U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT No. 6 to
FORM 10-K/A
________________________________________________________________________________
[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended August 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-23163
Texas 76-0494995
----- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 Courageous Drive, League City, Texas 77573
---------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
281-538-6000
------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: Common
Stock
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form
10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
Issuer's revenues for its fiscal year ended August 31, 2003, were $11,593,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price of the common stock on the American
Stock Exchange on February 28, 2003, was $15,341,000. As of July 26, 2004,
registrant had 201,964,815 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant is incorporating by reference in Part III of this Form 10-K
certain information contained in the registrant's proxy statement for its annual
meeting of shareholders, which proxy statement was filed by the registrant
before December 29, 2003.
EXPLANATORY NOTE
----------------
Eagle filed a Report of Form 8-K on August 24, 2004, reflecting that we replaced
Malone & Bailey, LLP, as our independent auditor with Lopez, Blevins, Bork and
Associates, LLP ("Lopez Blevins"). Members of Lopez Blevins, prior to the
formation of Lopez Blevins, performed all the audit-related work while employed
with Malone & Bailey, LLP, in connection with conducting our audit for the
fiscal year ended August 31, 2003. Lopez Blevins reaudited our fiscal year ended
August 31, 2003, which audit is contained herein. There are no other changes to
the Amended Form 10-K previously filed on July 29, 2004.
PART II
Item 8. Consolidated Financial Statements
The financial statements commencing on page F-1 have been audited by Lopez,
Blevins, Bork and Associates, LLP as of August 31, 2003, and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended and McManus & Co., P.C., independent certified public accountants, to the
extent and for the periods set forth in their reports appearing elsewhere herein
and are included in reliance upon such reports given upon the authority of said
firm as experts in auditing and accounting.
Item 15--Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules:
The financial statements are set forth under Item 8 of this Annual
Report on Form 10-K. Financial statement schedules have been omitted since they
are either not required, not applicable, or the information is otherwise
included.
(b) Reports on Form 8-K
The following reports were furnished on Form 8-K during the three
months ended August 31, 2003:
A report on Form 8-K, announcing information under Item 5 of the
report, was filed on June 30, 2003 with the Securities and Exchange Commission.
A report on Form 8-K, announcing information under Item 5 of the
report, was filed on August 27, 2003 with the Securities and Exchange
Commission.
(c) Exhibit Listing
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1(a) Eagle Broadband, Inc. Articles of
Incorporation, as Amended and Restated,
dated February 13, 2002.
Exhibit 3.1(b) Eagle Broadband, Inc. Articles of
Incorporation, as Amended, dated February
17, 2004.
Exhibit 3.2 Amended and Restated Eagle Broadband, Inc.
Bylaws (Incorporated by reference
to Exhibit 3.2 of Form 10-KSB for the fiscal
year ended August 31, 2001, filed
November 16, 2001)
Exhibit 4.1 Form of Common Stock Certificate
(incorporated by reference to Exhibit 4 of
Form S-3, file no. 333-111160).
Exhibit 4.2 Purchase Agreement by and between Eagle
Broadband and Investors dated August
23, 2003, including registration rights and
security agreement attached as an exhibit
thereto (incorporated by reference to
Exhibit 10.1 of Form S-3 file no.
333-109481)
Exhibit 4.3 Q-Series Bond Agreement (incorporated by
reference to Exhibit 10.3 of Form S-3, file
no. 333-106074)
Exhibit 4.4 Addendum to Q-Series Bond Agreement
(incorporated by reference to Exhibit 10.4
of Form S-3, file no. 333-106074)
Exhibit 4.5 Form of Subscription Agreement for Q Series
Bond, between Eagle Broadband and certain
investors (incorporated by reference to
Exhibit 10.5 of Form S-3, file no.
333-106074)
Exhibit 10.1 Asset Purchase Agreement between Eagle
Telecom International, Inc., a Delaware
corporation and Eagle Telecom International,
Inc., a Texas corporation (incorporated by
reference to Exhibit 10.1 of Form SB-2 file
no. 333-20011)
Exhibit 10.2 1996 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.1
of Form S-8 file no. 333-72645)
Exhibit 10.3 2002 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 of Form S-8 file
no. 333-97901)
32
Exhibit 10.4 2002 Stock Incentive Plan, as Amended
(incorporated by reference to Exhibit
10.1 of Form S-8 file no. 333-102506)
Exhibit 10.5 2003 Stock Incentive and Compensation Plan
(incorporated by reference to Exhibit 10.1
of Form S-8 file no. 333-103829)
Exhibit 10.6 2003 Stock Incentive and Compensation Plan,
as Amended (incorporated by reference to
Exhibit 10.1 of Form S-8 file no.
333-105074)
Exhibit 10.7 2003 Stock Incentive and Compensation Plan,
as Amended (incorporated by reference to
Exhibit 10.1 of Form S-8 file no.
333-109339)
Exhibit 10.8 2004 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 of Form S-8 file
no. 333-110309)
Exhibit 10.9 Agreement and Plan of Reorganization by and
between Eagle Wireless International, Inc.
Clearworks.net, Inc., and Eagle Acquisition
Corporation dated September 15, 2000
(incorporated by reference to Exhibit 10.1
of Form S-4 file no. 333-49688)
Exhibit 10.10 Stock Purchase Agreement between Eagle
Wireless International, Inc. and the
shareholders of Comtel Communications, Inc.
(incorporated by reference to Exhibit 10.4
of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000)
Exhibit 10.11 Stock Purchase Agreement between Eagle
Wireless International, Inc. and the
shareholders of Atlantic Pacific
Communications, Inc. (incorporated by
reference to Exhibit 10.5 of Form 10-KSB for
the fiscal year ended August 31, 2000, filed
December 13, 2000)
Exhibit 10.12 Stock Purchase Agreement between Eagle
Wireless International, Inc. and the
shareholders of Etoolz, Inc. (incorporated
by reference to Exhibit 10.6 of Form 10-KSB
for the fiscal year ended August 31, 2000,
filed December 13, 2000)
Exhibit 21.1 List of Subsidiaries (incorporated by
reference to Exhibit 21.1 of Form S-4
file no. 333-49688)
Exhibit 23.1 Consent of McManus & Co., P.C
Exhibit 23.2 Consent of Malone & Bailey, PLLC
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eagle Broadband, Inc.
By: //s// DAVID A. WEISMAN
-----------------------------
David A. Weisman
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
/S/ David A. Weisman Chairman of the Board and Oct. 11, 2004
- ----------------------------------- Chief Executive Officer
David A. Weisman (Principal Executive Officer)
/S/ Richard R. Royall Chief Financial Officer Oct. 11, 2004
- ----------------------------------- (Principal Financial and Accounting Officer)
Richard R. Royall
/S/ H. Dean Cubley Director Oct. 11, 2004
- -----------------------------------
H. Dean Cubley
/S/ Christopher W. Futer Director Oct. 11, 2004
- -----------------------------------
Christopher W. Futer
/S/ Glenn A. Goerke Director Oct 11, 2004
- -----------------------------------
Glenn A. Goerke
/S/ J. Reinhartsen Director Oct 11, 2004
- -----------------------------------
J. Reinhartsen
/S/ A.L. Clifford Director Oct 11, 2004
- -----------------------------------
A.L. Clifford
2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Eagle Broadband, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of Eagle Broadband,
Inc. as of August 31, 2003, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of Eagle Broadband, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Broadband,
Inc. as of August 31, 2003, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2, to the consolidated financial statements the Company
restated its prior period financial statements.
/S/ Lopez, Blevins, Bork and Associates, LLP
- --------------------------------------------
Lopez, Blevins, Bork and Associates, LLP
Houston, Texas
October 11, 2004
F-1
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF EAGLE BROADBAND, INC.:
We have audited the accompanying consolidated balance sheets of Eagle Broadband,
Inc. and subsidiaries as of August 31, 2002, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the two
years ended August 31, 2002 and 2001. These financial statements are the
responsibility of Eagle Broadband, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Eagle Broadband, Inc. and subsidiaries as of August 31, 2002, and
the results of their earnings, shareholders' equity, and their cash flows for
each of the two years then ended are in conformity with generally accepted
accounting principles.
As discussed in Note 2 the consolidated financial statements, the Company
restated its prior period financial statements.
/S/ McManus & Co., P.C.
- ----------------------------
McMANUS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
ROCKAWAY, NEW JERSEY
December 13, 2002, except as to Note 2
on which the date is July 27, 2004
F-2
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts, as restated (See Note 2)
ASSETS
August 31,
2003 2002
---- ----
1. Current Assets
Cash and Cash Equivalents $ 824 $ 1,273
Securities Available for Sale 1,714 2,148
Accounts Receivable, net 1,704 5,028
Inventories 3,199 6,059
Prepaid Expenses 668 358
---------------- ----------------
Total Current Assets 8,109 14,866
Property and Equipment
Operating Equipment 36,422 34,509
Less: Accumulated Depreciation (5,689) (3,661)
---------------- ----------------
Total Property and Equipment 30,733 30,848
Other Assets:
Deferred Costs 334 334
Goodwill, net 4,095 5,974
Contract rights, net 23,590 25,503
Customer relationships, net 5,912 6,390
Other Intangible assets, net 4,366 4,839
Other Assets 227 397
---------------- ----------------
Total Other Assets 38,524 43,437
---------------- ----------------
Total Assets $ 77,366 $ 89,151
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 5,461 $ 4,757
Accrued Expenses 7,790 2,873
Notes Payable 5,779 3,653
Capital Lease Obligation -- 48
---------------- ----------------
Total Current Liabilities 19,030 11,331
Long-Term Liabilities:
Capital Lease Obligations
(net of current maturities) -- 70
Long-Term Debt -- 1,202
---------------- ----------------
Total Long-Term Liabilities -- 1,272
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares -- --
Common Stock - $.001 par value
Authorized 200,000,000 shares
Issued and Outstanding at August 31, 2003
and 2002, 147,447,000 and 73,051,000, respectively 147 73
Paid in Capital 177,017 158,731
Accumulated Deficit (118,101) (81,600)
Accumulated Comprehensive Income (Loss) (727) (656)
---------------- ----------------
Total Shareholders' Equity 58,336 76,548
---------------- ----------------
Total Liabilities and Shareholders' Equity $ 77,366 $ 89,151
================ ================
See accompanying notes to consolidated financial statements.
F-3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, as restated (See Note 2))
For the years ended August 31,
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net Sales:
Structured wiring $3,692 $8,036 $7,643
Broadband services 2,809 2,657 523
Products 3,342 16,108 19,342
Other 1,750 3,016 602
-------------- -------------- --------------
Total Sales 11,593 29,817 28,110
-------------- -------------- --------------
Costs of Goods Sold:
Direct Labor and Related Costs 2,195 3,160 1,638
Products and Integration Service 5,400 15,250 14,931
Structured Wiring Labor and Materials 1,774 2,121 2,345
Broadband Services Costs 903 763 260
Depreciation and Amortization 456 377 1,053
Other Manufacturing Costs 56 1,033 181
-------------- -------------- --------------
Total Costs of Goods Sold 10,784 22,704 20,408
-------------- -------------- --------------
Gross Profit 809 7,113 7,702
-------------- -------------- --------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 6,102 7,795 6,169
Advertising and Promotion 247 963 600
Depreciation and Amortization 4,776 6,020 4,273
Other Support Costs 12,737 3,974 4,264
Research and Development 411 404 1,276
Impairment, write-downs & restructuring costs 7,611 64,665 ---
-------------- -------------- --------------
Total Operating Expenses 31,884 83,821 16,582
-------------- -------------- --------------
Loss from Operations (31,075) (76,708) (8,880)
Other Income/(Expenses)
Interest income, 68 360 2,348
Interest expense (5,494) (625) ---
-------------- -------------- --------------
Total Other Income (Expense) (5,426) (265) 2,348
-------------- -------------- --------------
Net Loss (36,501) (76,973) (6,532)
Other Comprehensive Loss:
Unrealized Holding Loss (71) (279) (359)
-------------- -------------- --------------
Other Comprehensive Loss $(36,572) $(77,252) $(6,891)
-------------- -------------- --------------
-------------- -------------- --------------
Net Loss per Common Share:
Basic $(0.38) $(1.20) $(0.13)
Diluted $(0.38) $(1.20) $(0.14)
Comprehensive Loss $(0.38) $(1.20) $(0.14)
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
F-4
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts, as restated (See Note 2))
Additional Accumulated Total
Common Stock Preferred Paid in Retained Comprehensive Shareholders
Shares Value Stock Capital Earnings Income Equity
Total Shareholders' Equity
As of August 31, 2000 25,609 $26 $--- $52,160 $1,905 $ (18) $54,073
Net Loss --- --- --- --- (6,532) (6,532)
New Stock Issued to Shareholders
For Services and Compensation 1,370 1 --- 973 --- 974
For Property and Other Assets 127 --- --- 2,837 --- 2,837
For Retirement of Debt and Liabilities 3,004 3 --- 5,693 --- 5,696
For Warrants Conversion 645 1 --- 1,078 --- 1,079
For Employee Stock Option Plan 96 --- --- 192 --- 192
For Acquisition of ClearWorks, Inc. 35,287 35 --- 99,762 --- 99,797
For Licenses and Investments 1,204 1 --- 2,965 --- 2,966
Syndication Costs --- --- --- (876) --- (876)
Treasury Stock (7,078) (7) --- (11,358) --- (11,365)
Unrealized Holding Loss --- --- --- --- (359) (359)
-------------------------------------------------------------------------------------
Total Shareholders' Equity
As of August 31, 2001 60,264 60 --- 153,426 (4,627) (377) 148,482
Net Loss --- --- --- --- (76,973) (76,973)
New Stock Issued to Shareholders
For Services and Compensation 1,648 2 --- 880 --- 882
For Property and Other Assets 2,867 2 --- 591 --- 593
For Retirement of Debt and Liabilities 7,846 9 --- 3,577 --- 3,586
For Warrants Conversion --- --- --- --- --- ---
For Employee Stock Option Plan --- --- --- --- --- ---
For Acquisitions 2,002 2 --- 1,079 --- 1,081
For Licenses and Investments --- --- --- 100 --- 100
Syndication Costs --- --- --- --- --- ---
Treasury Stock (1,576) (2) --- (922) --- (924)
Unrealized Holding Loss --- --- --- --- (279) (279)
-------------------------------------------------------------------------------------
Total Shareholders' Equity
As of August 31, 2002 73,051 73 --- 158,731 (81,600) (656) 76,548
Net Loss --- --- --- --- (36,501) (36,501)
New Stock Issued to Shareholders
For Services and Compensation 7,437 7 --- 1,813 --- 1,820
For Property and Other Assets 14,938 15 --- 3,032 --- 3,047
For Retirement of Debt and Liabilities 50,816 51 --- 13,827 --- 13,878
For Warrants Conversion --- --- --- --- --- ---
For Employee Stock Option Plan 1,647 2 --- 180 --- 182
Syndication Costs --- --- --- (368) --- (368)
Treasury Stock (442) (1) --- (198) --- (199)
Unrealized Holding Loss --- --- --- --- --- (71) (71)
-------------------------------------------------------------------------------------
Total Shareholders' Equity
As of August 31, 2003 147,447 $147 --- $177,017 $(118,101) $ (727) $58,336
=====================================================================================
See accompanying notes to consolidated financial statements.
