 29, 2004 and August 31, 2003, all of the Company's
marketable equity securities are classified as available-for-sale.
Securities available for sale include 967,500 shares of common stock of
Burst.com, 146,085,264 shares of Celerity Systems common stock and
$350,000 Celerity Systems Bonds as of February 29, 2004. These common
stock and bond investments have an aggregate cost basis of $867,650 and
an aggregate fair market value of $1,573,925.
NOTE 9 - Income Taxes:
The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
February 29, August 31,
2004 2003
(%) (%)
----------------- ----------------
U.S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference (34) (34)
----------------- ----------------
Effective U.S. Tax Rate 0 0
Foreign Tax Valuation 0 0
----------------- ----------------
Effective Tax Rate 0 0
================= ================
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S. Federal
income tax rate of 34% to pretax income from continuing operations as a
result of the following: (in thousands).
February 29, August 31,
2004 2003
-------------- ---------------
Computed Expected Tax Benefit $ (6,072) $ (11,456)
Increase in Valuation Allowance 6,072 11,456
-------------- ---------------
$ 0 $ 0
============== ===============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
February 29, 2004, and August 31, 2003, are presented below, in
thousands, and include the balances of the acquired company
ClearWorks.Net.
February 29, August 31,
2004 2003
-------------- ---------------
Deferred tax assets:
Accounts Receivable, Principally Due to
Allowance for Doubtful Accounts $ --- $ ---
Net Operating Loss Carry-Forwards 41,575 35,503
Less Valuation Allowance (41,575) (35,503)
-------------- ---------------
Net Deferred Tax Assets --- ---
Deferred Tax Liabilities:
Differences in Depreciation --- ---
-------------- ---------------
Net Deferred Tax Liabilities $ --- $ ---
============== ===============
16
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
The valuation allowance for deferred tax assets of February 29, 2004,
and August 31, 2003, was $41,575,000 and $35,503,000, respectively. At
February 29, 2004, the Company has net operating loss carry-forwards of
$130,741,000, which are available to offset future federal taxable
income, if any, with expirations from 2020 to 2021.
NOTE 10 - Issuance of Common Stock:
For the six months ended February 29, 2004, the Company issued shares
of common stock. The following table summarizes the shares of common
stock issued, in thousands.
Shares Outstanding August 31, 2003 147,447
---------
Shares Issued for Retirement of Debt and Liabilities 35,921
Shares Issued for Services, Compensation, Property and 4,729
Other Assets
---------
Shares Outstanding February 29, 2004 188,097
=========
NOTE 11 - Preferred Stock, Stock Options and Warrants:
-------------------------------------------
In July 1996, the Board of Directors and majority shareholders adopted
an employee stock option plan under which 400,000 shares of Common
Stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for issuance.
As of February 29, 2004, options to purchase 351,233 are outstanding
and 648,767 are available to be issued.
The Company has issued (or has acquired through its acquisitions) and
has outstanding the following warrants which have not yet been
exercised at February 29, 2004:
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 February 29, 2004, 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 February 29, 2004, these
warrants have expired unexercised.
41,667 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable shares
of the common stock, par value $.001 per share at a purchase price of
$2.00 per share. The shares of common stock underlying these have not
been registered as of November 30, 2002, under the Securities Act of
1933. As of February 29, 2004, none of these warrants have been
exercised.
41,667 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable shares
of the common stock, par value $.001 per share at a purchase price of
$2.25 per share. The shares of common stock underlying these warrants
have not been registered or issued, under the Securities Act of 1933.
As of February 29, 2004, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring April
1, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $1.10 per share. The shares of common stock underlying these
17
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
warrants were registered for resale on August 9, 2002, under the
Securities Act of 1933. As of February 29, 2004, all 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 February 29, 2004, 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 February 29, 2004, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
October 1, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share at
a purchase price of $0.69 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of November 30, 2003 none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
January 1, 2005. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share at
a purchase price of $0.61 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of February 29, 2004, 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 February 29, 2004, none of these warrants have been
exercised.
192,000 stock purchase warrants issued to Tech Technologies Services,
LLC, expiring April 24, 2008. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $7.50 per share. The shares of common
stock underlying these warrants have not been registered or issued,
under the Securities Act of 1933. As of February 29, 2004, 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 February 29, 2004, 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 of February 29, 2004, 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 of February 29, 2004, 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 February 29, 2004, 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 February 29, 2004, 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 of February 29, 2004, 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 February 29, 2004, 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 February 29, 2004, 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 February 29, 2004, 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 February 29, 2004, none of these warrants
have been exercised.
3,650,000 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
February 29, 2004, none of these warrants have been exercised.
18
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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
February 29, 2004, 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
February 29, 2004, 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
Warrants February 29, 2004 August 31, 2003 February 29, 2004 August 31, 2003
- ----------------------------------------------------------------------------------------------------------
0.26 25,000 25,000 25,000 25,000
0.28 25,000 25,000 25,000 25,000
0.35 25,000 25,000 25,000 25,000
0.38 50,000 50,000 50,000 50,000
0.39 25,000 25,000 25,000 25,000
0.41 3,650,000 3,800,000 3,650,000 1,550,000
0.45 25,000 25,000 25,000 25,000
0.60 400,000 400,000 400,000 -
0.61 25,000 25,000 25,000 25,000
0.69 25,000 25,000 25,000 25,000
0.75 500,000 500,000 500,000 -
1.04 50,000 50,000 50,000 50,000
1.10 - 25,000 - 25,000
1.35 25,000 25,000 25,000 25,000
2.00 41,667 41,667 41,667 41,667
2.25 41,667 41,667 41,667 41,667
3.00 58,333 58,333 58,333 58,333
7.50 192,000 192,000 192,000 192,000
7.50 240,000 240,000 240,000 240,000
7.50 168,000 168,000 168,000 168,000
7.50 200,000 200,000 200,000 200,000
ESOP 351,233 * 406,131 * 351,233 * 406,131
---------------------- -------------------- ---------------------- --------------------
6,142,900 ** 6,372,798 ** 6,142,900 ** 3,222,798
====================== ==================== ====================== ====================
* Denotes warrants which would have an anti-dilutive effect if currently used
to calculate earnings per share for the period ended February 29, 2004, and
August 31, 2003.
** Denotes 12,650,000 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 five 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 $10.00 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 February 29, 2004, none of these warrants have been either
earned or exercised.
NOTE 12 - Capitalization Activities:
Between November 25, 2002, and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45
accredited investors. The securities consisted of $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.
19
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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.
