U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 001-154649
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0494995
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)
101 Courageous Drive
League City Texas 77573-3925
(Address of principal executive offices, including zip code)
(281) 538-6000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of July 7, 2005, there were 269,168,427 shares of common stock outstanding.
EAGLE BROADBAND, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended May 31, 2005
Table of Contents
Part 1 - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at May 31, 2005, and August 31, 2004 1
Consolidated Statements of Operations for the Three Months and Nine Months Ended
May 31, 2005 and May 31, 2004 2
Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended
May 31, 2005, and Twelve Months Ended August 31, 2004 3
Consolidated Statements of Cash Flows for the Nine Months Ended
May 31, 2005 and May 31, 2004 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
Part 2 - Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
Signatures 25
Part 1 - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
May 31, August 31,
2005 2004
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $2,876 $2,051
Securities available for sale - 551
Accounts receivable, net 2,823 1,470
Inventories 884 403
Net investment in direct financing leases 485 291
Other assets 1,003 -
Prepaid expenses 346 327
---------- ----------
Total current assets 8,417 5,093
---------- ----------
Property and equipment
Operating equipment 35,992 36,415
Less accumulated depreciation (8,566) (7,837)
---------- ----------
Total property and equipment 27,426 28,578
---------- ----------
Other assets:
Net investment in direct financing leases 849 623
Goodwill, net 4,095 4,095
Contract rights, net 20,243 21,678
Customer relationships, net 5,072 5,431
Other intangible assets, net 3,864 4,034
Other assets 676 679
---------- ----------
Total other assets 34,799 36,540
---------- ----------
Total assets $ $70,642 $ $70,211
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ $6,248 $ $4,445
Accrued expenses 5,770 9,647
Notes payable 614 5,920
Deferred revenue 552 96
----------- ----------
Total current liabilities 13,184 20,108
---------- ----------
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 May 31, 2005,
and August 31, 2004, 260,758,000 and
205,509,000, respectively 261 206
Additional paid in capital 233,076 208,051
Accumulated deficit (175,879) (157,106)
Accumulated comprehensive income (loss) - (1,048)
---------- ----------
Total shareholders' equity 57,458 50,103
---------- ----------
Total liabilities and shareholders' equity $ $70,642 $ $70,211
=========================
See accompanying notes to consolidated financial statements.
1
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the three months ended May 31, For the nine months ended May 31,
--------------------------------- --------------------------------
2005 2004 2005 2004
------------ ------------ --------------- ---------------
Net sales:
Structured wiring $ 369 $ 156 $ 1,002 $ 673
Broadband services 1,797 709 3,537 4,805
Products 774 4,226 2,553 5,673
Other 36 - 96 81
-------- -------- --------- --------
Total sales 2,976 5,091 7,188 11,232
-------- -------- --------- --------
Costs of goods sold:
Direct labor and related costs 516 226 1,300 1,078
Products and integration service 799 3,937 3,002 4,375
Impairment, slow moving and obsolete inventory 300 - 300 -
Structured wiring labor and materials 270 115 776 376
Broadband services costs 207 304 1,465 2,550
Depreciation and amortization 291 285 867 856
Other manufacturing costs - - - 26
-------- -------- ---------- ---------
Total costs of goods sold 2,383 4,867 7,710 9,261
-------- -------- ---------- ---------
Gross profit 593 224 (522) 1,971
-------- -------- ---------- ---------
Operating expenses:
Selling, general and administrative:
Salaries and related costs 1,194 884 4,737 7,686
Advertising and promotion (5) - 45 20
Depreciation and amortization 805 960 2,451 2,945
Other support costs 3,382 2,494 8,989 6,586
Research and development 197 129 572 395
Impairment, write-downs and
restructuring costs - - 1,050 -
-------- -------- ---------- ---------
Total operating expenses 5,573 4,467 17,844 17,632
-------- -------- ---------- ---------
Loss from operations (4,980) (4,243) (18,366) (15,661)
-------- -------- ---------- ----------
Other income/(expenses):
Interest income 17 10 25 21
Interest expense (17) (140) (562) (7,789)
Gain (loss) on sale of assets - - - (642)
Gain (loss) on sale of marketable securities (5) - 144 466
Gain (loss) on extinguishment of debt 1,034 - 1,034
-------- -------- ---------- ---------
Total other income (expense) 1,029 (130) 641 (7,944)
-------- -------- ---------- ---------
Net loss (3,951) (4,373) (17,725) (23,605)
-------- -------- ---------- ---------
Other comprehensive loss:
Unrealized holding gain (loss) - (11) (1,048) 44
-------- -------- ---------- ---------
Total other comprehensive loss $ - $ (11) $ (1,048) $ 44
======== ======= ========== =========
Comprehensive losses $ (3,951) $ (4,384) $ (18,773) $ (23,561)
======== ======== ========== =========
Net loss per common share:
Basic $ (0.02) $ (0.02) $ (0.08) $ (0.13)
Diluted $ (0.02) $ (0.02) $ (0.08) $ (0.13)
Comprehensive loss $ (0.02) $ (0.02) $ (0.08) $ (0.13)
See accompanying notes to consolidated financial statements.
2
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Common Stock Additional Accumulated Total
---------------- Preferred Paid in Retained Comprehensive Shareholders'
Shares Value Stock Capital Earnings Income Equity
-------- ------- --------- ----------- ------------------------ --------------
Total shareholders' equity
as of August 31, 2003 147,447 $147 - $177,017 $(118,101) $(727) $58,336
-------- ------- --------- ----------- ---------- ------------- --------------
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
as of August 31, 2004 205,509 $206 $- $208,051 $(157,106) $(1,048) $50,103
======== ======= ========= =========== ========== ============= ==============
Net loss for the nine months ended
May 31, 2005
Net loss - - - - (18,773) - (18,773)
New stock issued to shareholders: -
For services, compensation and settlement of
accrued liabilities 14,105 14 - 9,632 - - 9,646
For retirement of debt 6,903 7 - 4,039 - - 4,046
Proceeds from sale of common stock, net 30,000 30 - 9,409 - - 9,439
Proceeds from exercise of options 4,125 4 - 1,945 - - 1,949
Beneficial conversion features on
convertible debentures - - - - - - -
Unrealized holding loss - - - - 1,048 1,048
-------- ------- --------- ----------- ---------- ------------- --------------
Total shareholders' equity
as of May 31, 2005 260,642 $261 - $233,076 $(175,879) - $57,458
======== ======= ========= =========== ========== ============= ==============
See accompanying notes to consolidated financial statements.
3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months Ended
-------------------------
May 31, May 31,
2005 2004
------------ ------------
Cash flows from operating activities
Net loss $(18,773) $(23,605)
------------ ------------
Adjustments to reconcile net loss to net cash Used by operating activities:
Impairment and write-downs 1,050 -
(Gain)/loss on sale of assets 904 611
(Gain)/loss on extinguishment of debt (1,034) -
Interest for beneficial conversion value - 6,912
Depreciation and amortization 3,318 3,801
Stock issued for interest expense 546 108
Stock issued for services rendered 1,479 8,947
Provision for bad debt 23 372
(Increase)/decrease in accounts receivable (1,376) (3,246)
(Increase)/decrease in inventories (481) 340
(Increase)/decrease in other assets (1,003)
(Increase)/decrease in prepaid expenses (19) 248
Increase/(decrease) in accounts payable 1,803 3,467
Increase/(decrease) in accrued expenses 4,363 (1,453)
------------ ------------
Total Adjustment 9,573 20,107
------------ ------------
Net cash provided/(used) by operating activities (9,200) (3,498)
------------ ------------
Cash flows from investing activities
(Purchase)/disposal of property and equipment (1,248) (686)
Increase/(decrease) deferred costs - 334
Increase/(decrease) in intangible costs (4) -
Increase/(decrease) in marketable securities 695 151
(Increase)/decrease in other assets 3 (557)
Gross equipment purchase for direct financing leases (803) (538)
Principal collections on direct financing leases 206 -
------------ ------------
Net cash provided/(used) by investing activities (1,151) (1,296)
------------ ------------
Cash flows from financing activities
Increase/(decrease) in notes payable and long-term debt (212) 5,597
Proceeds from sale of common stock, net 9,439 -
Proceeds from exercise of options 1,949 -
------------ ------------
Net cash provided/(used) by financing activities 11,176 5,597
------------ ------------
Net increase/(decrease) in cash 825 803
Cash at the beginning of the period 2,051 824
------------ ------------
Cash at the end of the period $2,876 $1,627
============ ============
Supplemental disclosure of cash flow information: Net cash paid during the year
for:
Interest $33 $312
Income taxes $- $-
Supplemental non-cash investing activities (See Note 18) and changes in
shareholders equity.
