UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
EAGLE BROADBAND, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 76-0494995
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
101 Courageous Drive Copy to: David Micek
League City, Texas 77573-3925 Thomas C. Pritchard, Esq. 101 Courageous Drive
(281) 538-6000 Brewer & Pritchard, P.C. League City, Texas 77573-3925
(Address, including zip Three Riverway, Suite 1800 (Name, address, including
code, and telephone number, Houston, Texas 77002 zip code, phone number,
including area code, Phone (713) 209-2950 including area code,
of registrant's Fax (713) 209-2921 of agent for service)
principal executive offices)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X].
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================== ================= ==================== ==================== ================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount Offering Price Aggregate Amount of
Securities To Be Registered Being Registered Per Share Offering Price (1) Registration Fee
---------------------------------------- ----------------- -------------------- -------------------- ----------------
Common Stock, par value $.001 per share 30,843,750 $0.16 $4,935,000 $625.26
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on
the basis of the average of the bid and ask prices per share of our common
stock, as reported on the American Stock Exchange, on August 24, 2005.
Subject to Completion, Dated August 26, 2005
The information contained in this preliminary prospectus is not complete
and may be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Prospectus
- ----------
SHARES OF COMMON STOCK
EAGLE BROADBAND, INC.
This prospectus relates to the offer and sale of up to 30,843,750 shares of
our common stock by the selling stockholders listed on page 36.
The prices at which the selling stockholders may sell these shares will be
determined by the prevailing market price for shares of our common stock or in
negotiated transactions. We will not receive any proceeds from the resale of
common stock by the selling stockholders. We will bear the cost relating to the
registration of the resale of the common stock offered by this prospectus.
Our common stock is quoted on the American Stock Exchange under the symbol
"EAG." On August 24, 2005, the last sales price of our common stock as reported
on the American Stock Exchange was $0.16.
You should read this prospectus in its entirety and carefully consider the
risk factors beginning on page 6 of this prospectus and the financial data and
related notes incorporated by reference before deciding to invest in the shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August ________, 2005.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell and we are
not seeking an offer to buy these securities in any jurisdiction where this
offer or sale is not permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock.
-------------------------
Table of Contents
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Page
----
Prospectus summary 3
Risk factors 6
Special note regarding forward-looking statements 10
Use of proceeds 10
Market price information and dividend policy 11
Management's discussion and analysis 11
Selected consolidated financial information 26
Selected consolidated quarterly financial information 27
Quantitative and qualitative disclosures about market risk 28
Our business 29
Selling stockholders 36
Plan of distribution 37
Management 38
Principal stockholders 46
Description of securities 47
Disclosure of SEC position on indemnification for Securities Act liabilities 48
Experts 48
Legal matters 48
Change of accountants 48
Where you can find more information 48
Financial statements F-1
2
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and does not contain all of the information that you should consider before
investing in our common stock. This prospectus contains information regarding
our businesses and detailed financial information. You should carefully read
this entire prospectus, including the historical financial statements and
related notes, before making an investment decision.
In this prospectus, "Eagle Broadband, Inc.," the "Company," "we," "us" or
"our" refer to Eagle Broadband, Inc., a Texas corporation, and its subsidiaries,
except where otherwise indicated or required by context.
Our Business
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 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 fast, low cost way for broadband providers to deliver
competitive IP video services; the MediaPro 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-based voice and data communications from any
location on Earth.
During the third quarter ended May 31, 2005, the Company implemented a
corporate restructuring designed to reduce costs, focus company resources to
drive revenue growth and position the Company to better compete in the
broadband, IP and communications markets. This has aligned our resources to
better capitalize on potential revenue opportunities for the Company's core
IPTV, IP set top box, and satellite communications offerings. This strategy
includes the formation of three main operating divisions:
o IPTV Solutions Division - focused on the Company's IPTVComplete and
Media Pro IP set top box product offerings.
o Satellite Communications Division - includes the SatMAX
non-line-of-sight satellite communications technology.
o Broadband Services Division - focused on offering broadband, security
and managed services.
Key components of the restructuring included:
o Reducing payroll-related expenses, lowering operational overhead and
controlling expenditures.
o Hiring of additional experienced sales staff to accelerate revenue
growth.
o 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.