NOTE 13 - Risk Factors:
For the six months ended February 29, 2004, and February 28, 2003,
substantially all of the Company's business activities have remained
within the United States and have been extended to the wireless
infrastructure, fiber, cabling computer services and broadband
industry. Approximately eighty percent of the Company's revenues and
receivables have been created solely in the state of Texas, zero
percent have been created in the international market, and the
approximate twenty percent remainder have been created relatively
evenly over the rest of the nation during the six months ended February
29, 2004. Whereas approximately seventy-six percent of the Company's
revenues and receivables have been created solely in the state of
Texas, zero percent have been created in the international market, and
the approximate twenty-four percent remainder has been created
relatively evenly over the rest of the nation for the six months ended
February 29, 2003. Through the normal course of business, the Company
generally does not require its customers to post any collateral.
NOTE 14 - Foreign Operations:
Although the Company is based in the United States, its product is sold
on the international market. Presently, international sales total
approximately 0% and 0% for the six months ended February 29, 2004, and
February 28, 2003, respectively.
NOTE 15 - Commitments and Contingent Liabilities:
Leases
For the six months ending February 29, 2004, and February 28, 2003,
rental expenses of approximately $314,000 and $472,000 respectively,
were incurred.
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.
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.
The Company's wholly owned subsidiary, Contact Wireless, Inc., leases
office space in San Antonio, Texas with Wade Holdings. This
non-cancelable lease expires June 2007. The monthly payments are
$3,300.
The Company's wholly owned subsidiary, Contact Wireless, Inc., leases
office space in San Antonio, Texas with Cotter & Sons. This
non-cancelable lease expires August 2004. The monthly payments are
$2,697.50.
Future obligations under the non-cancelable lease terms areas follows:
Period Ending August 31, Amount
-------------
2004 $ 198,695
2005 147,960
2006 75,720
2007 33,000
-------------
Total $ 455,375
=============
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.
20
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
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),
and In the United States District Court for the District of New Jersey.
The suit presents claims for breach of contract, fraud, federal and
state 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. During the three month period ended November 30, 2003,
the principal balance of the debenture was approximately $1.2 million
and 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, EPA sued ClearWorks.net presenting claims for recovery
costs and penalties for a waste tire processing facility. The suit
seeks recovery of costs and penalties in a sum in excess of $1,000,000,
attorneys' fees and cost of court. ClearWorks denies the claims and
intends to vigorously contest all claims in this case and to enforce
its indemnification rights against the principals of Southeast Tire
Recycling. The Company has not accrued any expenses against this
lawsuit as the outcome cannot be predicted at this time.
On September 26, 2003, Intratech served a lawsuit on ClearWorks.net in
Intratech Capital Partners, Ltd. vs. ClearWorks.net, Inc.; Case No. CF3
20136 in the High Court of Justice, Queen's Bench Division, Cardiff
District Registry. This lawsuit presents claims for breach of contract
for failing to pay the plaintiff for financial advice and services
allegedly rendered. The complaint seeks damages of $6,796,245.50, plus
attorneys' fees and costs. ClearWorks denies the claims and intends to
vigorously defend this lawsuit and claims against it. The Company has
accrued $100,000 in its fiscal 2003 financial statements for litigation
expenses but has not accrued any settlement costs against this lawsuit
as the outcome cannot be predicted at this time.
On or about September 2003, Enron sued United Computing Group, Inc., in
Enron Corp. (Debtors/Plaintiff) vs. United Computing Group, Inc.; Case
No. 01-16034 in the United States Bankruptcy Court for the Southern
District of New York. The suit presents claims pursuant to sections 547
and 550 of the Bankruptcy Code to avoid and recover a transfer in the
amount of approximately $1,500,000.00. Defendant has filed an answer,
denies the claims, and intends to vigorously defend this lawsuit and
claims against it. The Company has not accrued any expenses against
this lawsuit as the outcome cannot be predicted at this time.
On January 31, 2004, Eagle became a defendant in Avnet, Inc. d/b/a
Cilicon vs. Eagle Broadband, Inc. f/k/a Eagle Wireless International,
Inc.; Cause No. 04CV0046; in the 56th Judicial Court, Galveston County,
Texas. This suit presents claims for breach of contract, anticipatory
breach, failure to pay money due on sworn account and quantum meruit.
The suit seeks recovery of damages in the sum of $780,056.03, plus
interest, attorney fees and court costs. The Company settled this
lawsuit on April 6, 2004, for cash to be paid totaling $612,500 between
April 30, 2004, and June 30, 2004, and consequently $612,500 was
charged to operations in the Company's fiscal 2003 and 2004 financial
statements.
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.
21
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
NOTE 16 - Earnings Per Share:
The following table sets forth the computation of basic and diluted
earnings per share, in thousands (except Per-Share Amount):
For the six months ended February 29, 2004
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ --------
Net Loss $(17,859)
Basic EPS:
Income Available to
Common Stockholders $(17,859) 174,614 $(0.10)
Effect of Dilutive Securities
Warrants --- --- ---
-------- ---------- ---------
Diluted EPS:
Income Available to
Common Stockholders
and Assumed Conversions. $(17,859) 174,614 $(0.10)
========= ============== ======
For the six months ended February 28, 2003
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net Loss $(5,880)
Basic EPS:
Income Available to
Common Stockholders $(5,880) 60,707 $(0.10)
Effect of Dilutive Securities
Warrants 154 ---
-------- ---------- -------
Diluted EPS:
Income Available to
Common Stockholders
and Assumed Conversions. $(5,880) 60,707 $(0.10)
======== ============= ======
For the six months ended February 29, 2004, and February 28, 2003,
anti-dilutive securities existed (see Note 11).
NOTE 17 - Employee Stock Option Plan:
In July 1996, the Board of Directors and majority stockholders adopted
a stock option plan under which 400,000 shares of the Company's common
stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for issuance.
Under this plan, as of February 29, 2004, 351,233 options have been
issued and are outstanding to various employees
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees." Accordingly, since employee stock options are granted at
market price on the date of grant, no compensation expense is
recognized. However, SFAS 123 requires presentation of pro forma net
income and earnings per share as if the Company had accounted for its
employee stock options granted under the fair value method of that
statement. For the six months ended February 2004 and 2003, the impact
on net income is minimal; therefore, the pro forma disclosure
requirements prescribed by SFAS 123 are not significant to the Company.