See accompanying notes to consolidated financial statements.
4
NOTE 1 - Basis of Presentation and Significant Accounting Policies:
Eagle Broadband, Inc. (the "Company" or "Eagle"), incorporated as a
Texas corporation on May 24, 1993, and commenced business in April of
1996. The Company is a provider of broadband, Internet Protocol (IP)
and communications technology and services that aim to create new
revenue opportunities for broadband providers and enhance
communications for government, military and corporate customers. The
Company leverages years of proven experience delivering advanced
IP-based broadband bundled services to provide service provider
partners with a way to deliver advanced entertainment, communications
and security services to their customers. The Company's product
offerings include IPTVCompleteTM, a faster, lower cost way for
broadband providers to deliver competitive IP video services; the
MediPro line of standard and high definition IP set-top boxes that
enable broadband providers and hotel operators to maximize revenues
by delivering advanced interactive entertainment services; and the
SatMAXTM satellite communications system that provides civilian
government, military, homeland security and corporate customers with
reliable, non-line-of-sight, satellite voice and data communications
from any location on Earth.
The Company's balance sheet as of May 31, 2005, the related
statements of operations for the nine months ended May 31, 2005, and
May 31, 2004, and the statements of cash flows for the nine months
ended May 31, 2005, and May 31, 2004, included in the condensed
financial statements have been prepared by the Company without audit.
In the opinion of management, the accompanying condensed financial
statements include all adjustments (consisting of normal, recurring
adjustments) necessary to fairly summarize the Company's financial
position and results of operations. The results of operations for the
nine months ended May 31, 2005, are not necessarily indicative of the
results of operations for the full year or any other interim period.
The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis and Financial
Statements and notes thereto included in the Company's August 31,
2004, Form 10-K.
NOTE 2 - Related Party Transactions:
In February 2004, 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 on the issuance of promissory
notes upon the modification of outstanding options for 4,200,000
common shares and (ii) reflects a guaranteed compensation of the
modified options equivalent to $1.75 less the option strike price,
which was an additional $4,074,000 accrued in August 2004. The amount
of the accrual varies at each quarter end depending on the stock
market value fluctuation or upon exercise of options subject to
employment agreements. At quarter end May 31, 2005, the Company had
accrued net additional $1,246,000 in compensation. The total amount
of the guarantee liability at May 31, 2005, net of principal payments
was $4,010,000. Subsequent to May 31, 2005 the Company entered into
note exchange agreements whereby the note holders representing
$2,086,000 agreed to accept 7,954,000 of the Company's common stock
to fully satisfy such debt obligation. The remaining principal amount
of $1,924,000 is currently in default and is accruing interest per
the terms of the original agreement. Additional details are in Note
20 under subsequent events.
NOTE 3 - Accounts Receivable:
Accounts receivable consist of the following (in thousands):
May 31, August 31,
2005 2004
---------- -----------
Accounts receivable $5,147 $3,866
Allowance for doubtful accounts (2,324) (2,396)
---------- -----------
Accounts receivable, net $2,823 $1,470
========== ===========
Allowance for doubtful accounts
percentage of accounts receivable 45% 62%
5
NOTE 4 - Property, Plant and Equipment and Intangible Assets:
Components of property, plant and equipment are as follows
(in thousands):
May 31, August 31,
2005 2004
-------- -----------
Automobile $143 $143
Headend facility and fiber infrastructure 27,800 27,146
Furniture and fixtures 520 516
Leasehold improvements 183 133
Office equipment 1,027 1,023
Property, manufacturing and equipment 6,319 7,454
-------- -----------
Total property, plant and equipment $35,992 $36,415
Less accumulated depreciation (8,566) (7,837)
-------- -----------
Net property, plant and equipment $27,426 $28,578
======== ===========
Eagle's headend facilities and fiber infrastructure consist primarily of digital
computing and telecommunications equipment that comprise the Company's main
headend facility at its 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. The Company determined that twenty-year straight-line
depreciation method is appropriate for its headend facilities and fiber
infrastructure based on industry standards for these asset types.
The Company expensed repairs and maintenance of $32,000 and $16,000 for the
three months ended May 31, 2005, and May 31, 2004, respectively. The Company did
not have any capitalized major improvements for these periods. The Company
expensed repairs and maintenance of $55,000 and $36,000 for the nine months
ended May 31, 2005, and May 31, 2004, respectively and did not have any
capitalized major improvements for these periods.
Components of intangible assets are as follows (in thousands):
May 31, August 31,
2005 2004
----------- ----------
Goodwill $5,596 $5,596
Accumulated amortization (1,501) (1,501)
----------- ----------
$4,095 $4,095
=========== ==========
Contract rights $28,691 $28,691
Accumulated amortization (8,448) (7,013)
----------- ----------
$20,243 $21,678
=========== ==========
Customer relationships $7,189 $7,189
Accumulated amortization (2,117) (1,758)
----------- ----------
$5,072 $5,431
=========== ==========
Other intangible assets $6,885 $6,839
Accumulated amortization (3,021) (2,805)
----------- ----------
$3,864 $4,034
=========== ==========
Total intangibles $48,361 $48,315
Total accumulated amortization $(15,087) $(13,077)
----------- ----------
Net of amortization $33,274 $35,238
=========== ==========
6
NOTE 5 - Notes Payable:
The following table lists the Company's note obligations as of May 31,
2005, and August 31, 2004 (in thousands):
Amount
Annual ------------------------
Interest May 31, August 31,
Rate Due Date 2005 2004
--------- ----------- ------------------------
Notes payable:
Investor group 8.0% Demand $ 538 $ 4,888
Q-series bonds 12.0% Various - 744
Other Various Various 76 288
---------- -------------
Total notes payable $ 614 $ 5,920
---------- -------------
Less current portion 614 5,920
---------- -------------
Total long-term debt $ - $ -
========== =============
The Company entered into an agreement in June 2004 with four
accredited investors, pursuant to which the Company issued debentures
in the principal amount of $4,888,400, bearing interest at 8% per
annum and maturing June 2007, convertible into shares of the Company
common stock together with 5-year warrants to purchase an aggregate
of 1,340,022 shares of common stock at an exercise price of $.2035
per share. At May 31, 2005, $538,000 of convertible debt remains
outstanding. On June 23, 2005, one of the investors converted
$200,000 of the principal convertible debt into shares of common
stock at $0.2035 pre share. Additionally, a warrant to purchase
548,246 shares of common stock at $0.2035 per share was exercised on
June 23, 2005.
NOTE 6 - Income Taxes:
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Implementation of SFAS 109 did not have a material cumulative effect
on prior periods nor did it result in a change to the current year's
provision.
The effective tax rate for the Company is reconcilable to statutory
tax rates as follows:
May 31, August 31,
2005 2004
(%) (%)
---------- -----------
U. S. Federal statutory tax rate 34 34
U.S. valuation difference (34) (34)
Effective U. S. tax rate 0 0
Foreign tax valuation 0 0
Effective tax rate 0 0
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% to pretax income from continuing
operations as a result of the following (in thousands):
May 31, August 31,
2005 2004
---------- -----------
Computed expected tax benefit $(6,383) $(13,262)
Increase in valuation allowance 6,383 13,262
--------- -----------
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 May 31, 2005, and August 31, 2004, are presented
below (in thousands) and include the balances of the merged company
ClearWorks.net.
