U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended August 31, 2004
[ ] 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: 001-154649
Texas 76-0494995
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 Courageous Drive, League City, Texas 77573
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(Address of Principal Executive Office) (Zip Code)
281-538-6000
(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, 2004, were $12,490,000.
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 November 26, 2004, was $188,581,000. As of November 26, 2004,
registrant had 212,017,000 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 will be filed by the registrant
on or before December 29, 2004.
1
This annual report contains forward-looking statements. These statements
relate to future events or future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause Eagle's or Eagle's
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's competitive pricing; the Company's relationship with its
suppliers; relations with the Company's employees; the Company's ability to
manage its operating costs; the continued availability of financing and working
capital to fund business operations; governmental regulations; risks associated
with regional, national, and world economies; and ability to enter into
strategic, profitable business relationships relating to our products and
services. Any forward-looking statements should be considered in light of these
factors. Eagle cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither Eagle nor any other person assumes
responsibility for the accuracy and completeness of these forward-looking
statements. Eagle is under no duty to update any of the forward-looking
statements after the date of this report to conform its prior statements to
actual results.
PART I
Item 1. Description of Business
Overview
Eagle Broadband, Inc. (the "Company" or "Eagle"), is a leading provider of
broadband, Internet protocol (IP) and satellite communications technology and
services. The Company is focused on three core businesses: broadband bundled
services, IP set-top boxes and satellite communications technology. The
Company's product offerings include an exclusive "four-play" suite of IP-based
broadband bundled services with high-speed Internet, cable TV, telephone and
security monitoring, and a turnkey suite of financing, network design,
operational and support services that enables municipalities, utilities, real
estate developers, hotels, multi-tenant owners and service providers to deliver
exceptional value, state-of-the-art entertainment and communications choices and
single-bill convenience to their residential and business customers. Eagle
offers the HDTV-ready Media Pro IP set-top box product line that enables hotel
operators and service providers to maximize revenues by offering
state-of-the-art in-room entertainment and video services. The Company also
develops and markets the SatMAX satellite communications system that allows
government, military, homeland security, aviation, maritime and enterprise
customers to deliver reliable, non-line-of-sight, voice and data communications
services via the Iridium satellite network from any location on Earth.
As of August 31, 2004, the Company's active subsidiaries were: Eagle
Broadband Services, Inc. (EBS), operating as Eagle BDS; DSS Security, Inc.
(DSS), operating as Eagle Security Services; and Eagle Managed Services.
Additionally, Eagle has a number of inactive subsidiaries that had results in
one or more of the periods included in the financial statements covered by this
report. These inactive subsidiaries include: ClearWorks Communications, Inc.
(COMM), formerly operated as BDS; ClearWorks.net, Inc. (.NET); ClearWorks Home
Systems, Inc. (HSI), operated as Eagle Residential Structured Wiring; Eagle
Wireless International, Inc. (EWI); Contact Wireless, Inc. (CWI), operated as
Eagle Paging Services; United Computing Group, Inc. (UCG), operated as Eagle
Technology Services; and Link Two Communications, Inc. (LINK II), operated as
Eagle Messaging Services. Eagle has incorporated certain ongoing operations of
the inactive subsidiaries into the active subsidiaries listed above including
Atlantic Pacific Communications (APC) and Etoolz, Inc. (ETI). The consolidated
financial statements include the accounts of the Company and its subsidiaries.
All significant inter-company transactions and balances have been eliminated in
consolidation.
Eagle designs and manufactures a wide range of broadband products and
provides complete installation services for copper, fiber, and wireless to
commercial and residential markets. Core products offered by Eagle target end
users of broadband services and include Internet, telephone, cable television,
and security monitoring services, which services we refer to as bundled digital
services or BDS. Each subscriber provides the Company with the opportunity to
create a recurring revenue stream as well as the opportunity to sell additional
products, such as Eagle's set-top boxes to existing customers. Management's goal
is to obtain near-term and long-term recurring revenue.
Eagle designs, markets and services its products under the Eagle name.
Eagle provides service and support for its products, as well as consulting and
research development on a contract basis. In addition, Eagle offers a line of IP
set-top boxes and satellite communication products. In fiscal 2003 and 2002,
Eagle marketed products that included transmitters, receivers, controllers,
software and other equipment used in personal communications systems and radio
and telephone systems. Most of Eagle's broad line of products, covering the
messaging spectrum as well as specific personal communication systems, and
specialized mobile radio products are certified by the Federal Communications
Commission.
Eagle was incorporated in May 1993 and changed its name in February 2002 to
Eagle Broadband, Inc., its current name. Eagle's principal place of business is
located at 101 Courageous Drive, League City, Texas 77573. Its telephone number
is (281) 538-6000 and its web site address is www.eaglebroadband.com .
2
Product and Service Categories
Eagle BDS Services
Eagle provides fiber-to-the-user IP-based bundled digital services for
municipalities, utilities, real estate developers and service providers. These
services include high-speed Internet connectivity, home security monitoring,
telephone service, and cable-style TV service over fiber. Eagle's exclusive
"four-play" suite of high-speed Internet, video/cable TV, voice and security
monitoring bundled digital services, HDTV-ready IP set-top boxes, and turnkey
suite of financing, network design, deployment and operational services enable
municipalities, real-estate developers, hotels, multi-tenant owners and service
providers to deliver state-of-the-art entertainment and communication choices
and single-bill convenience to their residential and business customers.
The fiber optic networks that Eagle deploys into residential communities
and businesses consist of two parts: (a) the headend facility and (b) the fiber
optic cable installed into the home. Eagle also sells structured wiring and
audio/video products to single and multi-family units. These products and
services are being made available to both residential and commercial customers
in select states and communities nationwide.
Eagle's BDS Services revenues are reported under the category "Broadband
Services" on the Company's Consolidated Statements of Operations included as
page F-4 of this report and also under the category "EBS/DSS" within Note 22 -
Industry Segments.
Eagle Security Services
Eagle, through its subsidiary DSS Security, Inc., markets
security-monitoring services. DSS Security's principal business activity is
providing monthly security monitoring service to both commercial and residential
customers. As of August 31, 2004, DSS Security provided services to over 7,000
customers.
Eagle's Security Services revenues are reported under the category
"Broadband Services" on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category "EBS/DSS" within
Note 22 - Industry Segments.
Eagle Satellite-Based Voice and Data Communications Services
The SatMAX
The SatMAX represents innovative and proprietary non-line-of-sight
communications technology that enables users of the Iridium(R) satellite network
to establish reliable voice and data communications to and from any location
where the user is unable to gain line of sight to an orbiting Iridium Satellite
such as onboard in-flight aircraft, within buildings, under ground or from
obstructed areas. The technology provides global communications that enhance
user productivity, mobility, problem solving, field-to-headquarters
collaboration and emergency backup/response for a wide range of mission-critical
and everyday communications needs. By extending coverage indoors to areas not
traditionally served by satellite networks, the SatMAX extends customers' usage
area, while enhancing the utility and overall value for both new and existing
Iridium aviation, government, military, homeland security and
commercial/enterprise customers. The Company has received certification by both
the Federal Communications Commission (FCC Certification Identifier #
LOKJHJLBT05A00021) and Iridium Satellite LLC for the SatMAX.
IP Set-Top Box Products
Eagle markets broadband IP-media set-top-box products. These multimedia and
Internet based products provide users the ability to interface their Internet
connection, broadcast video, cable or DSL, or satellite video source directly to
their television receiver. Eagle markets the set-top boxes to Internet service
providers or ISP's, systems integrators and OEM customers who typically bundle
set-top-boxes with their own products and/or services.
Eagle designs and markets a complete line of advanced Media Pro IP set-top
box products. Either standalone or in conjunction with the company's EZ Media
middleware software, the products enable hotel and casino owners, hospitals,
apartment owners, municipalities, real estate developers and schools to deliver
a full range of higher-quality standard and high definition entertainment and
information services that can generate higher-margin revenues. Media Pro IP
set-top boxes also enable incumbent and competitive telecommunications service
providers to cost effectively deploy, high-demand, IP-based bundled broadband
and video services to their customers.
The Media Pro line of IP set-top boxes delivers full computing and video
functionality in a compact footprint with a very quiet, fan-less design that
enables a wide range of on-demand IP-based applications including high-speed
Internet access, streaming IP video, digital audio/music, video-on-demand, 3D
gaming, video conferencing and more. In addition, Eagle's customizable EZ-Magic
middleware software platform delivers stunning high definition streaming video,
superior digital audio, easier navigation of hotel and community services (i.e.,
concierge, local restaurants and events, etc.), advanced content and system
security for a wide variety of hardware platforms.
3
EZMagic Software
EZMagic is a software-based middleware platform capable of delivering
Eagle's complete "four-play" of voice, video, data, and security services over a
wide variety of standard hardware systems. EZMagic-HD expands Eagle Broadband's
EZMagic middleware software platform to include a range of new multi-media
capabilities. The capabilities made possible by EZMagic-HD enable hotel and
casino owners, municipalities, real estate developers, schools and health care
facilities to deliver enhanced high-demand multimedia services with the goal of
improving the satisfaction of residents and guests, maximizing occupancy rates
and improving brand loyalty.
EZMagic features include high definition streaming video, improved digital
audio and Internet capabilities, easier navigation of hotel and community
services (e.g., concierge, local restaurants and events, etc.), increased
content and system security, and additional operating system support. EZMagic-HD
is designed for a range of higher margin applications and services including (i)
high-end hospitality systems requiring sophisticated secure video; (ii) data and
gaming services; (iii) educational distance-learning systems to improve both
teacher and student education; (iv) on-demand entertainment including concerts,
movies, music videos, etc. with superior visual clarity; (v) Internet access,
video programming and other patient services for health care facilities; and
(vi) fiber-to-the-user IP-based entertainment terminals/media centers.
Eagle's Broadband IP set-top box products revenues are reported under the
category "Products" on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category "Eagle" within
Note 22 - Industry Segments.
Eagle Managed Services
Eagle provides data, telephony and fiber optic installation, project
management and support services from initial concept through engineering to
completion and documentation. Atlantic Pacific installs fiber and cabling to
commercial and industrial clients throughout the United States. Services
include:
o Multi-site rollout installation
o Statement of work/request for quotation preparation
o Installation supervision
o Structured wiring design
o Comprehensive project management
o Copper wiring configuration
o Fiber optic acceptance testing
o Aerial and underground OSP
o Fiber optic and copper cable
o Field service and support
Eagle's Communications Services revenues are reported under the category
"Structured Wiring" on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category "APC/HSI" within
Note 22 - Industry Segments.
Eagle Technology Services
Eagle, through its United Computing Group subsidiary, sold computer
hardware and IT business integration and enterprise management solutions in
fiscal 2003 and 2002 to companies with complex computing and communication
systems and needs. In fiscal 2004 Eagle did not conduct any United Computing
Group business.
Eagle's Technology Services product revenues are reported under the
category "Products" while the services components are reported under the
category "Other" on Eagle's Consolidated Statements of Operations included as
page F-4 of this report and also under the category "UCG" within Note 22 -
Industry Segments.
Eagle Consulting Services
Eagle routinely provides consulting services on a contract basis to support
the sale of its main product lines. Examples of these consulting services
include design and engineering support for fiber-to-the-user headend and optical
network integration. Eagle also performs research and development on a contract
basis.
Eagle's Consulting Services revenues are reported under the category
"Other" on the Company's Consolidated Statements of Operations included as page
F-4 of this report and also under the category "Other" within Note 22 - Industry
Segments.
Eagle Service and Support
Eagle provides service and support to customers on an on-going basis
including installation, project management of turnkey systems, training, and
service or extended warranty contracts with Eagle. Eagle believes that it is
essential to provide reliable service to customers in order to solidify customer
relationships and be the vendor of choice when a customer seeks new services or
system expansions.
4
This relationship is further developed as customers come to depend upon Eagle
for installation, system optimization, warranty and post-warranty services.
Eagle has a warranty and maintenance program for both its hardware and
software products and maintains customer service facilities. Eagle's standard
warranty provides its customers with repair or replacement of any defective
Eagle manufactured equipment. The warranty is valid on all products for the
period of one year from the later of the date of shipment or the installation by
an Eagle qualified technician.
Eagle's Service and Support Services revenues are reported under the
category "Other" on the Company's Consolidated Statements of Operations included
as page F-4 of this report and also under the category "Other" within Note 22 -
Industry Segments.
Eagle Paging Services
Eagle, through its subsidiary Contact Wireless, Inc., marketed paging and
mobile telephone solutions in fiscal 2003 and 2002. Contact Wireless provided
customers with paging and mobile telephone products and related monthly services
in San Antonio and Houston areas. The assets for Contact Wireless, Inc., were
sold effective October 1, 2003, and there was no additional business activity in
fiscal 2004.
Eagle's Paging Services revenues are reported under the category "Other" on
the Company's Consolidated Statements of Operations included as page F-4 of this
report and also under the category "Other" within Note 22 - Industry Segments.
Eagle Messaging Services
Eagle, through its subsidiary Link Two Communications, Inc., marketed
messaging network services. At August 31, 2002, management estimated through
recent sales of equipment and industry pricing of FCC licenses that an
impairment charge of $27,100,000 was necessary to reflect the ongoing value of
its assets and licenses. Eagle did not conduct any substantive business in
fiscal 2004, other than sustaining the FCC licenses.
Eagle's Messaging Services revenues are reported under the category "Other"
on the Company's Consolidated Statements of Operations included as page F-4 of
this report and also under the category "Eagle" within Note 22 - Industry
Segments.
Eagle Wireless International
Eagle provided messaging services to customers during fiscal 2002. Eagle's
Wireless International Products and Services revenues are reported under the
category "Products" on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category "Eagle" within
Note 22 - Industry Segments. Eagle did not conduct any Eagle Wireless business
in fiscal 2004.
Customers
Broadband and IP set-top box products are sold to a broad range of
customers. These include residential, commercial, enterprise, military,
government and service provider customers.
Eagle BDS Services historically sold its products and services primarily in
the Houston, San Antonio, Austin, Las Vegas and Phoenix metropolitan markets.
Today, however, such products and services are marketed nationwide through
direct marketing efforts and via Eagle's sales staff and service centers.
Currently the Company primarily markets the BDS Services to municipalities, real
estate developers, hospitality operators, public utility districts and service
providers, with residential and commercial customers typically subscribing to
one or more bundled digital services such as voice, video, data/Internet and
security monitoring.
Eagle Managed Services sells its project management services on a
nationwide basis to a wide range of customers including telecommunications,
hospitality, industrial and petrochemical, oil/gas companies and government
sectors.
Eagle markets the SatMAX global non-line-of-sight communications system to
Fortune 1000 enterprises, commercial aviation, government, the military and
homeland security customers.
The Company had two customers in fiscal year 2004 that accounted for 30%
and 25% of consolidated revenues. In fiscal years 2003 and 2002 the Company did
not have any customers that aggregated ten percent or more of consolidated
revenues.
Marketing and Sales
The majority of the Company's products and services are marketed through
its employees using direct sales, channel marketing and various types of direct
marketing techniques.