F-5
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts, as restated (See Note 2))
For the years ended August 31,
----------------------------------------------
2003 2002 2001
--------------- --------------- --------------
Cash Flows from Operating Activities
Net Loss $(36,501) $(76,973) $(6,532)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Impairment, write-downs & restructuring costs 7,611 64,665 ---
Interest for conversion value 91 --- ---
Depreciation and Amortization 5,232 6,397 5,326
Stock Issed for Services Rendered 1,820 882 974
Stock Issued for Interest Expense 2,477 100 ---
Changes in Assets and Liabilities
(Increase)/Decrease in Accounts Receivable 124 2,479 (462)
(Increase)/Decrease in Inventories 1,717 4,578 515
(Increase)/Decrease in Prepaid Expenses (311) 386 516
Increase/(Decrease) in Accounts Payable 921 232 (1,793)
Increase/(Decrease) in Accrued Expenses 8,557 (3,180) 1,493
Increase/(Decrease) in Expense Allowable for Doubtful
Acccounts 2,177 (363) ---
Increase/(Decrease) in Federal Income Taxes Payables --- --- (736)
--------------- ------------------------------
Total Adjustment 30,416 76,176 5,883
--------------- --------------- --------------
Net Cash Used by Operating Activities (6,085) (797) (699)
--------------- --------------- --------------
Cash Flows from Investing Activities
(Purchase)/Disposal of Property and Equipment (2,121) (12,886) (16,394)
(Purchase)/Disposal of Contact Wireless & DSS
Security, Net of Cash Acquired --- (869) ---
(Increase)/Decrease in Security Deposits --- --- (102)
(Increase)/Decrease in Investments 434 87 (3,189)
(Increase)/Decrease in Notes Receivable --- --- 8,655
(Increase)/Decrease in Deferred Advertising Costs --- --- 21
(Increase)/Decrease in Deferred Syndication Costs --- --- 270
(Increase)/Decrease in Other Intangible Assets --- --- 1,009
(Increase)/Decrease in Other Assets 411 --- 9
--------------- --------------- --------------
Net Cash Used by Investing Activities (1,276) (13,668) (9,721)
Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable 7,297 387 6,148
Increase/(Decrease) in Capital Leases -- 3 63
Increase/(Decrease) in Line of Credit --- (1,846) 230
Increase/(Decrease) in Deferred Taxes --- 32 ---
Proceeds from Sale of Common Stock, Net 182 --- 1,078
Retirement of ESOP Shares --- --- (2,740)
Syndication costs (368) --- ---
Treasury Stock (199) (918) (8,625)
--------------- --------------- --------------
Net Cash Provided by Financing Activities 6,912 (2,342) (3,846)
--------------- --------------- --------------
Net Increase/(Decrease) in Cash (449) (16,807) (14,266)
Cash at the Beginning of the Year 1,273 18,080 32,346
--------------- --------------- --------------
Cash at the End of the Year $824 $1,273 $18,080
--------------- --------------- --------------
--------------- --------------- --------------
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for:
Interest $3,288 $165 $112
Income Taxes --- --- ---
Supplemental non-cash investing activities (See Notes 5 & Note 12)
See accompanying notes to consolidated financial statements.
Supplemental non-cash investing activities (See Notes 5 & Note 12)
See accompanying notes to consolidated financial statements.
F-6
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 1 - Basis of Presentation and Significant Accounting Policies:
Eagle Broadband, Inc., (the Company or Eagle) incorporated as a Texas
corporation on May 24, 1993, and commenced business in April of 1996.
The Company is a supplier of broadband products and services,
providing telecommunications equipment with related software,
broadband products, and fiber and cable as used by service providers
in the paging and other personal communications markets. The Company
designs, manufactures, markets and services its products under the
Eagle Broadband, Inc., and BroadbandMagic names. These products
include transmitters, receivers, controllers, software, convergent
set-top boxes, fiber, cable, and other equipment used in commercial
and personal communications systems and radio and telephone systems.
Additionally, the Company provides cable television, telephone,
security, Internet connectivity, and related services under a bundled
digital services package, commonly known as "BDS," through single
source billing. Also provided is last mile cable and fiber
installation services as well as comprehensive IT products and
services.
A) Consolidation
At August 31, 2003, 2002 and 2001, the Company's subsidiaries were:
Atlantic Pacific Communications, Inc. (APC) - operated as Eagle
Communication Services; Etoolz, Inc. (ETI); Eagle Wireless
International, Inc. (EWI); ClearWorks.net, Inc. (.NET); ClearWorks
Communications, Inc. (COMM) - operated as Eagle BDS Services;
ClearWorks Home Systems, Inc. (HSI) - operated as Eagle Residential
Structured Wiring; Contact Wireless, Inc. (CWI) - operating as Eagle
Paging Services; DSS Security, Inc., (DSS) - operated as Eagle
Security Services; United Computing Group, Inc. (UCG) - operated as
Eagle Technology Services; and Link Two Communications, Inc. (LINK II)
- operated as Eagle Messaging Services. The consolidated financial
statements include the accounts of the Company and its subsidiaries.
All significant inter-company transactions and balances have been
eliminated in consolidation.
B) Cash and Cash Equivalents
The Company has $824,000 and $1,273,000 of cash and cash equivalents
invested in interest bearing accounts at August 31, 2003, and August
31, 2002, respectively.
The Company also has Securities available for sale that include
1,480,000 shares of common stock of Burst.com, 146,085,264 shares of
Celerity Systems common stock and $350,000 Celerity Systems Bonds.
These common stock and bond investments have an aggregate cost basis
of $1,075,000 and an aggregate fair market value of $1,714,006 and are
included in the Balance Sheet category of Securities available for
sale as of August 31, 2003 and 2002. See (Note 10).
C) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated by using the straight-line
method for financial reporting and accelerated methods for income tax
purposes. The recovery classifications for these assets are listed as
follows:
Years
Headend Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized. Eagle has
acquired all of its property and equipment with either cash or stock
and has not capitalized any interest expenses in its capital assets.
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the
following items, in thousands:
August 31,
2003 2002
Raw Materials $ 1,826 $ 4,515
Work in Process 1,237 1,262
Finished Goods 136 282
$3,199 $ 6,059
F-7
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
E) Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; BroadbandMagic;
ClearWorks Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle
Wireless International, Inc., Atlantic Pacific Communications, Inc.;
Link Two Communications, Inc.; United Computing Group, Inc.; Contact
Wireless, Inc.; and DSS Security, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of
adopting EITF 00-21 did not have a material effect to Eagle's results
of operations. Eagle's contracts that contain multiple elements as of
May 31, 2004, or prior were immaterial. When elements such as
hardware, software and consulting services are contained in a single
arrangement, or in related arrangements with the same customer, Eagle
allocates revenue to each element based on its relative fair value,
provided that such element meets the criteria for treatment as a
separate unit of accounting. The price charged when the element is
sold separately generally determines fair value. In the absence of
fair value for a delivered element, Eagle allocates revenue first to
the fair value of the undelivered elements and allocates the residual
revenue to the delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a single unit
of accounting, resulting in a delay of revenue recognition for the
delivered elements until the undelivered elements are fulfilled. Eagle
limits the amount of revenue recognition for delivered elements to the
amount that is not contingent on the future delivery of products or
services or subject to customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed
are deferred until the conclusion of the period of the service for
which the advance billing relates. Deferred revenues are included on
the balance sheet as a current liability under the heading Accrued
Expenses until the service is performed and then recognized in the
period in which the service is completed. Eagle's deferred revenues
primarily consist of billings in advance for cable, internet, security
and telephone services, which generally are between one and three
months of services. Eagle had deferred revenues of $230,397 and
$147,696 as of August 31, 2003 and 2002, respectively.
Eagle Wireless International, Inc.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in
commercial and personal communication systems, radio and telephone
systems. Revenues from these products are recognized when the product
is shipped. Eagle's Wireless International Product revenues are
reported under the category of Products on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also
under the category Eagle within Note 22 - Industry Segments.
BroadbandMagic
BroadbandMagic designs, manufactures and markets the convergent
set-top boxes. Products are sent principally to commercial customers
for a pre-sale test period of ninety days. Upon the end of the
pre-sale test period, the customer either returns the product or
accepts the product, at which time Eagle recognizes the revenue.
Eagle's Broadband Multimedia and Internet Products revenues are
reported under the category of Products on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also
under the category Eagle within Note 22 - Industry Segments. Revenue
from software consists of software licensing. There is no
post-contract customer support. Software revenue is allocated to the
license using vendor specific objective evidence of fair value
("VSOE") or, in the absence of VSOE, the residual method. The price
charged when the element is sold separately generally determines VSOE.
In the absence of VSOE of a delivered element, Eagle allocates revenue
to the fair value of the undelivered elements and the residual revenue
to the delivered elements. Eagle recognizes revenue allocated to
software licenses at the inception of the license.
Eagle Broadband, Inc.
Eagle Broadband, Inc., engages independent agents for sales
principally in foreign countries and certain geographic regions in the
United States. Under the terms of these one-year agreements the
distributor or sales agents provide the companies with manufacturing
business sales leads. The transactions from these distributors and
agents are subject to Eagle's approval prior to sale. The
distributorship or sales agent receives commissions based on the
amount of the sales invoice from the companies to the customer. The
sale is recognized at the time of shipment to the customer. These
sales agents and distributors are not a significant portion of total
sales in any of the periods presented. Eagle's Broadband, Inc.
revenues are reported under the category of Products on Eagle's
Consolidated Statements of Operations included as page F-4 of this
report and also under the category Eagle within Note 22 - Industry
Segments.
Eagle BDS Services - dba ClearWorks Communications, Inc.
ClearWorks Communications, Inc., provides Bundled Digital Services to
business and residential customers, primarily in the Texas market.
Revenue is derived from fees charged for the delivery of Bundled
Digital Services, which includes telephone, long distance, internet,
security monitoring and cable services. This subsidiary recognizes
revenue and the related costs at the time the services are rendered
Installation fees are recognized upon completion and acceptance.
Eagle's BDS Services revenues are reported under the category of
Broadband Services on Eagle's Consolidated Statements of Operations
included as page F-4 of this report and also under the category
EBS/DSS within Note 22 - Industry Segments.
F-8
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Eagle Residential Structured Wiring - dba ClearWorks Home Systems,
Inc.
ClearWorks Home Systems, Inc., sells and installs structured wiring,
audio and visual components to homes. This subsidiary recognizes
revenue and the related costs at the time the services are performed.
Revenue is derived from the billing of structured wiring to homes and
the sale of audio and visual components to the homebuyers. Eagle's
Residential Structured Wiring revenues are reported under the category
of Structured Wiring on Eagle's Consolidated Statements of Operations
included as page F-4 of this report and also under the category
APC/HSI within Note 22 - Industry Segments.