7
May 31, August 31,
2005 2004
----------- -----------
Deferred tax assets:
Net operating loss carry forwards $69,989 $63,606
Less valuation allowance (69,989) (63,606)
---------- -----------
Net deferred tax assets $ - $ -
========== ===========
The valuation allowance for deferred tax assets of May 31, 2005, and
August 31, 2004, was $69,989,000 and $63,606,000, respectively. As
of May 31, 2005, the Company has a net operating loss carry-forward
of $134,624,000, which is available to offset future federal taxable
income, if any, with expirations from 2021 to 2023.
NOTE 7 - Assets Held for Sale
The Company entered into an agreement to repurchase security
contracts for $1,003,316. Per the terms of the agreement, $985,000
of the $1,003,316 was offset against a receivable the Company had
from the seller. These contracts are considered an asset held for
sale and included in other current assets. The company intends to
resell the security contracts in the fourth quarter. If the
contracts are not sold, the purchase price of the contracts will be
amortized over their remaining life.
NOTE 8 - Preferred Stock, Stock Options and Warrants:
The options and warrants outstanding are segregated into two
categories (issued and outstanding, and exercisable):
Options/Warrants
Issued & Outstanding Options/Warrants Exercisable
------------------------- ----------------------------
Class of Expiration May 31, August 31, May 31, August 31,
Warrants Date 2005 2004 2005 2004
- --------- ---------- ----------- ---------- ------------- ------------
0.19 Oct-09 6,700,000 186,111
0.20 Jun-07 1,340,022 1,340,022
0.41 Sep-08 900,000 3,800,000 900,000 1,550,000
0.48 Oct-06 25,000 25,000 25,000 25,000
0.60 Sep-06 400,000 400,000 400,000 -
0.61 Oct-09 500,000 - 146,181 -
0.62 Oct-09 500,000 - 111,112 -
0.73 Oct-07 25,000 - - -
0.75 Sep-08 500,000 500,000 500,000 -
0.78 Various 424,991 - 424,991 -
0.97 Jul-07 25,000 25,000 - -
1.00 May-09 362,500 - 362,500 -
1.04 Apr-05 50,000 50,000 50,000 50,000
1.13 Sep-08 99,999 - 99,999 -
1.23 Apr-07 25,000 25,000 25,000 -
1.31 Jan-07 25,000 25,000 25,000 25,000
7.50 Apr-08 800,000 800,000 800,000 800,000
ESOP Various 516,120 * 346,002 * 346,002 346,002
----------- ---------- ------------- ------------
13,218,632 ** 5,996,002 ** 5,741,918 2,796,002
=========== ========== ============= ============
*Denotes warrants which would have an anti-dilutive effect if currently used to
calculate earnings per share for the three months ended May 31, 2005, and fiscal
year ended August 31, 2004.
** The shares of common stock underlying these warrants were not registered for
resale under the Securities Act of 1933. As of May 31, 2005, none of these
warrants have been exercised.
NOTE 9 - Risk Factors:
For the nine months ended May 31, 2005, 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 33% of the Company's revenues and
receivables were generated in the state of Texas, 1% in the international
market, and the approximate 66% remainder relatively evenly over the rest of the
nation during the nine months ended May 31, 2005; whereas approximately 85% of
the Company's revenues and receivables were generated in the state of Texas, 0%
in the international market, and the approximate 15% remainder relatively evenly
over the rest of the nation during the nine months ended May 31, 2004. Through
the normal course of business, the Company generally does not require its
customers to post any collateral.
8
NOTE 10 - Foreign Operations:
Although the Company is based in the United States, certain of its
products are sold in international markets. Presently, international
sales total approximately 1% and 0% for the nine months ended May 31,
2005, and May 31, 2004, respectively.
NOTE 11 - Commitments and Contingent Liabilities:
Leases
For the nine months ended May 31, 2005, and May 31, 2004, rental
expenses of approximately $345,000 and $464,000, 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 $ 74,950
2006 299,801
2007 306,180
2008 325,316
2009 243,987
---------------
Total $1,250,234
===============
LLV Broadband, LLC, Agreement
In November 2004, the Company entered into a Limited Liability
Company Agreement with Neva Holdings, LLC ("Neva"), whereby both
parties are members of LLV Broadband, LLC ("LLV"), and a Delaware
limited liability company. The purpose of LLV is to construct,
develop, and operate a system for the provision of television,
video-on-demand, audio, broadband data and Internet, telephone, and
security monitoring services to commercial, recreational, and
residential facilities located within the Lake Las Vegas Resort in
Clark County, Nevada, and the surrounding geographic areas.
LLV currently owns cable television assets including, without
limitation, cable real property easements, franchises and
governmental and third-party consents necessary for the operation of
the system (collectively the "Existing System Assets"). Neva's
capital account shall consist of the initial capital contribution of
the "Existing System Assets" and existing system documents having an
aggregate net fair value of $3,000,000 plus amounts funded by Neva or
its affiliates to or for the benefit of LLV between January 1, 2004,
and the effective date of this agreement.
The Company's capital account shall be an initial cash contribution
of $3,000,000 plus amounts funded by the Company or its affiliates
to, or for the benefit of LLV between January 1, 2004, and the
effective date of this agreement.
If at any time LLV's Board determines that additional funds are
needed as set forth in the approved budget and plan for the
development, construction or marketing of the system for any direct
out-of-pocket costs and expenses incurred by LLV in connection with
the formation, financing and operation of LLV or normal day-to-day
business affairs of LLV, then the Company shall be required to make
additional cash contributions in the amount of such deficit not to
exceed $2 million.
The Company shall act as the initial Manager of LLV. The Manager
shall be responsible for the conduct of the business of LLV
including without limitation the design, construction and operation
of the system. The Manager shall have full power, authority and duty
to manage the operations and affairs of LLV and to act for and to
bind LLV to the extent provided by the Act, and shall have the duty
and authority to do all things appropriate to the accomplishment of
the purposes of LLV. The Manager shall be reimbursed for the direct
costs and expenses of its employees and agents who provide services
to LLV.
9
Allocations of net income and distributions are generally made to
each member in proportion to their respective ownership and will
vary from quarter to quarter depending on capital balance from both
parties. As of May 31, 2005, the Company has yet to fund the $3
million initial capitalization contribution. Both parties are
discussing responsibilities going forward and are currently
operating under an oral agreement.
Legal Proceedings
In July 2003, the Company 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 the Company 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. The Company 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. 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.
The Company 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. The Company believes it has
adequate provisions for any such matters. The Company 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,
the Company 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.
10
NOTE 12 - 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 nine months ended May 31, 2005
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------------------------------
Net loss $(18,773) - $ -
Basic EPS:
Income available to common stockholders (18,773) 230,439 (0.08)
Effect of dilutive securities warrants - - -
Diluted EPS:
-------------- ------------------ ------------------
Income available to common stockholders
and assumed conversions $(18,773) 230,439 $(0.08)
============== ================== ==================
For the nine months ended May 31, 2004
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------------------------------
Net loss $(23,605) $ - $ -
Basic EPS:
Income available to common stockholders (23,605) 179,228 (0.13)
Effect of dilutive securities warrants - - -
Diluted EPS:
-------------- ------------------ ------------------
Income available to common stockholders
and assumed conversions $(23,605) $179,228 $(0.13)
============== ================== ==================
For the nine months ended May 31, 2005, and May 31, 2004,
anti-dilutive securities existed. (See Note 8.)