5
Eagle Technology Services were previously marketed through direct sales
staff and through various types of direct marketing. For the years ended August
31, 2004, 2003 and 2002, Eagle Technology Services represented 4%, 21% and 54%
of consolidated revenues, respectively.
Eagle Managed Services were marketed through Eagle's direct sales staff.
For the years ended August 31, 2004, 2003 and 2002, Eagle Managed Services
represented 50%, 34% and 18% of consolidated revenues, respectively.
Eagle Messaging Services were previously marketed through Eagle's direct
sales staff and publication advertising.
Eagle also markets the SatMAX global non-line-of-sight communications
system directly to Fortune 1000 enterprises, commercial aviation, government,
the military and homeland security customers.
Eagle Security Services are marketed through Eagle's direct sales staff.
Research and Development
Eagle believes that a strong commitment to research and development is
essential to the continued growth of its business. One of the key components of
Eagle's development strategy is the promotion of a close relationship between
its development staff, internally with Eagle manufacturing and marketing
personnel, and externally with Eagle customers. This strategy has allowed Eagle
to develop and bring to market customer-driven products that meet real customer
needs.
From 1999 to 2004, Eagle has focused a large portion of its new development
resources on the development of the new broadband multimedia and Internet
product line. In addition, Eagle has formed a number of strategic relationships
with other large suppliers and manufacturers that will allow the latest in
technology and techniques to be utilized in the Company's IP set-top-box product
line. Eagle will continue to incur research and development expenses with
respect to the IP set-top-box product line during the current fiscal year.
Eagle has extensive expertise in the technologies required to develop
wireless communications systems and products including high power, high
frequency RF design digital signal processing, real-time software, high-speed
digital logic, wireless DSL products, radio frequency and data network design.
Eagle believes that by having a research and development staff with expertise in
these key areas, it is well positioned to develop enhancements for its existing
products as well as the next generation of personal communication products.
Investment in advanced computer-aided design tools for simulation and analysis
has allowed Eagle to reduce the time for bringing new products to market.
Research and development expenditures incurred by Eagle for the fiscal years
ended August 31, 2004, 2003 and 2002 were $557,000, $411,000 and $404,000,
respectively.
Manufacturing
Eagle currently subcontracts and/or provides limited manufacturing of its
satellite-based communications and wireless products at its facilities in League
City, Texas. Some subassemblies are manufactured for Eagle by subcontractors at
various locations throughout the world. Eagle's manufacturing expertise resides
in assembling subassemblies and final systems that are configured to its
customers' specifications. The components and assemblies used in Eagle's
products include electronic components such as resistors, capacitors,
transistors, and semiconductors such as field programmable gate arrays, digital
signal processors and microprocessors, and mechanical materials such as cabinets
in which the systems are built. Substantially all of the components and parts
used in Eagle's products are available from multiple sources. In those instances
where components are purchased from a single source, the supplier is reviewed
frequently for stability and performance. Additionally, as necessary, Eagle
purchases sufficient quantities of components that have long-lead requirements
in the world market. Eagle ensures that all products are tested, tuned and
verified prior to shipment to the customer.
Eagle has determined that the most cost effective manufacturing method for
its high volume multimedia and Internet product line is to utilize offshore
contract production facilities supplemented with high volume United States based
contract facilities. The high volume requirements of the Company's convergence
set-top-box product line are well beyond the capabilities of the current
facilities and would be cost prohibitive to construct. However, in the selection
of a high volume international manufacturer, Eagle has selected Taiwanese
company with established subsidiaries in the USA, Netherlands, China and
Germany. With a strong research and development team, this company is not only
able to produce a wide range of products, but also has been recognized as a
pioneer in the field and is both ISO-9001 and ISO-9002 certified. The
manufacturing facility for the IP set-top-box is located in Taiwan.
Competition
Eagle competes with many established companies in the set-top-box business
including Scientific Atlanta, General Instrument, and many smaller companies.
Most of these companies have greater resources available than Eagle. The markets
that are currently developing for set-top box products are extremely large and
rapidly growing. Eagle has studied these markets and is of the belief based on
this research that it can effectively compete in these markets with its new IP
set-top-box product line. However, there can be no assurance that these
conclusions are correct and that the multimedia and Internet markets will
continue to expand at their current rates and that Eagle can gain significant
market share in the future.
6
Eagle BDS competes indirectly with many established companies and service
providers that provide fiber and cable, structured wiring, broadband
data/Internet, security monitoring, cable television and telephone services.
Most of these companies have greater resources than Eagle BDS. Eagle has studied
these markets, and is of the belief that the bundled digital services offered to
its customers as a complete package with one source billing is a competitive
advantage for Eagle BDS. Certain of Eagle's residential customers are subject to
developer and homeowner association agreements that allow Eagle BDS to be the
primary single-source provider of these services. However, there can be no
assurance that these conclusions are correct and that the bundled digital
services market will continue to expand at the current rates and that Eagle BDS
can gain significant market share in the future.
Eagle Managed Services competes with many established companies in the
fiber and cable, structured wiring and project management services areas. Most
of these companies have greater resources available than Eagle Managed Services.
Eagle has studied these markets and is of the belief that the offering of the
collective services on a nationwide scale is a competitive advantage for Eagle
Managed Services. The use of the sub-contractors located across the nation
allows Eagle Managed Services to complete large projects in an efficient manner,
which is a valuable tool. However, there can be no assurance that these
conclusions are correct and that these services will continue to expand at their
current rates and that Eagle Managed Services can gain significant market share
in the future.
Proprietary Information
Eagle attempts to protect its proprietary technology through a combination
of trade secrets, non-disclosure agreements, patent applications, copyright
filings, technical measures, and common law remedies with respect to its
proprietary technology. Eagle has not yet been issued any patents on its
products, technology or processes against such patent applications. This
protection may not preclude competitors from developing products with features
similar to Eagle's products. The laws of some foreign countries in which Eagle
sells or may sell its products do not protect Eagle's proprietary rights in the
products to the same extent as do the laws of the United States. Although Eagle
believes that its products and technology do not infringe on the proprietary
rights of others, there can be no assurance that third parties will not assert
infringement claims against Eagle in the future. If litigation resulted in
Eagle's inability to use technology, Eagle might be required to expend
substantial resources to develop alternative technology. There can be no
assurance that Eagle could successfully develop alternative technology on
commercially acceptable terms.
Regulation
Many of Eagle's products operate on radio frequencies. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States and internationally. Regulatory approvals
generally must be obtained by Eagle in connection with the manufacture and sale
of its products and by customers to operate Eagle's products. There can be no
assurance that appropriate regulatory approvals will continue to be obtained or
that approvals required with respect to products being developed for the
personal communications services market will be obtained. The enactment by
federal, state, local or international governments of new laws or regulations or
a change in the interpretation of existing regulations could affect the market
for Eagle's products. Although recent deregulation of international
telecommunications industries along with recent radio frequency spectrum
allocations made by the FCC have increased the demand for Eagle's products by
providing users of those products with opportunities to establish new messaging
and other wireless personal communications services, there can be no assurance
that the trend toward deregulation and current regulatory developments favorable
to the promotion of new and expanded personal communications services will
continue or that future regulatory changes will have a positive impact on Eagle.
Employees
As of November 1, 2004, Eagle employed approximately 85 persons and
retained independent contractors as necessary. Eagle believes its employee
relations to be good. Eagle enters into independent contractual relationships
with various individuals, from time to time, as needed.
Risk factors that may affect Eagle's results of operations and financial
condition.
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below before making an investment
decision. If any of the following risks actually occur, our business could be
harmed. The value of our stock could decline, and you may lose all or part of
your investment. Further, this Form 10-K contains forward-looking statements and
actual results may differ significantly from the results contemplated by such
forward-looking statements.
We have a history of operating losses and may never achieve profitability.
From inception through August 31, 2004, we have incurred an accumulated net
deficit in the amount of $157,106,000. For the fiscal year ended August 31,
2004, we incurred net losses in the amount of $39,005,000. We anticipate that we
will incur losses from operations for the current fiscal year. We will need to
generate significant revenues and control expenses to achieve profitability. Our
future revenues may never exceed operating expenses, thereby making the
continued viability of our company dependent upon raising additional capital.
As we have not generated positive cash flow from operations for the past
three fiscal years, our ability to continue operations is dependent on our
ability to either begin to generate positive cash flow from operations or our
ability to raise capital from outside sources.
7
We have not generated positive cash flow from operations during the last
three fiscal years and we currently rely on external sources of capital to fund
operations. For the fiscal year ended August 31, 2004, we have suffered losses
from operations of approximately $39,005,000. At August 31, 2004, we had
approximately $2,602,000 in cash, cash equivalents and securities available for
sale, and a working capital deficit of approximately $15,272,000. Our net cash
used by operations for the fiscal year ended August 31, 2004, was approximately
$3,493,000.
We believe our current cash position and expected cash flow from operations
will be sufficient to fund operations during the current fiscal year.
Thereafter, we will need to raise additional funding unless our operations
generate sufficient cash flows to fund operations. Historically, we have relied
upon best efforts third-party funding from individual accredited investors.
Though we have been successful at raising additional capital on a best efforts
basis in the past, we may not be successful in any future best efforts financing
efforts. We do not have any significant credit facilities or firm financial
commitments established as of the date hereof. If we are unable to either obtain
financing from external sources or generate internal liquidity from operations,
we may need to curtail operations or sell assets.
We have been named a defendant in several lawsuits, which if determined
adversely, could harm our ability to fund operations.
Eagle Broadband and its subsidiaries have been named defendants in several
lawsuits in which plaintiffs are seeking substantial damages, which may include
any of the following lawsuits:
Enron Corp. vs. United Computing Group, Inc. In September 2003, Enron sued
United Computing Group seeking to avoid and recover a transfer in the
amount of approximately $1,500,000 under Section 547 and 550 of the
Bankruptcy Code.
Cornell Capital Partners, LP. vs. Eagle Broadband, Inc. In July 2003,
Cornell Capital sued Eagle Broadband alleging breach of contract, fraud and
negligent misrepresentation. As of November 30, 2003, the principal balance
of the debenture of approximately $1.2 million was repaid, although the
suit remains outstanding. Cornell seeks damages against Eagle in the amount
of approximately $1,000,000. We have filed a counter-claim against Cornell
Capital seeking in excess of $2,000,000.
The Tail Wind Fund Ltd. vs. Link Two Communications, Inc., and Eagle
Broadband, Inc. In its complaint, The Tail Wild Fund asserts breach of
contract claims in the amount of approximately $25 million.
Palisades Master Fund L.P. vs. Eagle Broadband, Inc., In November 2004,
Palisades sued Eagle claiming in excess of $3,100,000 in damages.
We intend to vigorously defend these and other lawsuits and claims against
us. However, we cannot predict the outcome of these lawsuits, as well as other
legal proceedings and claims with certainty. An adverse resolution of any one
pending lawsuit could substantially harm our ability to fund operations.
Our revenues may decrease if recurring-revenue contracts and security monitoring
contracts are cancelled.
For the fiscal years ended August 31, 2004 and 2003, approximately 44% and
24%, respectively, of our revenue was generated by recurring-revenue contracts
with Eagle Broadband Services and our security monitoring contracts with DSS
Security. Although to date we have not experienced any significant interruptions
or problems in our broadband or security services, any defects or errors in our
services or any failure to meet customers' expectations could result in the
cancellation of services, the refund of customers' money, or the requirement
that we provide additional services to a client at no charge. Any of these
events, could reduce the revenues or the margins associated with this revenue
segment.
We rely heavily on third party suppliers for the material components for our
products, and supply shortages could cause delays in manufacturing and
delivering products which could reduce our revenues.
We rely upon unaffiliated suppliers for the material components and parts
used to assemble our products. Most parts and components purchased from
suppliers are available from multiple sources. We have not experienced
significant supply shortages in the past and we believe that we will be able to
continue to obtain most required components and parts from a number of different
suppliers. However, the lack of availability of certain components could require
a major redesign of our products and could result in production and delivery
delays, which could reduce our revenues and impair our ability to operate
profitably.
Because our industry is rapidly evolving, if we are unable to adapt or adjust
our products to new technologies, our ability to compete and operate profitably
may be significantly impaired.
The design, development, and manufacturing of personal communication
systems, specialized mobile radio products, and multimedia entertainment
products are highly competitive and characterized by rapid technology changes.
We compete with other existing products and will compete against other
technologies. Development by others of new or improved products or technologies
may make our products obsolete or less competitive. While we believe that our
products are based on established state-of-the-art technology, our products may
become obsolete in the near future or we may not be able to develop a commercial
market for our products in response to future
8
technology advances and developments. The inability to develop new products or
adapt our current products to new technologies will impair our ability to
compete and to operate profitably.
Approximately 48% of our total assets are comprised of intangible assets
including goodwill, contract rights, customer relationships and other intangible
assets which are subject to review on a periodic basis to determine whether an
impairment on these assets is required. An impairment would not only greatly
diminish our assets, but would also require us to record a significant charge
against our earnings.
We are required under generally accepted accounting principles to review
our intangible assets for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. Goodwill is required to be
tested for impairment at least annually. At August 31, 2004, our intangible
assets, including goodwill, were net $35,238,000 million. If management
determines that impairment exists in future periods, we will be required to
record a significant charge to earnings in our financial statements during the
period in which any impairment of our goodwill is determined.
Our business relies on our use of proprietary technology. Asserting, defending
and maintaining intellectual property rights are difficult and costly and the
failure to do so could harm our ability to compete and to fund our operations.
We rely, to a significant extent, on trade secrets, confidentiality
agreements and other contractual provisions to protect our proprietary
technology. In the event we become involved in defending or pursuing
intellectual property litigation, such action may increase our costs and divert
management's time and attention from our business. In addition to costly
litigation and diversion of management's time, any potential intellectual
property litigation could force us to take specific actions, including:
o cease selling products that use the challenged intellectual property;
o obtain from the owner of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on reasonable terms or at all; or
o redesign those products that use infringing intellectual property.
We compete with many companies that are larger and better financed than us, and
our growth and profitability are dependent on our ability to compete with these
entities.
We face competition from many entities with significantly greater financial
resources, well-established brand names, and larger customer bases. We may
become subject to severe price competition for our products and services as
companies seek to enter our industry or current competitors attempt to gain
market share. We expect competition to intensify in the future and expect
significant competition from traditional and new telecommunications companies
including, local, long distance, cable modem, Internet, digital subscriber line,
microwave, mobile and satellite data providers. If we are unable to make or keep
our products competitively priced and attain a larger market share in the
markets in which our products compete, our levels of sales and our ability to
achieve profitability may suffer.
A system failure could delay or interrupt our ability to provide products or
services and could increase our costs and reduce our revenues.
Our operations are dependant upon our ability to support a highly complex
network infrastructure. Many of our customers are particularly dependent on an
uninterrupted supply of services. Any damage or failure that causes
interruptions in our operations could result in loss of these customers. To
date, we have not experienced any significant interruptions or delays which have
affected our ability to provide products and services to our clients. Because
our headquarters and infrastructure are located in the Texas Gulf Coast area,
there is a likelihood that our operations may be effected by hurricanes or
tropical storms, tornados, or flooding. Although we maintain redundant systems
in north Houston, Texas, which allow us to operate our networks on a temporary
basis, the occurrence of a natural disaster, operational disruption or other
unanticipated problem could cause interruptions in the services we provide and
significantly impair our ability to generate revenue and achieve profitability.