In August 2005, the Company announced that it was further concentrating its
efforts on delivering IP-based video and set-top box solutions to broadband and
hospitality providers and satellite communications solutions to government,
military and commercial customers.
Recent Developments
On August 10, 2005, the Company entered into a purchase agreement with
certain accredited investors for the sale of up to 30 million shares of its
3
common stock , pursuant to Regulation D of the Securities Act of 1933, at a
price per share of $0.135, for total gross proceeds of up to $4,050,000. The
Company has agreed to pay a placement agent a cash commission 7% of the gross
dollar proceeds of the sale of the shares in this placement and issue such agent
a five year warrant to purchase a number of shares of Company common stock equal
to 5% of the gross proceeds of the offering, divided by $0.24, at an exercise
price per share of $0.24. The American Stock Exchange is requiring shareholder
approval for the issuance of 14,875,000 of the 30,000,000 shares of our common
stock committed for purchase in this offering. For purposes of this registration
statement, unless otherwise stated, we have assumed that we will receive
shareholder approval of the issuance of the 14,875,000 shares on September 20,
2005 and that the American Stock Exchange will approve such listing. However, we
have only treated the 15,125,000 shares as issued and outstanding as of August
26, 2005 unless otherwise stated.
On August 5, 2005, the Company and Neva Holdings, LLC ("Neva") executed an
agreement whereby the parties agreed to terminate the Restated Limited Liability
Company Agreement (the "LLC Agreement") that the parties entered into on
November 23, 2004. The termination of the agreement provides for the Company's
withdrawal as a member of LLV Broadband, LLC (the "LLC") and complete release
from any future obligations under the LLC Agreement.
The terms and conditions of the LLC Agreement called for the Company to
participate in the construction, development and operation of a system for the
provision of a range of broadband, entertainment and communications services to
the commercial, recreational, and residential buildings located within the Lake
Las Vegas Resort and surrounding geographical areas. Under the terms of the LLC
Agreement, the Company was required to make a capital contribution of between $3
million and $5 million to fund ongoing development and operating activities. The
parties initially estimated that the LLC's gross revenues would be approximately
$15.5 million over a 6 year period through the year 2010. As a result of the
termination, the Company will not be required to make any additional capital
contributions to the LLC and will not recognize its allocation of any revenues
associated with membership in the LLC. The Company will not incur any early
termination penalties associated with the termination of the LLC Agreement.
General
Eagle was incorporated in May 1993 and changed its name in February 2002 to
Eagle Broadband, Inc., its current name. Our principal place of business is
located at 101 Courageous Drive, League City, Texas 77573 and our telephone
number is (281) 538-6000.
The Offering
In this offering, we are registering the resale of up to 30,843,750 shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of common stock by the selling stockholders, but we may receive
gross proceeds of up to $202,500 from the exercise of a warrant.
4
o Number of shares offered for resale: Up to 30,843,750 shares
o Number of Shares of Common
Stock Outstanding, as of August 26, 2005: 288,211,275 shares (does not give
effect to the 14,875,000 shares,
the issuance of which is subject
to shareholder approval)
o Number of Shares Outstanding
does not include the following: 13,048,016 shares reserved for issuance
pursuant to outstanding options, warrants,
or other derivative securities.
o American Stock Exchange Ticker Symbol EAG
o Risks We face risks in operating our business,
Including risks that may prevent us from
achieving our business objectives or that may
adversely affect our business, financial
condition and operating results. See "Risk
Factors" on Page 7 and other information
included in this prospectus for a discussion
of factors you should consider carefully
before deciding to invest in our common stock.
Selected Consolidated Financial Information
The following tables show selected historical consolidated financial
information as of the end of each of the periods indicated. Our historical
results are not necessarily indicative of the results that may be expected for
any future period. The following should be read in conjunction with
"Management's Discussion and Analysis" and the historical and consolidated
financial statements and notes included in this prospectus.