NOTE 13 - 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 May 31, 2005, a
total of 516,120 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 the nine months ended May 31 2005,
and 2004, is estimated as $1.08 on the date of grant. Management
estimates the average fair value for options granted during fiscal
2005 to be comparable to those granted in fiscal 2004. 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:
May 31, May 31,
2005 2004
---------- ----------
Dividend yield 0.00% 0.00%
Volatility 0.91% 0.91%
Risk-free interest rate 4.00% 4.00%
Expected life 4.5 5
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a
straight-line basis over the vesting period of the stock option or
purchase right was as follows for the three months ended May 31,
2005, and May 31, 2004:
11
May 31, May 31,
(in thousands, except share amounts) 2005 2004
------------------- -------------------
Net loss, as reported $(18,773) $(23,605)
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 (61) -
------------------- -------------------
Pro forma net earnings/(loss) $(18,834) $(23,605)
=================== ===================
Net loss per share:
As reported $ (0.08) $ (0.13)
Pro forma $ (0.08) $ (0.13)
Diluted net loss per share:
As reported $ (0.08) $ (0.13)
Pro forma $ (0.08) $ (0.13)
Option activity was as follows for the nine months ended May 31, 2005:
2005
Weighted-Average
Shares Exercise Price
----------- ----------------
Outstanding at beginning of year 346,002 $1.27
Granted 170,118 0.50
Assumed through acquisitions - -
Exercised - -
Forfeited/cancelled - -
----------- ---------------
Outstanding throughout the period 516,120 $1.08
=========== ===============
Exercisable at year end 516,120 $1.08
=========== ===============
Information about options outstanding was as follows at May 31, 2005:
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- ----------------- ------------------------------------- ------------------------
$0 - $1.00 379,278 4.50 0.53 379,278 0.53
$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
------------ -------------
516,120 1.08 516,120 1.08
============ =============
NOTE 14 - Retirement Plans:
During October 1997, the Company initiated a 401(k) plan for its
employees, 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 nine
months ended May 31, 2005, and May 31, 2004, employee contributions
were approximately $91,254 and $28,091, respectively. The Company
matched $0 and $0, respectively, for these periods.
NOTE 15 - Major Customer:
The Company had gross revenues of $2,976,000 and $5,091,000 for the
three months ended May 31, 2005, and May 31, 2004, respectively. The
three-month period ended May 31, 2005, included $1,390,000 or 47% of
the quarter's total broadband services sales from Alarm Security
Group, LLC. The contract, valued at $1,737,000, was executed with the
Company's broadband services division, The remaining $347,000 has
been deferred in conjunction with a twelve month holdback provision
of the contract. There were no other customers individually that
represented greater than 10% of the revenues in the three months
ended May 31, 2005.
12
The Company had gross sales of $7,188,000 and $11,232,000 for the
nine months ended May 31, 2005, and May 31, 2004, respectively. The
nine-month period ended May 31, 2005, included $756,000 or 11% of
the period's total sales from Sweetwater Security Capital, LLC, that
were executed with the Company's security-monitoring service
subsidiary, DSS Security, Inc. Additionally, the nine months ended
May 31, 2005, included $1,957,000 or 27% of the nine months total
product sales from General Dynamics and also included $1,390,000 or
19% of the nine months total broadband services sales from Alarm
Security Group, LLC which the contract is valued at $1,737,000 that
was executed with the Company's broadband services division. The
remaining $347,000 has been deferred in conjunction with a twelve
month holdback provision of the contract. There were no other
customers individually that represented greater than 10% of the
revenues in the nine months ended May 31, 2005.
NOTE 16 - Industry Segments:
This summary reflects the Company's current and past operating
segments, as described below. All have discontinued operations except
Eagle Broadband, Inc., Eagle Broadband Services, Inc., and DSS
Security, Inc.:
Eagle:
-----
Eagle Broadband, Inc., (Eagle) is a provider of broadband,
Internet Protocol (IP) and communications technology and equipment
with related software and broadband products (including past
subsidiaries Eagle Wireless International, Inc.; BroadbandMagic;
and Etoolz, Inc., for this summary).
EBS/DSS:
-------
Eagle Broadband Services, Inc., (EBS) provides broadband services
to residential and business customers in select communities.
DSS Security, Inc., (DSS) is a wholesale security monitoring
company.
ClearWorks Communications, Inc., provided solutions to consumers
by implementing technology both within the residential community
and home, through the installation of fiber optic backbones to
deliver voice, video and data solutions directly to consumers.
(Has discontinued operations.)
APC/HSI:
-------
Atlantic Pacific Communications, Inc., (APC) specialized 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. (Has discontinued operations.)
ClearWorks Home Systems, Inc., (HSI) specialized in providing
fiber optic and copper based structured wiring solutions and
audio and visual equipment to single-family and multi-family
dwelling units. (Has discontinued operations.)
UCG:
---
United Computing Group, Inc., (UCG) was a computer hardware and
software reseller. (Has discontinued operations.)
Other:
-----
Link Two Communications, Inc., (Link II) was a developer and
marketer of messaging systems. (Has discontinued operations.)
ClearWorks.net, Inc., (.NET) is inactive with exception of
debt related expenses. (Has discontinued operations.)
Contact Wireless, Inc., was a paging, cellular, and mobile
services provider and reseller whose assets were sold October 10,
2003. (Has discontinued operations.)
For the nine months ended May 31, 2005
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
------- ------- ----- -------- ------- --------- --------
Revenue $21 $3,537 $- $3,630 $- $- $7,188
Segment Loss (98) (2,534) (3) (14,660) (1,071) - (18,366)
Total Assets 8 30,529 30 129,253 55,885 (144,730) 70,975
Capital Expenditures - 1,156 - 92 - - 1,248
Depreciation 31 1,192 2 2,072 21 - 3,318
For the nine months ended May 31, 2004
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
------- ------- ----- -------- ------- --------- --------
Revenue $673 $4,805 $445 $5,228 $81 $- $11,232
Segment Loss (688) (1,475) (19) (13,449) (30) - (15,661)
Total Assets 361 28,830 72 130,788 57,006 (139,615) 77,442
Capital Expenditures - 692 16 41 - - 749
Depreciation 132 1,156 46 2,391 76 - 3,801
13
Reconciliation of Segment Loss May 31, May 31,
from Operations to Net Loss 2005 2004
---------------------------------- ----------- -----------
Total segment loss from operations $(18,366) $(15,661)
Total other income (expense) (407) (7,944)
---------- -----------
Net loss $(18,773) $(23,605)
========== ===========
The accounting policies of the reportable segments are the same as
those described in the section titled Critical Accounting Policies.
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 17 - Quarterly Financial Data:
Nov. 30 Feb. 28 May 31 Aug. 31
------- ------- ------- --------
Year Ended August 31,
2005
Revenues $1,528 $2,683 $2,976
Net earnings (loss) (5,496) (9,326) (3,951)
Basic loss per share (0.02) (0.04) (0.02)
Diluted loss per share (0.02) (0.04) (0.02)
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 18 - Supplemental Non-Cash Disclosures:
During the nine month period ended May 31, 2005, the Company issued
stock in lieu of cash as payment for the following:
For the nine months ended May 31, 2005
(in thousands) Non Cash
Settlements
--------------
Settlements including Legal $784
Interest Expense 546
Professional Fees 502
Salary and Compensation 151
Other services rendered 42
Accrued Liabilities 7,607
Notes Payable 5,094
--------------
Total Non Cash Settlements 14,726
--------------
NOTE 19 - Equity Financing
On February 14, 2005, the Company completed the sale of 20 million
shares of its common stock to certain investors at a price of $0.41
per share. The net proceeds to the Company from this offering, after
placement agent fees and offering expenses were $7,504,000.
14
On April 15, 2005, the Company additionally completed the sale of 10
million shares of its common stock to certain investors at a price of
$0. 2035 per share. The net proceeds to the Company from this
offering after placement agent fees were 1,935,000. This offering is
a prospectus supplement connected to the shelf registration statement
that the Company filed with the SEC using a "shelf" registration
process. Under this registration statement, the Company registered
the offering of up to 30 Million shares of common stock.