Our stock price has fluctuated intensely in the past, and stockholders face the
possibility of future fluctuations in the price of our common stock.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. From January 30, 2003, through November
1, 2004, the highest sales price of our common stock was $2.08 which occurred on
January 20, 2004, and the lowest sales price was $0.12, which occurred on March
7, 2003. The market price of our common stock has been volatile in the last 12
months and may continue to be volatile.
Our industry is highly regulated, and new government regulation could hurt our
ability to timely introduce new products and technologies.
Our telecommunication and cable products are regulated by federal, state,
and local governments. We are generally required to obtain regulatory approvals
in connection with providing telephone and television services. For example, the
cable and satellite television industry is regulated by Congress and the Federal
Communications Commission, and various legislative and regulatory proposals
9
under consideration from time to time may substantially affect the way we design
our products. New laws or regulations may harm our ability to timely introduce
new products and technologies, which could decrease our revenues by shortening
the life-cycle of a product.
Item 2. Description of Property
Eagle's headquarters are located in League City, Texas, and include
approximately 25,550 square feet of leased office, production, and storage
space. The lease expires in June 2007. Eagle believes that its rental rents are
at market prices. Eagle has insured its facilities in an amount that it believes
is adequate and customary in the industry.
Item 3. Legal Proceedings
In July 2003, Eagle became a defendant in Cornell Capital Partners, L.P.
vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), In the United
States District Court for the District of New Jersey. The suit presents claims
for breach of contract, state and federal securities fraud and negligent
misrepresentation. Plaintiff has also alleged that Eagle has defaulted on a
convertible debenture for failing to timely register the shares of common stock
underlying the convertible debenture and is seeking to accelerate the maturity
date of the debenture. In November 2003, the principal balance of the debenture
was repaid, although the suit remains outstanding. Cornell claims damages in
excess of $1,000,000. 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 in the amount of $2,000,000.
The Company has not accrued any expenses against this lawsuit, as the outcome
cannot be predicted at this time.
In December 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.
In 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.
In fiscal 2004, The Tail Wind Fund Ltd. sued Link Two Communications, Inc.,
and Eagle Broadband, Inc., Civil Action 04-CV-05776, in the United States
District Court for the Southern District of New York. Tail Wind claims breach of
contract seeking $25 million. The Company intends to vigorously defend this
claim. The Company has accrued $500,000 in expenses against this lawsuit,
although the outcome cannot be predicted at this time.
In November 2004, Palisades Master Fund L.P. sued Eagle Broadband, Ind.,
and David Weisman, Civil Action 04603626, in New York County, New York Supreme
Court. Palisades seeks an injunction setting a conversion price on certain
convertible debt and warrants at $0.4456 per share of Eagle common stock and
seeks damages in excess of $3.1 million. The Company intends to vigorously
defend this claim. The Company has not accrued any expenses against the lawsuit,
as the outcome cannot be predicted at this time.
Eagle is involved in lawsuits, claims, and proceedings, including those
identified above, which arise in the ordinary course of business. In accordance
with SFAS No. 5, "Accounting for Contingencies," Eagle makes a provision for a
liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Eagle believes it has adequate
provisions for any such matters. Eagle reviews these provisions at least
quarterly and adjusts these provisions to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel, and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, Eagle believes that it has valid defenses with respect to legal matters
pending against it. Nevertheless, it is possible that cash flows or results of
operations could be materially affected in any particular period by the
unfavorable resolution of one or more of these contingencies.
We intend to vigorously defend these and other lawsuits and claims against
us. However, we cannot predict the outcome of these lawsuits, as well as other
legal proceedings and claims with certainty. An adverse resolution of pending
litigation could have a material adverse effect on our business, financial
condition and results of operations. The Company is subject to legal proceedings
and claims that arise in the ordinary course of business. The Company's
management does not expect that the results in any of these legal proceedings
will have adverse affect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
At a special shareholders meeting in July 2004, shareholders holding
84,908,456 shares of our common stock adopted the June 2004 Compensatory Stock
Option Plan reserving 10,000,000 shares to be issued under such plan. Holders of
830,792 shares abstained from the vote, and holders of 14,181,648 shares voted
against the adoption of the plan.
10
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Shares of Eagle common stock are listed on the American Stock Exchange
under the symbol "EAG." On November 18, 2004, Eagle's common stock closed at
$.62 per share. Eagle is authorized to issue 350,000,000 shares of common stock,
205,509,000 of which were issued and outstanding at November 18, 2004. At
November 18, 2004, there were approximately 1,076 holders of record of Eagle
common stock.
The table set forth below, for the periods indicated, lists the reported
high and low sale prices per share of Eagle common stock on the American Stock
Exchange.
Eagle Common Stock
---------------------
High Low
--------- ---------
Fiscal 2004
Quarter ended November 30, 2003 $ 2.13 $ 0.42
Quarter ended February 28, 2004 2.08 1.10
Quarter ended May 31, 2004 1.59 0.77
Quarter ended August 31, 2004 1.15 0.71
Fiscal 2003
Quarter ended November 30, 2002 0.54 0.27
Quarter ended February 28, 2003 0.53 0.16
Quarter ended May 31, 2003 0.37 0.12
Quarter ended August 31, 2003 0.63 0.33
Eagle has never paid any cash dividends on its common stock and does not
anticipate paying cash dividends within the next two years.
Recent Sales of Unregistered Securities
In June 2004, the Company issued approximately 10,475,766 shares of common
stock to 44 accredited investors in connection with these investors converting
convertible debt into shares of common stock. This convertible debt was
originally issued in October and November of 2003.
In October 2004, the Company issued 25,000 shares of its common stock as a
partial settlement of a debt obligation.
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.
11
Item 6. Selected Financial Data
The data that follows should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in Item 8 and
"Management's Discussion and Analysis."
Year Ended August 31,
----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- -------------------------------------------------
Operating Data:
Net Sales $ 12,490 $ 11,593 $ 29,817 $ 28,110 $ 5,240
Operating Expenses 31,055 31,884 83,821 16,582 3,973
Operating Income (Loss) (30,952) (31,075) (76,708) (8,880) (1,215)
Other Income (Expense), Net (8,053) (5,426) (265) 2,348 1,516
Income Tax Provision - - - - 96
---------- ---------- ---------- ---------- ---------
Net Income (Loss) $ (39,005) $ (36,501) $ (76,973) $ (6,532) $ 187
========== ========== ========== ========== =========
Earnings Per Share (Basic) (0.21) (0.38) (1.20) (0.13) 0.01
Statement of Cash Flows Data:
Cash Used by Operating Activities $ (3,493) $ (6,085) $ (797) $ (699) $ (5,299)
Cash used by Investing Activities $ (1,216) $ (1,276) $ (13,668) $ (9,721) $ (2,224)
Cash Provided (Used) by
Financing Activities $ 5,936 $ 6,912 $ (2,406) $ (3,846) $ 39,681
Balance Sheet Data:
Total Assets $ 70,211 $ 77,366 $ 89,151 $ 170,021 $ 57,653
Long-Term Debt - - $ 1,272 $ 2,136 $ 73
Total Stockholders' Equity $ 50,103 $ 58,336 $ 76,548 $ 148,482 $ 54,073
Item 7. Management's Discussion and Analysis
Overview
Eagle Broadband, Inc. (the "Company" or "Eagle"), is a leading provider of
broadband, Internet protocol (IP) and satellite communications technology and
services. The Company is focused on three core businesses: broadband bundled
services, IP set-top boxes and satellite communications technology. The
Company's product offerings include an exclusive "four-play" suite of IP-based
broadband bundled services with high-speed Internet, cable TV, telephone and
security monitoring, and a turnkey suite of financing, network design,
operational and support services that enables municipalities, utilities, real
estate developers, hotels, multi-tenant owners and service providers to deliver
exceptional value, state-of-the-art entertainment and communications choices and
single-bill convenience to their residential and business customers." Eagle
offers the HDTV-ready Media Pro IP set-top box product line that enables hotel
operators and service providers to maximize revenues by offering
state-of-the-art in-room entertainment and video services. The Company also
develops and markets the SatMAX satellite communications system that allows
government, military, homeland security, aviation, maritime and enterprise
customers to deliver reliable, non-line-of-sight, voice and data communications
services via the Iridium satellite network from any location on Earth.
During the fiscal year ended August 31, 2004, Eagle's business strategy has
focused on pursuing higher-margin business opportunities in its core business
segments, specifically in the bundled digital services and related products. We
expect this trend to continue in fiscal 2005 with our goal of growing sales of
the SatMAX satellite voice and data communications products for military,
government and commercial customers. Set forth below is a table presenting the
revenue derived from our business segments in the last three years:
($ in thousands) 2004 % of Total 2003 % of Total 2002 % of Total
------------ ------------ ------------- ------------- ------------ ------------
Structured Wiring $ 678 5% $ 3,692 32% $ 8,036 27%
Broadband Services 5,525 44% 2,809 24% 2,657 9%
Products 6,190 50% 3,342 29% 16,108 54%
Other 97 1% 1,750 15% 3,016 10%
------------ ------------ ------------- ------------- ------------ ------------
Total $ 12,490 100% $ 11,593 100% $ 29,817 100%
============ ============ ============= ============= ============ ============
During the fiscal year ended August 31, 2004, Eagle recognized 44% of its
revenues from sales of bundle digital services and 21% from sales of set-top
boxes (part of product sales) as compared to 2003 sales of bundled digital
services and set-top boxes representing 24% and 11% of revenues, respectively.
12
Results of Operations
Fiscal Year Ended August 31, 2004, Compared to Fiscal Year Ended August 31, 2003
The following table sets forth summarized consolidated financial
information for the fiscal years ended August 31, 2004 and 2003:
Condensed Financial Information
Fiscal Year Ended August 31,
------------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- -------------- ------------ -------------
Total Sales $ 12,490 $ 11,593 $ 897 8%
Cost of Goods Sold 12,387 10,784 $ 1,603 15%
------------- -------------- ------------ -------------
Gross Profit 103 809 $ (706) -87%
------------- -------------- ------------ -------------
Percent of Total Sales 1% 7%
Operating Expenses 31,055 31,884 $ (829) -3%
------------- -------------- ------------ -------------
Loss from Operations (30,952) (31,075) $ 123 0%
------------- -------------- ------------ -------------
Other Income (Expense) (8,053) (5,426) $ (2,627) 48%
------------- -------------- ------------
Net Loss (39,005) (36,501) $ (2,504) 7%
Unrealized Holding Loss (321) (71) $ (250) 352%
------------- -------------- ------------ -------------
Comprehensive Loss $ (39,326) $ (36,572) $ (2,754) 8%
============= ============== ============ =============
For the fiscal year ended August 31, 2004, Eagle's business operations
reflected emphasis and further expansion of its IP set-top box and BDS business
segments including Eagle's broadband bundled digital services (Internet, video,
voice and security) for residential and business customers. The Company's
consolidated operations generated revenues of $12,490,000 with a corresponding
gross profit of $103,000 for the fiscal year ended August 31, 2004. The overall
increase of 8% in revenues for the fiscal year ended August 31, 2004, as
compared to the fiscal year ended August 31, 2003, was primarily attributable to
a $5,564,000 increase in the Company's sales of bundled digital services, IP
set-top boxes and ancillary equipment product shipments; offset by decreases of
$4,667,000 in structured wiring and other operations.
The Company incurred a net loss of $(39,005,000) for the fiscal year ended
August 31, 2004. The loss was attributable primarily to $26,212,000 of non-cash
charges and increased operating expenses.
The Company's net loss for the fiscal year ended August 31, 2004, included
approximately $5,097,000 in depreciation and amortization expenses and
$1,984,000 in expenses associated with a net increase in the Company's accounts
receivable allowances. Additionally, the Company's expenses included $18,472,000
of non-cash charges and stock issued to pay for interest expense and for
services rendered.
The Company is continuing the development and expansion of the Company's
bundled digital services model for distribution on a nationwide basis of voice,
video and data content; increased sales efforts in the telephone, cable,
Internet, security services and wireless segments; securing of long-term
relationships for content for the bundled digital services activities; and
marketing/sales agreements with other companies for the sale of broadband
products and services. On a nationwide basis, we are entering into business
relationships with financial and technology companies to provide bundled digital
services (digital content) to real estate developments, cities and
municipalities that currently have or are in the process of completing
construction of their own fiber infrastructure to the home.
The following table sets forth summarized sales information for the fiscal
years ended August 31, 2004 and 2003:
Fiscal Year Ended August 31,
---------------------------------------------------------
($ in thousands) 2004 % of Total 2003 % of Total $ Change % Change
------------ ------------- ------------ ------------ ------------- ------------
Structured Wiring $ 678 5% $ 3,692 32% $ (3,014) -81.6%
Broadband Services 5,525 44% 2,809 24% $ 2,716 96.7%
Products 6,190 50% 3,342 29% $ 2,848 85.2%
Other 97 1% 1,750 15% $ (1,653) -94.5%
------------ ------------- ------------ ------------ ------------- ------------
Total Sales $ 12,490 100% $ 11,593 100% $ 897 7.7%
============ ============= ============ ============ ============= ============
Sales Information
- -----------------
Net Sales. For the fiscal year ended August 31, 2004, net sales increased
to $12,490,000 from $11,593,000 during the fiscal year ended August 31, 2003.
The overall increase of 7.7% was attributable to a $1,389,000 increase in the
Company's product sales of IP set-top boxes and an increase of $2,716,000 in the
Company's BDS sales; offset by decreases of $3,014,000 in structured wiring
operations and a $1,653,000 decrease in other sales. The $2,848,000 increase in
the Company's product sales was primarily attributable to shipment of IP set-top
boxes and related equipment to a major customer. The $2,716,000 increase in
sales of the Company's broadband services was primarily attributable to
contracts valued at $3,111,000 executed by the Company's security-monitoring
subsidiary, DSS Security, Inc., against which the Company realized sales of
$2,874,000 during the fiscal year ended August 31, 2004. Without giving effect
to the security monitoring
13
contract transactions of $2,874,000, the Company's base broadband services sales
decreased by approximately $158,000 in the fiscal year ended August 31, 2004,
primarily attributable to the exit from the unprofitable Austin area BDS market
discussed in prior periods and the decline in recurring security monitoring
sales resulting from the sale of certain security monitoring contracts in the
Company's portfolio to Sweetwater Capital, LLC. The $3,014,000 decrease in
structured wiring sales corresponded to the Company's previously announced
strategy to no longer pursue structured wiring and commercial cabling
opportunities on a direct basis outside of the its BDS model. The $1,653,000
decrease in other sales was primarily attributable to the other sales components
from various operating segments that were divested or phased out during fiscal
2004 including Contact Wireless, UCG, and Eagle Wireless.