The fair values were determined using a Black-Scholes option-pricing
model with the following assumptions:
February 29, February 28,
2004 2003
----------------- ---------------
Dividend Yield 0.00% 0.00%
Volatility 0.91 0.91
Risk-Free Interest Rate 4.00% 7.00%
Expected Life 5 5
22
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a
straight-line basis over the vesting period of the stock option or
purchase right was as follows for the three-month period ended February
29, 2004, and February 28, 2003:
2004 2003
------------- -------------
Net loss, as reported $ (17,859) $ (1,810)
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 - -
PRO FORMA NET EARNINGS (LOSS) $ (17,859) $ (1,810)
----------- -----------
Net Loss Per Share:
As Reported $ (0.10) $ (0.10)
Pro Forma $ (0.10) $ (0.10)
Diluted Net Loss Per Share
As Reported $ (0.10) $ (0.10)
Pro Forma $ (0.10) $ (0.10)
Option activity was as follows for the six months ended February 29,
2004:
Weighted-Average
Shares Exercise Price
------------- -------------------
Outstanding at beginning of year 406,131 $ 1.27
Granted -
Assumed through acquisitions - -
Exercised (54,898) 0.66
Forfeited/Cancelled - -
Outstanding at end of year 351,233 1.36
Exercisable at year-end 351,233 $ 1.36
Information about options outstanding was as follows at February 29,
2004:
Options Outstanding Options Exercisable
--------------------------------------------------------- ---------------------------------
Range of Exercise Prices Number Weighted- Weighted- Number Weighted-
Average Average Average
Remaining ------------ ------------
Contractual Exercise Exercise
Outstanding Life in Years - Price Exercisable - Price
-----------
------------------ ----------------
$0-$1.00 213,141 5.0 $0.55 213,141 $0.55
$1.01-$2.00 112,532 5.0 $1.73 112,532 $1.73
$2.01-$7.50 25,500 5.5 $6.55 25,500 $6.55
351,233 5.2 $2.32 351,233 $2.32
================== ================ ============== ================ ==============
NOTE 18 - Retirement Plans:
During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its
participants. This plan maintains that the Company will match up to 3%
of each participant's contribution. For the three months ended February
29, 2004, and February 28, 2003, employee contributions were
approximately $30,891 and $54,628, respectively. The Company matched
approximately $0 and $22,065, respectively for those same periods.
23
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
NOTE 19 - Major Customers:
The Company had gross sales of $3,744,000 and $3,063,000 for the three
months ended February 29, 2004, and February 28, 2003, respectively.
The three month period ended February 29, 2004, included $2,007,335 or
54% of the quarters total sales from Sweetwater Security Capital, LLC,
in conjunction with a contract valued at $2,032,587 that was executed
with the Company's security-monitoring service subsidiary, DSS
Security, Inc. The remaining $25,252 associated with this contract has
been deferred in conjunction with a six-month holdback provision of the
contract. Additionally, the three months ended February 29, 2004,
included $742,538 or 20% of the three months total sales from General
Dynamics in conjunction with shipments of convergent set-top-boxes.
The Company had gross sales of $6,141,000 and $7,681,000 for the six
months ended February 29, 2004, and February 28, 2003, respectively.
The six month period ended February 29, 2004, included $2,873,548 or
47% of the six month period total sales from Sweetwater Security
Capital, LLC, in conjunction with contracts valued at $3,115,354 that
were executed with the Company's security-monitoring service
subsidiary, DSS Security, Inc. The remaining $241,805 associated with
these contracts has been deferred in conjunction with six-month
holdback provisions of these contracts. Additionally, the six-month
ended February 29, 2004, included $750,488 or 12% of the six months
total sales from General Dynamics in conjunction with shipments of
convergent set-top-boxes.
There were no parties individually that represented greater than ten
percent of the revenues in the three and six months ended February 28,
2003.
NOTE 20 - Industry Segments:
The Company has 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., (EBS) 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., (DSS) 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 six months ending February 29, 2004
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------- ---------- --------- ---------- ---------- ---------- ----------
Revenue 517 4,097 428 1,019 81 --- 6,141
Segment Loss (499) (706) (21) (8,785) (33) --- (10,045)
Total Assets 461 23,283 182 174,592 57,026 (130,996) 124,547
Capital Expenditures 228 12 33 0 0 273
Depreciation 88 199 30 811 54 --- 1,183
24
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
For the six months ending February 28, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------- ---------- --------- ---------- ---------- ---------- ----------
Revenue 2,767 1,561 1,734 1,394 225 --- 7,681
Segment Loss (95) (68) (585) (672) (148) --- (1,568)
Total Assets 9,587 34,699 1,010 221,206 32,571 (167,620) 131,453
Capital Expenditures 11 2,811 0 0 --- --- 2,822
Dep. and Amort. 112 308 62 78 58 --- 618
February 29, 2004 February 28, 2003
-------------------- -------------------
Reconciliation of Segment Loss from Operations to Net
Loss:
Total Segment Loss from Operations $ (10,045) $ (1,568)
Total Other Income (Expense) (7,814) (242)
Net Loss $ (17,859) $ (1,810)
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of its
operating segments based on income before net interest expense, income
taxes, depreciation and amortization expense, accounting changes and
non-recurring items.
Note 21 - Supplemental Non-Cash Disclosures:
During the quarter ended November 30, 2003, the Company issued
$3,000,000 of convertible debt which was retired through the issuance
of 2,000,000 shares of Series A Preferred Stock which was concurrently
converted into 29,500,000 shares of the Company's Common Stock.
Additionally, the Company received proceeds of $3,912,000 from the sale
of convertible Q-Series Bonds. See Note 12 - Capitalization Activities.
The beneficial conversion values associated with these financings
aggregating $6,912,000 are calculated at the difference between the
conversion price and the fair value of the common stock into which the
debt is convertible, multiplied by the number of shares into which the
debt is convertible. Since the beneficial conversion value exceeded the
$6,912,000 raised on these convertible instruments, the value charged
to interest expense during the quarter was limited to $6,912,000. This
non-cash charge comprises $6,912,000 of the $7,080,000 interest expense
on the Company's Statement of Operations and is shown as an adjustment
to reconcile net loss to net cash on the Company's Statement of Cash
Flows.
During the three month period ended February 29, 2004, the Company
recorded a non-cash expense of $4,494,000 in Salaries and Related Costs
associated with the cancellation and re-issuance of warrants for
4,200,000 common shares issued to certain officers and key employees
under incentive clauses of employment contracts.
Note 22 - Exit Activities:
---------------
An analysis of accrued costs and amounts charged against the provision are as follows:
Beginning Ending
Balance Period Balance
11/30/2003 Costs (Additions) Payments 2/29/2004
---------- ----------------- --------- ----------
Accrued Exit
Expenses:
Severance $- $-
Terminated Lease
costs 171,000 $171,000
Total $171,000 $171,000
25
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
Item 2. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q. Information included herein relating to projected growth and future
results and events constitute forward-looking statements. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's competitive pricing; the Company's relationship with its
suppliers; relations with the Company's employees; the Company's ability to
manage its operating costs; the continued availability of financing;
governmental regulations; risks associated with regional, national, and world
economies. Any forward-looking statements should be considered in light of these
factors.