During the nine months ended May 31, 2005, the Company entered into
an agreement with a former employee whereby the Company utilized his
services as an escrow agent. Under the agreement, the agent received
shares of the Company's stock which were liquidated by the agent and
the proceeds were used to discharge certain obligations of the
Company. The escrow agent settled approximately $6,900,000 in
liabilities. In connection with this agreement, the company incurred
fees of approximately $1,700,000. The escrow agent also made cash
advances to the company of approximately $1,400,000 which was repaid
in stock. Fees and interest incurred by the Company associated with
the advances were approximately $300,000.
NOTE 20 - Subsequent Events:
In June 2005, the Company entered into note exchange agreements with
Mr. Jonathan Hayden, Ms. Billie Mize, Mr. John Nagel and Mr. David
Weisman in which the Company issued 7,954,085 shares of its common
stock to fully satisfy the Company's outstanding guarantee
obligations in the amount of $2,086,251, and any remaining obligations
under the promissory notes. The note exchange agreements also fully
satisfy the Company's contingent guarantee obligation with respect to
unexercised options held by Mr. Hayden and Mr. Nagel.
Additionally, as described in Note 5: Notes Payables, on June 23,
2005, one of the investors converted $200,000 of the principal
convertible debt into shares of common stock at $0.2035 per share.
Additionally, a warrant to purchase 548,246 shares of common stock at
$0.2035 per share was exercised on June 23, 2005.
Item 2. Management's Discussion and Analysis
Overview
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere
in this Form 10-Q. Information included herein relating to projected
growth and future results and events constitutes forward-looking
statements. Actual results in future periods may differ materially
from the forward-looking statements due to a number of risks and
uncertainties, including but not limited to fluctuations in the
construction, technology, communications and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the
success of the Company's products and pricing; the Company's
relationship with its suppliers; relations with the Company's
employees; the Company's ability to manage its operating costs; the
continued availability of financing; governmental regulations; and
risks associated with regional, national, and world economies. Any
forward-looking statements should be considered in light of these
factors.
Eagle Broadband, Inc. (the "Company" or "Eagle"), incorporated as a
Texas corporation on May 24, 1993, and commenced business in April of
1996. The Company is a provider of broadband, Internet Protocol (IP)
and communications technology and services that aim to create new
revenue opportunities for broadband providers and enhance
communications for government, military and corporate customers. The
Company leverages years of proven experience delivering advanced
IP-based broadband bundled services to provide service provider
partners with a way to deliver advanced entertainment, communications
and security services to their customers. The Company's product
offerings include IPTVComplete(TM), a faster, lower cost way for
broadband providers to deliver competitive IP video services; the
MediPro line of standard and high definition IP set-top boxes that
enable broadband providers and hotel operators to maximize revenues
by delivering advanced interactive entertainment services; and the
SatMAX(TM) satellite communications system that provides civilian
government, military, homeland security and corporate customers with
reliable, non-line-of-sight, satellite voice and data communications
from any location on Earth.
Results of Operations
Three and Nine Months Ended May 31, 2005, Compared to Three and
Nine Months Ended May 31, 2004
The following table sets forth summarized consolidated financial
information for the three months and nine months ended May 31, 2005
and May 31, 2004:
15
Condensed Financial Information
Three Months Ended May 31, Nine Months Ended May 31,
---------------------------------------------- ----------------------------------------
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
------------ ----------- -------------------------------- ---------- ------------------
Total sales $2,976 $5,091 $(2,115) -42% $7,188 $11,232 $(4,044) -36%
Cost of goods sold 2,383 4,867 (2,484) -51% 7,710 9,261 (1,551) -17%
------------ ----------- ---------- ---------- ---------- ---------- -------- ---------
Gross profit 593 224 369 165% (522) 1,971 (2,493) -126%
------------ ----------- ---------- ---------- ---------- ---------- -------- ---------
Percent of total sales 20% 4% 16% 353% -7% 18% -25% -141%
Operating expenses 5,573 4,467 1,106 25% 17,844 17,632 212 1%
------------ ----------- ---------- ---------- ---------- ---------- -------- ---------
Loss from operations (4,980) (4,243) (737) 17% (18,366) (15,661) (2,705) 17%
------------ ----------- ---------- ---------- ---------- ---------- -------- ---------
Other income/(expense) 1,029 (130) 1,159 -892% (407) (7,944) 7,537 -95%
------------ ----------- ---------- ---------- ---------- ---------- -------- ---------
Net gain/(loss) (3,951) (4,373) 422 -10% (18,773) (23,605) 4,832 -20%
Unrealized holding gain/(loss) (11) 11 -100% 44 (44) -100%
----------- ---------- ---------- ---------- ---------- -------- ---------
Comprehensive loss $(3,951) $(4,384) $433 -10% $(18,773) $(23,561) $4,788 -20%
============ =========== ========== ========== ========== ========== ======== =========
Overview
For the three months ended May 31, 2005, the Company's business
operations reflected increases in broadband, security and managed
services. The Company's consolidated operations generated revenues of
$2,976,000 with a corresponding gross margin of $593,000 for the
three months ended May 31, 2005. The overall decrease of 42% in
revenues for the three months ended May 31, 2005, as compared to the
three months ended May 31, 2004, was primarily attributable to a
$3,452,000 decrease in the Company's products sales, offset by an
increase in broadband services of $1,088,000 and an increase in
structured wiring services of $213,000.
For the three months ended May 31, 2005, the Company incurred a net
loss of $3,951,000 which was primarily attributable to increased
operating expenses related to professional fees, taxes, depreciation
and salary expense. The Company's net loss for the three months ended
May 31, 2005, included approximately $805,000 in depreciation and
amortization expenses and $1,787,000 in expenses associated with a
net increase in professional services fees, $1,194,000 in salary
expense, and $755,000 in taxes.
During the quarter, the Company implemented a company-wide
restructuring which included the formation of the three main
operating divisions: IPTV Solutions, Satellite Communications and
Broadband Services. Key components of the restructuring included:
-- Reducing payroll-related expenses, lowering operational
overhead and carefully controlling expenditures.
-- Hiring of additional experienced sales staff to accelerate
revenue growth.
-- Realigning staff and resources to maximize efficiencies,
better serve customers and partners and concentrate on sales
of the Company's three core offerings: IPTVComplete,
MediaPro IP set top boxes and SatMAX satellite
communications system as the Company shifts its emphasis to
providing solutions to broadband and service provider
partners.
Sales Information
The following table sets forth summarized sales information for the
three months and nine months ended May 31, 2005, and May 31, 2004:
Three Months Ended May 31,
------------------------------------------------------------------
($ in thousands) 2005 % of Total 2004 % of Total $Change % Change
----------- ---------- ---------- ----------- --------- ----------
Structured wiring $369 12% $156 3% $213 136.5%
Broadband services 1,797 60% 709 14% 1,088 153.5%
Products 774 26% 4,226 83% (3,452) -81.7%
Other 36 1% - 0% 36 -100.0%
----------- ---------- ---------- ----------- --------- ----------
Total sales $2,976 100% $5,091 100% $(2,115) -41.5%
=========== ========== ========== =========== ========= ==========
Nine Months Ended May 31,
------------------------------------------------------------------
($ in thousands) 2005 % of Total 2004 % of Total $Change % Change
----------- ---------- ---------- ----------- --------- ----------
Structured wiring $1,002 14% $673 6% $329 48.9%
Broadband services 3,537 49% 4,805 43% (1,268) -26.4%
Products 2,553 36% 5,673 51% (3,120) -55.0%
Other 96 1% 81 1% 15 18.5%
----------- ---------- ---------- ----------- --------- ----------
Total sales $7,188 100% $11,232 100% $(4,044) -36.0%
=========== ========== ========== =========== ========= ==========
16
For the three months ended May 31, 2005, net sales decreased to
$2,976,000 from $5,091,000, compared to the three-months ended May
31, 2004. The overall decrease of 42% was attributable to a
$3,452,000 decrease in product sales, offset with an increase of
$1,088,000 primarily attributable to $1,390,000 in the Company's
broadband services related to sale of security monitoring contracts
and an increase of $213,000 in structured wiring services. The
$3,452,000 decrease in sales of the Company's products during the
three months ended May 31, 2005, reflected lower product sales of
$774,000 compared to $3,788,000 from a major customer in the same
period a year ago. The $1,088,000 increase is primarily attributable
to the recognition of revenue from the sale of security monitoring
contracts of $1,390,000 from a $1,737,000 contract with a major
customer that was executed with the Company's broadband services
division. The remaining $347,000 associated with the contract sale
has been deferred in conjunction with twelve month holdback provision
of the contract. The $213,000 increase in structured wiring sales is
attributable to the Company's increased sales force to pursue
commercial structured wiring and cabling opportunities.