Eagle Communication Services - dba Atlantic Pacific Communications,
Inc.
Atlantic Pacific Communications, Inc., provides project planning,
installation, project management, testing and documentation of fiber
and cable to commercial and industrial clients throughout the United
States. The revenue from the fiber and cable installation and services
is recognized upon percentage of completion of the project. Most
projects are completed in less than one month, therefore, matching
revenue and expense in the period incurred. Service, training and
extended warranty contract revenues are recognized as services are
completed. Eagle's Communications Services revenues are reported under
the category of Structured Wiring on Eagle's Consolidated Statements
of Operations included as page F-4 of this report and also under the
category APC/HSI within Note 22 - Industry Segments.
Etoolz, Inc.
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to
independent third parties.
Eagle Messaging Services - dba Link Two Communications, Inc.
Link Two Communications, Inc., provides customers with one- and
two-way messaging systems. The revenue from the sale of these products
is recognized at the time the services are provided. Eagle's Messaging
Services revenues are reported under the category of Other on Eagle's
Consolidated Statements of Operations included as page F-4 of this
report and also under the category Eagle within Note 22 - Industry
Segments.
Eagle Paging Services - dba Contact Wireless, Inc.
Contact Wireless, Inc., provides customers with paging and mobile
telephone products and related monthly services. Revenue from product
sales is recorded at the time of shipment. Revenue for the mobile
phone and paging service is billed monthly as the service is provided.
Eagle's Paging Services revenues are reported under the category of
Other on Eagle's Consolidated Statements of Operations included as
page F-4 of this report and also under the category Other within Note
22 - Industry Segments.
Eagle Security Services - dba DSS Security, Inc.
DSS Security, Inc., provides monthly security monitoring services to
residential customers. The customers are billed three months in
advance of service usage. The revenues are deferred at the time of
billing and ratably recognized over the prepayment period as service
is provided. Installation fees are recognized upon completion and
acceptance. Eagle's Security Services revenues are reported under the
category of Broadband Services on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the
category EBS/DSS within Note 22 - Industry Segments.
Eagle Technology Services - dba United Computing Group, Inc.
United Computing Group, Inc., provides business-to-business hardware
and software network solutions and network monitoring services. The
revenue from the hardware and software sales is recognized at the time
of shipment. The monitoring services recognition policy is to record
revenue on completion.. Eagle's Technology Services product revenues
are reported under the category of "Products" while the services
components are reported under the category "Other" on Eagle's
Consolidated Statements of Operations included as page F-4 of this
report and also under the category UCG within Note 22 - Industry
Segments.
F) Research and Development Costs
For the years ended August 31, 2003, 2002 and 2001, the Company
performed research and development activities for internal projects
related to its Orb'Phone Exchange, convergent set-top boxes as well as
its multi-media entertainment centers. Research and development costs
of $ 411,000, $404,000, and $1,276,000 were expensed for the years
ended August 31, 2003, 2002, and 2001, respectively.
No research and development services were performed for outside
parties for the year ended August 31, 2003, 2002 and 2001.
G) Income Taxes
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
which requires a change from the deferral method to assets and
liability method of accounting for income taxes. Timing differences
exist between book income and tax income, which relate primarily to
depreciation methods.
H) Net Earnings Per Common Share
Net earnings per common share are shown as both basic and diluted.
Basic earnings per common share are computed by dividing net income
less any preferred stock dividends (if applicable) by the weighted
average number of shares of common stock outstanding. Diluted earnings
per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average
number of shares of common stock outstanding plus any dilutive common
stock equivalents. The components used for the computations are shown
as follows, in thousands:
F-9
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
August 31,
------------------------------------------
2003 2002 2001
---------- ----------- -----------
Weighted Average Number of Common
Shares Outstanding Including
Basic Common Stock Equivalents 95,465 64,004 49,726
Fully Diluted Common Stock Equivalents 95,465 64,158 49,880
I) Impairment of Long-Lived Assets and Goodwill
Our long-lived assets primarily include goodwill, contract rights and
customer relationships. Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires
that goodwill and intangible assets be tested for impairment at the
reporting unit level (operating segment or one level below an
operating segment) on an annual basis and between annual tests in
certain circumstances. Application of the goodwill impairment test
requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning
goodwill and intangible assets to reporting units, and determining the
fair value of each reporting unit. Significant judgments required to
estimate the fair value of reporting units include estimating future
cash flows, determining appropriate discount rates and other
assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value for each reporting
unit.
The intangible assets primarily are the Company rights to deliver
bundled digital services such as, Internet, telephone, cable
television and security monitoring services to residential and
business users. The Company assessed the fair value of the intangible
assets. There were a number of significant and complex assumptions
used in the calculation of the fair value of the intangible assets. If
any of these assumptions prove to be incorrect, the Company could be
required to record a material impairment to its intangible assets. The
assumptions include significant market penetration in its current
markets under contract and significant market penetration in markets
where they are currently negotiating contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. An impairment loss would be deemed necessary when the estimated
non-discounted future cash flows are less than the carrying net amount
of the asset. If an asset were deemed to be impaired, the asset's
recorded value would be reduced to fair market value. In determining
the amount of the charge to be recorded, the following methods would
be utilized to determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
At August 31, 2002, Eagle determined that an impairment of Link Two
paging network equipment and nationwide licenses existed. Link Two
Communications competes with many established companies in the
nationwide one and two-way messaging services area. The paging
industry has declined over the past year and the major paging
companies have undergone significant beneficial financial
restructurings. These companies are able to offer products and related
services at more favorable rates than Link Two. Because the paging
industry and related financial credit availability from banks for
financing emerging nationwide networks has been declining over the
last year, Link Two has been unable to obtain significant funding to
expand and provide cost effective service to its customers.
Accordingly, Link Two has had to curtail its development on a
nationwide basis and restricted its operations to serve the Houston
and Dallas, Texas, markets. The equipment servicing the nationwide
network has been inactive and is being dismantled. The equipment
servicing the nationwide network is inactive and has been impaired as
well as the value of the related FCC licenses. At August 31, 2002,
management estimated through recent sales of equipment and industry
pricing of FCC licenses that an impairment charge of $27,100,000 was
necessary to reflect the ongoing value of its assets and licenses.
At August 31, 2003, management determined that a $7,611,000 non-cash
impairment charge was necessary against realigned operations and the
discontinued sale of low margin commodity products, residential and
commercial structured wiring operations and the withdrawal from its
Austin area BDS development based on the lack of demand for BDS
services resulting from a slower build out of the development than
originally projected in conjunction with local market competition.
Included in the impairment was the write down of goodwill associated
with the Comtel acquisition of $1,878,000.
J) Intangible Assets
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at the dates of acquisition and
were being amortized using the straight-line method over twenty (20)
years for Atlantic Pacific Communications, Inc., and twenty-five (25)
years for Bundled Digital Services through June 30, 2001.
Contract rights and customer relationships relate to the Company
rights to deliver bundled digital services such as Internet,
telephone, cable television and security monitoring services to
certain residential and business users that were aquired in the
Clearworks.net, Inc. merger and are being amortized over the lives of
the contracts which is fifteen (15) years.
Other intangible assets consist of licenses and permits and other
acquired contracts, which are being amortized using the straight-line
method over their estimated useful lives of 1 to twenty (20) years.
Eagle's licenses include FCC licenses for designated narrowband
personal communications services, radio frequencies or spectrum to
service providers. Prior to the adoption of FAS 142, Eagle amortized
these licenses using the straight line method over twenty years. At
August 31, 2002, management estimated through recent sales of
equipment and industry pricing of FCC licenses that an impairment
charge of $27,100,000 was necessary to reflect the ongoing value of
its assets and licenses; thereby leaving an unamortized balance of
licenses on its books of $1,562,000. 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.
F-10
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Goodwill is carried at cost less accumulated amortization. Intangible
assets were amortized on a straight-line basis over the economic lives
of the respective assets, generally ten to twenty-five years. Prior to
July 1, 2001, goodwill was amortized over 20 to 25 years. The
Company's adoption of SFAS 142 eliminated the requirement to amortize
goodwill subsequent to the fiscal year ending August 31, 2001. Under
the provisions of SFAS 142, the Company is required to periodically
assess the carrying value of goodwill associated with each of its
distinct business units that comprise its business segments of the
Company to determine if impairment in value has occurred. Impairment
tests completed as of August 31, 2002 and August 31, 2001 concluded
that the carrying amount of goodwill for each acquired business unit
did not exceed its net realizable value based on the Company's
estimate of expected future cash flows to be generated by its business
units, except as described above in Note 1, I. The Company updated its
assessment as of August 31, 2003 and concluded that based on a
valuation model incorporating expected future cash flows in
consideration of historical cash flows and results to date, no
impairment charge was necessary.
Goodwill and other intangibles of $75,528,000 net of prior impairments
and amortization were recorded under the purchase method for the
purchases of ClearWorks.net, Inc., Atlantic Pacific, Inc., DSS
Security, Inc., Contact Wireless, Inc., and Comtel, Inc. The majority
of the intangibles were from the ClearWorks acquisition. ClearWorks
was in the business of selling telecommunications services to
residential neighborhoods. In fiscal 2003, Eagle realized it had
failed to successfully achieve profits using the ClearWorks model of
installing fiber optic cable to neighborhoods under the speculative
attempt to capture enough individual homeowners in each neighborhood
via individual selling methods to pay for the cable infrastructure. In
early 2003, Eagle modified its strategy to deliver the ClearWorks
developed bundled digital services approach including Internet,
telephone, cable television and security monitoring services to
residential and business users by targeting municipalities,
homebuilders and residential real estate developers that finance and
install the fiber optic cable backbone in every lot and offer Eagle
exclusive rights to deliver digital bundled services to homeowners,
using pre-selling promotions and other low cost mass marketing
techniques. In October 2003, Eagle hired a new Chief Executive Officer
with an extensive sales and marketing background and proven senior
management and operational skills leading high-growth technology
companies to implement its modified strategy. As of December 5, 2003,
the date of the auditor's report, Eagle had realized several initial
successes in projects where the municipalities, public utility
districts and developers assume the predominate capital cost
responsibility and contract with Eagle to provide the services and
content; thereby significantly limiting the Company's capital outlays
on such projects.
Eagle assessed the fair value of the intangible assets as of August
31, 2003 and concluded that the goodwill and other intangible assets
valuations remains at an amount greater than the current carrying and
other intangible assets value.
There were a number of significant and complex assumptions used in the
calculation of the fair value of the goodwill. If any of these
assumptions prove to be incorrect, Eagle could be required to record a
material impairment to its goodwill. The assumptions include
significant market penetration in its current markets under contract
and significant market penetration in markets where they are currently
negotiating contracts.
K) Advertising Costs
In fiscal 2003, 2002, and 2001, advertising costs have been
capitalized and amortized on the basis of contractual agreements
entered into by the Company. These contracts are amortized over the
life of the individual contracts or expensed in the period incurred.
For the year ended August 31, 2003, 2002, and 2001, the Company
expensed $247,000, $963,000 and $600,000 respectively.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that
are directly attributable to fundraising and the collection thereto.
Upon successful collection of the funds, all expenses incurred will be
reclassified to additional paid in capital and treated as syndication
costs; netted against the funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent asset and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
N) Marketable Securities
Eagle holds minority equity investments in companies having operations
or technology in areas within Eagle's strategic focus. Eagle applies
the equity method of accounting for minority investments when Eagle
has the ability to exert significant influence over the operating and
financial policies of an investment. In the absence of such ability,
Eagle accounts for these minority investments under the cost method.
Certain investments carry restrictions on immediate disposition.
Investments in public companies (excluding those accounted for under
the equity method) with restrictions of less than one year are
classified as available-for-sale and are adjusted to their fair market
value with unrealized gains and losses, net of tax, recorded as a
component of accumulated other comprehensive income. Upon disposition
of these investments, the specific identification method is used to
determine the cost basis in computing realized gains or losses, which
are reported in other income and expense. Declines in value that are
judged to be other than temporary are reported in other income and
expense.
F-11
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This
statement considers the presentation of unrealized holding gains and
losses attributable to debt and equity securities classified as
available-for-sale. As stated, any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income." For the fiscal year ended August
31, 2003, 2002, and 2001 comprehensive loss was ($71,000), ($279,000)
and ($359,000), respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
year ended August 31, 2002, and 2001, to facilitate comparisons.