Nine Months Ended May 31,
-----------------------------
2005 2004
-----------------------------
($ in thousands, except per share amounts)
Net Sales $ 7,188 $ 11,232
Cost of Goods Sold 7,710 9,261
Operating Expenses 17,844 17,632
Operating Income (Loss) (18,366) (15,661)
Other Income (Expense), Net 641 (7,944)
Income Tax Provision - -
--------- ----------
Net Income (Loss) $ (17,725) $ (23,605)
========= ==========
Earnings Per Share (Basic) (0.08) (0.13)
Cash Used by Operating Activities $ (9,200) $ (3,498)
Cash used by Investing Activities $ (1,151) $ (1,296)
Cash Provided (Used) by
Financing Activities $ 11,176 $ 5,597
Total Assets $ 70,642 $ 70,211
Long-Term Debt - -
Total Stockholders' Equity $ 57,458 $ 50,103
Year Ended August 31,
-------------------------------------------------
2004 2003 2002
-------------------------------------------------
($ in thousands, except per share amounts)
Net Sales $ 12,490 $ 11,593 $ 29,817
Cost of Goods Sold 12,387 10,784 22,704
Operating Expenses 31,055 31,884 83,821
Operating Income (Loss) (30,952) (31,075) (76,708)
Other Income (Expense), Net (8,053) (5,426) (265)
Income Tax Provision - - -
---------- ---------- ----------
Net Income (Loss) $ (39,005) $ (36,501) $ (76,973)
========== ========== ==========
Earnings Per Share (Basic) (0.21) (0.38) (1.20)
Cash Used by Operating Activities $ (3,493) $ (6,085) $ (797)
Cash used by Investing Activities $ (1,216) $ (1,276) $ (13,668)
Cash Provided (Used) by
Financing Activities $ 5,936 $ 6,912 $ (2,342)
Total Assets $ 70,211 $ 77,366 $ 89,151
Long-Term Debt - - $ 1,272
Total Stockholders' Equity $ 50,103 $ 58,336 $ 76,548
5
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below before making an investment
decision. If any of the following risks actually occur, our business could be
harmed. The value of our stock could decline, and you may lose all or part of
your investment. Further, this prospectus contains forward-looking statements
and actual results may differ significantly from the results contemplated by
such forward-looking statements.
Our business strategy focuses on the marketing and sale of three core product
offerings which may not be commercially successful.
We seek to execute our business strategy by realigning staff and resources
to concentrate on the sales of these products. Therefore, there can be no
assurances that the Company will be successful in marketing these products, or
that customers will ultimately purchase our products. Failure to have commercial
success from the sale of these products will negatively impact our financial
condition.
We have a history of operating losses and may never achieve profitability.
From inception through May 31, 2005, we have incurred an accumulated
deficit in the amount of $175,879,000. For the quarter ended May 31, 2005, we
incurred losses from operations in the amount of $4,980,000. We anticipate that
we will incur losses from operations for the foreseeable future. Our future
revenues may never exceed operating expenses, thereby making the continued
viability of our Company dependent upon raising additional capital.
As we have not generated positive cash flow from operations for the past three
fiscal years, our ability to continue operations is dependent on our ability to
either begin to generate positive cash flow from operations or our ability to
raise capital from outside sources.
We have not generated positive cash flow from operations during the last
three fiscal years and have relied on external sources of capital to fund
operations. At May 31, 2005, we had approximately $2,876,000 in cash, cash
equivalents and securities available for sale, and a working capital deficit of
approximately $4,767,000. Our net cash used by operations for the nine-months
ended May 31, 2005, was approximately $9,200,000.
In August 2005, the Company privately placed the sale of up to 30 million
shares of its common stock for net proceeds of up to $3,766,500. The Company
will utilize these proceeds along with its cash and cash equivalents to fund
operations. We may need to raise additional capital to fund working capital in
the third quarter of fiscal 2006. If shareholder approval for the issuance of
the 14,875,000 shares is not obtained, we will only receive net proceeds of
$1,898,943 and we may need to raise additional capital to meet working capital
requirements in the second quarter of fiscal 2006.
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
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
may need to continue to rely upon financing from external sources to fund its
operations for the foreseeable future. If we are unable to raise sufficient
capital from external sources to fund our operations, the Company may need to
sell assets to meet working capital needs or curtail operations.
6
We have been named a defendant in several lawsuits, which if determined
adversely, could harm our ability to fund operations.