The following table sets forth summarized cost of goods sold information
for the fiscal years ended August 31, 2004 and 2003:
Cost of Goods Sold
------------------
Fiscal Year Ended August 31,
----------------------------
($ in thousands) 2004 2003 $ Change % Change
--------- --------- --------- --------
Direct Labor and Related Costs $ 1,244 $ 2,195 $ (951) -43.3%
Products and Integration Service 5,372 2,773 $ 2,599 93.7%
Impairment Slow Moving & Obsolete Inventory 1,300 2,627 (1,327) -50.5%
Structured Wiring Labor and Material 448 1,774 $ (1,326) -74.7%
Broadband Services Costs 2,856 903 $ 1,953 216.3%
Depreciation and Amortization 1,141 456 $ 685 150.2%
Other Manufacturing Costs 26 56 $ (30) -53.6%
--------- --------- --------- --------
Total Operating Expenses $ 12,387 $ 10,784 $ 1,603 14.9%
========= ========= ========= ========
Cost of Goods Sold. For the fiscal year ended August 31, 2004, cost of
goods sold increased by 14.9% to $12,387,000 from $10,784,000 as compared to
fiscal year ended August 31, 2003. The overall increase of $1,603,000 was
primarily attributable to the shipment of IP set-top boxes and the purchase and
resale of certain related equipment. The Company's overall gross profit
percentage was 1% and 7% for the fiscal years ended August 31, 2004 and 2003,
respectively. This substantial decrease in gross profit percentage is primarily
attributable to a heavy sales mix of product shipments of IP set-top boxes and
the dilutive effect of the purchase and resale of certain related equipment
versus the prior fiscal year; the dilutive effect of the security monitoring
transactions recorded in the fiscal year ended August 31, 2004, i.e., sales
recorded of $2,873,000 with corresponding cost of sales of $1,901,000, the
decision to no longer pursue structured wiring outside of its BDS model and an
increase in depreciation expenses associated with the build-out of the Company's
BDS infrastructure.
The following table sets forth summarized operating expense information for
the fiscal years ended August 31, 2004 and 2003.
Operating Expenses
------------------
Fiscal Year Ended August 31,
---------------------------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- ------------ ------------ -------------
Salaries and Related Costs $ 13,146 $ 6,102 $ 7,044 115%
Advertising and Promotion 29 247 (218) -88%
Depreciation and Amortization 3,943 4,776 (833) -17%
Research and Development 570 411 159 39%
Other Support Costs 13,367 12,737 630 5%
Impairment, Write-Downs & Restructuring Costs 7,611 (7,611) -100%
------------- ------------ ------------ -------------
Total Operating Expenses $ 31,055 $ 31,884 $ (829) -3%
============= ============ ============ =============
14
The following table breaks out other support costs information for the
fiscal years ended August 31, 2004 and 2003:
Other Support Costs
-------------------
Fiscal Year Ended August 31,
-----------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- ------------ ------------- -------------
Auto Related $ 22 $ 19 $ 3 16%
Bad Debt 2,643 2,177 466 21%
Delivery and Postage 47 95 (48) -51%
Fees 288 418 (130) -31%
Insurance and Office 425 437 (12) -3%
Professional and Contract Labor 6,818 6,129 689 11%
Rent 507 1,183 (676) -57%
Repairs and Maintenance 43 47 (4) -9%
Travel 237 377 (140) -37%
Taxes 1,474 170 1,304 767%
Telephone and Utilities 794 1,394 (600) -43%
Other 69 291 (222) -76%
------------- ------------ ------------- -------------
Total Operating Expenses $ 13,367 $ 12,737 $ 630 5%
============= ============ ============= =============
Operating Expenses. For the fiscal year ended August 31, 2004, operating
expenses decreased by 3% to $31,055,000 as compared to $31,884,000 for the
fiscal year ended August 31, 2003. The primary fluctuations that occurred as
evidenced by the two preceding tables immediately above are discussed below:
o A $7,044,000 increase in salaries and related costs. The increase was
attributable to an expansion of executive and general management
compensation expenses, increased Board of Director compensation
expense, and compensation expense associated with stock option
exercises and severance. In addition, compensation for certain
officers and key employees under incentive clauses of their employment
contracts (i) includes a non-cash expense of $4,493,000 incurred upon
the modification of warrants for 4,200,000 common shares and (ii)
reflects a guaranteed compensation of the modified warrants equivalent
to $1.75 less the warrant strike price.
o An $833,000 decrease in depreciation and amortization, due principally
to the prior year disposition of assets in subsidiaries that are no
longer active.
o A $630,000 increase in other support costs, the components of which
are set forth on the table included immediately above. Included in
this increase was a $1,304,000 increase in property taxes recorded
against the Company's BDS infrastructure, a $687,000 increase in
professional and contract labor and a $466,000 increase in bad debt,
offset by a $676,000 decrease in rent expense and a $597,000 decrease
in telephone and utilities.
o A $159,000 increase in research and development expenses, primarily
consisting of the Company's continued investment in HDTV-ready IP
set-top boxes for hospitality and broadband customers and the SatMAX
satellite voice and data communications products for military,
government and commercial customers.
Net Loss For the fiscal year ended August 31, 2004, Eagle's net loss was
$(39,005,000), compared to a net loss of $(36,501,000) during the fiscal year
ended August 31, 2003.
Changes in Cash Flow. Eagle's operating activities used net cash of
$(3,784,000) in the fiscal year ended August 31, 2004, compared to use of net
cash of $(6,085,000) in the fiscal year ended August 31, 2003. The decrease in
net cash used by operating activities was primarily attributable to fund an
increase in the Company's net loss, net of non-cash charges, totaling
$27,512,000 combined with $8,000,000 of cash provided by fluctuations in working
capital requirements consisting of the combination of accounts receivable,
inventory, prepaid expenses, accounts payable and accrued expenses. Eagle's
investing activities used net cash of $1,216,000 in the fiscal year ended August
31, 2004, compared to $1,276,000 in the fiscal year ended August 31, 2003. The
decrease was due primarily to a significant decline in investment activities and
purchase of equipment associated with the prior years build out of Eagle's
network and infrastructure for the delivery of broadband services. Eagle's
financing activities provided cash of $5,936,000 in the fiscal year ended August
31, 2004, compared to $6,912,000 of cash provided in the fiscal year ended
August 31, 2003. The decrease resulted from less borrowing activities during the
fiscal year ended August 31, 2004.
Year Ended August 31, 2003, Compared to Year Ended August 31, 2002
Net Sales. For the year ended August 31, 2003, net sales declined to
$11,593,000 from $29,817,000 during the year ended August 31, 2002. The overall
decrease of 61% was primarily attributable to the Company's decision to no
longer pursue direct sales of low-margin commodity computer products in the
Company's subsidiary United Computing Group, Inc. Additionally, a decline in the
sale of commercial and residential home cabling occurred as a result of a
deferral of implementation of national contracts and the Company's decision to
no longer pursue Atlantic Pacific/Home Systems structured wiring opportunities
on a direct standalone model basis outside of its BDS model,
15
including home cabling projects in the Arizona, Houston, San Antonio and Austin,
Texas, markets, partially offset by increased sales of broadband products and
services.
Cost of Goods Sold. For the year ended August 31, 2003, cost of goods sold
declined to $10,784,000 from $22,704,000 during the year ended August 31, 2002.
The decrease was primarily attributable to the Company's decision to no longer
pursue the direct sales of low-margin commodity computer products and commercial
structured wiring in the markets referenced above. Eagle's overall gross profit
percentage was 7% and 24% for the years ended August 31, 2003 and August 31,
2002. This decrease is primarily attributable to write-downs of inventory of
$2.6 million in connection with impaired, slow moving and obsolete inventory.
Eagle's Structured Wiring cost of goods sold decreased to $1,774,000 from
$2,121,000 for the period ending August 31, 2003 and 2002, respectively, on
corresponding revenues for these same periods of $3,692,000 and $8,036,000;
thereby resulting in a gross margin decline to $1,918,000 from $5,915,000 for
the same periods. This gross margin decline is primarily attributable to the
Company's decision to no longer pursue the direct sales of commercial structured
wiring and inventory write-downs totaling $0.5 million.
Eagle's Broadband Services cost of goods sold increased to $903,000 from
$763,000 for the period ending August 31, 2003 and 2002, respectively, on
corresponding revenues for these same periods of $2,809,000 and $2,657,000;
thereby resulting in a gross margin increase to $1,906,000 from $1,894,000 for
the same periods. This gross margin increase is primarily attributable to the
increase in revenues for this sector.
Eagle's Products cost of goods sold decreased to $5,400,000 from
$15,250,000 for the period ending August 31, 2003 and 2002, respectively, on
corresponding revenues for these same periods of $3,342,000 and $16,108,000;
thereby resulting in a gross margin decline to a deficit $2,058,000 from
$858,000 for the same periods. This gross margin decline is primarily
attributable to the decline in revenues for this sector, resulting from Eagle's
decision to no longer pursue direct sales of low-margin commodity computer
products and inventory write-downs totaling $2.1 million .
Operating Expenses. For the year ended August 31, 2003, operating expenses
decreased to $31,884,000 from $83,821,000 for the year ended August 31, 2002.
The primary portions of the decrease are discussed below:
o A $57,054,000 decrease in non-cash impairment charges resulting from a
$7,611,000 non-cash impairment charge for the year ended August 31,
2003, associated with the Company's decision to no longer pursue the
direct sales of low-margin commodity products discussed above compared
to a $64,665,000 non-cash impairment charges for the year ended August
31, 2002, for the impairment of licenses and equipment in Eagle's Link
Two subsidiary and goodwill related to the Clearworks.net acquisition.
At August 31, 2003, management determined that a $7,611,000 non-cash
impairment charge was necessary for realigned, impaired and abandoned
operations including direct sales of low-margin commodity products,
residential and commercial structured wiring operations and the
withdrawal from its Austin, Texas, area BDS development based on the
lack of demand for BDS services resulting from a slower build out of
the development than originally projected in conjunction with local
market competition. Included in the impairment was the write down of
goodwill associated with the Atlantic Pacific Comtel acquisition of
$1,878,000.
o A $1,693,000 decrease in salaries and related costs as a result of
overall staffing reductions across all business units, the majority of
which occurred in Atlantic Pacific/Home Systems and United Computing
Group operations.
o A $716,000 decrease in advertising and promotion, due primarily to
extensive cost reductions measures implemented in fiscal 2003 as the
Company placed more emphasis on directly marketing its products and
services to its customers as well as entering into business
relationships with financial and technology companies to provide BDS
services to cities and municipalities and decreased attendance at
conventions and tradeshows.
o A $1,244,000 decrease in depreciation and amortization, due
principally to the disposal of certain assets from the Company's
Austin area BDS operations.
o An $8,763,000 increase in other support costs, due to an increase in
litigation settlement costs of $3,650,000, bad debt expense of
$2,177,000 and various charges included in accrued expenses related to
costs associated with reserves for early terminations of certain
property leases totaling $171,000 and reserves for sales tax
liabilities that resulted from a sales tax audit of the Company's
United Computing Group operation for time periods that preceded the
acquisition date of this operation totaling $553,000.
Net Loss. For the year ended August 31, 2003, Eagle's net loss was
$36,501,000, compared to a net loss of $76,973,000 during the year ended August
31, 2002.
Liquidity and Capital Resources.
Current assets for the fiscal year ended August 31, 2004, totaled
$5,093,000 (includes cash and cash equivalents of $2,051,000 and securities
available for sale of $551,000) as compared to $8,109,000 reported for the year
ended August 31, 2003. During the fiscal year
16
ended August 31, 2004, Eagle received net proceeds of $6,778,000 through the
issuance of debt and through the sale of marketable securities held as
short-term investments and has retired or reduced certain of its notes payable
and accrued expenses.
The Company anticipates that it will incur significantly less capital
expenditures for broadband fiber infrastructure as a result of an emphasis of
the sale of its BDS services to municipalities, real estate developers, hotels,
multi-tenant units and service providers that own or will build a their own
fiber networks. Historically, the Company built out these networks, thereby
incurring significant capital expenditures. The Company incurred approximately
$729,000 in capital expenditures in fiscal 2004. The Company currently intends
to continue its nationwide expansion into the delivery of bundled digital
services using partnerships and joint marketing agreements funded through cash
in amounts equal to or exceeding expenditures in fiscal 2004 as well as through
equity securities.
The Company expects that certain of its liabilities listed on the balance
sheet under the headings Accounts Payable, Accrued Liabilities and Notes Payable
will be retired by issuing stock versus cash during the next 12 months. The
Company has historically used stock for retirement of certain liabilities on a
negotiated basis. The Company issued stock for retirement of certain liabilities
aggregating $3,586,000, $13,878,000 and $13,341,000 for fiscal years 2002, 2003
and 2004, respectively. Eagle Broadband expects to continue its practice of
retiring certain liabilities as may be negotiated through a combination of cash
and the issuance of shares of Eagle common stock. The Company cannot quantify
the amount of common stock expected to be issued to retire such debts at this
time and as such will report these results on a quarterly basis. In fiscal 2004,
the Company completed $5,936,000 in net financing activities. The Company's
management believes it has sufficient capital to fund operations for the next
twelve months based on: (i) the Company's reduced capital expenditure
requirements for fiscal 2005, and (ii) the Company's current cash, cash
equivalents and securities held for resale, including recent net financing
proceeds and sale of marketable securities received during fiscal 2005.
Historically, we have financed operations through the sale of debt and
equity securities. We do not have any significant credit facilities available
with financial institutions or other third parties and historically, we have
relied upon best efforts third-party funding from individual accredited
investors. Though we have been successful at raising additional capital on a
best efforts basis in the past, we can provide no assurance that we will be
successful in any future best efforts financing efforts. If we are unable to
either obtain financing from external sources or generate internal liquidity
from operations in the future, we may need to curtail operations or sell assets.
Contractual Obligations
Payments Due by Period
----------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
- ---------------------------- --------------- ---------------- ----------------- ---------------- -----------------
Long-Term Debt Obligations $ 5,920 $ 5,920 $ - $ - $ -
Operating Lease Obligations 1,475 300 931 244
--------------- ---------------- ----------------- ---------------- -----------------
Total $ 7,395 $ 6,220 $ 931 $ 244 $ -
=============== ================ ================= ================ =================
The Company's contractual obligations consist of long-term debt as set
forth in Note 6 (Notes Payable) to the Company's financial statements and
certain off-balance-sheet obligations for office space operating leases
requiring future minimal commitments under non-cancelable leases. See Item 2 -
Management's Discussion and Analysis under non-cancelable leases as described in
Note 17 to the Company's financial statements under the heading Commitments and
Contingent Liabilities.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following policies as critical to its
business and the understanding of its results of operations. The Company
believes it is improbable that materially different amounts would be reported
relating to the accounting policies described below if other acceptable
approaches were adopted. However, the application of these accounting policies,
as described below, involve the exercise of judgment and use of assumptions as
to future uncertainties; therefore, actual results could differ from estimates
generated from their use.