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support cost for the twelve months ended August 31, 2003, 2002,
and 2001 are as follows, in thousands: -
2003 2002 2001
------------------------------------------
Advertising/Conventions $ --- 8 $ 737
Auto Related 66 174
Bad debt 2,177 --- ---
Contract Labor 907 100 ---
Delivery/Postage 95 162 178
Fees 418 --- ---
Insurance 437 181 263
Office & telephone 675 880 482
Other 291 21 17
Professional 5,222 424 831
Rent 1,183 1,052 791
Travel 377 459 437
Taxes 170 53 90
Utilities 719 460 438
---------- ---------- ----------
Total $ 12,737 3,974 $ 4,264
========== ========== ==========
R) Recent Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with
Exit or Disposal Activities," which nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that costs associated with an exit
or disposal activity be recognized only when the liability is incurred
(that is, when it meets the definition of a liability in the FASB's
conceptual framework). SFAS 146 also establishes fair value as the
objective for initial measurement of liabilities related to exit or
disposal activities. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company
adopted SFAS in the first quarter of fiscal 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." For certain
guarantees issued after December 31, 2002, FIN 45 requires a guarantor
to recognize, upon issuance of a guarantee, a liability for the fair
value of the obligations it assumes under the guarantee. Guarantees
issued prior to January 1, 2003, are not subject to liability
recognition, but are subject to expanded disclosure requirements. The
Company does not believe that the adoption of this Interpretation has
had a material effect on its consolidated financial position or
statement of operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which requires
the Company to consolidate variable interest entities for which it is
deemed to be the primary beneficiary and disclose information about
variable interest entities in which it has a significant variable
interest. FIN 46 became effective immediately for variable interest
entities formed after January 31, 2003 and effective for periods
ending after December 15, 2003, for any variable interest entities
formed prior to February 1, 2003. The Company does not believe that
this Interpretation will have a material impact on its consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which requires that the extinguishment of debt not be
considered an extraordinary item under APB Opinion No. 30 ("APB 30"),
"Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," unless the debt extinguishment
meets the "unusual in nature and infrequent of occurrence" criteria in
APB 30. SFAS 145 is effective for fiscal years beginning after May 15,
2002, and, upon adoption, companies must reclassify prior period items
that do not meet the extraordinary item classification criteria in APB
30. The Company adopted SFAS 145 and related rules as of August 31,
2002. The adoption of SFAS 145 had no effect on the Company's
financial position or results of operations.
F-12
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an
asset in some circumstances). The provisions of this Statement are
effective for financial instruments entered into or modified after May
31, 2003, and otherwise are effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this
Statement did not have an impact on the Company's financial results of
operations and financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends
and clarifies financial accounting and reporting derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified and for
hedging relationships designated after June 30, 2003. The adoption of
this statement did not have an impact on the Company's operating
results or financial position.
S) Product Warranties
The Company warrants its products against defects in design, materials
and workmanship generally for six months to a year. Other warranties
from our vendors which are incorporated in our products are passed on
to the customer at the completion of the sale. Provision for estimated
warranty costs is made in the period in which such costs become
probable. Historically, Eagle has not incurred any material warranty
costs and, accordingly, Eagle has not accrued for these costs at
August 31, 2003 and 2002. Eagle provides for the estimated cost of
product warranties at the time it recognizes revenue. Eagle engages in
product quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers; however,
ongoing product failure rates, material usage and service delivery
costs incurred in correcting a product failure, as well as specific
product class failures outside of Eagle's baseline experience, affect
the estimated warranty obligation. If actual product failure rates,
material usage or service delivery costs differ from estimates,
revisions to the estimated warranty liability would be required.
T) Beneficial Conversion Values:
Beneficial conversion values are calculated at the difference between
the conversion price and the fair value of the common stock into which
the debt is convertible, multiplied by the number of shares into which
the debt is convertible. The beneficial conversion value is charged to
interest expense because the debt is convertible at the date of
issuance. The value is limited to the total proceeds received.
NOTE 2 - Restatement of Financial Statements
During the quarter ended May 31, 2004, and subsequent to the issuance
of the Company's financial statements as of August 31, 2003, it was
determined that the allocation of the purchase price to net assets
acquired in connection with its merger with Clearworks.net, Inc. and
certain other classifications of intangible assets had not been
appropriately accounted for. The principal change to previously issued
financial statements related to the reclassification of a portion of
the Company's goodwill acquired in the Clearwork.net, Inc. merger to
contract rights, customer relationships and other intangible assets
that are amortizable versus goodwill not being amortizable following
the Company's adoption of FAS 142. Eagle also determined that goodwill
was impaired at August 31, 2002, and recorded an impairment charge of
$37,565,000 Accordingly, the Company has restated its consolidated
financial statements for the years ended August 31, 2003, 2002 and
2001 to correctly present goodwill, intangible assets, amortization
expense and net loss and restated its consolidated financial
statements as of May 31, 2003, and February 28, 2003, to increase the
provision for bad debt.
The accompanying consolidated financial statements as of August 31,
2003 and 2002 and for the years ended August 31, 2003, 2002 and 2001
have been restated to correctly present goodwill, intangible assets
and amortization expense and net loss.
A comparison of the Company's consolidated financial position as of
August 31, 2003 and 2002 prior to and following the restatement
follows:
August 31, 2003 August 31, 2002
--------------------- ----------------------
As As As As
Reported Restated Reported Restated
========== ========== ========== ===========
Goodwill $82,138 $5,596 $84,017 $7,475
Accumulated amortization (2,541) (1,501) (2,541) (1,501)
---------- ---------- ---------- -----------
$79,597 $4,095 $81,476 $5,974
========== ========== ========== ===========
Contract rights $- $28,691 $- $28,691
- ---------------
Accumulated amortization - (5,101) - (3,188)
- ------------------------ ---------- ---------- ---------- -----------
$- $23,590 $- $25,503
========== ========== ========== ===========
Customer relationships $- $7,189 $- $7,189
- ----------------------
Accumulated amortization - (1,277) - (799)
- ------------------------ ---------- ---------- ---------- -----------
$- $5,912 $- $6,390
========== ========== ========== ===========
Other Intangible assets $3,743 $6,839 $3,743 $6,895
Accumulated amortization (1,737) (2,473) (1,737) (2,056)
---------- ---------- ---------- -----------
$2,006 $4,366 $2,006 $4,839
========== ========== ========== ===========
Total Assets 121,006 77,366 129,983 89,151
Accumulated deficit (75,188) (118,101) (41,424) (81,600)
Total Shareholders' Equity 101,976 58,336 117,380 76,548
Total Liabilities and
Shareholders' Equity 121,006 77,366 129,983 89,151
The following table summarizes the impact of these adjustments on
the results of operations for the years ended August 31, 2003, 2002
and 2001:
August 31, 2003 August 31, 2002 August 31, 2001
--------------------- --------------------- --------------------
As As As As As As
Reported Restated Reported Restated Reported Restated
---------- -------------------------------- --------- ----------
Depreciation and
amortization $ 1,968 $ 4,776 $ 3,399 $ 6,020 $ 3,615 $ 4,273
Impairment 7,611 7,611 27,100 64,665 - -
Total Operating
Expenses 29,076 31,884 43,635 83,821 15,924 16,582
Loss from Operations (28,267) (31,075) (36,522) (76,708) (8,222) (8,880)
Net Loss (33,693) (36,501) (36,787) (76,973) (5,874) (6,532)
Other Comprehensive
Loss (33,764) (36,572) (37,066) (77,252) (6,233) (6,891)
Basic $(0.35) $(0.38) $(0.57) $(1.20) $(0.12) $(0.13)
Diluted $(0.35) $(0.38) $(0.57) $(1.20) $(0.12) $(0.14)
Comprehensive Loss $(0.35) $(0.38) $(0.58) $(1.21) $(0.13) $(0.14)
NOTE 3 - Accounts Receivable:
Accounts receivable consist of the following, in thousands:
August 31,
2003 2002
----------- ------------
Accounts Receivable $ 2,116 $ 5,270
Allowance for Doubtful Accounts (412) (242)
----------- ------------
Net Accounts Receivable $ 1,704 $ 5,028
=========== ============
F-13
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 4 - Property, Plant & Equipment and Intangible Assets:
Components of property, plant & equipment are as follows, in
thousands:
August 31,
2003 2002
---------- ----------
Automobile $ 143 $ 392
Headend Facility and Fiber Infrastructure 26,688 20,090
Construction in progress --- 7,074
Furniture & Fixtures 565 634
Leasehold Improvements 122 216
Office Equipment 979 1,015
Property, Manufacturing & Equipment 7,925 5,088
---------- ----------
Total Property, Plant & Equipment $ 36,422 $ 34,509
Less: Accumulated Depreciation (5,689) (3,661)
---------- ----------
Net Property, Plant & Equipment $ 30,733 $ 30,848
========== ==========
Eagle expenses repairs and maintenance against income as incurred
whereas major improvements are capitalized. Eagle defines major
improvements as those assets acquired that extend the life of the
underlying base asset while defining other improvements that do not
extend the life as repairs and maintenance. Eagle expensed repairs and
maintenance of $47,000, $63,000, and $47,354 for the three years ended
August 31, 2003, 2002 and 2001, respectively, whereas it did not have
any capitalized major improvements for the same time periods.
Eagle's headend facility and fiber infrastructure consist primarily of
digital computing and telecommunications equipment that comprise
Eagle's main headend facility at it headquarters, wireless headend
equipment, a digital headend facility and a fiber backbone in the
master planned communities in which it operates and a fiber ring
connecting the various master planned communities in the Houston area.
These fiber and headend infrastructures are similar to those that
would exist in a major telecommunications or cable television provider
that offers digital services for internet, cable TV, telephone and
security monitoring services. Eagle determined that a twenty-year
straight line depreciation method is appropriate for its Headend
Facility and Fiber Infrastructure based on industry standards for
these asset types.
Components of intangible assets are as follows, in thousands:
August 31, 2003 August 31, 2002
----------------------------------- ----------------------------------
As As As As
Reported Restated Reported Restated
---------------- ----------------- ---------------- ----------------
Goodwill $82,138 $ 5,596 $84,017 $ 7,475
Accumulated amortization (2,541) (1,501) (2,541) (1,501)
---------------- ----------------- ---------------- ----------------
$79,597 $ 4,095 $81,476 $ 5,974
================ ================= ================ ================
Contract rights $ - $28,691 $ - $28,691
Accumulated amortization - (5,101) - (3,188)
---------------- ----------------- ---------------- ----------------
$ - $23,590 $ - $25,503
================ ================= ================ ================
Customer relationships $ - $ 7,189 $ - $ 7,189
Accumulated amortization - (1,277) - (799)
---------------- ----------------- ---------------- ----------------
$ - $ 5,912 $ - $ 6,390
================ ================= ================ ================
Other intangible assets $ 3,743 $ 6,839 $ 3,743 $ 6,895
Accumulated amortization (1,737) (2,473) (1,737) (2,056)
---------------- ----------------- ---------------- ----------------
$ 2,006 $ 4,366 $ 2,006 $ 4,839
================ ================= ================ ================
The changes in the carrying amount of goodwill amortization for the
twelve months ended August 31, 2003 are as follows (in thousands):
Eagle
Balance at August 31, 2002 $ 7,475
Acquisitions and other (1) (1,879)
---------------
Balance at August 31, 2003 $ 5,596
===============
(1) Other primarily includes the $1,879,000 of impairment recorded against the
Comtel goodwill as discussed in Note 1 (J) to the Company's Consolidated
Financial Statements.
NOTE 5 - Business Combinations:
On February 1, 2001, the Company completed the purchase of
ClearWorks.net, Inc., and its subsidiaries, ClearWorks Communication,
Inc., ClearWorks Structured Wiring Services, Inc., ClearWorks
Integration Services, Inc., United Computing Group, Link Two
Communications, Inc., and LD Connect, Inc., (collectively, ClearWorks)
by acquiring all the outstanding common stock for a total purchase
price of approximately $99.8 million. The acquisition was accounted
for using the purchase method of accounting. ClearWorks is a
communications carrier providing broadband data, video and voice
communication services to residential and commercial customers,
currently within Houston, Texas. These services are provided over
fiber-optic networks ("Fiber-To-The-Home" or "FTTH"), which the
Company designed, constructed, owned and operated inside large
residential master-planned communities and office complexes.
ClearWorks also provides information technology staffing personnel,
network engineering, vendor evaluation of network hardware,
implementation of network hardware and support of private and
enterprise networks, as well as, developing residential, commercial
and education accounts for deployment of structured wiring solutions.
The results of operation for ClearWorks are included in the
accompanying financial statements since the date of acquisition. The
Company acquired the net assets of ClearWorks for $99,797,000 through
the issuance of 29,410,000 shares of its common stock valued at
$91,172,000 and a cash total of $8,625,000. Prior to the acquisition,
the Company provided to ClearWorks, working capital and materials
totaling $8,625,000. During February 2001, ClearWorks repaid these
advances through the issuance of 7,346,000 shares of its common stock,
which converted into 5,877,000 Eagle Wireless International, Inc.,
common stock shares. These shares were converted to Treasury shares at
this date. The Company allocated (in thousands) the acquisition costs
to current assets of $11,708, property, plant and equipment of $6,570,
intangible assets of $96,920 (which consist of $38,594 in goodwill,
$7,189 in customer relationships, $28,691 in contract rights, $2,921
in acquired contracts, $175 in non-compete agreement, and $19,350 in
licenses), other assets of $79 and assumed liabilities of accounts
payable and accrued expenses of $10,784, banks lines of credit and
notes of $4,696 for a total acquisition of $99,797,000. The allocation
of the purchase price is based on the fair value of assets and
liabilities assumed as determined either by independent third parties
or management's estimates, based on existing contracts, recent
purchases of assets and underlying loan documents at August 31, 2002,
Eagle recorded an impairment charge of $37,565,000.