Results of Operations
Three and Six Months Ended February 29, 2004, Compared to the Three and Six
Months Ended February 28, 2003
The following table sets forth summarized consolidated financial
information for the three and six months ended February 29, 2004, and February
28, 2003
Condensed Financial Information
Three Months Ended February 29 Six Months Ended February 29
(or February 28, as appropriate) (or February 28, as appropriate)
--------------------------------------------- -----------------------------------------------
($ in thousands) 2004 2003 $ Change % Change 2004 2003 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Total Sales $ 3,744 $ 3,063 $ 681 22% $ 6,141 $ 7,681 $ (1,540) -20%
Cost of Goods Sold 3,099 1,344 1,755 131% 4,394 3,970 424 11%
----------------------------------------------------------------------------------------------
Gross Profit 645 1,719 (1,074) -62% 1,747 3,711 (1,964) -53%
----------------------------------------------------------------------------------------------
% of Total Sales 17% 56% -158% 28% 48% 128%
Operating Expenses 8,952 2,615 6,337 242% 11,792 5,279 6,513 123%
----------------------------------------------------------------------------------------------
Loss from Operations (8,307) (896) (7,411) 827% (10,045) (1,568) (8,477) 541%
----------------------------------------------------------------------------------------------
Other Income (Expense) (1,091) (83) (1,008) 1214% (7,814) (242) (7,572) 3129%
----------------------------------------------------------------------------------------------
Net Loss (9,398) (979) (8,419) 860% (17,859) (1,810) (16,049) 887%
==============================================================================================
Unrealized Holding Loss (255) (954) 699 -73% 54 (941) 995 -106%
----------------------------------------------------------------------------------------------
Other Comprehensive Loss $ (9,653) $ (1,933) $ (7,720) 399% $ (17,805) $ (2,751) $ (15,054) 547%
==============================================================================================
Overview
For the three-month period ended February 29, 2004, Eagle's business
operations reflected emphasis and further transition and expansion of its BDS
and convergent set-top box business segments including Eagle's broadband Bundled
Digital Services (Internet, video, voice and security) for residential and
business customers. This transition is consistent with the Company's previously
disclosed strategy to no longer pursue the direct sale of low-margin commodity
computer products and the direct sale of structured wiring and commercial
cabling opportunities outside of it BDS model. The Company's consolidated
operations generated revenues of $3,744,000 with a corresponding gross profit of
$645,000 for the three-month period ended February 29, 2004. The overall
increase of 22% in revenues for the three-month period ended February 29, 2004,
as compared to the corresponding period of 2003, was primarily attributable to a
$1,645,000 increase in the Company's broadband services segment combined with a
$935,000 increase in convergent set-top box product shipments; offset by
decreases of $915,000 in structure wiring operations and a $984,000 decrease in
other sales.
The Company incurred a net loss of $9,398,000 for the three-month
period ended February 29, 2004. The loss was attributable to a non-cash expense
of $4,494,000 in Salaries and Related Costs associated with the cancellation and
re-issuance of warrants for 4,200,000 common shares issued to certain officers
and key employees under incentive clauses of employment contracts, an increase
in other support costs totaling $1,689,000; the components of which are set
forth on the table included below titled as Other Support Costs and an overall
decline in gross margins as the Company continues its transition strategy.
Included in the increase of other support costs was $760,000 in professional
fees associated with the Company's ongoing legal matters, a $120,000 increase in
investor relations and a $507,000 increase in property taxes recorded against
the Company's BDS infrastructure.
The Company's net loss for the three month period ended February 29,
2004, also included approximately $578,000 in depreciation and amortization
expenses and a loss of sale of assets of $642,000 in conjunction with the
transaction between the Company's subsidiary, Contact Wireless, Inc., and eRF,
Inc. - See Note 4.
26
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
The Company is continuing the development and expansion of the
Company's BDS model for distribution on a nationwide basis of voice, video and
data content; increased sales efforts in the telephone, cable, Internet,
security services and wireless segments; securing of long-term relationships for
content for the bundled digital services activities; and marketing/sales
agreements with other companies for the sale of broadband products and services.
On a nationwide basis, we are entering into business relationships with
financial and technology companies to provide bundled digital services (digital
content) to cities and municipalities that currently have or are in the process
of completing construction of their own fiber infrastructure to the home. We
believe that our companies have the technology, products and capabilities to
provide these fiber-ready cities with digital content set-top boxes and
structured wiring services.
The follow table sets forth summarized sales information for the three and six
months ended February 29, 2004, and February 28, 2003.
Sales Information
Three Months Ended February 29 (or February 28, as appropriate)
($ in thousands) 2004 % of Total 2003 % of Total $ Change % Change
---- ---------- ---- ---------- -------- --------
Structured Wiring $ 125 3% $ 1,040 34% $ (915) -88%
Broadband Services 2,533 68% 888 29% 1,645 185%
Products 1,086 29% 151 5% 935 619%
Other 0 0% 984 32% (984) -100%
-----------------------------------------------------------------
Total Sales $ 3,744 100% $ 3,063 100% $ 681 22%
=================================================================
Six Months Ended February 29 (or February 28, as appropriate)
($ in thousands) 2,004 % of Total 2,003 % of Total $ Change % Change
------ ---------- ------ ---------- -------- --------
Structured Wiring $ 517 8% $ 2,600 34% $ (2,083) -80%
Broadband Services 4,096 67% 1,562 20% 2,534 162%
Products 1,447 24% 2,195 29% (748) -34%
Other 81 1% 1,324 17% (1,243) -94%
------------------------------------------------------------------
Total Sales $ 6,141 100% $ 7,681 100% $ (1,540) -20%
==================================================================
Net Sales. For the three-month period ended February 29, 2004, net
sales increased to $3,744,000 from $3,063,000 during the three-month period
ended February 28, 2003. The overall increase of 22% was attributable to a
$1,645,000 increase in the Company's broadband services segment combined with a
$935,000 increase in product shipments; offset by decreases of $915,000 in
structure wiring operations and a $984,000 decrease in other sales. The
$1,645,000 increase in sales of the Company's broadband services was primarily
attributable to a contract valued at $2,032,587 executed by the Company's
security-monitoring subsidiary, DSS Security, Inc.; against which the Company
realized sales of $2,007,335 during the quarter. Absent the security monitoring
contract transaction of $2,007,335, the Company's base broadband services sales
decreased by approximately $362,000 in the three-month period ended February 29,
2004; primarily attributable to the exit from the unprofitable Austin area BDS
market discussed in prior periods and the decline in recurring security
monitoring sales resulting from the sale of certain security monitoring
contracts in the Company's portfolio to Sweetwater Capital, LLC, in the first
quarter of fiscal 2004. The $1,040,000 decrease in structured wiring sales
corresponded to the Company's previously announced strategy to no longer pursue
structured wiring and commercial cabling opportunities on a direct basis outside
of the its BDS model. The $1,086,000 increase in product sales was primarily
attributable to the shipment of convergent set-top boxes to a major client in
the second quarter of fiscal 2004 as compared to product fulfillment sales of
$151,000 in the second fiscal quarter of fiscal 2003.