Impairment of Long-Lived Assets and Goodwill
Background
Goodwill and other intangibles of $35,238,000 net of prior impairments and
amortization were recorded under the purchase method for the purchases of
ClearWorks.net, Inc.; Atlantic Pacific, Inc.; DSS Security, Inc.; Contact
Wireless, Inc.; and Comtel, Inc. The majority of the intangibles were from the
ClearWorks acquisition. ClearWorks was in the business of selling
telecommunications services to residential neighborhoods.
Impairment Assessment
Our long-lived assets predominantly include goodwill. Statement of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets" ("SFAS 142") requires that goodwill and intangible assets be
tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis and between annual tests in
certain circumstances. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assigning assets and
17
liabilities to reporting units, assigning goodwill and intangible assets to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.
Goodwill is primarily the Company rights to deliver bundled digital
services such as Internet, telephone, cable television and security monitoring
services to residential and business users. The Company obtained an independent
appraisal as of August 31, 2004, to assess the fair value of the intangible
assets. There were a number of significant and complex assumptions used in the
calculation of the fair value of the intangible assets. If any of these
assumptions prove to be incorrect, the Company could be required to record a
material impairment to its intangible assets. The assumptions included
significant market penetration in its current markets under contract and
significant market penetration in markets where they are currently negotiating
contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing basis. An
impairment loss would be deemed necessary when the estimated non-discounted
future cash flows are less than the carrying net amount of the asset. If an
asset were deemed to be impaired, the asset's recorded value would be reduced to
fair market value. In determining the amount of the charge to be recorded, the
following methods would be utilized to determine fair market value (i) quoted
market prices in active markets, (ii) estimate based on prices of similar assets
and (iii) estimate based on valuation techniques. The Company tested the fair
value of its goodwill and intangibles as of August 31, 2004, and determined that
these net assets totaling $35,238,000 were not impaired.
Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under its principal subsidiaries and operating business units
including; Eagle Wireless International, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Atlantic Pacific
Communications, Inc.; Contact Wireless, Inc.; DSS Security, Inc.; Link Two
Communications, Inc.; and United Computing Group, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of adopting EITF
00-21 did not have a material effect to Eagle's results of operations. Eagle's
contracts that contain multiple elements as of August 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 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 for between one and three months of services.
Eagle had deferred revenues of $96,000 and $230,000 as of August 31, 2004, and
August 31, 2003, respectively.
Eagle Wireless International, Inc.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial and
personal communication systems, radio and telephone systems. Revenues from these
products are recognized when the product is shipped. Eagle's Wireless
International Product revenues are reported under the category "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 IP 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 "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.
18
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 "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
"Broadband Services" on Eagle's Consolidated Statements of Operations included
as page F-4 of this report and also under the category "EBS/DSS" within Note 22
- - Industry Segments.
Eagle Residential Structured Wiring - dba ClearWorks Home Systems, Inc.
ClearWorks Home Systems, Inc., sells and installs structured wiring, audio
and visual components to homes. This subsidiary recognizes revenue and the
related costs at the time the services are performed. Revenue is derived from
the billing of structured wiring to homes and the sale of audio and visual
components to the homebuyers. Eagle's Residential Structured Wiring revenues are
reported under the category "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 "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 "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 "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 security monitoring services to residential
and commercial customers, purchases and resells and bundles and sells contracts
from its own portfolio to independent third-party companies. Security monitoring
customers are billed three months in advance of service usage. The revenues are
deferred at the time of billing and ratably recognized over the prepayment
period as service is provided. Installation fees are recognized upon completion
and acceptance. Revenues from the sale of security monitoring contracts, both
purchased and owned, are recognized upon contract execution except for reserves,
hold backs or retentions, which are deferred until the contract provisions are
fulfilled. Eagle's Security Services revenues are reported under the category
"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
"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.
19
Receivables
For the fiscal year ended August 31, 2004, Eagle accounts receivable
decreased to $1,470,000 from $1,704,000 at August 31, 2003. The majority of this
decrease was due to the increase on an allowance for doubtful accounts of
$2,000,000 from the sale of IP set-top boxes and ancillary equipment to a major
customer in the third quarter of fiscal 2004, totaling $3,806,806, as discussed
earlier herein.
The Company's accounts receivable aging as measured by days sales
outstanding (DSO) totaled 29 days at August 31, 2004, and 75 days at August 31,
2003, on an adjusted basis after recording the write-off's and reserves. The
primary decrease in DSO from 75 days at August 31, 2003, to 29 days at August
31, 2004, was attributable to an allowance on a major customer that the Company
determined could be potentially impaired based on several factors: (i) current
economic condition of the customer, (ii) management believes that the ultimate
collectibility of this customer receivable cannot be determined at this time
and, accordingly, has increased its allowance for doubtful accounts to reflect
the collectibility issue of slow paying.
The Company's allowance for doubtful accounts totaled $2,396,000 and
$412,000 for the years ended August 31, 2004 and 2003, respectively. These
allowance for doubtful accounts amounts represented 61% and 20% of the gross
accounts receivable balances for the years ended August 31, 2004 and 2003,
respectively; while they likewise represented7% and 39% of the Company's greater
than 90-day accounts for these same respective time periods.
The Company reviews its accounts receivable balances by customer for
accounts greater than 90 days old and makes a determination regarding the
collectibility of the accounts based on specific circumstances and the payment
history that exists with such customers. The Company also takes into account its
prior experience, the customer's ability to pay and an assessment of the current
economic conditions in determining the net realizable value of its receivables.
The Company also reviews its allowances for doubtful accounts in aggregate for
adequacy following this assessment. Accordingly, the Company believes that its
allowances for doubtful accounts fairly represent the underlying collectibility
risks associated with its accounts receivable.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectibility of accounts
receivable. Accounts receivables deemed uncollectible are charged against the
allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At August 31, 2004, Eagle's
inventory totaled $403,000 as compared to $3,199,000 at August 31, 2003. The
majority of this decrease was due to an impairment of slow moving, obsolete
inventory. The significant impairment of $1,300,000 consisted of less
marketable, obsolete set-top boxes which were replaced with a new design set-top
box in the fiscal 2004. Management has incorporated "just in time" inventory
practices to avoid future inventory obsolesce. Eagle is outsourcing most, if not
all, production based on contract orders from customers.
Recent Accounting Pronouncements
In March 2004, the FASB issued a proposed Statement, "Share-Based Payment,
an amendment of FASB Statements Nos. 123 and 95," that addresses the accounting
for share-based payment transactions in which a Company receives employee
services in exchange for either equity instruments of the Company or liabilities
that are based on the fair value of the Company's equity instruments or that may
be settled by the issuance of such equity instruments. The proposed statement
would eliminate the ability to account for share-based compensation transactions
using the intrinsic method that the Company currently uses and generally would
require that such transactions be accounted for using a fair-value-based method
and recognized as expense in the consolidated statement of operations. The
effective date of the proposed standard is for periods beginning after June 15,
2005. It is expected that the final standard will be issued before December 31,
2004 and should it be finalized in its current form, it will have a significant
impact on the consolidated statement of operations as the Company will be
required to expense the fair value of stock option grants and stock purchases
under employee stock purchase plan.
In April 2004, the Emerging Issues Task Force ("EITF") issued Statement No.
03-06 "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the Company when, and if, it
declares dividends on its common stock. The issue also provides further guidance
in applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 became effective during the quarter ended June 30, 2004,
the adoption of which did not have an impact on the calculation of earnings per
share of the Company.
In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08,
"The Effect of Contingently Convertible Debt on Diluted Earnings per Share"
("EITF 04-08"). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met. If
adopted, the consensus reached by the Task Force in this Issue will be effective
for reporting periods ending after December 15, 2004. Prior period earnings per
20
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding. Currently, there would be no effect of this proposed statement on
our financial position and results of operations
In September 2004, the EITF delayed the effective date for the recognition
and measurement guidance previously discussed under EITF Issue No. 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-01") as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. Currently, there would be no
effect of this proposed statement on its financial position and results of
operations.
Item 8. Consolidated Financial Statements
The financial statements have been audited by Lopez, Blevins, Bork &
Associates, LLP, for the fiscal years ended August 31, 2004 and 2003, and the
related statements of operations, stockholders' equity, and cash flows for the
years then ended, and the financial statements for the fiscal year ended August
31, 2002, and the related statements of operations, stockholders' equity, and
cash flows for the year then ended have been audited by McManus & Co., P.C.,
independent certified public accountants, to the extent and for the periods set
forth in their report appearing herein and are included in reliance upon such
reports given upon the authority of said firms as experts in auditing and
accounting.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On August 23, 2004, the Board of Directors and the Audit Committee of the
Board of Directors of Eagle Broadband (the "Company") dismissed its independent
auditors, Malone & Bailey, PLLC, and engaged Lopez, Blevins, Bork & Associates,
LLP, as the Company's registered public accounting firm for the fiscal year
ending August 31, 2004. The Company filed a Current Report, dated August 30,
2004, on Form 8-K regarding this change in accountants.
There were no changes in or disagreements with accountants on accounting or
financial disclosure during fiscal year 2004.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Principal Accounting Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-15(be) or Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
our fourth fiscal quarter of 2003. Based on such evaluation, such officers have
concluded that the Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act. Our Chief Accounting Officer,
instead of our Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of August 31, 2004, and certifies to such
effect pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002. Our
prior Chief Financial Officer resigned in November 2004 and our current Chief
Financial Officer was hired in November 2004. From August 31, 2004 to the date
hereof, our Principal Accounting Officer has performed the function of our Chief
Financial Officer.
21
Changes in Internal Controls
There has been no change in the Company's internal control over financial
reporting identified in connection with our evaluation as of the end our fourth
fiscal quarter ended August 31, 2004, that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference
from the information provided in the Company's Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
from the information provided in the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information, as of August 31, 2004, with
respect to the Company's compensation plans under which common stock is
authorized for issuance
Number of Securities Remaining
Number of Securities to be Weighted Average Available for Future Issuance
Issued upon Exercise of Exercise Price of Under Equity Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Securities Reflected in
Warrants and Rights Warrants and Rights Column A)
Plan Category (A) (B) (C)
- ------------------------------- ------------------------------- ------------------------ -------------------------------------
Equity Compensation Plans Approved
by Security Holders 346,002 $1.27 9,653,998
Equity Compensation Plans Not
Approved by Security(1) 6,051,798 $1.47 -
- ------------------------------- ------------------------------- ------------------------ -------------------------------------
Total 6,397,800 9,653,998
(1) A description of the equity compensation not approved by the security
holders is set forth in Note 13 to the financial statements contained in this
Form 10-K.
22
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, 2004:
A report on Form 8-K, announcing information under Items 5 and 7 of the
report, was filed on June 17, 2004, with the Securities and Exchange
Commission.
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on July 21, 2004, with the Securities and Exchange Commission.
A report on Form 8-K, announcing information under Items 4.01 and 9.01 of
the report, was filed on August 24, 2004, with the Securities and Exchange
Commission.
A report on Form 8-K/A, announcing information under Items 4.01 and 9.01 of
the report, was filed on August 30, 2004, 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)
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)
23
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 Principal Accounting 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 Principal Accounting 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 November 30, 2004
- -------------------
David A. Weisman Chief Executive Officer
(Principal Executive Officer)
/S/Tom Matura Corporate Controller November 30, 2004
- -------------
Tom Matura (Principal Financial and Accounting Officer)
/S/A. L. Clifford Director November 30, 2004
- -----------------
A. L. Clifford
/S/H. Dean Cubley Director November 30, 2004
- -----------------
H. Dean Cubley
/S/Christopher W. Futer Director November 30, 2004
- -----------------------
Christopher W. Futer
/S/Glenn A. Goerke Director November 30, 2004
- ------------------
Glenn A. Goerke
24
/S/Lorne E. Persons Director November 30, 2004
- -------------------
Lorne E. Persons
/S/Jim Reinhartsen Director November 30, 2004
- ------------------
Jim Reinhartsen
/S/ James R. Yarbrough Director November 30, 2004
- ----------------------
James R. Yarbrough
25
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, 2004 and 2003, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Broadband,
Inc. as of August 31, 2004 and 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.
/S/ Lopez, Blevins, Bork and Associates, LLP
- --------------------------------------------
Lopez, Blevins, Bork and Associates, LLP
Houston, Texas
November 15, 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 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 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 year then ended are in conformity with generally accepted accounting
principles.
/S/ McManus & Co., P.C.
McManus & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
ROCKAWAY, NEW JERSEY
December 13, 2002
F-2
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
ASSETS
August 31,
2004 2003
---------- ----------
Current Assets
Cash and Cash Equivalents $2,051 $824
Securities Available for Sale 551 1,714
Accounts Receivable, net 1,470 1,704
Inventories 403 3,199
Net investment in direct financing leases 291 -
Prepaid Expenses 327 668
---------- ----------
Total Current Assets 5,093 8,109
---------- ----------
Property and Equipment
Operating Equipment 36,415 36,422
Less: Accumulated Depreciation (7,837) (5,689)
---------- ----------
Total Property and Equipment 28,578 30,733
---------- ----------
Other Assets:
Deferred Costs --- 334
Net investment in direct financing leases 623 ---
Goodwill, net 4,095 4,095
Contract rights, net 21,678 23,590
Customer relationships, net 5,431 5,912
Other Intangible assets, net 4,034 4,366
Other Assets 679 227
---------- ----------
Total Other Assets 36,540 38,524
---------- ----------
Total Assets $70,211 $ $77,366
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ $4,445 $ $5,461
Accrued Expenses 9,647 7,560
Notes Payable 5,920 5,779
Deferred revenue 96 230
---------- ----------
Total Current Liabilities 20,108 19,030
---------- ----------
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares --- ---
Common Stock - $.001 par value
Authorized 350,000,000 shares
Issued and Outstanding at August 31, 2004
and 2003, 205,509,000 and 147,447,000,
respectively 206 147
Additional Paid in Capital 208,051 177,017
Accumulated Deficit (157,106) (118,101)
Accumulated Comprehensive Income (Loss) (1,048) (727)
---------- ----------
Total Shareholders' Equity 50,103 58,336
---------- ----------
Total Liabilities and Shareholders' Equity $70,211 $77,366
========== ==========
See accompanying notes to consolidated financial statements.