F-14
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Effective January 1, 2002, the Company acquired DSS Security, Inc.,
and Contact Wireless in a business combination accounted for as a
purchase. DSS Security, Inc., provides security monitoring to business
and residential customers. Contact Wireless sells and services mobile
phones and one- and two-way messaging devices. The Company paid cash
of $450,000 and issued a short-term note payable of $130,000 for the
assets of Contact Wireless for a total purchase price of $580,000.
Additionally, the Company acquired DSS Security, Inc., for $2,002,147.
In this transaction, the Company issued 2,002,147 shares of its common
stock with a guaranteed value of $1 per share. The Company allocated
$51,595 to the fair value of the property and equipment and $1,950,552
in goodwill. The allocation of the purchase price is based on the fair
value of the assets acquired based on management's estimates and
existing contracts. At August 31, 2003 and 2002, the Company has
accruals for $573,000 and $921,000; respectively for the portion of
the purchase that represents the difference between purchase price and
market value of the Company's common stock on the date of purchase.
NOTE 6 - Notes Payable:
The following table lists the Company's note obligations as of August
31, 2003 and 2002, in thousands:
Annual
Interest Amount
Rate Due Date 2003 2002
-----------------------------------------------
Vehicles Various Various $ 4 $ 27
5% Convertible
Debenture
(Note 9)
Tail Wind 5.0% Demand 1,200 2,000
Convertible
Debenture 2.0% Demand 1,595 2,000
Notes Payable
- Investor 10.0% October 900 ---
Group 2003
Notes Payable
- Q Series
Bonds 12.0% Various 1,363 ---
Other Various Various 717 828
-------- --------
Total notes
payable $ 5,779 $ 4,855
-------- --------
Less current
portion 5,779 3,653
-------- --------
Total long-term
debt $ --- $ 1,202
======== ========
NOTE 7 - Capital Lease Obligations:
The Company historically has leased equipment from various companies
under capital leases. The assets and liabilities under the capital
lease are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are
depreciated over the estimated useful life with the value and
depreciation being included as a component of Property and Equipment
under operating equipment.
NOTE 8 - Lines of Credit:
On September 29, 2000, Atlantic Pacific Communications, Inc., "(APC",
a wholly owned subsidiary of the Company) entered into a one year
$900,000 line of credit agreement with Southwest Bank of Texas,
("SWBT"). This note bears interest at SWBT's prime rate plus .25%,
which was payable monthly with principal due September 28, 2001. APC's
accounts receivable are pledged as collateral with Eagle Wireless
International, Inc., the guarantor. This line of credit was repaid to
Southwest Bank of Texas in the nine months ended May 31, 2002;
therefore, there was not a balance outstanding as of August 31, 2002.
Subsequent to the fiscal year ended August 31, 2002, APC entered into
a new credit facility with SWBT to provide working capital and fund
ongoing operations. The new credit facility is a purchase and sale
agreement against accounts receivable, provides for borrowings up to
$1,000,000 based on eligible accounts receivable and is secured by APC
accounts receivable and guaranteed by Eagle Broadband, Inc. As of
August 31, 2003, APC reduced its accounts receivable by $198,851 to
reflect the gross sale of $360,003 to SWBT less $161,851 of reserves
held by SWBT against such purchases. Subsequent to the fiscal year
ended August 31, 2003, APC repaid and canceled the line of credit in
full to SWBT in September 2003.
F-15
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
The Company, through its subsidiary United Computing Group, Inc.
(UCG), maintained $3,000,000 line of credit with IBM Credit
Corporation (IBM) bearing a variable rate of interest. At May 31,
2002, a balance of $1,012,000 existed. During July 2002, UCG entered
into a credit facility with Southwest Bank of Texas (SWBT) to provide
working capital, repay the IBM credit line and fund ongoing
operations. The new credit facility is a purchase and sale agreement
against accounts receivable, provides for borrowings up to $3,000,000
based on eligible accounts receivable and is secured by UCG accounts
receivable and guaranteed by Eagle Broadband, Inc. As of August 31,
2002, UCG reduced its accounts receivable by $817,401 to reflect the
gross sale of $961,649 to SWBT less $144,247 of reserves held by SWBT
against such purchases. As of August 31, 2003, UCG reduced its
accounts receivable by $44,799 to reflect the gross sale of $52,210 to
SWBT less $7,832 of reserves held by SWBT against such purchases.
Subsequent to the fiscal year ended August 31, 2003, APC repaid and
canceled the line of credit in full to SWBT in September 2003.
On July 16, 2002_, the Company entered into a $20,000,000 line of
credit with Cornell Capital Partners, LP (CCP). The Company has not
drawn on the line of credit and currently has no plans to do so. One
of the issues in the litigation between CCP and the Company (see Legal
Proceedings below) is whether the Company owes CCP a commitment fee
for this line of credit. Cornell contends that the Company owes
$395,000 of stock; the Company denies the liability
NOTE 9 - Convertible Debentures:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). At CCP's
option, the entire principal amount and all accrued interest shall be
either (a) paid to CCP on the third year anniversary from the date of
the debenture or (b) converted into Company common stock according to
a schedule set forth in the debenture, or (c) partially repaid and
partially converted into Company common stock. The significant
conversion terms are that CCP is entitled, at its option, to convert,
and sell on the same day, at any time and from time to time subject to
the terms of the agreement, until payment in full of the debenture,
all or any part of the principal amount of the debenture, plus accrued
interest, into shares of the Company's common stock at the price per
share equal to either (a) $1.00 or (b) 90% of the average of the four
lowest closing trade prices of the common stock, for the five trading
days immediately preceding the conversion date. Eagle determined that
the conversion value of this note to be $91,000. This value has been
accounted for as interest expense. CCP shall not be entitled to
convert the debenture for a period of 180 days from the date of the
debenture. After 180 days, if the conversion price is below $1.00, CCP
shall be entitled, at its option, to convert, and sell on the same day
up to $50,000 every five business days. After 12 months from the date
of the debenture, if the conversion price is below $1.00, CCP shall be
entitled, at its option, to convert and sell on the same day up to
$75,000 every five business days. Notwithstanding the foregoing, after
180 days from the date of the debenture, CCP shall be entitled, at its
option, to convert and sell on the same day without restriction if the
conversion price is above $1.00. Under the terms of this agreement
Eagle received $2,500,000 in cash and a $500,000 secured convertible
debenture from Celerity Systems, Inc., (CCI) bearing interest at ten
percent due September 19, 2007. Eagle is entitled, at its option, to
convert, and sell on the same day, at any time, until payment in full
of this debenture, all or any part of the principal amount of the
debenture, plus accrued interest, into CCI shares. The conversion
price is equal to either $.06 or eighty-seven and one-half percent
(87.5%) of the lowest bid price of the common stock for the preceding
five trading days. At August 31, 2003, Eagle has converted $150,000 of
the bond into 146,085,264 shares of CCI. Eagle intends to liquidate
the bond into cash through the conversion process and immediate sale
of CCI shares. This investment is recorded at a cost of $500,000 until
the debenture or converted shares are sold. At August 31, 2003, the
underlying value of this debenture is approximately $520,000. Eagle is
in discussions with CCP to amend certain provisions of the debenture
as it relates to shares currently issued and stock payments for
accrued interest. Subsequent to the fiscal year ended August 31, 2003,
the Company entered into discussions with CCP regarding the retirement
of the convertible debenture and settlement of CCP commitment fees in
connection to a $20,000,000 Equity Line of Credit. During the three
month period ended November 30, 2003, the principal balance of the
debenture was repaid, although a lawsuit remains outstanding - see
Legal Proceedings. Subsequent to the fiscal year ended August 31,
2003, the Company entered into discussions with CCP regarding the
retirement of the convertible debenture and settlement of CCP
commitment fees in connection to a $20,000,000 Equity Line of Credit.
At August 31, 2003, the Company issued $1,363,000 five-year Q-Series
Bonds as more fully described in Note 14. Subsequent to August 31,
2003, the bondholders have elected to be repaid in Common Stock as
defined in the bond agreement. Accordingly, these bonds have been
classified as a current liability in Notes Payable. The Company
determined that no significant conversion value existed at the date of
bond issuance.
At August 31, 2002, $2,000,000 in principal plus $600,000 of accrued
interest and fees were outstanding to Candlelight Investors, LLC. In
November 2002, the Company issued 2,600,000 shares of stock to settle
this debt.
During 2001, the Company acquired ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. Link Two
Communications, Inc., is a subsidiary of ClearWorks, and as a result
of the merger, is now a secondary subsidiary of Eagle. Link Two
entered an agreement with The Tail Wind Fund Ltd., under which Tail
Wind purchased from Link Two a 2% convertible note in the initial
amount of $5,000,000 (the "First Note"), and Link Two has the ability
to require Tail Wind to purchase additional convertible notes in the
amount of $4,000,000 (the "Second Note") and $3,000,000 (the "Third
Note"). The conversion terms of the convertible debentures become
effective after ninety days of the initial closing date. The note
balance will be due in fiscal 2003. Link Two may require Tail Wind to
purchase the Second Note if: (a) the price of Eagle's common stock is
above $5.00 per share for 20 consecutive trading days during calendar
2001,and other various terms are met. Link Two may require Tail Wind
to purchase the Third Note if the price of Eagle's common stock is
above $8.00 per share for 20 consecutive trading days during calendar
2001, and the agreed upon covenants are met. In conjunction with the
issuance of the First Note, Link Two issued Tail Wind a warrant, and
if Link Two chooses to issue the Second and Third Notes, it will issue
Tail Wind additional warrants.
As a result of the merger, Eagle the parent of Link Two, has
guaranteed the Link Two notes issued to Tail Wind and allowed Tail
Wind to convert the above mentioned debt into Eagle common stock at a
rate of $1.79 per share. The agreement also permits Tail Wind to
convert the Link Two warrant into Eagle warrants to purchase shares of
our common stock. Tail Wind would have a warrant to purchase 1,396,648
shares of our common stock at an exercise price of $1.83 per share,
exercisable between August 2002 and September 2006. If Link Two
requires Tail Wind to purchase the Second and Third Note, the
additional warrants it issues will also be convertible into shares of
our common stock. The number of shares that the additional warrants
may be converted into will depend on the price of our common stock,
and cannot be determined at this time. However, the exercise price of
the additional warrants may not be less than $1.83 per share.
F-16
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
The Company has agreed to pre-pay the notes at the rate of a minimum
of $250,000 per month and a maximum of $500,000 per month. The
pre-payment may be in cash or in shares of our common stock at the
rate of 90% of the average of the two lowest market prices of our
common stock for the applicable month. However, the Company may not
issue shares of our common stock for pre-payment purposes if the total
number of shares exceeds the aggregate trading volume of our common
stock for the twelve trading days preceding the date of payment, in
which case we must pay the difference in cash. As the number of shares
to be issued for pre-payment purposes is dependent on the price and
trading volume of our common stock, there is no way to determine the
number of shares that may be issued at this time. Eagle has filed a
registration statement for the potential conversion shares for the
note and warrants exercise. As of May 31, 2002, the Company has paid
to Tail Wind $2,000,000 towards the reduction of debt. The current
financial statements have recorded as current maturity for this debt,
$1,595,000.
As part of the above agreements, the Company entered into a
registration rights agreement with Tail Wind, and the Company filed a
registration statement, in order to permit Tail Wind to resell to the
public the shares of common stock that it may acquire upon any
conversion of the First Note and exercise of the warrant associated
with the First Note. The Company have registered for resale 5,000,000
shares of common stock, which represents 122% of the shares to be
issued upon conversion of the First Note at $1.79 per share and 100%
of the exercise of the warrant associated with the First Note at $1.83
per share. The additional shares registered is to account for the
shares that may be issued for pre-payment as described in the above
paragraph, or upon the exercise of the anti-dilution rights provided
for in the following paragraph. If Link Two chooses to require Tail
Wind to purchase the Second and Third Notes, we will file another
registration statement covering the resale of the shares that may be
issued on conversion of the Second and Third Notes and upon the
exercise of the warrants associated with the Second and Third Notes.
In our agreement with Tail Wind, the Company granted Tail Wind
anti-dilution rights. If the Company sells common stock or securities
exercisable for or convertible into shares of our common stock for
less than $1.79 per share, the Company must reduce the conversion
price of the notes and the exercise price of the warrants to the price
the Company sold the common stock or the exercise or conversion price
the Company issued the convertible securities. The Company has agreed
to register for resale any additional shares that will be issued
pursuant to these anti-dilution rights on a future registration
statement, unless such additional shares are available in the current
registration statement. In addition, under the terms of the agreement,
without Tail Wind's approval, the Company may not issue Tail Wind
shares of common stock such that Tail Wind would ever be considered to
beneficially own greater than 4.99% of the outstanding common stock.
In connection with this transaction, Link Two Communications, Inc. has
paid Ladenburg Thalman and Co. a fee of 5% of the purchase price of
the notes. Additionally, the Company has valued the conversion feature
of the convertible debenture and warrants at $1,648,045 and
$1,270,995, respectively; the amounts were determined by using the
Black-Scholes calculation. These amounts have been capitalized as part
of the cost of developing the wireless infrastructure. At August 31,
2003, Eagle and Tail Wind were renegotiating the terms of this note.