For the six-month period ended February 29, 2004, net sales decreased
to $6,141,000 from $7,681,000 during the six-month period ended February 28,
2003. The overall decrease of 20% was attributable to a $2,534,000 increase in
the Company's broadband services segment; offset by a decrease of $748,000 in
product sales, a decrease of $2,083,000 in structure wiring operations and a
$1,243,000 decrease in other sales. The $2,534,000 increase in sales of the
Company's broadband services was primarily attributable to contracts valued at
$3,111,354 executed by the Company's security-monitoring subsidiary, DSS
Security, Inc., against which the Company realized sales of $2,873,548 during
the six months ended February 29, 2004. Absent the security monitoring contract
transaction of $2,873,548, the Company's base broadband services sales decreased
by approximately $340,000 in the six-month period ended February 29, 2004,
primarily attributable to the exit from the unprofitable Austin area BDS market
discussed in prior periods and the decline in recurring security monitoring
sales resulting from the sale of certain security monitoring contracts in the
Company's portfolio to Sweetwater Capital, LLC, in the first quarter of fiscal
2004. The $2,083,000 decrease in structured wiring sales corresponded to the
Company's previously announced strategy to no longer pursue structured wiring
and commercial cabling opportunities on a direct basis outside of the its BDS
model. The $748,000 decrease in product sales was primarily attributable to the
27
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
February 29, 2004
previously announced strategy to no longer pursue the direct sales of low-margin
commodity products partially offset by the shipment of convergent set-top boxes
to a major client in the second quarter of fiscal 2004.
The following table sets forth summarized cost of goods sold information for the
three and six months ended February 29, 2004, and February 28, 2003
Costs of Goods Sold:
Three Months Ended February 29 Six Months Ended February 29
(or February 28, as appropriate) (or February 28, as appropriate)
---------------------------------------- --------------------------------------
($ in thousands) 2004 2003 $ Change % Change 2004 2003 $ Change % Change
---------------------------------------- --------------------------------------
Direct Labor and Related Costs $ 391 $ 402 (11) -3% $ 852 $ 748 $ 104 14%
Products and Integration Service 301 114 187 164% 438 1,651 (1,213) -73%
Structured Wiring Labor and Materials 56 429 (373) -87% 261 658 (397) -60%
Broadband Services Costs 2,057 254 1,803 710% 2,246 530 1,716 324%
Depreciation and Amortization 285 114 171 150% 571 228 343 150%
Other Manufacturing Costs 9 31 (22) -71% 26 155 (129) -83%
---------------------------------------- --------------------------------------
Total Operating Expenses $ 3,099 $ 1,344 $ 1,755 131% $ 4,394 $ 3,970 $ 424 11%
======================================== ======================================
Cost of Goods Sold. For the three-month period ended February 29, 2004,
cost of goods sold increased by 131% to $3,099,000 from $1,344,000 as compared
to the three-month period ended February 28, 2003. The overall increase of
$1,755,000 was primarily attributable to the purchase and resale of certain
security monitoring contracts with a cost of sale component valued at
$1,900,534. The Company's overall gross profit percentage was 17% and 56% for
the three-month periods ended February 29, 2004, and February 28, 2003. This
substantial decrease in gross profit percentage is primarily attributable to
dilutive effect of the security monitoring transaction recorded in the second
fiscal quarter, i.e., sales recorded of $2,007,335 with corresponding cost of
sales of $1,900,534, a heavy sales mix of product shipment of convergent set-top
boxes versus the prior year period and an increase in depreciation expenses
associated with the build-out of the company's BDS infrastructure.
For the six-month period ended February 29, 2004, cost of goods sold
increased by 11% to $4,394,000 from $3,970,000 as compared to the six-month
period ended February 28, 2003. The overall increase of $424,000 was primarily
attributable to the purchase and resale of certain security monitoring contracts
with a cost of sale component valued at $1,900,534. The Company's overall gross
profit percentage was 28% and 48% for the six-month periods ended February 29,
2004, and February 28, 2003. This substantial decrease in gross profit
percentage is primarily attributable to dilutive effect of the security
monitoring transactions recorded in the six-months ended February 29, 2004,
i.e., sales recorded of $2,873,548 with corresponding cost of sales of
$1,900,534, a heavy sales mix of product shipment of convergent set-top boxes
versus the prior year period, the decision to no longer pursue structured wiring
outside of its BDS model and an increase in depreciation expenses associated
with the build-out of the company's BDS infrastructure.
The following table sets forth summarized operating expense information for the
three and six months ended February 29, 2004, and February 28, 2003.
Operating Expenses:
Three Months Ended February 29 Six Months Ended February 29
(or February 28, as appropriate) (or February 28, as appropriate)
------------------------------------------- -------------------------------------------
($ in thousands) 2004 2003 $ Change % Change 2004 2003 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Salaries and Related Costs $ 5,844 $1,355 $ 4,489 331% $ 6,802 $ 2,863 $ 3,939 138%
Advertising and Promotion 2 19 (17) -89% 21 56 (35) -63%
Depreciation and Amortization 293 237 56 24% 612 390 222 57%
Other Support Costs 2,666 977 1,689 173% 4,091 1,911 2,180 114%
Research and Development 147 27 120 444% 266 59 207 351%
------------------------------------------- -------------------------------------------
Total Operating Expenses $ 8,952 $2,615 $ 6,337 242% $ 11,792 $ 5,279 $ 6,513 123%
=========================================== ===========================================
28
The following table breaks out other support costs information for the three and
six months ended February 29, 2004, and February 28, 2003.