For the nine months ended May 31, 2005, net sales decreased to
$7,188,000 from $11,232,000 during the nine months ended May 31,
2004. The overall decrease of 36% was attributable to a decrease of
$3,120,000 in the Company's product sales and a decrease of
$1,268,000 of broadband services, offset with an increase of $329,000
in structured wiring. The $3,120,000 decrease in sales of Company's
products during the nine months ended May 31, 2005, was primarily
attributable to a decrease in prior year product sales of $3,788,000
from a major customer. The $1,268,000 decrease in sales of the
Company's broadband services during the nine months ended May 31,
2004, was primarily attributable to a prior year sale of security
monitoring contracts of $2,844,000 by the Company's
security-monitoring subsidiary, DSS Security, Inc., and is offset by
security systems sales to Sweetwater Capital LLC of $756,000 and the
recognition of revenue from the sale of security monitoring contracts
of $1,390,000 from a $1,737,000 contract with a major customer that
was executed with the Company's broadband services division. The
remaining $347,000 associated with the contract sale has been
deferred in conjunction with twelve month holdback provision of the
contract. The decrease also included $447,000 attributable to 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 increase of $329,000 in structured wiring sales is attributable
to the Company's increased sales force to pursue commercial
structured wiring and cabling opportunities.
Cost of Goods Sold
The following table sets forth summarized cost of goods sold
information for the three and nine months ended May 31, 2005, and May
31, 2004:
Three Months Ended May 31, Nine Months Ended May 31,
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
------- ------- -------- --------- ------- ------- -------- ---------
Direct labor and related costs $516 $ 226 $ 290 128.3% $1,300 $1,078 $222 20.6%
Products and integration service 799 3,937 $(3,138) -79.7% 3,002 4,375 $(1,373) -31.4%
Impairment slow moving and obsolete inventory 300 $ 300 100.0% 300 - $ 300 100.0%
Structured wiring labor and material 270 115 $ 155 134.8% 776 376 $ 400 106.4%
Broadband services costs 207 304 $ (97) -31.9% 1,465 2,550 $(1,085) -42.5%
Depreciation and amortization 291 285 $ 6 2.1% 867 856 $ 11 1.3%
Other manufacturing costs - - $ - - 26 $ (26) -100.0%
------- ------- -------- -------- ------- ------- -------- ---------
Total operating expenses $2,383 $4,867 $(2,484) -51.0% $7,710 $9,261 $(1,551) -16.7%
======= ======= ======== ======== ======= ======= ======== =========
For the three months ended May 31, 2005, cost of goods sold decreased
by 51% to $2,383,000 from $4,867,000 as compared to the three months
ended May 31, 2004. The overall decrease of $2,484,000 was primarily
attributable to the Company's cost associated with prior year product
sales to a major customer. The Company's overall gross profit
percentage was 20% for the three months ended May 31, 2005, compared
to an overall gross profit percentage of 4% for the three months
ended May 31, 2004. This increase in gross profit percentage is
primarily attributable the recognition of revenue from the sale of
security monitoring contracts of $1,390,000 to a major customer
executed with the Company's broadband services division.
For the nine months ended May 31, 2005, cost of goods sold decreased
by 17% to $7,710,000 from $9,261,000 as compared to the nine months
ended May 31, 2004. The overall decrease of $1,551,000 was primarily
attributable to the Company's costs associated with prior year
product sales to a major customer. The Company's overall negative
gross profit percentage is 7% for the nine months ended May 31, 2005,
compared to an overall gross profit percentage of 18% for the nine
months ended May 31, 2004. This decrease in gross profit percentage
is primarily attributable to (i) additional costs of $759,000 for
design changes and expedite charges incurred due to a change in
product requirements from a key customer and (ii) depreciation
expenses associated with the buildout of the Company's broadband
services infrastructure.
17
Operating Expenses
The following table sets forth summarized operating expense
information for the three months and nine months ended May 31, 2005,
and May 31, 2004:
Three Months Ended May 31, Nine Months Ended May 31,
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
--------- --------- ---------- ------------------ --------- --------- ---------
Salaries and related costs $1,194 $ 884 $ 310 35% $ 4,737 $ 7,686 $(2,949) -38%
Advertising and promotion (5) - (5) -100% 45 20 25 125%
Depreciation and amortization 805 960 (155) -16% 2,451 2,945 (494) -17%
Research and development 197 129 68 53% 572 395 177 45%
Other support costs 3,382 2,494 888 36% 8,989 6,586 2,403 36%
Impairment, write-downs and
restructuring costs - - - 1,050 - 1,050 100%
--------- ---------- -------- --------- --------- --------- ---------
Total operating expenses $5,573 $4,467 $1,106 25% $17,844 $17,632 $ 212 1%
========= ========= ========== ======== ========= ========= ========= =========
The following table breaks out "Other Support Costs" information for
the three and nine months ended May 31, 2005, and May 31, 2004:
Three Months Ended May 31, Nine Months Ended May 31,
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Auto related $ 14 $ 11 $ 3 27% $ 28 $ 17 $ 11 65%
Bad debt 3 176 (173.00) -98% 23 372 (349.00) -94%
Contract labor * - - - 0% - - -
Delivery/postage 7 12 (5.00) -42% 35 37 (2.00) -5%
Fees 144 91 53.00 58% 245 218 27.00 12%
Insurance and office 318 167 151.00 90% 733 590 143.00 24%
Professional fees 1,787 1,047 740.00 71% 5,741 3,139 2,602.00 83%
Rent 116 149 (33.00) -22% 345 464 (119.00) -26%
Repairs and maintenance 32 16 16.00 100% 55 36 19.00 53%
Travel 113 75 38.00 51% 313 176 137.00 78%
Taxes 755 640 115.00 18% 1,080 1,199 (119.00) -10%
Telephone and utilities 93 99 (6.00) -6% 310 289 21.00 7%
Other - 11 (11.00) -100% 81 49 32.00 65%
----------- ---------- ---------- ---------- ---------- ----------
Total operating expenses $3,382 $2,494 $ 888 36% $ 8,989 $ 6,586 $ 2,403 36%
=========== ========== ========== ========== ========== ==========
Operating Expenses.
For the three months ended May 31, 2005, operating expenses increased
by 25% to $5,573,000 as compared to $4,467,000 for the three months
ended May 31, 2004. The changes, which are reflected in the two
preceding tables immediately above, are discussed below:
o A $310,000 increase in salaries and related costs. The increase
was primarily attributable to the hiring of additional sales
staff to grow revenues in the companies core IPTV, set top box
and satellite communications product lines.
o A $155,000 decrease in depreciation and amortization, due
principally to retirement of assets and full depreciation of some
capital assets.
o An $888,000 increase in other support costs, the components of
which are set forth on the table included immediately above.
Included in this increase was a $740,000 increase in professional
fees that included costs associated with corporate compliance,
consulting and litigation, $151,000 increase in insurance and
office expenses and $115,000 increase in taxes associated with
sales tax audit; offset by a $173,000 decrease in bad debt.
o A $68,000 increase in research and development expenses primarily
consisting of product development and engineering activities in
the Company's IPTV, set top box and satellite communications
product lines.