During the renegotiation period, the Company has agreed to pay
interest until all new terms and conditions have been resolved.
NOTE 10 Securities held for Resale:
As discussed in Note 1, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" and SFAS No. 130, "Accounting for Other Comprehensive
Income." At August 31, 2003, all of the Company's marketable equity
securities are classified as available-for-sale; they were acquired
with the intent to dispose of them within the next year.
Securities available for sale include 1,480,000 shares of common stock
of Burst.com, 146,085,264 shares of Celerity Systems common stock and
$350,000 Celerity Systems Bonds. These common stock and bond
investments have an aggregate cost basis of $1,075,000 and an
aggregate fair market value of $1,714,006 and are included in the
Balance Sheet category of Securities available for sale as of August
31, 2003.
NOTE 11 - Income Taxes:
As discussed in note 1, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Implementation of SFAS 109 did not have
a material cumulative effect on prior periods nor did it result in a
change to the current year's provision.
The effective tax rate for the Company is reconcilable to statutory
tax rates as follows:
August 31,
2003 2002 2001
% % %
U.S. Federal Statutory Tax Rate 34 34 34
U.S. Valuation Difference (34) (34) (34)
Effective U.S. Tax Rate 0 0 0
Foreign Tax Valuation 0 0 0
Effective Tax Rate 0 0 0
F-17
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S.
Federal income tax rate of 34% to pretax income from continuing
operations as a result of the following: (in thousands)
August 31,
2003 2002 2001
------------ ----------- -----------
Computed expected tax benefit $ (12,410) $ (26,171) $ (2,220)
Increase in valuation allowance 12,410 26,171 2,220
------------ ----------- -----------
$ --- $ --- $ ---
============ =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
August 31, 2003 and 2002, are presented below, in thousands and
include the balances of the merged company ClearWorks.net.
2003 2002
--------- ---------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 0 $ 0
Net operating loss carry-forwards 50,344 37,934
Less valuation allowance (50,344) (37,934)
--------- ----------
Net deferred tax assets --- ---
Deferred tax liabilities:
Differences in depreciation 0 0
--------- ----------
Net deferred tax liabilities $ 0 $ 0
========= ==========
The valuation allowance for deferred tax assets of August 31, 2003,
and 2002, was $50,344,000 and $37,934,000 respectively. At August 31,
2003 and 2002, the Company has net operating loss carry-forwards of
$148,071,000 and $111,571,000, respectively, which are available to
offset future federal taxable income, if any, with expirations from
2020 to 2021.
NOTE 12 - Issuance of Common Stock:
During the fiscal year ended August 31, 2003, the Company issued
shares of common stock. The following table summarizes the shares of
common stock issued, in thousands.
Shares Outstanding August 31, 2002 73,051
Shares issued for Services and Compensation 7,437
Shares issued for Property and Other Assets 14,938
Shares issued for Retirement of Debt and Liabilities 50,816
Shares issued for Stock Option exercise 1,647
Treasury Stock (442)
----------------
Shares Outstanding August 31, 2003 147,447
================
NOTE 13 - Preferred Stock, Stock Options and Warrants:
In July 1996, the Board of Directors and majority shareholders adopted
an employee stock option plan under which 400,000 shares of Common
Stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for
issuance. As of August 31, 2003, options to purchase 406,131 are
outstanding and 551,370 are available to be issued.
The Company has issued (or has acquired through its acquisitions) and
has outstanding the following warrants which have not yet been
exercised at August 31, 2003:
50,000 stock purchase options issued to L.A. Delmonico Consulting,
Inc., expiring April 4, 2005. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $1.04 per share. The shares of common
stock underlying these warrants were registered for resale on August
9, 2002, under the Securities Act of 1933. As of August 31, 2003, none
of these options have been exercised
25,000 stock purchase warrants issued to Synchton, Inc., expiring
January 1, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $2.00 per share. As of August 31, 2003, none of
these warrants have been exercised.
41,667 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.00 per share. The shares of common stock underlying these
have not been registered as of November 30, 2002, under the Securities
Act of 1933. As of August 31, 2003, none of these warrants have been
exercised.
F-18
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
41,667 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.25 per share. The shares of common stock underlying these
warrants have not been registered or issued, under the Securities Act
of 1933. As of August 31, 2003, none of these warrants have been
exercised. s
25,000 stock purchase warrants issued to Synchton, Inc., expiring
April 1, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $1.10 per share. The shares of common stock
underlying these warrants were registered for resale on August 9,
2002, under the Securities Act of 1933. As of August 31, 2003, none of
these warrants have been exercised.
58,333 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $3.00 per share. The shares of common stock underlying these
warrants have not been registered or issued, under the Securities Act
of 1933. As of August 31, 2003, none of these warrants have been
exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July
1, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $1.35 per share. The shares of common stock underlying these
warrants were registered for resale on August 9, 2002, under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
October 1, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.69 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
January 1, 2005. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.61 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
April 1, 2005. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.38 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
192,000 stock purchase warrants issued to Tech Technologies Services,
LLC, expiring April 24, 2008. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $7.50 per share. The shares of common
stock underlying these warrants have not been registered or issued,
under the Securities Act of 1933. As of August 31, 2003, none of these
warrants have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July
1, 2005. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $0.39 per share. The shares of common stock underlying these
warrants were not registered for resale under the Securities Act of
1933. As of August 31, 2003, none of these warrants have been
exercised.
240,000 stock purchase warrants issued to Shannon D. McLeroy expiring
April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As August 31, 2003, none of these warrants
have been registered, issued or exercised.
168,000 stock purchase warrants issued to Michael T. McClere expiring
April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As August 31, 2003, none of these warrants
have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
October 1, 2005. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.35 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
40,000 stock purchase warrants issued to Rachel McClere 1998 Trust
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of August 31, 2003, none of these
warrants have been registered, issued or exercised.
160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As August 31, 2003, none of these warrants
have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
January 1, 2006. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.28 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
April 1, 2006. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.26 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July
1, 2006. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $0.38 per share. The shares of common stock underlying these
warrants were not registered for resale under the Securities Act of
1933. As of August 31, 2003, none of these warrants have been
exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
October 1, 2006. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.45 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
3,800,000 stock purchase warrants issued to Eagle Broadband employees
under incentive clauses of employment contracts expiring September 1,
2008. The warrants vest based on market performance of Eagle's common
stock at market capitalization between $50 million and $200 million.
The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of
$0.41 per share. The shares of common stock underlying these warrants
were not registered for resale under the Securities Act of 1933. As of
August 31, 2003, none of these warrants have been exercised.
F-19
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
400,000 stock purchase warrants issued to Eagle Broadband employee
under incentive clauses of employment contracts expiring September 1,
2008 The warrants vest based on market performance of Eagle's common
stock at market capitalization between $50 million and $200 million.
The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of
$0.60 per share. The shares of common stock underlying these warrants
were not registered for resale under the Securities Act of 1933. As of
August 31, 2003, none of these warrants have been exercised.
500,000 stock purchase warrants issued to Eagle Broadband employee
under incentive clauses of employment contracts expiring September 1,
2008. The warrants vest based on market performance of Eagle's common
stock at market capitalization between $50 million and $200 million.
The warrants are to purchase fully paid and non-assessable shares of
the common stock, par value $.001 per share at a purchase price of
$0.75 per share. The shares of common stock underlying these warrants
were not registered for resale under the Securities Act of 1933. As of
August 31, 2003, none of these warrants have been exercised.
The warrants outstanding are segregated into two categories (issued
and outstanding and exercisable):
Warrants Issued & Outstanding Warrants Exercisable
Class of August 31, August 31,
Warrants 2003 2002 2003 2002
- --------- ----------------------------- --------------------
0.26 25,000 - 25,000 -
0.28 25,000 - 25,000 -
0.35 25,000 - 25,000 -
0.38 50,000 - 50,000 -
0.39 25,000 - 25,000 -
0.41 3,800,000 - 1,550,000 -
0.45 25,000 - 25,000 -
0.60 400,000 - - -
0.61 25,000 - 25,000 -
0.69 25,000 - 25,000 -
0.75 500,000 - - -
1.04 50,000 50,000 50,000 50,000
1.10 25,000 - 25,000 -
1.35 25,000 - 25,000 -
1.55 - 25,000 - 25,000
1.75 - 13,766 - 13,766
2.00 25,000 25,000 25,000 25,000
2.00 41,667 41,667 41,667 41,667
2.25 41,667 41,667 41,667 41,667
3.00 - 50,000 - 50,000
3.00 58,333 58,333 58,333 58,333
3.75 - 40,000 - 40,000
3.75 - 160,000 - 160,000
3.75 - 232,000 - 232,000
3.75 - 176,000 - 176,000
3.95 - 328,000 - 328,000
4.50 - 25,000 - 25,000
7.00 - 100,000 - 100,000
7.49 - 250,000 - 250,000
7.50 - 25,000 - 25,000
7.50 192,000 192,000 192,000 192,000
7.50 240,000 240,000 240,000 240,000
7.50 168,000 168,000 168,000 168,000
7.50 200,000 200,000 200,000 200,000
9.68 - 50,000 - 50,000
10.00 - 275,000 - 275,000
12.00 - 250,000 - 250,000
14.00 - 350,000 - 350,000
18.00 - 250,000 - 250,000
25.00 - 150,000 - 150,000
ESOP 406,131 * 355,170 * 406,131 355,170
----------------------------- --------------------
6,397,798 ** 4,121,603 3,247,798 4,121,603
============================= ====================
*Denotes warrants which would have an anti-dilutive effect if
currently used to calculate earnings per share for the years ended
August 31, 2003 and 2002.
**Denotes 12,700,000 warrants for shares that have been excluded from
this table that are subject to issuance to certain employees under
incentive clauses of employment contracts expiring 5 years from the
date of issuance. The warrants vest based on accumulated revenue
targets ranging from $50 million to $500 million and on market
performance of Eagle's common stock at market capitalization between
$450 million and $1 billion. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $0.001 per
share at purchase prices ranging from $0.41 to $1.50 per share. The
Company has determined that the probability of the achievement of such
targets is remote as of the date of the issuance of the Company's
financial statements and thus has not included them in the outstanding
warrant table above. The shares of common stock underlying these
warrants were not registered for resale under the Securities Act of
1933. As of August 31, 2003, none of these warrants have been
exercised.
F-20
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 14 - Capitalization Activities:
Between November 25, 2002 and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45
accredited investors. The securities consisted of $25,000, 12%
five-year bonds. The bonds are due and payable upon maturity at the
end of the five-year period. Interest on the bonds is payable at the
rate of 12% per annum, and is payable semiannually. The bondholder may
require the Company to convert the bond (including any unpaid
interest) into shares of the Company's common stock at any time during
the first year but not thereafter. The conversion rates vary from
$0.16 to $0.34 per share. The Company may redeem the bonds at any time
after the first year.
Between October 30, 2003 and November 5, 2003, the Company sold
approximately $4.1 million of convertible debt securities to 36
accredited investors. The securities consisted of $25,000, 12%
five-year bonds. The bonds are due and payable upon maturity at the
end of the five-year period. Interest on the bonds is payable at the
rate of 12% per annum, and is payable semiannually. The bondholder may
require the Company to convert the bond (including any unpaid
interest) into shares of the Company's common stock at any time during
the first year but not thereafter. The conversion rates vary from
$0.50 to $0.75 per share. The Company may redeem the bonds at any time
after the first year.
These transactions were completed pursuant to Regulation D of the
Securities Act. With respect to the issuances, the Company determined
that each purchaser was an "accredited investor" as defined in Rule
501(a) under the Securities Act.
Except as otherwise noted, all sales of the Company's securities were
made by officers of the Company who received no commission or other
remuneration for the solicitation of any person in connection with the
respective sales of securities described above. The recipients of
securities represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with
any distribution thereof and appropriate legends were affixed to the
share certificates and other instruments issued in such transactions.
NOTE 15 - Risk Factors:
For the years ended August 31, 2003, 2002, and 2001, substantially all
of the Company's business activities have remained within the United
States and have been extended to the wireless infrastructure, fiber,
cabling computer services and broadband industries. Approximately,
seventy four percent of the Company's revenues and receivables have
been created solely in the state of Texas, zero percent have been
created in the international market, and the approximate twenty-six
percent remainder have been created relatively evenly over the rest of
the nation during the year ended August 31, 2003. Approximately,
eighty four percent of the Company's revenues and receivables have
been created solely in the state of Texas, zero percent have been
created in the international market, and the approximate sixteen
percent remainder have been created relatively evenly over the rest of
the nation during the year ended August 31, 2002. Whereas
approximately eighty seven percent of the Company's revenues and
receivables have been created solely in the state of Texas, two
percent have been created in the international market, and the
approximate eleven percent remainder has been created relatively
evenly over the rest of the nation for the year ended August 31, 2001.
Through the normal course of business, the Company generally does not
require its customers to post any collateral.