(or February 28, as appropriate) (or February 28, as appropriate)
------------------------------------------ ------------------------------------------
($ in thousands) 2004 2003 $ Change % Change 2004 2003 $ Change % Change
---- ---- -------- -------- ---- ---- -------- --------
Advertising and Conventions $ - $ - $ - -NA- $ - $ - $ - -NA-
Auto Related 2 27 (25) -93% 12 38 (26) -68%
Bad Debt 92 0 92 -NA- 196 0 196 -NA-
Contract Labor 266 80 186 233% 592 104 488 469%
Delivery and Postage 9 5 4 80% 25 66 (41) -62%
Fees 284 82 202 246% 346 190 156 82%
Insurance 139 0 139 -NA- 250 0 250 -NA-
Office 107 51 56 110% 186 114 72 63%
Other 26 47 (21) -45% 38 70 (32) -46%
Professional 874 114 760 667% 1,281 198 1,083 547%
Rent 177 244 (67) -27% 314 472 (158) -33%
Repairs and Maintenance 0 15 (15) -100% 0 26 (26) -100%
Travel 46 78 (32) -41% 102 153 (51) -33%
Taxes 555 48 507 1056% 558 65 493 758%
Telephone and Utilities 89 186 (97) -52% 191 415 (224) -54%
------------------------------------------ ------------------------------------------
Total Other Support Costs $ 2,666 $ 977 $ 1,689 173% $ 4,091 $ 1,911 $ 2,180 114%
========================================== ==========================================
Operating Expenses. For the three-month period ended February 29, 2004,
operating expenses increased by 242% to $8,952,000 as compared to $2,615,000 for
the three-month period ended February 28, 2003. The primary fluctuations that
occurred as evidenced by the two preceding tables immediately above are
discussed below:
o A $4,489,000 increase in salaries and related costs. The entire
increase was attributable to non-cash compensation expense
recorded against the cancellation and re-issuance of warrants for
4,200,000 common shares issued to certain officers and key
employees under incentive clauses of employment contracts.
o A $17,000 decrease in advertising and promotion as the Company
placed more emphasis on directly marketing its products and
services to its customers as well as entering into business
relationships with financial and technology companies to provide
BDS services to cities and municipalities and decreased attendance
at conventions and tradeshows.
o A $56,000 increase in depreciation and amortization, due
principally to the additional build-out of the Company's BDS
infrastructure in fiscal 2003.
o A $1,689,000 increase in other support costs; the components of
which are set forth on the table included immediately above.
Included in this increase was $760,000 in professional fees
associated with the Company's ongoing legal matters, a $120,000
increase in investor relations, and a $507,000 increase in
property taxes recorded against the Company's BDS infrastructure.
o An $120,000 increase in research and development expenses,
primarily consisting of the Company's continued investment in
HDTV-ready multimedia set-top boxes for hospitality and broadband
customers and the Orb'Phone Exchange satellite voice and data
communications products for military, government and commercial
customers.
For the six-month period ended February 29, 2004, operating expenses
increased by 123% to $11,792,000 as compared to $5,279,000 for the six-month
period ended February 28, 2003. The primary fluctuations that occurred as
evidenced by the two preceding tables immediately above are discussed below:
o A $3,939,000 increase in salaries and related costs. The increase
was attributable to non-cash compensation expense of $4,494,000
recorded against the cancellation and re-issuance of warrants for
4,200,000 common shares issued to certain officers and key
employees under incentive clauses of employment contracts
partially offset by a decline in salaries and related costs
associated with the Company's reduction in personnel in fiscal
2003. Excluding this non-cash compensation expensed recorded in
the second quarter of fiscal 2004, salaries and related costs
declined by $555,000 in the six-month period ended February 29,
2004, as compared to the six-month period ended February 28, 2003.
29
o A $36,000 decrease in advertising and promotion as the Company
placed more emphasis on directly marketing its products and
services to its customers as well as entering into business
relationships with financial and technology companies to provide
BDS services to cities and municipalities and decreased attendance
at conventions and tradeshows.
o A $222,000 increase in depreciation and amortization, due
principally to the additional build-out of the Company's BDS
infrastructure in fiscal 2003.
o A $2,180,000 increase in other support costs, the components of
which are set forth on the table included immediately above.
Included in this increase was $1,083,000 in professional fees
associated with the Company's ongoing legal matters, a $120,000
increase in investor relations and $493,000 increase in property
taxes recorded against the Company's BDS infrastructure.
o An $207,000 increase in research and development expenses,
primarily consisting of the Company's continued investment in
HDTV-ready multimedia set-top boxes for hospitality and broadband
customers and the Orb'Phone Exchange satellite voice and data
communications products for military, government and commercial
customers.
Net Loss. For the three months ended February 29, 2004, Eagle's net
loss was $9,398,000, compared to a net loss of $979,000 during the three month
period ended February 28, 2003. For the six months ended February 29, 2004,
Eagle's net loss was $17,859,000, compared to a net loss of $1,810,000 during
the six month period ended February 28, 2003.
Changes in Cash Flow. Eagle's operating activities used net cash of
$3,165,000 in the six-month period ended February 29, 2004, compared to use of
net cash of $1,201,000 in the six-month period ended February 28, 2003. The
increase in net cash used by operating activities was primarily attributable to
$2,739,000 of cash utilized for working capital requirements consisting of the
combination of accounts receivable, inventory, prepaid expenses, accounts
payable and accrued expenses and an increase in the Company's net operating
loss, net of non-cash charges, totaling $426,000. Eagle's investing activities
produced net cash of $393,000 in the six-month period ended February 29, 2004,
compared to $1,174,000 in the six-month period ended February 28, 2003. The
decrease was due primarily to a significant decline in investment activities and
purchase of equipment associated with the prior years build out of Eagle's
network and infrastructure for the delivery of broadband services. Eagle's
financing activities provided cash of $5,563,000, in the six-month period ended
February 29, 2003, compared to $2,438,000 of cash provided in the six-month
ended February 28, 2003. The increase is attributable to an increase in
convertible notes aggregating a net of $5,608,000 in conjunction with the
Company's financing activities in the first fiscal quarter of 2004.
Liquidity and Capital Resources. Current assets for the period ended
February 29, 2004, totaled $13,638,000 (includes cash and cash equivalents of
$3,615,000 and securities available for sale of $1,574,000) as compared to
$8,109,000 reported for the year ended August 31, 2003. During the first six
months ended February 29, 2004, Eagle received net proceeds of $6,174,000 from
the sale of convertible bonds and notes and through the sale of marketable
securities held as short-term investments and has retired or reduced certain of
its notes payable and accrued expenses including numerous lawsuits, thereby
reducing the Company's current and contingent liabilities.
The Company anticipates that it will incur significantly less capital
expenditures for broadband fiber infrastructure 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 $214,000 in capital expenditures in the first
six months of fiscal 2004 ended February 29, 2004. 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 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 six months ended February
29, 2004, the Company retired approximately $8,034,000 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 six months of
fiscal 2004, the Company completed $5,563,000 in net financing activities. 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 six months
of fiscal 2004.
Historically, we have financed operations through the sale of debt and
equity securities. We do not have any significant credit facilities available
with financial institutions or other third parties and historically, we have
relied upon best efforts third-party funding from individual accredited
investors. Though we have been successful at raising additional capital on a
best efforts basis in the past, we can provide no assurance that we will be
successful in any future best efforts financing efforts. If we are unable to
either obtain financing from external sources or generate internal liquidity
from operations in the future, we may need to curtail operations or sell assets.