For the nine months ended May 31, 2005, operating expenses increased
by 1% to $17,844,000 as compared to $17,632,000 for the nine months
ended May 31, 2004. The changes, which are reflected in the two
preceding tables immediately above, are discussed below:
o A $2,949,000 decrease in salaries and related costs. The decrease
was primarily attributable to a prior year non-cash expense of
$4,493,000 incurred upon the modification of certain outstanding
options to purchase 4,200,000 common shares, offset with a net
market-to-market adjustment of additional $1,246,000 increasing
the original guarantee liability net of principal payments to
$4,010,000 at May 31, 2005. The adjustment to compensation is
variable until all of the remaining options are exercised by key
employees. This reflects a guaranteed compensation of the
modified options equivalent to $1.75 less the warrant strike
price. Subsequent to May 31, 2005 the Company entered into note
exchange agreements whereby the note holders representing
$2,086,000 agreed to accept 7,954,000 of the Company's common
stock to fully satisfy such debt obligation. The remaining
principal amount of $1,924,000 is currently in default and is
accruing interest per the terms of the original agreement.
Additional details are in Note 20 under subsequent events.
18
o A $494,000 decrease in depreciation and amortization, due
principally to retirement of assets and full depreciation of some
capital assets.
o A $2,403,000 increase in other support costs. Included in the
increase was a $2,602,000 increase in professional fees that
included costs associated with corporate compliance, audits,
review fees, consulting and litigation, $143,000 increase in
insurance and office expenses, and $137,000 increase in travel,
offset by a $349,000 decrease in bad debt, $119,000 decrease in
rent and a $119,000 one-time adjustment to capture the
appropriate property tax accrued in prior years.
o A $177,000 increase in research and development expenses,
primarily consisting of product development and engineering
activities in the Company's IPTV, set top box and satellite
communications product lines.
o A $1,050,000 increase in impairment primarily consists of Link 2
Communications assets. Management determined that the value of
the assets was nominal after a review of the marketplace.
Net Loss.
For the three months ended May 31, 2005, the Company's net loss was
$3,951,000, compared to a net loss of $4,373,000 during the three
months ended May 31, 2004. For the nine months ended May 31, 2005,
the Company's net loss was $18,773,000 compared to a net loss of
$23,605,000 during the nine months ended May 31, 2004.
Changes in Cash Flow.
The Company's operating activities increased net cash used to
$9,200,000 in the nine months ended May 31, 2005, compared to use of
net cash of $3,498,000 in the nine months ended May 31, 2004. The
increase in net cash used by operating activities was primarily
attributable to fund an increase in the Company's net operating loss,
net of 6,286,000 non-cash charges combined with $3,287,000 of cash
provided by fluctuations in working capital requirements consisting
of the combination of accounts receivable, inventory, other assets,
prepaid expenses, accounts payable and accrued expenses. The
Company's investing activities used net cash of $1,151,000 in the
nine months ended May 31, 2005, compared to use of net cash
$1,296,000 in the nine months ended May 31, 2004. The decrease was
due primarily to direct finance leasing and purchase of equipment
associated with the prior years build out of the Company's network
and infrastructure for the delivery of broadband services. The
Company's financing activities provided net cash of $11,176,000 in
the nine months ended May 31, 2005, compared to $5,597,000 of cash
provided in the nine months ended May 31, 2004. The increase resulted
from net proceeds of $9,439,000 from the sale of 30 million shares of
common stock to certain investors and $1,949,000 from the exercise of
stock options.
Liquidity and Capital Resources
At May 31, 2005, the Company's current assets totaled $8,417,000
(includes cash and cash equivalents of $2,876,000) and total current
liabilities were $13,184,000, which gave the Company a negative
working capital of $4,767,000. The Company's strategy is to utilize
cash on hand and issue common stock to settle current liabilities and
to raise additional capital through the sale of its securities to
fund operations.
The Company has historically used stock for retirement of certain
liabilities on a negotiated basis. During the first nine months ended
May 31, 2005, the Company retired $4,046,000 in debt with stock
versus cash. Also, as of May 31, 2005, accrued liabilities in the
amount of $4,010,000 were outstanding. Subsequent to May 31, 2005,
$2,086,000 of the $4,010,000 in accrued liabilities was retired
through the issuance of 7,954,085 shares of common stock and the
remaining principal amount of $1,924,000 is currently in default and
accruing interest (see note 2 for additional details). The Company
expects to continue its practice of retiring certain liabilities as
may be negotiated through a combination of cash and the issuance of
shares of the Company common stock. The Company cannot quantify the
amount of common stock expected to be issued to retire such debts at
this time and there is no assurance that this strategy will be
successful.
Historically, we have financed operations through the sale of debt
and equity securities. During the nine months ended May 31, 2005, we
raised $12,082,000 cash through the issuance of common stock upon the
exercise of derivative securities. The Company currently does not
have credit facilities available with financial institutions or other
third parties and historically we have relied upon best efforts
third-party funding. 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 endeavors. The Company will continue to rely
upon financing from external sources to fund its operations for the
foreseeable future and it will need to raise additional capital to
fund working capital requirements in the fourth quarter of 2005 or
the first quarter of fiscal 2006. If we are unable to raise
sufficient capital from external sources to fund our operations for
the foreseeable future, the Company may need to sell assets to meet
working capital needs or curtail operations.
19
Contractual Obligations
Payments Due by Period
------------------------------------------------------------------------
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
-------------- --------------------------- ------------- ------------
Contractual obligations:
Long-term debt obligations $ 614 $ 614 $ - $ - $ -
Operating lease obligations 1,250 75 931 244 -
-------------- ------------- ------------ ------------- ------------
Total $ 1,864 $ 689 $ 931 $ 244 $ -
============== ============= ============ ============= ============
Payments Due by Period
------------------------------------------------------------------------
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
-------------- --------------------------- ------------- ------------
Off-balance sheet obligations 3,000 3,000 - - -
-------------- ------------- ------------ ------------- ------------
Total $ 3,000 $ 3,000 $ - $ - $ -
============== ============= ============ ============= ============
Payments Due by Period
------------------------------------------------------------------------
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
-------------- --------------------------- ------------- ------------
Contractual obligations:
Long-term debt obligations $ 614 $ 614 $ - $ - $ -
Operating lease obligations 1,250 75 931 244 -
-------------- ------------- ------------ ------------- ------------
Total contractual obligations $ 1,864 $ 689 $ 931 $ 244 $ -
============== ============= ============ ============= ============
Off balance sheet obligations
LLV $ 3,000 $ 3,000 $ - $ - $ -
-------------- ------------- ------------ ------------- ------------
Total off balance sheet obligations $ 3,000 $ 3,000 $ - $ - $ -
============== ============= ============ ============= ============
The Company's contractual obligations consist of long-term debt as
set forth in Note 5 (Notes Payable) to the Company's financial
statements. See Note 11 (Commitments and Contingent Liabilities) for
certain obligations for office space operating leases requiring
future minimal commitments under non-cancelable leases and for
off-balance sheet contractual obligations. The Company has no off
balance sheet arrangements other than with LLV Broadband, LLC.
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 $33,274,000 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 and other
intangible assets and property and equipment. Statement of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and
Other Intangible Assets" ("SFAS 142") requires that goodwill and
intangible assets be tested for impairment at the reporting unit
level (operating segment or one level below an operating segment)
on an annual basis and between annual tests in certain
circumstances. Application of the goodwill impairment test
requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units,
assigning goodwill and intangible assets to reporting units, and
determining the fair value of each reporting unit. Significant
judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate
discount rates and other assumptions. Changes in these estimates
and assumptions could materially affect the determination of fair
value for each reporting unit.
20
Goodwill is primarily the Company rights to deliver broadband
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 the name of Eagle Broadband, Inc., and its
subsidiaries.