F-3
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
For the years ended August 31,
--------------------------------------
2004 2003 2002
------------ --------- ----------
Net Sales:
Structured wiring $678 $3,692 $8,036
Broadband services 5,525 2,809 2,657
Products 6,190 3,342 16,108
Other 97 1,750 3,016
------------ --------- ----------
Total Sales 12,490 11,593 29,817
------------ --------- ----------
Costs of Goods Sold:
Direct Labor and Related Costs 1,244 2,195 3,160
Products and Integration Service 5,372 2,773 15,250
Impairment Slow Moving &
Obsolete Inventory 1,300 2,627 -
Structured Wiring Labor and
Materials 448 1,774 2,121
Broadband Services Costs 2,856 903 763
Depreciation and Amortization 1,141 456 377
Other Manufacturing Costs 26 56 1,033
------------ --------- ----------
Total Costs of Goods Sold 12,387 10,784 22,704
------------ --------- ----------
Gross Profit 103 809 7,113
------------ --------- ----------
Operating Expenses:
Selling, General and
Administrative:
Salaries and Related Costs 13,146 6,102 7,795
Advertising and Promotion 29 247 963
Depreciation and Amortization 3,956 4,776 6,020
Other Support Costs 13,367 12,737 3,974
Research and Development 557 411 404
Impairment, Write-Downs &
Restructuring Costs - 7,611 64,665
------------ --------- ----------
Total Operating Expenses 31,055 31,884 83,821
------------ --------- ----------
Loss from Operations (30,952) (31,075) (76,708)
-------------------------------------------------
Other Income/(Expenses):
Interest Income, 32 68 360
Interest Expense (8,325) (5,494) (625)
Gain (Loss) on Sale of Assets 240 - -
------------ --------- ----------
Total Other Income (Expense) (8,053) (5,426) (265)
------------ --------- ----------
Net Loss (39,005) (36,501) (76,973)
-------------------------------------------------
Other Comprehensive Loss:
Unrealized Holding Loss (321) (71) (279)
------------ --------- ----------
Total Other Comprehensive Loss $(321) (71) (279)
============ ========= ==========
Comprehensive Losses $(39,326) $(36,572) $(77,252)
============ ========= ==========
Net Loss per Common Share:
Basic (0.21) (0.38) (1.20)
Diluted (0.21) (0.38) (1.20)
Comprehensive Loss (0.21) (0.38) (1.20)
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)
- --------------------------------------------------------------------------------
Additional Accumulated Total
Common Stock Preferred Paid in Retained Comprehensive Shareholders'
-------------- --------- ---------- --------- ------------- -------------
Shares Value Stock Capital Earnings Income Equity
------- ----- --------- ---------- --------- ------------- -------------
Total Shareholders' Equity 60,264 60 --- 153,426 (4,627) (377) 148,482
As of August 31, 2001
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 Acquisitions 2,002 2 - 1,079 - - 1,081
For Licenses and Investments --- --- - 100 - - 100
Treasury Stock (1,576) (2) - (922) - - (924)
Unrealized Holding Loss - - - --- - (279) (279)
--------------------------------------------------------------------------
Total Shareholders' Equity 73,051 73 158,731 (81,600) (656) 76,548
--------------------------------------------------------------------------
As of August 31, 2002
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 Employee Stock Option Plan 1,647 2 - 180 - - 182
Syndication Costs - - - (368) - - (368)
Treasury Stock and Cost (442) (1) - (198) - - (199)
Unrealized Holding Loss - - - --- (71) (71)
--------------------------------------------------------------------------
Total Shareholders' Equity 147,447 147 177,017 (118,101) (727) 58,336
--------------------------------------------------------------------------
As of August 31, 2003
Net Loss - - - - (39,005) - (39,005)
New Stock Issued to Shareholders: -
For Services and Compensation 11,016 12 - 6,335 - - 6,347
For Retirement of Debt and Liabilities 47,046 47 - 13,294 - - 13,341
Stock-Based Compensation - - - 4,493 - - 4,493
Beneficial Conversion Features on
Convertible Debentures - - - 6,912 - - 6,912
Unrealized Holding Loss - - - - (321) (321)
--------------------------------------------------------------------------
Total Shareholders' Equity 205,509 $206 $- $208,051 $(157,106) $(1,048) $50,103
==========================================================================
As of August 31, 2004
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)
- --------------------------------------------------------------------------------
For the years ended August 31,
-----------------------------------
2004 2003 2002
---------- --------- ----------
Cash Flows from Operating Activities
Net Loss $(39,005) $(36,501) $(76,973)
---------- --------- ----------
Adjustments to Reconcile Net Loss to Net
Cash
Used by Operating Activities:
Impairment, write-downs & restructuring
costs 1,300 10,238 64,665
Gain (Loss) on sale of Assets 611 - -
Interest for beneficial conversion value 6,912 91
Depreciation and Amortization 5,097 5,232 6,397
Stock Issued for Interest Expense 108 2,477 100
Stock Issued for Services Rendered 10,841 1,820 882
Provision for bad debt 2,643 2,177 (363)
(Increase)/Decrease in Accounts Receivable (1,750) 124 2,479
(Increase)/Decrease in Inventories 1,496 (910) 4,578
(Increase)/Decrease in Prepaid Expenses 341 (311) 386
Increase/(Decrease) in Accounts Payable (1,016) 921 232
Increase/(Decrease) in Accrued Expenses 8,929 8,557 (3,180)
---------- --------- ----------
Total Adjustment 35,512 30,416 76,176
---------- --------- ----------
Net Cash Used by Operating Activities (3,493) (6,085) (797)
---------- --------- ----------
Cash Flows from Investing Activities
(Purchase)/Disposal of Property and
Equipment (729) (2,121) (12,886)
Increase/(Decrease) Deferred Costs 334 - -
Increase/(Decrease) in Intangible Costs (40) - -
Increase/(Decrease) in Marketable
Securities 842 434 87
(Increase)/Decrease in Other Assets (452) 411 -
(Purchase)/Disposal of Contact Wireless &
DSS Security, - - (869)
Net of Cash Acquired
Gross Equipment Purchase for Direct
Financing Leases (1,212) - -
Principal Collections on Direct Financing
Leases 41 - -
---------- --------- ----------
Net Cash Used by Investing Activities (1,216) (1,276) (13,668)
---------- --------- ----------
Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable &
Long-Term Debt 5,936 7,297 387
Increase/(Decrease) in Capital Leases - - 3
Increase/(Decrease) in Line of Credit - - (1,846)
Increase/(Decrease) in Deferred Taxes - - 32
Proceeds from Sale of Common Stock, Net - 182 -
Syndication costs - (368) -
Treasury Stock - (199) (918)
---------- --------- ----------
Net Cash Provided (Used) by Financing
Activities 5,936 6,912 (2,342)
---------- --------- ----------
Net Increase/(Decrease) in Cash 1,227 (449) (16,807)
Cash at the Beginning of the Year 824 1,273 18,080
---------- --------- ----------
Cash at the End of the Year $2,051 $824 $1,273
========== ========= ==========
Supplemental Disclosure of Cash Flow
Information:
Net Cash Paid During the Year for:
Interest $1,305 $3,288 $165
See accompanying notes to consolidated financial statements.
F-6
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 1 - Basis of Presentation and Significant Accounting Policies:
Eagle Broadband, Inc. (the "Company" or "Eagle"), incorporated as a Texas
corporation on May 24, 2993, and commenced business in April of 1996. The
Company is a leading provider of broadband, Internet protocol (IP) and
satellite communications technology and services. The Company is focused on
three core businesses: broadband bundled services, IP set-top boxes and
satellite communications technology. The Company's product offerings
include an exclusive "four-play" suite of IP-based broadband bundled
services with high-speed Internet, cable TV, telephone and security
monitoring, and a turnkey suite of financing, network design, operational
and support services that enables municipalities, utilities, real estate
developers, hotels, multi-tenant owners and service providers to deliver
exceptional value, state-of-the-art entertainment and communications
choices and single-bill convenience to their residential and business
customers. Eagle offers the HDTV-ready Media Pro IP set-top box product
line that enables hotel operators and service providers to maximize
revenues by offering state-of-the-art in-room entertainment and video
services. The Company also develops and markets the SatMAX satellite
communications system that allows government, military, homeland security,
aviation, maritime and enterprise customers to deliver reliable,
non-line-of-sight, voice and data communications services via the Iridium
satellite network from any location on Earth.
A) Consolidation
At August 31, 2004, 2003 and 2002, 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 considers all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents. The Company
maintains cash deposits in banks which from time to time exceed the amount
of deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any potential
credit loss is minimal.
The Company has $2,051,000 and $824,000 of cash and cash equivalents
invested in interest bearing accounts at August 31, 2004, and August 31,
2003, respectively.
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.
F-7
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the following
items, in thousands:
August 31,
2004 2003
---------- ----------
Raw Materials $ 294 $ 1,826
Work in Process 108 1,237
Finished Goods 1 136
---------- ----------
$ 403 $ 3,199
========== ==========
E) Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the Eagle Broadband, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle Wireless
International, Inc., Atlantic Pacific Communications, Inc.; Link Two
Communications, Inc.; United Computing Group, Inc.; Contact Wireless, Inc.;
and DSS Security, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of adopting
EITF 00-21 did not have a material effect to Eagle's results of operations.
Eagle's contracts that contain multiple elements as of August 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 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 $353,000 and
$230,000 as of August 31, 2004 and 2003, respectively.
Eagle Wireless International, Inc.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial and
personal communication systems, radio and telephone systems. Revenues from
these products are recognized when the product is shipped. Eagle's Wireless
International Product revenues are reported under the category "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 IP 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 "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.
F-8
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
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 "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 "Broadband Services" on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category
"EBS/DSS" within Note 22 - Industry Segments.
Eagle Residential Structured Wiring - dba ClearWorks Home Systems, Inc.
ClearWorks Home Systems, Inc., sells and installs structured wiring, audio
and visual components to homes. This subsidiary recognizes revenue and the
related costs at the time the services are performed. Revenue is derived
from the billing of structured wiring to homes and the sale of audio and
visual components to the homebuyers. Eagle's Residential Structured Wiring
revenues are reported under the category "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 "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 "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 "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 "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
F-9
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
recognition policy is to record revenue on completion. Eagle's Technology
Services product revenues are reported under the category "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
Research and development expenditures are generally charged to operations
as incurred. For the years ended August 31, 2004, 2003 and 2002, the
Company performed research and development activities for internal projects
related to its SatMAX global non-line-of-sight communications system, IP
set-top boxes as well as its multi-media entertainment centers. Research
and development costs of $557,000, $411,000, and $404,000, were expensed
for the years ended August 31, 2004, 2003, and 2002, respectively.
No research and development services were performed for outside parties for
the year ended August 31, 2004, 2003 and 2002.
G) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires a
change from the deferral method to assets and liability method of
accounting for income taxes. Timing differences exist between book income
and tax income, which relate primarily to depreciation methods.
H) Net Earnings Per Common Share
Net earnings per common share are shown as both basic and diluted. Basic
earnings per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average number of
shares of common stock outstanding. Diluted earnings per common share are
computed by dividing net income less any preferred stock dividends (if
applicable) by the weighted average number of shares of common stock
outstanding plus any dilutive common stock equivalents. The components used
for the computations are shown as follows, in thousands:
2004 2003 2002
---------- ----------- ----------
Weighted Average Number of Common
Shares Outstanding Including:
Basic Common Stock Equivalents 185,046 95,465 64,004
Fully Diluted Common Stock Equivalents 185,046 95,465 64,158
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:
F-10
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
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 acquired 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.
During the fiscal year ended August 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 acquisition of ClearWorks.net, Inc., and
certain other classifications of intangible assets had not been
appropriately classified. Eagle also determined that goodwill was impaired
at August 31, 2002, and recorded an impairment charge of $37,565,000,
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 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.
F-11
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Goodwill and other intangibles of $35,238,000 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.
Eagle assessed the fair value of the intangible assets as of August 31,
2004, and concluded that the goodwill and other intangible assets
valuations remain 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
Advertising costs are expensed when incurred. For the year ended August 31,
2004, 2003, and 2002, the Company expensed $29,000, $247,000 and $963,000,
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.
The Company has Securities Available for Sale that include shares of common
stock and bonds. These investments have a fair market value of $551,000 and
of $1,714,006 and are included in the Balance Sheet category "Securities
Available for Sale" as of August 31, 2004 and 2003. (See Note 10.)
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
F-12
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
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, 2004, 2003, and 2002 other
comprehensive loss was ($321, 000), ($71,000) and ($279,000), respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
years ended August 31, 2004, 2003 and 2002, to facilitate comparisons.
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support costs for the twelve months ended August 31, 2004, 2003, and
2002 are as follows, in thousands: -
2004 2003 2002
-------------- -------------- ------------
Advertising/Conventions $ - $ - $ 8
Auto Related 22 19 111
Bad Debt 2,643 2,177 -
Delivery/Postage 47 95 162
Fees 288 418 -
Insurance and Office 425 437 191
Professional and Contract Labor 6,818 6,129 514
Rent 507 1,183 1,052
Repairs and Maintenance 43 47 63
Travel 237 377 459
Taxes 1,474 170 53
Telephone and Utilities 794 1,394 1,340
Other 69 291 21
-------------- -------------- ------------
Total $ 13,367 $ 12,737 $ 3,974
============== ============== ============
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 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
F-13
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
reclassify prior period items that do not meet the extraordinary item
classification criteria in APB 30. The Company adopted SFAS 145 and related
rules as of August 31, 2002. The adoption of SFAS 145 had no effect on the
Company's financial position or results of operations.
In March 2004, the FASB issued a proposed Statement, "Share-Based Payment,
an amendment of FASB Statements Nos. 123 and 95," that addresses the
accounting for share-based payment transactions in which a Company receives
employee services in exchange for either equity instruments of the Company
or liabilities that are based on the fair value of the Company's equity
instruments or that may be settled by the issuance of such equity
instruments. The proposed statement would eliminate the ability to account
for share-based compensation transactions using the intrinsic method that
the Company currently uses and generally would require that such
transactions be accounted for using a fair-value-based method and
recognized as expense in the consolidated statement of operations. The
effective date of the proposed standard is for periods beginning after June
15, 2005. It is expected that the final standard will be issued before
December 31, 2004 and should it be finalized in its current form, it will
have a significant impact on the consolidated statement of operations as
the Company will be required to expense the fair value of stock option
grants and stock purchases under employee stock purchase plan.
In April 2004, the Emerging Issues Task Force ("EITF") issued Statement No.
03-06 "Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses
a number of questions regarding the computation of earnings per share by
companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings
of the Company when, and if, it declares dividends on its common stock. The
issue also provides further guidance in applying the two-class method of
calculating earnings per share, clarifying what constitutes a participating
security and how to apply the two-class method of computing earnings per
share once it is determined that a security is participating, including how
to allocate undistributed earnings to such a security. EITF 03-06 became
effective during the quarter ended June 30, 2004, the adoption of which did
not have an impact on the calculation of earnings per share of the Company.
In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08,
"The Effect of Contingently Convertible Debt on Diluted Earnings per Share"
("EITF 04-08"). EITF 04-08 reflects the Task Force's tentative conclusion
that contingently convertible debt should be included in diluted earnings
per share computations regardless of whether the market price trigger has
been met. If adopted, the consensus reached by the Task Force in this Issue
will be effective for reporting periods ending after December 15, 2004.
Prior period earnings per share amounts presented for comparative purposes
would be required to be restated to conform to this consensus and the
Company would be required to include the shares issuable upon the
conversion of the Notes in the diluted earnings per share computation for
all periods during which the Notes are outstanding. . Currently, there
would be no effect of this proposed statement on our financial position and
results of operations
In September 2004, the EITF delayed the effective date for the recognition
and measurement guidance previously discussed under EITF Issue No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt
and equity securities, in particular investments within the scope of FASB
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and investments accounted for under the cost method.
Currently, there would be no effect of this proposed statement on its
financial position and results of operations.