Eagle Broadband and its subsidiaries have been named defendants in several
lawsuits in which plaintiffs are seeking substantial damages, which may include
any of the following lawsuits:
o Enron Corp. vs. United Computing Group, Inc. In September 2003, Enron
sued United Computing Group seeking to avoid and recover a transfer in
the amount of approximately $1,500,000 under Section 547 and 550 of
the Bankruptcy Code.
o Cornell Capital Partners, LP. Vs. Eagle Broadband. In July 2003,
Cornell Capital sued Eagle Broadband alleging breach of contract,
fraud and negligent misrepresentation. As of November 30, 2003, the
principal balance of the debenture was approximately $1.2 million and
was repaid, although the suit remains outstanding. We have filed a
counter-claim against Cornell Capital seeking in excess of $2 million.
o The Tail Wind Fund, Ltd. v. Eagle Broadband and Link Two
Communications. In June 2004, the Tail Wind Fund asserted breach of
contract claim in the amount of approximately $25 million.
o State of Florida Dept. of Environmental Protection vs. RECO Tricote,
Inc. and Southwest Tire Recycling Inc., a/k/a ClearWork.Net, Inc. 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 Southwest Tire
Recycling.
We intend to vigorously defend these and other lawsuits and claims against
us. However, we cannot predict the outcome of these lawsuits, as well as other
legal proceedings and claims with certainty. An adverse resolution of any one
pending lawsuit could substantially harm our ability to fund operations.
Our future revenues are not predictable.
During the third quarter of the fiscal year ending August 31, 2005,
management determined to further focus marketing efforts on the Company's
IPTVComplete product, the MediaPro IP set top boxes and SatMAX Satellite
communications systems. Historical revenues should not be viewed as indicative
of any future revenues since future revenues will be dependant upon the market
acceptance of our core product offerings.
Our business is subject to many factors that could cause quarterly or annual
operating results to fluctuate and our stock price to be volatile.
Our quarterly and annual operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. If our quarterly or annual operating results
do not meet the expectations of investors, the trading price of our common stock
could decline. Some of the factors that could affect our quarterly or annual
operating results include:
o the timing and amount of, or cancellation or rescheduling of, orders
for our products;
o our ability to develop, introduce, ship and support certain products;
o announcements, new product introductions and reductions in price of
products offered by our competitors;
o our ability to control costs;
o the loss of one or more of our major customers or a significant
reduction in orders from those customers;
7
o increased competition, particularly from larger, better capitalized
competitors;
o fluctuations in demand for our products and services; and
o market conditions specifically and economic conditions generally.
We rely heavily on third-party suppliers for the material components for our
products and supply shortages could cause delays in manufacturing and delivering
products which could reduce our revenues.
We rely upon unaffiliated suppliers for the material components and parts
used to assemble our products. Most parts and components purchased from
suppliers are available from multiple sources. We have not experienced
significant supply shortages in the past and we believe that we will be able to
continue to obtain most required components and parts from multiple suppliers.
However, the lack of availability of certain components could require a major
redesign of our products and could result in production and delivery delays,
which could reduce revenues from product sales.
Because our industry is rapidly evolving, if we are unable to adapt or adjust
our products to new technologies, our ability to compete and operate profitably
may be significantly impaired.
The design, development, and manufacturing of IP, broadband, entertainment
and communications products are highly competitive and characterized by rapid
technology changes. We compete with products and technologies from a number of
other companies Development by others of new or improved products or
technologies may make our products obsolete or less competitive. While we
believe that our products are based on advanced technologies, our products may
become obsolete in the future or we may not be able to develop a commercial
market for our products in response to future technology advances and
developments. The inability to develop new products or adapt our current
products to new technologies could impact our financial condition.
Approximately 47% of our total assets are comprised of intangible assets
including goodwill, contract rights, customer relationships and other intangible
assets which are subject to review on a periodic basis to determine whether an
impairment on these assets is required. An impairment would not only greatly
diminish our assets, but would also require us to record a significant charge
against our earnings.