The Company records revenues from its fixed-price, long-term
contracts using the percentage-of-completion method, whereby
revenues are recorded based on construction costs incurred to
date as a percentage of estimated total cost at completion. The
percentage-of-completion, determined by using total costs
incurred to date as a percentage or estimated total costs at
completion, reflects the actual physical completion of the
project. This method of revenue recognition is used because
management considers total cost to be the best available measure
of progress on the contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably
possible that the estimates used will change within the near
term.
The Company 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 the Company's
results of operations. The Company's contracts that contain multiple
elements as of May 31, 2005, 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, the Company 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, the Company
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. the Company 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.
The Company'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. The
Company had deferred revenues of $552,000 and $96,000 as of May 31,
2005, and August 31, 2004, respectively.
Receivables
For the nine months ended May 31, 2005, the Company's net accounts
receivable increased to $2,823,000 from $1,470,000 at August 31,
2004. The majority of this increase was due to the sale of retail
security contracts to major customers in the third quarter of fiscal
2005 in the amount of $1,390,000,
The Company's accounts receivable aging as measured by days sales
outstanding (DSO) totaled 28 days at May 31, 2005, and 29 days at
August 31, 2004, on an adjusted basis after recording the write-off's
and reserves. The primary decrease in DSO from 29 days at August 31,
2004, to 28 days at May 31, 2005, was attributable to collecting on
some past due accounts from slow paying customers during the first
nine months.
The Company's allowance for doubtful accounts totaled $2,324,000 and
$2,396,000 for the nine months ended May 31, 2005, and the year ended
August 31, 2004, respectively. These allowance for doubtful accounts
amounts represented 45% and 62% of the gross accounts receivable
balances for the nine months ended May 31, 2005, and the year ended
August 31, 2004, respectively; while they likewise represented 53%
and 7% of the Company's greater than 90-day accounts for these same
respective time periods.
21
The Company reviews its accounts receivable balances by customer for
accounts greater than 90 days old and makes a determination regarding
the collectability 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 collectability risks associated with its accounts
receivable.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of
accounts receivable. Accounts receivables deemed uncollectible are
charged against the allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At May 31, 2005,
the Company's inventory totaled $884,000 as compared to $403,000 at
August 31, 2004. The majority of this increase was due to an increase
in raw materials inventory associated with in-process set-top box
manufacturing. The company had an impairment charge of $300,000 in
the 3rd quarter related from partial impairment of inventory at
August 31, 2004. Management had reasonably identified prospects for
this inventory at August 31, 2004 which did not materialize as plan.
The company does not for see any significant adjustments in
subsequent quarters. Management has incorporated "just in time"
inventory practices to avoid future inventory obsolescence. The
Company is currently outsourcing a majority of 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 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 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate and Equity Market Risks
The Company is exposed both to market risk from changes in interest
rates on funded debt and changes in equity values on common stock
investments it holds in publicly traded companies. The Company also
previously had exposure that related to the Company's revolving
credit facility. The Company fully retired its revolving credit
facility in September 2003 and thus no longer has such exposure
related to interest rate risk. Borrowings under the credit facility
bear interest at variable rates based on the bank prime rate. The
extent of this risk with respect to interest rates on funded debt is
not quantifiable or predictable due to the variability of future
interest rates; however, the Company does not believe a change in
these rates would have a material adverse effect on the Company's
operating results, financial condition, and cash flows.
22
The Company's cash and cash equivalents are invested in mortgage and
asset backed securities, mutual funds, money market accounts and
common stock. Accordingly, the Company is subject to both changes in
market interest rates and the equity market fluctuations and risk.
There is an inherent roll over risk on these funds as they accrue
interest at current market rates. The extent of this risk is not
quantifiable or predictable due to the variability of future interest
rates. The Company does not believe a change in these rates would
have a material adverse effect on the Company's operating results,
financial condition, and cash flows with respect to invested funds in
mortgage and asset backed securities, mutual funds and money market
accounts.
Credit Risks
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, but does not require collateral
from these parties. Three customers, Sweetwater Capital, LLC, Alarm
Security Group, LLC and General Dynamics, represented greater than
10% of the Company's revenues during the nine months ended May 31,
2005. The Company does not believe that the credit risk posed by
Sweetwater Capital, LLC, which has been fully collected, Alarm
Security Group, LLC and General Dynamics or any other specific
customer would have a material adverse affect on its financial
condition.
Item 4. 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 defined in Rule 13a-15(e) or Rule
15d-15(e) under the Exchange Act) as of the end of our third fiscal
quarter 2005. Based on such evaluation, such officers have concluded
that the Company's disclosure controls and procedures are effective.
Changes in Internal Controls
There has been no change in the Company's internal control over
financial reporting identified in connection with our evaluation that
occurred during our last fiscal quarter ended May 31, 2005, that has
materially affected, or is reasonably likely to materially affect,
the Company's internal controls over financial reporting.
Part 2. - Other Information
Item 1 - Legal Proceedings
In July 2003, the Company 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 the Company 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. The Company 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 Dec. 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 court costs. 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. 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.
The Company is also subject to legal proceedings and claims that
arise in the ordinary course of business. The Company's management
does not expect that the results in any of these legal proceedings
will have a material adverse effect on the Company's financial
condition or results of operations (see Note 11).
23
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
On April 28, 2005, the Company entered into a confidential settlement
agreement with Palisades Master Fund L.P. pursuant to which the
Company issued 1,500,000 shares of its common stock in settlement of
a lawsuit filed in November 2004 by Palisades Master Fund L.P. The
Company believes the securities issued in the above transaction was
exempt from registration pursuant to Section 3 (a) (10) of the
Securities Act. There were no underwritten offerings employed and no
sales commissions were paid in connection with the sales and
issuances of the unregistered securities in the transaction set forth
above.
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The transactions contemplated by the note exchange agreements entered
into in June 2005 and reported in Form 8-K filed on June 29, 2005,
closed as of June 30, 2005.
Item 5 - Other Information None
Item 6--Exhibits
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Eagle Wireless International, Inc. Articles of
Incorporation, as Amended (incorporated by
reference to Exhibit 3.1 of Form SB-2 file no.
333-20011)
Exhibit 3.2 Amended and Restated Eagle Wireless International,
Inc. Bylaws (Incorporated by reference to Exhibit
3.2 of Form 10-KSB for the fiscal year ended
August 31, 2001, filed November 16, 2001)
Exhibit 4.1 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of Form SB-2 file no.
333-20011)
Exhibit 10.1 Asset Purchase Agreement between Eagle Telecom
International, Inc., a Delaware corporation and
Eagle Telecom International, Inc., a Texas
corporation (incorporated by reference to Exhibit
10.1 of Form SB-2 file no. 333-20011)
Exhibit 10.2 Stock Option Plan (incorporated by reference to
Exhibit 10.2 of Form SB-2 file no. 333-20011)
Exhibit 10.3 Agreement and Plan of Reorganization dated
September 15, 2000 (incorporated by reference to
Exhibit 10.1 of Form S-4 file no. 333-49688)
Exhibit 10.4 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Comtel
Communications, Inc. (incorporated by reference to
Exhibit 10.4 of Form 10-KSB for the fiscal year
ended August 31, 2000, filed December 13, 2000)
Exhibit 10.5 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of
Atlantic Pacific Communications, Inc.
(incorporated by reference to Exhibit 10.5 of Form
10-KSB for the fiscal year ended August 31, 2000,
filed December 13, 2000)
Exhibit 10.6 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of
Etoolz, Inc. (incorporated by reference to Exhibit
10.6 of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000)
Exhibit 21.1 List of Subsidiaries (incorporated by reference
to Exhibit 21.1 of Form S-4 file no. 333-49688)
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EAGLE BROADBAND, INC.
Date: July 11, 2005
By: /S/David Micek
--------------
David Micek
President and
Chief Executive Officer
(Principal Executive Officer)
/S/Eric Blachno
---------------
Eric Blachno
Chief Financial Officer
/S/Tom Matura
-------------
Tom Matura
Corporate Controller and
Principal Accounting Officer
25