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, 2004 and
2003. Eagle provides for the estimated cost of product warranties at the
time it recognizes revenue. Eagle engages in product quality programs and
processes, including actively monitoring and evaluating the quality of its
component suppliers; however, ongoing product failure rates, material usage
and service delivery costs incurred in correcting a product failure, as
well as specific product class failures outside of Eagle's baseline
experience, affect the estimated warranty obligation. If actual product
failure rates, material usage or service delivery costs differ from
estimates, revisions to the estimated warranty liability would be required.
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.
F-14
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 2 - Related Party Transactions:
Sale of Assets:
During the fiscal year ended August 31, 2004, the Company completed a
transaction with an effective date of October 1, 2003, with Eagle RF
International, Inc. (dba ERF), to sell certain assets of its subsidiary
Contact Wireless, Inc. Eagle RF International, Inc., is a private company
engaged in providing products and services to the wireless industry. ERF
has a board member who is also a member of the Company's board of
directors, namely H. Dean Cubley. The assets sold related to the Contract
Wireless paging network business and included a switch center lease and
tower lease, network equipment, network contracts, paging licenses,
accounts receivable, inventory, furniture and fixtures. The Company had
downsized this subsidiary during the course of fiscal 2003 and during the
three months ended February 29, 2004, elected to exit this business
segment. The Company has recorded approximately $329,000 in revenues with a
corresponding segment loss of approximately $387,000 from this business
segment in fiscal 2003 and recorded approximately $80,000 in revenues with
a corresponding loss of $25,000 in the first quarter of fiscal 2004. The
Company had no competing offers with respect to the sale of assets and/or
sale of the business and the Company's board of directors determined that
the offer from ERF represented fair value. The Company terminated its
remaining employees associated with this subsidiary and ERF entered into
new employment arrangements with certain of these employees. Additionally,
ERF assumed certain liabilities and subleased certain property from the
Company in Houston and San Antonio. In conjunction with this transaction,
the Company recorded a loss of $642,000 on the sale of assets and certain
other costs incurred in the exit from this line of business.
Compensation
Eagle renewed a professional service agreement effective April 1, 2004,
with the son of a director. The agreement states that consulting services
provided will include support in the areas of management information
systems, investor relations, and corporate finance and accounting.
Compensation includes monthly salary of $10,000 and quarterly issuance of
stock options to purchase common stock of Eagle Broadband.
In addition, compensation for certain officers and key employees under
incentive clauses of their employment contracts (i) includes a non-cash
expense of $4,493,000 incurred upon the modification of warrants for
4,200,000 common shares and (ii) reflects a guaranteed compensation of the
modified warrants equivalent to $1.75 less the warrant strike price.
NOTE 3 - Accounts Receivable:
Accounts receivable consist of the following, in thousands:
August 31,
---------------------------------
2004 2003
------------ ------------
Accounts Receivable $ 3,866 $ 2,116
Allowance for Doubtful Accounts (2,396) (412)
------------ ------------
Accounts Receivable, Net $ 1,470 $ 1,704
============ ============
F-15
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 4 - Property, Plant & Equipment and Intangible Assets:
Components of property, plant & equipment are as follows, in thousands:
August 31,
--------------------------------
2004 2003
------------ -------------
Automobile $ 143 $ 143
Headend facility and fiber infrastructure 27,146 26,688
Furniture and fixtures 516 565
Leasehold improvements 133 122
Office equipment 7,454 979
Property, manufacturing and equipment $ 1,023 $ 7,925
------------ -------------
Total Property, Plant and Equipment 36,415 36,422
Less accumulated depreciation $ (7,837) $ (5,689)
------------ -------------
Net property, plant and equipment $ 28,578 $ 30,733
============ =============
Eagle expenses repairs and maintenance against income as incurred whereas
major improvements are capitalized. Eagle defines major improvements as
those assets acquired that extend the life of the underlying base asset
while defining other improvements that do not extend the life as repairs
and maintenance. Eagle expensed repairs and maintenance of $43,000, $47,000
and $63,000 for the three years ended August 31, 2004, 2003 and 2002,
respectively, whereas it did not have any capitalized major improvements
for the same time periods.
Eagle's headend facility and fiber infrastructure consist primarily of
digital computing and telecommunications equipment that comprise Eagle's
main headend facility at it headquarters, wireless headend equipment, a
digital headend facility and a fiber backbone in the master planned
communities in which it operates and a fiber ring connecting the various
master planned communities in the Houston area. These fiber and headend
infrastructures are similar to those that would exist in a major
telecommunications or cable television provider that offers digital
services for Internet, cable TV, telephone and security monitoring
services. Eagle determined that a twenty-year straight line depreciation
method is appropriate for its Headend Facility and Fiber Infrastructure
based on industry standards for these asset types.
Components of intangible assets are as follows, in thousands:
August 31,
----------------------------
2004 2003
---------- -----------
Goodwill $ 5,596 $ 5,596
Accumulated Amortization (1,501) (1,501)
---------- -----------
$ 4,095 $ 4,095
---------- -----------
Contract Rights $28,691 $28,691
Accumulated Amortization (7,013) (5,101)
---------- -----------
$21,678 $ 23,590
---------- -----------
Customer Relationships $ 7,189 $ 7,189
Accumulated Amortization (1,758) (1,277)
---------- -----------
$ 5,431 $ 5,912
---------- -----------
Other Intangible Assets $ 6,839 $ 6,839
Accumulated Amortization (2,805) (2,473)
---------- -----------
$ 4,034 $ 4,366
---------- -----------
NOTE 5 - Business Combinations:
Effective January 1, 2002, the Company acquired DSS Security, Inc., and
Contact Wireless in a business combination accounted for as a purchase. DSS
Security, Inc., provides security monitoring to business and residential
customers. Contact Wireless sells and services mobile phones and one- and
two-way messaging devices. The Company paid cash of $450,000 and issued a
short-term note payable of $130,000 for the assets of Contact Wireless for
a total purchase price of $580,000. Additionally, the Company acquired DSS
Security, Inc., for $2,002,147. In this transaction, the Company issued
2,002,147 shares of its common stock with a guaranteed value of $1 per
share. The Company allocated $51,595 to the fair value of the property and
equipment and
F-16
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
$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,
2004 and 2003, in thousands:
Annual Amount
Interest --------------------------
Rate Due Date 2004 2003
---------- -------------- ---------- ----------
Vehicles Various Various $ - $ 4
5% Convertible Debenture (Note 9) Tail Wind 5.0% Demand - 1,200
Convertible Debenture 2.0% Demand - 1,595
Notes Payable: Investor Group 10.0% Oct. 2003 - 900
Notes Payable: Investor Group 8.0% Demand 4,888 -
Notes Payable: Q Series Bonds 12.0% Various 744 1,363
Other Various Various 288 717
---------- ----------
Total Notes Payable $ 5,920 $5,779
---------- ----------
Less Current Portion 5,920 5,779
---------- ----------
Total Long-Term Debt $ - $ -
========== ==========
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. As of August 31, 2004,
there was no equipment under capital lease.
NOTE 8 - Lines of Credit:
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). During the
three month period ended November 30, 2003, the principal balance of the
debenture was repaid, although a lawsuit remains outstanding - see Legal
Proceedings. On July 16, 2002, the Company entered into a $20,000,000 line
of credit with Cornell Capital Partners, LP (CCP). The Company has not
drawn on the line of credit and currently has no plans to do so. One of the
issues in the litigation between CCP and the Company (see Legal Proceedings
below) is whether the Company owes CCP a commitment fee for this line of
credit. Cornell contends that the Company owes $395,000 of stock; the
Company denies the liability. The Company is currently negotiating to
settle this contested liability and the cancellation of the line of credit.
During 2001, the Company acquired ClearWorks.net, Inc., and as a result,
ClearWorks is a wholly owned subsidiary of Eagle. Link Two Communications,
Inc., is a subsidiary of ClearWorks. Link Two entered an agreement with The
Tail Wind Fund Ltd., under which Tail Wind purchased from Link Two a 2%
convertible note in the initial amount of $5,000,000. As a result of the
acquisition, Eagle the parent of Link Two, has guaranteed the Link Two
notes issued to Tail Wind and allowed Tail Wind to convert the above
mentioned debt into Eagle common stock and warrants at various rates.
During fiscal 2002 Eagle made payments of $500,000 in cash and converted
$2,500,000 into common stock. During fiscal 2003, Tail Wind converted
$405,169 into common stock and during fiscal 2004 Eagle made the final
payment of $1,594,831 in cash.
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
F-17
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
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.
Eagle Broadband, Inc. ("Eagle" or "Company") entered into a Securities
Purchase Agreement dated June 2, 2004, (the "Agreement") with four
accredited investors (collectively, the "Investors"), pursuant to which
Eagle agreed to sell, and the Investors agreed to purchase, debentures in
the principle amount of $4,888,400 bearing interest at the rate of 8% per
annum, maturing in June 2007 ("Debentures"), convertible into an aggregate
of 5,360,088 shares of Eagle common stock, par value $.001 per share (the
"Common Stock"), together with five-year warrants to purchase an aggregate
of 1,340,022 shares of Common Stock at an exercise price of $1.265 per
share (the " Warrants") ( the funding of the Debentures and issuance of the
Warrants referred to as the "Financing").
The Debentures are convertible immediately. Subject to certain exceptions,
in the event that on or before the date on which the Debentures are
converted, Eagle issues or sells, or is deemed to have issued or sold in
accordance with the terms of the Debentures, any shares of Common Stock for
consideration per share less than the conversion price of the Debentures as
then in effect (a "Dilutive Issuance"), then the conversion price of the
Debentures will be adjusted to equal the consideration per share of Common
Stock issued or sold or deemed to have been issued and sold in such
Dilutive Issuance.
All of the Warrants are exercisable immediately. Subject to certain
exceptions, in the event that on or before the date on which the Warrants
are exercised, Eagle issues or sells, or is deemed to have issued or sold
in accordance with the terms of the Warrants, a Dilutive Issuance, then the
exercise price of the Warrants will be adjusted to equal the consideration
per share of Common Stock issued or sold or deemed to have been issued and
sold in such Dilutive Issuance.
Eagle also granted the Investors a right to participate in subsequent
private offerings of its equity or equity equivalent securities undertaken
by Eagle for the purpose of raising capital (each, a "Subsequent
Placement"). The Investors' right of participation is subject to certain
additional limitations and expires 6 months from the effective date of the
registration statement filed to register the resale of the shares of Common
Stock underlying the Debentures and Warrants ("Shares").
Eagle has agreed to file a registration statement with the Securities and
Exchange Commission within 40 days after the closing of the Financing in
order to register the resale of the Shares. If Eagle fails to meet this
deadline, if the registration statement is not declared effective prior to
the 90th day after the closing date, if Eagle fails to respond to comments
made by the SEC within 10 days, if the registration statement ceases to
remain effective, or certain other events occur, Eagle has agreed to pay
the Investors 2.0% of the aggregate purchase price for each month of such
event.
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, 2004
and 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.
At August 31, 2004, securities available for sale include 580,000 shares of
Burst.com with a cost basis of $127,832 and a fair market value of
$551,000.
At August 31, 2003, 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.
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.
F-18
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
August 31,
-----------------------------------
2004 2003 2002
(%) (%) (%)
-------- ------- --------
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
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,
-----------------------------------------------
2004 2003 2002
------------ ------------ -------------
Computed Expected Tax Benefit $ (13,262) $ (12,410) $ (26,171)
Increase in Valuation Allowance 13,262 12,410 26,171
-----------------------------------------------
Income Tax Expense $ - $ - $ -
===============================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 2004 and
2003, are presented below (in thousands) and include the balances of the merged
company ClearWorks.net.
August 31,
--------------------------------
2004 2003
------------ ------------
Deferred Tax Assets:
Net Operating Loss Carry Forwards $ 63,606 $ 50,344
Less Valuation Allowance (63,606) (50,344)
------------ ------------
Net Deferred Tax Assets $ - $ -
============ ============
The valuation allowance for deferred tax assets of August 31, 2004, 2003 and
2002, was $63,606,000, $50,344,000 and $25,162,000, respectively. At August 31,
2003 and 2002, the Company has net operating loss carry-forwards of $110,507,000
and $74,006,000, respectively, which are available to offset future federal
taxable income, if any, with expirations from 2020 to 2022.
NOTE 12 - Issuance of Common Stock:
During the fiscal year ended August 31, 2004, the Company issued shares of
common stock. The following table summarizes the shares of common stock
issued, in thousands.
Shares Outstanding August 31, 2003 147,447
Shares Issued for Retirement of Debt and Liabilities 47,046
Shares Issued for Service, Compensation Property and Other Assets 11,016
----------
Shares Outstanding August 31, 2004 205,509
==========
F-19
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 13 - Preferred Stock, Stock Options and Warrants:
The warrants outstanding are segregated into two categories (issued and
outstanding and exercisable):
Warrants Issued & Outstanding Warrants Exercisable
Class of Expiration August 31, August 31,
Warrants Date 2004 2003 2004 2003
- -------- ---------- ----------------------- -----------------------
0.41 Sep-08 3,800,000 3,800,000 1,550,000 1,550,000
0.48 Oct-06 25,000 25,000 25,000 25,000
0.60 Sep-06 400,000 400,000 - -
0.61 Jan-05 25,000 25,000 25,000 25,000
0.69 Oct-04 25,000 25,000 25,000 25,000
0.75 Sep-08 500,000 500,000 - -
0.97 Jul-07 25,000 - - -
1.04 Apr-05 50,000 50,000 50,000 50,000
1.23 Apr-07 25,000 - - -
1.31 Jan-07 25,000 - 25,000 -
7.50 Apr-08 800,000 800,000 800,000 800,000
ESOP Various 346,002 * 406,131 346,002 406,131
----------------------- -----------------------
6,046,002 **6,031,131 2,846,002 2,881,131
======================= =======================
*Denotes warrants which would have an anti-dilutive effect if currently
used to calculate earnings per share for the years ended August 31, 2004
and 2003.
**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, 2004, none of these warrants have been exercised.
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.
Eagle Broadband, Inc. ("Eagle" or "Company") entered into a Securities
Purchase Agreement dated June 2, 2004, (the "Agreement") with four
accredited investors (collectively, the "Investors"), pursuant to which
Eagle agreed to sell, and the Investors agreed to purchase, debentures in
the principle amount of $4,888,400 bearing interest at the rate of 8% per
annum, maturing in June 2007 ("Debentures"), convertible into an aggregate
of 5,360,088 shares of Eagle common stock, par value $.001 per share (the
"Common Stock"), together with five-year warrants to purchase an aggregate
of 1,340,022 shares of Common Stock at an exercise price of $1.265 per
share (the " Warrants") ( the funding of the Debentures and issuance of the
Warrants referred to as the "Financing").
F-20
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 15 - Risk Factors:
For the years ended August 31, 2004, 2003, and 2002, substantially all of
the Company's business activities have remained within the United States
and have been extended to the wireless infrastructure, fiber, cabling,
computer services and broadband industries. Approximately, 83% of the
Company's revenues and receivables have been created solely in the state of
Texas, 0% have been created in the international market, and the
approximate 17% remainder have been created relatively evenly over the rest
of the nation during the year ended August 31, 2004. Approximately, 74% of
the Company's revenues and receivables have been created solely in the
state of Texas, 0% have been created in the international market, and the
approximate 26% remainder have been created relatively evenly over the rest
of the nation during the year ended August 31, 2003. Whereas, approximately
84% of the Company's revenues and receivables have been created solely in
the state of Texas, 0% has been created in the international market, and
the approximate 16% remainder has been created relatively evenly over the
rest of the nation for the year ended August 31, 2002. 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 0% at August 31, 2004, 2003, and 2002,
respectively.