We are required under generally accepted accounting principles to review
our intangible assets for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. Goodwill is required to be
tested for impairment at least annually. At fiscal year ended August 31, 2002,
Eagle determined that $37,565,000 of goodwill associated with the acquisition of
ClearWorks.net was impaired. At the fiscal year ended August 31, 2003,
management determined that a $7,611,000 non-cash impairment charge was necessary
against realigned operations and the discontinued sale of low margin commodity
products, residential and commercial structured wiring operations and the
withdrawal from Austin, Texas area broadband services development. Included in
the impairment was the write down of goodwill of $1,878,000 associated with the
acquisition of Comtel. At May 31, 2005, our intangible assets, including
goodwill, were approximately $33.3 million. If management determines that
impairment exists, we will be required to record a significant charge to
earnings in our financial statements during the period in which any impairment
of our goodwill is determined.
Our business relies on our use of proprietary technology. Asserting, defending
and maintaining intellectual property rights is difficult and costly and the
failure to do so could harm our ability to compete and to fund our operations.
We rely, to a significant extent, on trade secrets, confidentiality
agreements and other contractual provisions to protect our proprietary
technology. In the event we become involved in defending or pursuing
intellectual property litigation, such action may increase our costs and divert
management's time and attention from our business. In addition to costly
litigation and diversion of management's time, any potential intellectual
property litigation could force us to take specific actions, including:
8
o cease selling products that use the challenged intellectual property;
o obtain from the owner of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o redesign those products that use infringing intellectual property.
We compete with many companies that are larger and possess greater capital
resources than we do, and our growth and profitability are dependent on our
ability to compete with these entities.
We face competition from many entities with significantly greater financial
resources, well-established brand names, and larger customer bases. We may
become subject to severe price competition for our products and services as
companies seek to enter our industry or current competitors attempt to gain
market share. We expect competition to intensify in the future and expect
significant competition from other companies and technology providers. If we are
unable to make or keep our products competitively priced and attain a market
share in the markets in which our products compete, our sales may suffer which
could impact our financial condition.
A system failure could delay or interrupt our ability to provide products or
services and could increase our costs and reduce our revenues.
Certain parts of our operations are dependent upon our ability to support
a complex network infrastructure. Many of our customers are dependent on
an uninterrupted supply of services. Any damage or failure that causes
interruptions in our operations could result in loss of these customers. To
date, we have not experienced any significant interruptions or delays which have
affected our ability to provide products and services to our clients. Because
our headquarters and some of our infrastructure is located in the Texas Gulf
Coast area, there is a likelihood that our operations may be effected by
hurricanes or tropical storms, tornados, or flooding. Although we maintain
redundant systems in north Houston, Texas, which allow us to operate our
networks on a temporary basis, the occurrence of a natural disaster, operational
disruption or other unanticipated problem could cause interruptions in the
services we provide and impair our ability to generate revenue and achieve
profitability.
Our stock price has been volatile in the past, and stockholders face the
possibility of future fluctuations in the price of our common stock.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. From June 30, 2004, through June 30,
2005, the highest sales price of our common stock was $0.99, which occurred on
July 2, 2004, and the lowest sales price was $0.15, which occurred on August 19,
2005. The market price of our common stock has been volatile in the last 12
months and may continue to be volatile in the future.
Our industry is highly regulated, and new government regulation could hurt our
ability to timely introduce new products and technologies.
Our broadband and communications products are regulated by federal, state,
and local governments. We are generally required to obtain regulatory approvals
in connection with providing telephone and television services. For example, the
cable and satellite television industry is regulated by Congress and the Federal
Communications Commission, and various legislative and regulatory proposals
under consideration from time to time may affect the way we design our products.
New laws or regulations may harm our ability to timely introduce new products
and technologies, which could decrease our revenues by shortening the life cycle
of a product.
9
Shares eligible for future sale may adversely affect the market price of our
common stock.