30
Contractual Obligations
Payments Due by Period
(in Thousands)
-------------------------------------------------------------
Contractual Obligations Total Less than 1-3 years 3-5 years More than
1 year 5 years
- ------------------------------------------------------------------------------------------
Long-Term Debt Obligations 5,547 5,547 --- --- ---
Operating Lease Obligations 455 198 257 --- ---
-------------------------------------------------------------
-------------------------------------------------------------
Total 6,002 5,745 257 --- ---
=============================================================
The Company's contractual obligations consist of long-term debt as set
forth in Note 5 (Notes Payable) to the Company's financial statements and
certain off-balance sheet obligations for office space operating leases
requiring future minimal commitments under non-cancelable leases. See Item 2 -
Management's Discussion and Analysis under non-cancelable leases as described in
Note 15 to the Company's financial statements under the heading Commitments and
Contingent Liabilities.
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 $81,603,000 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.
Impairment Assessment:
Our long-lived assets predominantly include goodwill. Statement of
Financial Accounting Standards No. 142 (SFAS 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 as of August 31, 2003, 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 February 29, 2004, and August 31,
2003, and determined that these assets totaling $81.6 million were not impaired.
31
Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under its principal subsidiaries and operating business units
including; Eagle Wireless International, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Atlantic Pacific
Communications, Inc.; Contact Wireless, Inc.; DSS Security, Inc.; Link Two
Communications, Inc.; and United Computing Group, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of adopting EITF
00-21 did not have a material effect to Eagle's results of operations. Eagle's
contracts that contain multiple elements as of February 29, 2004, or prior were
immaterial. When elements such as hardware, software and consulting services are
contained in a single arrangement, or in related arrangements with the same
customer, Eagle allocates revenue to each element based on its relative fair
value, provided that such element meets the criteria for treatment as a separate
unit of accounting. The price charged when the element is sold separately
generally determines fair value. In the absence of fair value for a delivered
element, Eagle allocates revenue first to the fair value of the undelivered
elements and allocates the residual revenue to the delivered elements. In the
absence of fair value for an undelivered element, the arrangement is accounted
for as a single unit of accounting, resulting in a delay of revenue recognition
for the delivered elements until the undelivered elements are fulfilled. Eagle
limits the amount of revenue recognition for delivered elements to the amount
that is not contingent on the future delivery of products or services or subject
to customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed are
deferred until the conclusion of the period of the service for which the advance
billing relates. Deferred revenues are included on the balance sheet as a
current liability 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 $452,000 and $230,397 as of February 29, 2004, and
August 31, 2003, 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 20 - 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 20 - 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 20 - Industry Segments.
32
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 20 -
Industry Segments.
Eagle Residential Structured Wiring - dba ClearWorks Home Systems, Inc.
ClearWorks Home Systems, Inc., sells and installs structured wiring,
audio and visual components to homes. This subsidiary recognizes revenue and the
related costs at the time the services are performed. Revenue is derived from
the billing of structured wiring to homes and the sale of audio and visual
components to the homebuyers. Eagle's Residential Structured Wiring revenues are
reported under the category of Structured Wiring on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category APC/HSI within Note 20 - 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 20 - 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 20 - 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 20 - Industry Segments.
Eagle Security Services - dba DSS Security, Inc.
DSS Security, Inc., provides security monitoring services to
residential and commercial customers, purchases and resells and bundles and
sells contracts from its own portfolio to independent third party companies.
Security monitoring 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. Revenues from the sale of security
monitoring contracts, both purchased and owned, are recognized upon contract
execution except for reserves, hold backs or retentions, which are deferred
until the contract provisions are fulfilled. 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 20 - 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 20 - Industry Segments.
33
Receivables
For the three-month period ended February 29, 2004, Eagle accounts
receivable increased to $3,974,000 from $1,704,000 at August 31, 2003. The
majority of this increase was due to the increased sales in the Company's
security-monitoring subsidiary, DSS Security, Inc., in conjunction with the
contract recorded in the second quarter ended February 29, 2004, totaling
$2,032,587, as discussed earlier herein.
The Company's accounts receivable aging as measured by day's sales
outstanding (DSO) totaled 96 days at February 29, 2004, as compared to 90 days
at November 30, 2003, and 75 days at August 31, 2003, on an adjusted basis after
recording the write-off's and reserves in the fourth quarter of fiscal 2003. The
primary increase in DSO from 75 days at August 31, 2003, to 96 days at February
29, 2004, was attributable to deferred revenue components of the transactions
entered into with Sweetwater Security, LLC, totaling $241,805 and the impact of
large dollar volume transactions associated with customers comprising greater
than ten percent of the Company's revenues during the period ended February 29,
2004. DSO as measured by a moving average calculation totaled 72 days as of
February 29, 2004.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivables deemed uncollectible are charged against the
allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At February 29, 2004, Eagle's
inventory totaled $4,072,000 as compared to $3,199,000 at August 31, 2003. The
majority of this increase was due to an increase in raw materials inventory
associated with in process set-top box manufacturing.
Recent Accounting Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or
Disposal Activities," which nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146
requires that costs associated with an exit or disposal activity be recognized
only when the liability is incurred (that is, when it meets the definition of a
liability in the FASB's conceptual framework). SFAS 146 also establishes fair
value as the objective for initial measurement of liabilities related to exit or
disposal activities. SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company adopted SFAS in the first
quarter of fiscal 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." For certain guarantees issued
after December 31, 2002, FIN 45 requires a guarantor to recognize, upon issuance
of a guarantee, a liability for the fair value of the obligations it assumes
under the guarantee. Guarantees issued prior to January 1, 2003, are not subject
to liability recognition, but are subject to expanded disclosure requirements.
The Company does not believe that the adoption of this Interpretation has had a
material effect on its consolidated financial position or statement of
operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which requires the
Company to consolidate variable interest entities for which it is deemed to be
the primary beneficiary and disclose information about variable interest
entities in which it has a significant variable interest. FIN 46 became
effective immediately for variable interest entities formed after January 31,
2003, and effective for periods ending after December 15, 2003, for any variable
interest entities formed prior to February 1, 2003. The Company does not believe
that this Interpretation will have a material impact on its consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," which requires
that the extinguishment of debt not be considered an extraordinary item under
APB Opinion No. 30 (APB 30), "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," unless the debt extinguishment
meets the "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
34
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 Statement of Financial Accounting
Standards No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which amends and clarifies financial
accounting and reporting derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified and for hedging
relationships designated after June 30, 2003. The adoption of this statement did
not have an impact on the Company's operating results or financial position.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate and Equity Market Risks
The Company is exposed both to market risk from changes in interest
rates on funded debt and changes in equity values on common stock investments it
holds in publicly traded companies. The Company also previously had exposure
that related to the Company's revolving credit facility. The Company fully
retired its revolving credit facility in September 2003 and thus no longer has
such exposure related to interest rate risk. Borrowings under the credit
facility bear interest at variable rates based on the bank prime rate. The
extent of this risk with respect to interest rates on funded debt is not
quantifiable or predictable due to the variability of future interest rates;
however, the Company does not believe a change in these rates would have a
material adverse effect on the Company's operating results, financial condition,
and cash flows.