NOTE 17 - Commitments and Contingent Liabilities:
Leases
For the years ending August 31, 2004 and 2003, rental expenses of
approximately $507,000 and $1,183,000, respectively, were incurred.
The Company renewed its primary office lease space in League City, Texas,
for $24,983 per month with South Shore Harbor Development, Ltd. The renewal
lease commenced on June 1, 2004, and expires on May 31, 2009. The Lessor
agreed to grant the Company a one-time option to terminate the lease at 36
months by paying an unamortized leasing commission of $35,000 and a penalty
of 1.5 months rent of $37,000 for a combined total of $72,000.
Period Ending
August 31, Amount
---------------- ----------------
2005 $ 299,801
2006 299,801
2007 306,180
2008 325,316
2009 243,987
----------------
Total $ 1,475,085
================
Legal Proceedings
In July 2003, Eagle became a defendant in Cornell Capital Partners, L.P.
vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), In the United
States District Court for the District of New Jersey. The suit presents claims
for breach of contract, state and federal securities fraud and negligent
misrepresentation. Plaintiff has also alleged that Eagle has defaulted on a
convertible debenture for failing to timely register the shares of common stock
underlying the convertible debenture and is seeking to accelerate the maturity
date of the debenture. In November 2003, the principal balance of the debenture
was repaid, although the suit remains outstanding. Cornell claims damages in
excess of $1,000,000. 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 in the amount of $2,000,000.
The Company has not accrued any expenses against this lawsuit, as the outcome
cannot be predicted at this time.
In December 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-21
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
In 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. 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.
In fiscal 2004, The Tail Wind Fund Ltd. sued Link Two Communications and
Eagle, Civil Action 04-CV-05776, in the United States District Court for the
Southern District of New York. Tail Wind claims breach of contract seeking $25
million. The Company intends to vigorously defend this claim. The Company has
accrued $500,000 in expenses against this lawsuit, although the outcome cannot
be predicted at this time.
In November 2004, Palisades Master Fund L.P. sued Eagle Broadband, Ind.,
and David Weisman, Civil Action 04603626, in New York County, New York Supreme
Court. Palisades seeks an injunction setting a conversion price on certain
convertible debt and warrants at $0.4456 per share of Eagle common stock and
seeks damages in excess of $3.1 million. The Company intends to vigorously
defend this claim. The Company has not accrued any expenses against the lawsuit,
as the outcome cannot be predicted at this time.
Eagle is involved in lawsuits, claims, and proceedings, including those
identified above, which arise in the ordinary course of business. In accordance
with SFAS No. 5, "Accounting for Contingencies," Eagle makes a provision for a
liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Eagle believes it has adequate
provisions for any such matters. Eagle reviews these provisions at least
quarterly and adjusts these provisions to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel, and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, Eagle believes that it has valid defenses with respect to legal matters
pending against it. Nevertheless, it is possible that cash flows or results of
operations could be materially affected in any particular period by the
unfavorable resolution of one or more of these contingencies.
We intend to vigorously defend these and other lawsuits and claims against
us. However, we cannot predict the outcome of these lawsuits, as well as other
legal proceedings and claims with certainty. An adverse resolution of pending
litigation could have a material adverse effect on our business, financial
condition and results of operations. The Company is subject to legal proceedings
and claims that arise in the ordinary course of business. The Company's
management does not expect that the results in any of these legal proceedings
will have adverse affect on the Company's financial condition or results of
operations.
NOTE 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, 2004
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ --------------- ---------
Net Loss $ (39,005) $ - $ -
Basic EPS:
Income Available to Common Stockholders (39,005) 185,046 (0.21)
Effect of Dilutive Securities Warrants - - -
Diluted EPS:
------------ --------------- ---------
Income Available to Common Stockholders (39,005) 185,046 $ (0.21)
and Assumed Conversions ============ =============== =========
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 $ (36,501) $ 95,465 $ (0.38)
and Assumed Conversions ============ =============== =========
For the year ended August 31, 2004, anti-dilutive securities existed. (see Note
13)
F-22
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
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, 2004, a total of 346,002 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:
August 31,
----------------------
2004 2003
--------- --------
U. S. Federal Statutory Tax Rate 0.00% 0.00%
U.S. Valuation Difference 0.91% 0.91%
Effective U. S. Tax Rate 4.00% 4.00%
Foreign Tax Valuation 4.00% 7.00%
Effective Tax Rate 5 years 5 years
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, 2004, 2003 and 2002:
(thousands, except share amounts) 2004 2003 2002
-------- -------- --------
Net loss, as reported $(39,005) $(36,501) $(76,973)
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 (9) (20) (50)
-------- -------- --------
Pro forma net earnings (loss) $(39,014) $(36,521) $(77,023)
======== ======== ========
Net loss per share:
As reported $ (0.21) $ (0.38) $ (1.20)
Pro forna $ (0.21) $ (0.38) $ (1.20)
Diluted net loss per share:
As reported $ (0.21) $ (0.38) $ (1.20)
Pro forna $ (0.21) $ (0.38) $ (1.20)
Option activity was as follows for the years ended August 31, 2004, 2003 and
2002:
2004 2003 2002
-------------------- --------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- ---------- ---------
Outstanding at Beginning of
Year 406,131 $ 1.27 355,170 $ 2.32 355,170 $ 2.32
Granted 20,907 0.60 50,961 0.45 - -
Assumed through Acquisitions - - - -
Exercised 81,036 0.61 - - - -
Forfeited/Cancelled - - - -
--------- -------- ---------- -------- ---------- ---------
Outstanding at End of Year 346,002 $ 1.27 406,131 $ 1.27 355,170 $ 2.32
========= ======== ========== ======== ========== =========
Exercisable at Year-End 346,002 $ 1.27 406,131 $ 1.27 355,170 $ 2.32
========= ======== ========== ======== ========== =========
F-23
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Information about options outstanding was as follows at August 31, 2004:
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- ---------------- ------------ ------------- ------------ ------------- ------------
$0 - $1.00 209,160 4.00 0.55 209,160 0.55
$1.01 - $2.00 111,342 4.00 1.73 111,342 1.73
$2.01 - $7.50 25,500 4.50 6.55 25,500 6.55
------------ -------------
346,002 1.27 346,002 1.27
============ =============
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. Prior to
March 2003, the Company matched the participant's contribution up to 3%
of their salary. Subsequent to March 2003, the plan was amended and the
Company match became elective. For the year ended August 31, 2004 and 2003,
employee contributions were approximately $109,000 and $279,000,
respectively. The Company matched approximately $0 and $67,850,
respectively, for those same periods.
NOTE 21 - Major Customer:
The Company had gross revenues of $12,490,000 and $11,593,000 for the year
ended August 31, 2004 and 2003, respectively.
The fiscal year ended August 31, 2004, included $3,103,937 or 25% of the
fiscal year total sales from Sweetwater Security Capital, LLC, that were
executed with the Company's security-monitoring service subsidiary, DSS
Security, Inc. Also during this period, Eagle Broadband Inc, had sales of
$3,806,806 or 30% sales to a major customer for shipment of IP set-top
boxes and related equipment. There were no other customers individually
that represented greater than 10% of the revenues in the fiscal year ended
August 31, 2003.
NOTE 22 - Industry Segments:
The Company has seven business units have separate management teams and
infrastructures that offer different products and services. The business
units have been aggregated into five reportable segments (as described
below) since the long-term financial performance of these reportable
segments is affected by similar economic conditions.
Eagle Broadband, Inc., (Eagle) is a supplier of broadband and
telecommunications equipment with related software and broadband products.
(Including Eagle Wireless International, Inc.; BroadbandMagic; and Etoolz,
Inc., for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in providing
professional data and voice cable and fiber optic installations through
project management services on a nationwide basis for multiple site-cabling
installations for end users and re-sellers.
ClearWorks Communications, Inc., (EBS) provides solutions to consumers by
implementing technology both within the residential community and home.
This is accomplished through the installation of fiber optic backbones to
deliver voice, video and data solutions directly to consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber optic
and copper based structured wiring solutions and audio and visual equipment
to single-family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and computer
hardware and software reseller. UCG / INT maintain a national market
presence.
Link Two Communications, Inc., (Link II) is in the development and delivery
of one- and two-way messaging systems.
DSS Security, Inc., (DSS) is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt related
expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services provider
and reseller.
F-24
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
For the year ending August 31, 2004
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
------------------------------------------------------------------------------------------
Revenue 678 5,525 445 5,761 81 12,490
Segment Loss (827) (2,483) (58) (27,534) (50) (30,952)
Total Assets 148 28,204 32 127,896 56,956 (142,768) 70,468
Capital Expenditures 0 729 0 0 0 729
Depreciation 176 1,565 62 3,196 98 5,097
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 97,948 83,852 (144,793) 77,366
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) 12,866
Depreciation 208 715 166 4,039 1,269 --- 6,397
Reconciliation of Segment Loss from
Operations to Net Loss August 31, 2004 August 31, 2003 August 31, 2002
- -------------------------------------- --------------- --------------- ---------------
Total segment loss from operations $ (30,952) $ (31,075) $ (76,708)
Total Other Income (Expense) (8,053) (5,426) (265)
--------------- -------------- ------------
Net Loss $ (39,005) $ (36,501) $ (76,973)
=============== ============== ============
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,
2004
Revenues $ 2,397 $ 3,744 $ 5,091 $ 1,258
Net Earnings (Loss) (8,461) (9,398) (4,373) (16,773)
Basic Loss per Share (0.05) (0.05) (0.02) (0.08)
Diluted Loss per Share (0.05) (0.05) (0.02) (0.08)
2003
Revenues 4,618 3,063 1,947 1,965
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)
NOTE 24 - Supplemental Non-Cash Disclosures:
During the fiscal year ended August 31, 2004, the Company issued $3,000,000
of convertible debt which was retired through the issuance of 2,000,000
shares of Series A Preferred Stock which was concurrently converted to
29,500,000 shares of the Company's common stock. Additionally, the Company
received proceeds of $3,912,000 from the sale of convertible bonds.
F-25
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
The beneficial conversion values associated with these financings
aggregating $6,912,000 are calculated at the difference between the
conversion price and the fair value of the common stock into which the debt
is convertible, multiplied by the number of shares into which the debt is
convertible. Since the beneficial conversion value exceeded the $6,912,000
raised on these convertible instruments, the value charged to interest
expense during the quarter was limited to $6,912,000 raised on these
convertible instruments, the value charged to interest expense during the
fiscal year ended August 31, 2004, was limited to $6,912,000. This non-cash
charge comprises $6,912,000 of the $8,325,000 interest expense on the
Company's Statement of Operations as is shown as an adjustment to reconcile
net loss to net cash on the Company's Statement of Cash Flows.
In addition, compensation for certain officers and key employees under
incentive clauses of their employment contracts (i) includes a non-cash
expense of $4,493,000 incurred upon the modification of warrants for
4,200,000 common shares and (ii) reflects a guaranteed compensation of the
modified warrants equivalent to $1.75 less the warrant strike price.
NOTE 25 - 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:
o A revised collection assessment of certain accounts receivables from
these and other down-sized Eagle business segments.
o The decision to no longer pursue new commercial structured cabling
opportunities on a direct basis versus the outsource model; thereby
resulting in the impairment of goodwill from its Atlantic Pacific
operations.
o The decision to no longer pursue Home Systems structured wiring
opportunities on a direct standalone model basis outside its BDS
model; thereby resulting in the impairment of its Home Systems
inventory.
o The decision to withdraw from certain unprofitable BDS projects,
namely its Austin area BDS developments; thereby impairing certain
assets including property, plant and equipment.
o The decision to settle 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.
o The decisions to consolidate its operating segments into its corporate
lease space; thereby resulting in reserves for property lease
settlements.
o The decision to negotiate the settlement of certain sales tax
liabilities that resulted from a sales tax audit of United Computing
Group operations for periods that preceded the acquisition date of
this subsidiary.
Accordingly, Eagle incurred certain asset impairments and operating charges
in the fourth quarter associated with these decisions. These asset
impairment charges, allowances, write-off's and reserves included the
following:
o Accounts receivable write-off's and reserves aggregating $2,177,000;
of which $1,348,000 was attributable to the decisions affecting the
Company's Atlantic Pacific / Home Systems operations, $15,000
attributable to the decisions affecting its United Computing Group
operations and $814,000 attributable to the Company's Eagle, EBS and
Other segment operations.
F-26
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
o Inventory impairment charges of $2,627,000; of which $501,000 was
attributable to the decisions affecting the Company's Atlantic Pacific
/ Home Systems operations and $74,000 attributable to the decisions
affecting its United Computing Group operations. Additionally, the
Company recorded an impairment charge of $1,125,000 for slow-moving
and obsolete inventory in its Eagle operations. This charge primarily
resulted from a major client's decision to upgrade from a 400 MHz chip
to a 500 MHz chip for the Company's IP set top box.
o Litigation settlement costs and reserves of $3,650,000 against certain
of the legal proceedings previously discussed in Item 3. Legal
Proceedings. Additionally, the Company recorded charges aggregating
$2,274,000 to settle threatened and existing legal proceeding
associated with prior financing transactions, including the Kaufman
litigation.
o Lease settlement costs and reserves of $171,000 were attributable to
the decision to consolidate various operating segments into its
corporate lease space; thereby resulting in reserves for early exit of
such leases.
o Impairment, write-down's and restructuring costs aggregating
$7,611,000; of which $1,878,000 was attributable to an impairment of
goodwill in the Company's Atlantic Pacific operations following the
Company's decision to no 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 Costs Balance
8/31/2003 (Additional) Payments 8/31/2004
---------- -------- ----------- ---------
Accrued Exit Expenses:
Severance $- $- $- $-
Terminated Lease Costs 171,000 - - $171,000
--------- -------- ---------- ---------
$171,000 $- $- $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/HIS KBS/DSS UCG Eagle Other Total
- ------------------------- ---------- ---------- ---------- ---------- ---------- ------------
Severance $37,000 $24,000 $ 14,000 $ 21,000 $ - $ 96,000
Terminated Lease Costs 50,000 - 44,000 - 7,700 101,700
---------- ---------- ---------- ---------- ---------- ------------
Total $87,000 $24,000 $58,000 $ 21,000 $ 7,700 $ 197,700
========== ========== ========== ========== ========== ============
F-27
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended August 31, 2004, 2003, and 2002
(amounts in thousands)
Additions
Balance at Charged to Balance at
Beginning of Expenses/ End of
Description Period Revenues Deductions Period
- -------------------------- --------- --------- ---------- ----------
Allowance for Doubtful
Accounts:
2004 $ 412 $ 2,643 $ (659) $ 2,396
2003 242 2,177 (2,007) 412
2002 480 125 (363) 242
F-28