NOTE 16 - Foreign Operations:
Although the Company is based in the United States, its product is
sold on the international market. Presently, international sales total
approximately 0%, 0% and 2% at August 31, 2003, 2002, and 2001,
respectively.
NOTE 17 - Commitments and Contingent Liabilities:
Leases
The Company leases its primary office space in League City, Texas, for
$36,352 per month with Gateway Park Joint Venture. This non-cancelable
lease commenced on January 1, 2002, and expires on May 31, 2004.
For the years ending August 31, 2003and 2002, rental expenses of
approximately $1,183,000 and $436,219 respectively, were incurred.
The Company also leased office space in Oxnard, California with Tiger
Ventura County, L.P. This three-year non-cancelable lease commenced
August 1, 2000, and expires July 31, 2004. Under the terms of the
lease, monthly payments will be $2,130 for the first twelve months
whereas the monthly payments will increase by 3.5% at the beginning of
both the second and third years.
The Company's wholly owned subsidiary, Atlantic Pacific, leases office
space in Houston, Texas with Houston Industrial Partners, Ltd. This
non-cancelable lease expires December 2005. The monthly payments are
$9,030 per month.
Atlantic Pacific also leased office space in Chicago, Illinois with
Lasalle Bank National Association. This twenty-nine month lease
commenced on October 1, 2000,and expired February 28, 2003. Under the
terms of the lease, monthly payments will be $2,220 for the first
twelve months whereas they will increase by 3.2% at the thirteenth and
twenty-fifth months.
Atlantic Pacific also leased office space in Houston, Texas with WL
and Deborah Miller in the amount of $4,500 per month. This
non-cancelable lease expired September 2002 and maintains a five-year
renewal option. The renewal option was waived in September 2002.
The Company's subsidiary, ClearWorks.net, Inc., leased office space in
Houston, Texas with 2000 North Loop. This non-cancelable lease expired
on April 30, 2003. The monthly payments increased from $7,306 to
$11,091 on April 30, 2000, and again on May 1, 2002, to $11,217 for
the remaining twelve months.
F-21
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Also, ClearWorks.net, Inc., leased office space in Phoenix, Arizona
with Airpark Holdings. This non-cancelable lease expired on July 31,
2003. The monthly payments are variable.
Also, ClearWorks.net, Inc., leased office space in San Antonio, Texas
with Wade Holdings. This is a month-to-month lease. The monthly
payments were $3,300.
The Company's subsidiary, United Computing Group, leased office space
in Houston, Texas with Eastgroup Properties, L.P. This non-cancelable
lease expired on August 31, 2003. The monthly payments were $8,570.
UCG previously leased office space with Techdyne, Inc., that expired
August 31, 2002.
The Company's subsidiary, ClearWorks Home Systems, leases office space
in Austin, Texas with Ditto Communications Technologies, Inc. This
non-cancelable lease commenced on September 1, 2002, and expires
January 31, 2005. The monthly payments are $5,876.
The Company's subsidiary, United Computing Group, leased office space
in Dallas, Texas with AMB Property II, LP. This non-cancelable lease
commenced on June 19, 2000, expired on June 30, 2002, and was extended
to expire on June 30, 2003. The monthly payments are $2,794. Future
obligations under the non-cancelable lease terms areas follows:
Period Ending
August 31, Amount
2004 $ 521,000
2005 116,000
2006 58,000
-------------------
Total $ 695,000
===================
Legal Proceedings
On February 23, 2001, ClearWorks and Eagle became defendants in
Kaufman Bros., LLP v. Clearworks.Net, Inc. and Eagle Wireless, Inc.,
Index No. 600939/01, pending in the Supreme Court of the State of New
York, County of New York. In this action, plaintiff alleges that
defendants have breached an agreement with ClearWorks to pay plaintiff
a fee for financial advice and services allegedly rendered by
plaintiff. The complaint seeks compensatory damages of $4,000,000,
plus attorneys' fees and costs. The Company settled this lawsuit on
November 4, 2003 by issuing cash and stock totaling a fair market
value of $1,320,000 as of the settlement date and consequently,
$1,320,000 was charged to operations in the Company's fiscal 2003
financial statements.
On December 17, 2001, Kevan Casey and Tommy Allen sued ClearWorks.net,
Inc., ClearWorks Integration, Inc., and Eagle Wireless International,
Inc. for breach of contract and other related matters in Cause No.
2001-64056; In the 281st Judicial District Court of Harris County,
Texas. This lawsuit is scheduled for the two-week docket beginning
December 1, 2003. The Company denies the claims and intends to
vigorously defend this lawsuit and claims against it. The Company
settled this lawsuit on November 26, 2003 for cash and stock to be
paid and issued totaling a fair market value of $3,000,000 as of the
settlement date and consequently, $3,000,000 was charged to operations
in the Company's fiscal 2003 financial statements.
On July 10, 2003, Eagle became a defendant in Cornell Capital
Partners, L.P. vs. Eagle Broadband, Inc., et al., Civil Action No.
03-1860 (KSH), In the United States District Court for the District of
New Jersey. The suit presents claims for breach of contract, fraud and
negligent misrepresentation. Plaintiff has also alleged that Eagle has
defaulted on a convertible debenture for failing to timely register
the shares of common stock underlying the convertible debenture and is
seeking to accelerate the maturity date of the debenture. As of August
31, 2003, the principal balance of the debenture was approximately
$1.2 million. During the three month period ended November 30, 2003,
the principal balance of the debenture was repaid, although the suit
remains outstanding. The Company denies the claims and intends to
vigorously defend this lawsuit and the claims against it. Eagle has
asserted counterclaims against Cornell for fraud and breach of
contract. TheCompany has not accrued any expenses against this
lawsuit, as the outcome cannot be predicted at this time.
On December 14, 2000, ClearWorks became a defendant in State Of
Florida Department Of Environmental Protection vs. Reco Tricote, Inc.
And Southeast Tire Recycling, Inc. A/K/A Clearwork.net, Inc.; In The
Circuit Court Of The Tenth Judicial Circuit In And For Polk County,
Florida. The Florida EPA sued ClearWorks.net presenting claims for
recovery costs and penalties for a waste tire processing facility. The
suit seeks recovery of costs and penalties in a sum in excess of
$1,000,000, attorneys' fees and cost of court. ClearWorks denies the
claims and intends to vigorously contest all claims in this case and
to enforce its indemnification rights against the principals of
Southeast Tire Recycling. The Company has not accrued any expenses
against this lawsuit as the outcome cannot be predicted at this time.
F-22
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
On September 26, 2003 Intratech served a lawsuit on ClearWorks.net in
Intratech Capital Partners, Ltd. vs. ClearWorks.net, Inc.; Case No.
CF3 20136 in the High Court of Justice, Queen's Bench Division,
Cardiff District Registry. This lawsuit presents claims for breach of
contract for failing to pay the plaintiff for financial advice and
services allegedly rendered. The complaint seeks damages of
$6,796,245.50, plus attorneys' fees and costs. ClearWorks denies the
claims and intends to vigorously defend this lawsuit and claims
against it. The Company has accrued $100,000 in its fiscal 2003
financial statements for litigation expenses but has not accrued any
settlement costs against this lawsuit as the outcome cannot be
predicted at this time.
On or about September 2003, Enron sued United Computing Group, Inc. in
Enron Corp. (Debtors/Plaintiff) vs. United Computing Group, Inc.; Case
No. 01-16034 in the United States Bankruptcy Court for the Southern
District of New York. The suit presents claims pursuant to sections
547 and 550 of the Bankruptcy Code to avoid and recover a transfer in
the amount of approximately $1,500,000.00. Defendant has filed an
answer, denies the claims, and intends to vigorously defend this
lawsuit and claims against it. The Company has not accrued any
expenses against this lawsuit as the outcome cannot be predicted at
this time.
Eagle is involved in lawsuits, claims, and proceedings, including
those identified above, consisting of, commercial, securities,
employment and environmental matters, which arise in the ordinary
course of business. In accordance with SFAS No. 5, "Accounting for
Contingencies," Eagle makes a provision for a liability when it is
both probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. Eagle believes it has adequate
provisions for any such matters. Eagle reviews these provisions at
least quarterly and adjusts these provisions to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel, and other
information and events pertaining to a particular case. Litigation is
inherently unpredictable. However, Eagle believes that it has valid
defenses with respect to legal matters pending against it.
Nevertheless, it is possible that cash flows or results of operations
could be materially affected in any particular period by the
unfavorable resolution of one or more of these contingencies.
We intend to vigorously defend these and other lawsuits and claims
against us. However, we cannot predict the outcome of these lawsuits,
as well as other legal proceedings and claims with certainty. An
adverse resolution of pending litigation could have a material adverse
effect on our business, financial condition and results of operations.
The Company is subject to legal proceedings and claims that arise in
the ordinary course of business. The Company's management does not
expect that the results in any of these legal proceedings will have
adverse affect on the Company's financial condition or results of
operations.
F-23
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 18 - Earnings Per Share:
The following table sets forth the computation of basic and diluted
earnings per share, in thousands except Per-Share Amount:
For the year ended August 31, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Loss $(36,501)
Basic EPS:
Income available to
common stockholders (36,501) 95,465 $(0.38)
Effect of Dilutive Securities
Warrants -------- -------- ---------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(36,501) 95,465 $(0.38)
========= ======== =========
For the year ended August 31, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Loss $ (76,973)
Basic EPS:
Income available to
common stockholders (76,973) 64,004 $(1.20)
Effect of Dilutive Securities
Warrants --- 154 ---
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $ (76,973) 64,158 $(1.20)
========= ======== =========
For the year ended August 31, 2002, and August 31, 2001, anti-dilutive
securities existed. (see Note 13)
NOTE 19 - Employee Stock Option Plan:
In July 1996, the Board of Directors and majority stockholders adopted
a stock option plan under which 400,000 shares of the Company's common
stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for
issuance. Under this plan, as of August 31, 2003, a total of 406,131
options have been issued to various employees.
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees." Accordingly, since employee stock options are granted
at market price on the date of grant, no compensation expense is
recognized. However, SFAS 123 requires presentation of pro forma net
income and earnings per share as if the Company had accounted for its
employee stock options granted under the fair value method of that
statement. The weighted average fair value of the individual options
issued and granted during 2003 is estimated as $0.58 on the date of
grant. Management estimates the average fair value for options granted
during 2003, to be comparable to those granted in 2002. The impact on
net loss is minimal; therefore, the pro forma disclosure requirements
prescribed by SFAS 123 are not significant to the Company. The fair
values were determined using a Black-Scholes option-pricing model with
the following assumptions:
2003 2002
--------- --------
Dividend Yield 0.00% 0.00%
Volatility 0.91 0.91
Risk-free Interest Rate 4.00% 7.00%
Expected Life 5 5
F-24
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a
straight-line basis over the vesting period of the stock option or
purchase right was as follows for the years ended August 31, 2003,
2002 and 2001:
2003 2002 2001
In thousands,
except per share amounts
Net loss, as reported $(36,501) $(76,973) $(6,532)
Add: Stock-based employee compensation included in reported net
earnings (loss), net of related tax effects - - -
Less: stock-based employee compensation expense determined
under fair-value based method for all awards, net of related
tax effects (20) (50) (181)
--------- --------- ------------
Pro forma net earnings (loss) $(36,521) $(77,023) $(6,713)
========= ========= ============
Net loss per share:
As reported $(0.38) $(1.20) $(0.13)
Pro forma $(0.38) $(1.20) $(0.14)
Diluted net loss per share
As reported $(0.38) $(1.20) $(0.13)
Pro forma $(0.38) $(1.20) $(0.14)
Option activity was as follows for the years ended August 31, 2003, 2002 and
2001:
2003 2002 2001
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of
year 355,170 $2.32 355,170 $2.32 242,607 $2.93
Granted 50,961- 0.45 - - 237,809 1.83
Assumed through
acquisitions - - - - - -
Exercised - - - - - -
Forfeited/Cancelled - - - - 125,246 2.62
--------- --------- ---------
Outstanding at end of year 406,131 1.27 355,170 $2.32 355,170 2.32
Exercisable at year-end 406,131 $1.27 355,170 $2.32 355,170 $2.32
Information about options outstanding was as follows at August 31, 2003:
Options Outstanding Options Exercisable
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number Life in Exercise Number Exercise
Range of Exercise Prices Outstanding Years Price Exercisable Price
$0-$1.00 264,865 5.0 $0.55 264,865 $0.55
$1.01-$2.00 115,766 5.0 $1.73 115,766 $1.73
$2.01-$7.50 25,500 5.5 $6.55 25,500 $6.55
406,131 5.2 $2.32 406,131 $2.32
NOTE 20 - Retirement Plans:
During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its
participants. This plan maintains that the Company will match up to 3%
of each participant's contribution. For the year ended August 31, 2003
and 2002, employee contributions were approximately $279,000 and
$279,000, respectively. The Company matched approximately $67,850 and
$67,850, respectively for those same periods.
F-25
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 21 - Major Customer:
The Company had gross revenues of $11,593,000 and $29,817,000 for the
year ended August 31, 2003 and 2002, respectively. There were no
parties individually that represented a greater than ten percent of
these revenues.