The Company's cash and cash equivalents and securities available for
sale 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 rollover 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 $1,573,925 in market
value as of February 29, 2004.
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 had two customers that represented greater than 10% of its
revenues during the three- and six-month period ended February 29, 2004. See
Note 19 - Major Customers. With respect to transactions entered into with
Sweetwater Capital, LLC, for the six months ended February 29, 2004, the Company
had collected $757,937 of the aggregate contract value of $3,115,354 while
$2,357,417 remained in accounts receivable, of which $241,805 related to
deferred revenue. Subsequent to the period ended February 29, 2004, the Company
collected $2,007,335 in accounts receivable associated with this client. With
respect to transactions entered into with General Dynamics for the six months
ended February 29, 2004, the Company had collected $318,737 of the six-month
sales totaling $750,488 while $431,751 remained in accounts receivable at
February 29, 2004. Subsequent to the period ended February 29, 2004, the Company
collected $133,101 in accounts receivable associated with this client. Given
collections to date totaling $3,217,110 against these two accounts, the Company
believes that it has mitigated any significant credit risk posed by specific
customers which could have had a material adverse affect on its financial
condition.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
[as such term is defined in Rules 13a-15(b) under the Securities Exchange Act of
1934, as amended (the Exchange Act)] as of the end of the period covered by this
quarterly report. Based on such evaluation, such officers have concluded that
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
There were no changes in Eagle's internal control over financial
reporting that occurred during the quarter ended February 29, 2004, that have
materially affected, or reasonably likely to materially affect, Eagle's internal
control over financial reporting.
Eagle's disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching Eagle's desired disclosure control
objectives and are effective in reaching that level of reasonable assurance.
35
Part 2. - Other Information
Item 1 - Legal Proceedings
For a description of certain legal matters, refer to Note 15.
"Commitments and Contingent Liabilities" under the heading Legal Proceedings in
Part 1, Item 1.,"Consolidated Financial Statements."
The Company is also subject to legal proceedings and claims that arise
in the ordinary course of business. The Company's management does not expect
that the results in any of these legal proceedings will have a material adverse
effect on the Company's financial condition or results of operations (Note 15).
Item 2 - Recent Sales of Unregistered Securities or Changes in Securities and
Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Eagle Broadband, Inc., was held
on February 17, 2004, for the following purposes:
1. Election of Directors. To elect seven directors to the
Board of Directors to serve until our next annual meeting of
shareholder's, or until their respective successors are elected and
qualified.
- The following Directors were elected to serve until our
next annual meeting of shareholder's, or until their
respective successors are elected and qualified: Dave
Weisman, H. Dean Cubley, Christopher W. Futer, A. L.
Clifford, Glenn Allan Goerke, C.J. Reinhartsen and
Lorne E. Persons, Jr.
2. Approval of Amendment of Voting Percentages. To amend our
Articles of Incorporation to add a section permitting amendments to the
Articles of Incorporation to be accomplished through the vote of a
majority of the shares entitled to vote at the meeting, as opposed to
66 2/3% of the shares entitled to vote at the meeting.
- Not Passed.
3. Approval of Amendment to Special Meeting Rules. To amend
our Articles of Incorporation to provide that special meetings of the
shareholders may only be called by a majority of the Board of
Directors, the Chairman of the Board, the Chief Executive Officer, or
the holders of at least 50% of all the shares entitled to vote at the
proposed special meeting.
- Not Passed.
4. Approval of Amendment to increase authorized common shares.
To amend our Articles of Incorporation to increase the common shares
that we have authority to issue from 200 million to 350 million.
- Passed.
5. Ratification of Auditors. To ratify the selection of Malone
& Bailey, P.C., as auditors for Eagle for the fiscal year ending August
31, 2004.
- Passed.
Item 5 - Other Information
None
36
Item 6 - Exhibits, Financial Statement Schedules and Reports on Form 8-K -
(Brewer & Pritchard to review and Advise)
(a) Financial Statements and Schedules:
The financial statements are set forth under Item 1 of this Quarterly
Report on Form 10-Q. Financial statement schedules have been omitted since they
are either not required, not applicable, or the information is otherwise
included.
(b) Reports on Form 8-K
The following reports were furnished on Form 8-K during the three
months ended February 29, 2004:
A report on Form 8-K, announcing information under Item 5 of the
report, was filed on January 21, 2004, with the Securities and Exchange
Commission.
A report on Form 8-K, announcing information under Item 9 of the
report, was filed on February 18, 2004, with the Securities and Exchange
Commission.
(c) Exhibit Listing
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Eagle Broadband, Inc. Articles of Incorporation, as Amended and Restated, dated February 13, 2002
(incorporated by reference to Exhibit 3.1 (a) of Form 1-KSB/A Amendment No. 2 for the fiscal year
ended August 31, 2003, filed March 30, 2004).
Exhibit 3.2 Eagle Broadband, Inc. Articles of Incorporation, as Amended, dated February 17, 2004 (incorporated
by reference to Exhibit 3.1 (b) of Form 1-KSB/A Amendment No. 2 for the fiscal year ended August
31, 2003, filed March 30, 2004).
Exhibit 3.3 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/A, file no.
333-111160, filed March 26, 2004).
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 Convertible Debt Agreement (incorporated by reference to Exhibit 10.3 of Form S-3, file
no. 333-106074).
Exhibit 4.4 Addendum to Convertible Debt Agreement (incorporated by reference to Exhibit 10.4 of Form S-3,
file no. 333-106074).
Exhibit 4.5 Form of Subscription Agreement for
Convertible Debt, 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).
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)
37
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 10.13 Purchase Agreement between Eagle Broadband, Inc.'s subsidiary, Contact
Wireless, Inc.
Exhibit 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 of Form S-4 file no. 333-49688).
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EAGLE BROADBAND, INC.
Date: June 1, 2004
By: /s/David A. Weisman
--------------------------------
David A Weisman
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/Richard R. Royall
--------------------------------
Chief Financial Officer
(Principal Financial & Accounting Officer)
38