NOTE 22 - Industry Segments:
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". At August
31, 2001, the Company's seven business units have separate management
teams and infrastructures that offer different products and services.
The business units have been aggregated into five reportable segments
(as described below) since the long-term financial performance of
these reportable segments is affected by similar economic conditions.
Eagle Broadband, Inc., (Eagle) is a supplier of broadband and
telecommunications equipment with related software and broadband
products. (Including Eagle Wireless International, Inc.,
BroadbandMagic and Etoolz, Inc., for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in providing
professional data and voice cable and fiber optic installations
through project management services on a nationwide basis for multiple
site-cabling installations for end users and re-sellers.
ClearWorks Communications, Inc., (COMM) provides solutions to
consumers by implementing technology both within the residential
community and home. This is accomplished through the installation of
fiber optic backbones to deliver voice, video and data solutions
directly to consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber
optic and copper based structured wiring solutions and audio and
visual equipment to single family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT maintains a
national market presence.
Link Two Communications, Inc., (Link II) is in the development and
delivery of one and two way messaging systems.
DSS Security, Inc., is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt
related expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services
provider and reseller.
For the year ending August 31, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------
Revenue 4,220 2,809 2,433 1,803 328 --- 11,593
Segment Loss (4,500) (6,083) (2,279) (17,849) (364) --- (31,075)
Total Assets 8,929 31,316 114 135,513 83,852 (144,793) 114,931
Capital Expenditures 11 6,254 1 --- 158 --- 6,424
Depreciation 372 1,351 72 3,184 253 --- 5,232
For the year ending August 31, 2002
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------
Revenue 8,767 2,657 16,143 1,699 551 --- 29,817
Segment Loss (279) (193) (1,304) (45,740) (29,192) --- (76,708)
Total Assets 5,114 30,980 853 121,458 68,528 (137,782) 89,151
Capital Expenditures 125 12,034 --- 562 156 (11) 12,886
Dep. and Amort. 208 715 166 4,039 1,269 --- 6,397
For the year ending August 31, 2001
(in thousands) APC/HSI EBS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------
Revenue 8,173 571 18,137 1,205 24 28,110
Segment Loss (990) (299) (211) (5,217) (2,163) (8,880)
Total Assets 5,351 13,149 4,394 156,113 34,128 (43,114) 170,021
Capital Expenditures 151 9,350 24 198 6,671 16,394
Dep. and Amort. 149 1,053 19 3,249 857 5,327
F-26
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Reconciliation of Segment Loss from August 31, August 31, August 31,
Operations to Net Loss: 2003 2002 2001
Total segment loss from operations $ (31,075) $ (76,708) $ (8,880)
Total Other Income (Expense) (5,426) (265) 2,348
------------- ------------- -------------
Net Loss $ (36,501) $ (76,973) $ (6,532)
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of
its operating segments based on income before net interest expense,
income taxes, depreciation and amortization expense, accounting
changes and non-recurring items.
Note 23 - Quarterly Financial Data.
Nov. 30, Feb. 28, May 31, Aug. 31,
---------------------------------------------------
Year Ended August 31, (restated - (restated - (restated - (restated -
2003 see Note 2) see Note 2) see Note 2) see Note 2)
Revenues 4,618 3,063 1,847 2,065
Net Earnings (loss) (1,533) (2,012) (3,833) (29,123)
Basic Loss per Share (0.02) (0.03) (0.05) (0.28)
Diluted Loss per Share (0.02) (0.03) (0.05) (0.28)
Year Ended August 31,
2002
Revenues 8,761 7,380 6,485 7,191
Net Earnings (loss) (4,026) (2,668) (2,479) (67,799)
Basic Loss per Share (0.07) (0.04) (0.04) (1.05)
Diluted Loss per Share (0.07) (0.04) (0.04) (1.05)
For the year ended August 31, 2002, the quarterly financial
information has been adjusted to reflect the application of Financial
Accounting Standards Pronouncements No. 142 (Goodwill and other
Intangible Assets) and No. 144 (Accounting for the Impairment or
Disposal of Long-Lived Assets).
Note 24 - Exit Activities:.
During the fiscal year ended August 31, 2003, we implemented cost
reductions in various operating segments. In the aggregate, the
Company reduced its overall personnel by 114 headcount or a 50%
reduction for the fiscal year ended August 31, 2003 as compared to the
fiscal year ended August 31, 2002. The predominate reduction in
headcount related to the Company's Atlantic Pacific / Homes Systems
structured wiring and commercial cabling segment with headcount
reductions of nine, six and 57 personnel in the first three quarters
of fiscal 2003; aggregating an overall headcount reduction of 72 or
71% of this segments workforce. Additionally, the Company reduced its
United Computing Group computer hardware sales segment by 18, nine,
and two personnel in the first three quarters of fiscal 2003;
aggregating an overall reduction of 29 or 59% of this segments
workforce. These two operating segments accounted for 101 of the 114
headcount reductions affected in fiscal 2003. Specifically, certain
components of these operating segments, i.e., home systems structured
wiring, commercial cabling and computer hardware sales, were not
expected to provide significant long-term revenues and profitability,
and therefore were reduced. Following the series of cost reduction
activities implemented during the first three quarters of fiscal 2003,
Eagle's management assessed the viability of continued financial
investment in these unprofitable segments in the fourth quarter of
fiscal 2003 and into early first quarter of fiscal 2004 and made
further reductions. In conjunction with the appointment of , Mr.
Weisman as our new Chief Executive Officer, in early October 2003, the
Company completed the final consolidation of the United Computing
Group segment into other Eagle operations while further reducing the
Atlantic Pacific / Home Systems operations to an outsource commercial
cabling and structured wiring operation that project manages affiliate
contractors.
Additionally, in conjunction with the appointment of Mr. Weisman as
Chief Executive Officer,, the Company made certain decisions during
the preparation of its Form 10-K in our first quarter of fiscal 2004
that affected the value of certain assets as of August 31, 2003. These
decisions included:
-- A revised collection assessment of certain accounts receivables
from these and other down-sized Eagle business segments.
-- The decision to no longer pursue new commercial structured
cabling opportunities on a direct basis versus the outsource
model; thereby resulting in the impairment of goodwill from its
Atlantic Pacific operations.
-- The decision to no longer pursue Home Systems structured wiring
opportunities on a direct standalone model basis outside its BDS
model; thereby resulting in the impairment of its Home Systems
inventory.
F-27
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
-- The decision to withdraw from certain unprofitable BDS projects,
namely its Austin area BDS developments; thereby impairing
certain assets including property, plant and equipment.
-- The decision to settle numerous existing and threatened legal
proceedings versus continuing the timing consuming and costly
process of defending such proceedings; thereby resulting in the
accrual of numerous reserves for such settlements.
-- The decisions to consolidate its operating segments into its
corporate lease space; thereby resulting in reserves for property
lease settlements.
-- The decision to negotiate the settlement of certain sales tax
liabilities that resulted from a sales tax audit of United
Computing Group operations for periods that preceded the
acquisition date of this subsidiary.
Accordingly, Eagle incurred certain asset impairments and operating charges
in the fourth quarter associated with these decisions. These asset
impairment charges, allowances, write-off's and reserves included the
following:
-- Accounts receivable write-off's and reserves aggregating
$2,177,000; of which $1,348,000 was attributable to the decisions
affecting the Company's Atlantic Pacific / Home Systems
operations, $15,000 attributable to the decisions affecting its
United Computing Group operations and $814,000 attributable to
the Company's Eagle, EBS and Other segment operations.
-- Inventory impairment charges of $2,627,000; of which $501,000 was
attributable to the decisions affecting the Company's Atlantic
Pacific / Home Systems operations and $74,000 attributable to the
decisions affecting its United Computing Group operations.
Additionally, the Company recorded an impairment charge of
$1,125,000 for slow-moving and obsolete inventory in its Eagle
operations. This charge primarily resulted from a major clients
decision to upgrade from a 400 MHz chip to a 500 MHz chip for the
Company's convergent set top box.
-- Litigation settlement costs and reserves of $3,650,000 against
certain of the legal proceedings previously discussed in Item 3.
Legal Proceedings. Additionally, the Company recorded charges
aggregating $2,274,000 to settle threatened and existing legal
proceeding associated with prior financing transactions,
including the Kaufman litigation.
-- Lease settlement costs and reserves of $171,000 were attributable
to the decision to consolidate various operating segments into
its corporate lease space; thereby resulting in reserves for
early exit of such leases.
-- Impairment, write-down's and restructuring costs aggregating
$7,611,000; of which $1,878,000 was attributable to an impairment
of goodwill in the Company's Atlantic Pacific operations
following the Company's decision to no longer pursue commercial
cabling opportunities on a direct basis versus an outsource
model. These costs were also comprised of $3,412,000 in
impairment of property and equipment following the Company's
decision to withdraw from certain unprofitable BDS projects,
namely in the Austin area, and $323,000 of impairment of property
and equipment from the Company's Atlantic Pacific / Home Systems
operations following the decision to no longer pursue structured
wiring opportunities on a direct standalone basis outside of its
BDS model. Additionally, the aggregate total included a $553,000
charge for certain sales tax liabilities that resulted from an
audit of the Company's United Computing Group operations for time
periods that preceded the acquisition date of this operation.
-- Eagle incurred approximately $96,000 for severance and accrued
vacation related to employees terminated in fiscal 2003. Eagle
does not expect to incur any additional future period costs
associated with such restructuring activities other than those
accrued for and recorded in the fourth quarter of fiscal 2003.
An analysis of accrued costs and amounts charged against the provision are as
follows:
Beginning Ending
- --------------------------------------------------------------------------------
Balance Period Balance
- --------------------------------------------------------------------------------
Costs Payments
8/31/2002 (Additions) 8/31/2003
- --------------------------------------------------------------------------------
Accrued Exit
Expenses:
- --------------------------------------------------------------------------------
Severance $- $96,000 $96,000 $-
- --------------------------------------------------------------------------------
Terminated Lease
costs - $171,000 - $171,000
- --------------------------------------------------------------------------------
Total $- $267,000 $96,000 $171,000
- --------------------------------------------------------------------------------
For the year ended August 31, 2003, the Company incurred exit costs of $267,000
which are principally severance and lease termination costs. The total expected
exit costs for severance and terminated leases are $96,000 and $171,000,
respectively. These costs are included in the consolidated statement of income
under the categories of salaries and related costs and other support costs.
These period and accumulated costs are included in the segment reporting as
follows:
Costs APC/HSI EBS/DSS UCG EAGLE OTHER Total
- ------------------------------------------------------------------------------------
Severance $37,000 $24,000 $14,000 $21,000 $96,000
- ------------------------------------------------------------------------------------
Terminated
Lease Costs 50,000 $44,000 $77,000 171,000
- ------------------------------------------------------------------------------------
Total $87,000 $24,000 $58,000 $21,000 $77,000 $267,000
- ------------------------------------------------------------------------------------
Note 25 - Subsequent Events.
Resignation/Appointment of Chief Executive Officer. In October 2003,
H. Dean Cubley resigned as chief executive officer to become the chief
technology officer, and David Weisman accepted the position of chief
executive officer.
Recent Financings. During the first fiscal quarter of 2004, Eagle has
received net proceeds of $7,687,000 from private placement offerings
of stock and bonds and through the sale of stock held as short term
investments and has retired or reduced certain of its notes payable,
accounts payable and other obligations including numerous lawsuits;
thereby significantly reducing the Company's current and contingent
liabilities.
Conversion of Outstanding Debt. During the four months ended September
30, 2003, holders of the Q-Series Bonds elected to convert bonds with
an aggregate principal balance of 6,483,158 into 31,620,049 shares of
common stock, of which 2,000,000 shares were registered in a Form S-3
Registration statement filed in October 2003.
Private Placement Offering. In October 2003, we received gross
proceeds of $3,000,000 from a private placement to accredited
investors in which we issued promissory notes in the aggregate
principal amount of $3,000,000 ("Notes") and 2,000,000 shares of
Series A Convertible Preferred Stock ("Series A Preferred"). The
Series A Preferred is convertible into 29,500,000 shares of common
stock, subject to adjustment based on certain anti-dilution
provisions. We received net proceeds from this offering of $2,915,000,
which we intend to use for general corporate purposes. Terms of the
Series A Preferred and Notes are described below under the caption
"Description of Securities." We granted registration rights to the
selling stockholders covering the resale of shares of our common
stock, which are issuable upon conversion of the Series A Preferred.
We registered the resale of 29,500,000 shares of common stock
underlying 2,000,000 shares Series A Preferred on a Form S-3
Registration Statement.
F-28
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended August 31, 2003, 2002, and 2001
Additions
Balance at Charged to Balance at
Beginning of Expenses/ End of
Description Period Revenues Deductions Period
(In thousands)
Allowance for doubtful accounts:
2003 $242 $2,177 $(2,007 ) $ 412
2002 $480 $ 125 $ (363 ) $ 242
2001 $ 89 $ 391 $ --- $ 480
F-29