The 30,843,750 shares, the resale of which is being registered hereunder,
may be sold by the selling stockholders into the public market pursuant to this
prospectus. Further sales of shares of our common stock, or the perception that
such sales may occur, could adversely affect the market price of our common
stock. A lower stock price could impair our ability to raise capital through
the sale of equity securities.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements subject to the "safe
harbor" legislation appearing at Section 27A of the Securities Act of 1933, as
amended ("Securities Act"), and Section 21E of the Securities Exchange Act of
1934, as amended ("Exchange Act"). We make "forward-looking statements"
throughout this prospectus. Whenever you read a statement that is not solely a
statement of historical fact (such as when we use words such as "believe,"
"expect," "anticipate," "estimate," "intend," "plan," "will," "would," "could,"
"likely" and other similar words, phrases or statements), you should understand
that our expectations may not be correct, although we believe they are
reasonable. We do not guarantee that the transactions and events described in
this prospectus will happen as described or that any positive trends noted in
the prospectus will continue. The forward-looking information contained in this
prospectus is generally located under the headings "Our Business" and "Risk
Factors," but may be found in other locations as well. These forward-looking
statements generally relate to our strategies, plans, objectives and
expectations for future operations and are based upon management's reasonable
beliefs or estimates of future results or trends. You should read this
prospectus completely and with the understanding that actual future results may
be materially different from what we expect. We will not update these
forward-looking statements, even if our situation changes in the future.
Specific factors that might cause actual results to differ from our
expectations or may affect the value of our securities include, but are not
limited to:
o our ability to develop and introduce innovative products;
o our ability to gain and maintain market acceptance for our new
products and to satisfy consumer preferences;
o our ability to protect our existing intellectual property rights and
to adequately secure and enforce rights for new proprietary
technology;
o cancellation or lack of market acceptance of our recurring-revenue
contracts;
o risks of competition in our existing and future markets;
o the failure to obtain or maintain or delays in obtaining any necessary
regulatory approvals or licenses for our products;
o our liquidity constraints; and
o the other risks described in "Risk Factors" or elsewhere in this
prospectus, and in our reports on Forms 10-K, 10-Q and 8-K filed from
time-to-time with the SEC.
All future written and verbal forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed
in this prospectus might not occur.
USE OF PROCEEDS
We will not receive any proceeds from the resale of the common stock
offered under this prospectus. If the warrant to purchase 843,750 shares of
common stock are exercised for cash, we will receive gross proceeds of $202,500
which will be used for general working capital purposes.
10
MARKET PRICE INFORMATION AND DIVIDEND POLICY
Our common stock trades on the American Stock Exchange under the symbol
EAG. The market for our common stock is highly volatile. The following table
sets forth the approximate high and low closing sales prices for our common
stock for the last two fiscal years. The quotations reflect inter-dealer prices,
without retail markups, markdowns, or commissions and may not represent actual
transactions.
Year 2005 High Low
------ ------
Quarter ended November 30 $ 0.90 $ 0.59
Quarter ended February 28 $ 0.82 $ 0.36
Quarter ended May 31 $ 0.40 $ 0.19
Year 2004
Quarter ended November 30 $ 2.13 $ 0.42
Quarter ended February 28 $ 2.08 $ 1.10
Quarter ended May 31 $ 1.59 $ 0.77
Quarter ended August 31 $ 1.15 $ 0.71
Year 2003
Quarter ended November 30 $ 0.54 $ 0.27
Quarter ended February 28 $ 0.53 $ 0.16
Quarter ended May 31 $ 0.37 $ 0.12
Quarter ended August 31 $ 0.63 $ 0.33
As of August 19, 2005, we believe that there are approximately 36,000
shareholders. We have neither declared nor paid any cash dividends to date. We
do not anticipate paying dividends in the foreseeable future until such time as
the Company has sufficient cash flow from operations to justify payment of a
dividend.
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 S-1.
Results of operations contain historical financial information that may not be
indicative of future operating results. Information included herein relating to
projected growth and future results and events constitute forward-looking
statements. Actual results in future periods may differ materially from the
forward-looking statements due to a number of risks and uncertainties, including
but not limited to fluctuations in the construction, technology, 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.
Historical Results of Operations for Interim Periods During Fiscal 2004 and 2005
The following table sets forth summarized consolidated historical financial
information for the three months and nine months ended May 31, 2005 and May 31,
2004:
11
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% 641 (7,944) 7,537 -95%
------------ ----------- --------- --------- --------- ---------- -------- ---------
Net gain/(loss) (3,951) (4,373) 422 -10% (17,725) (23,605) 4,832 -20%
Unrealized
holding gain/(loss) -- (11) 11 -100% (1,048) 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 $755,000 in taxes.
During the quarter, the Company implemented a company-wide restructuring
which included the formation of the three main operating divisions: IPTV
Solutions, Satellite Communications and Broadband Services. Key components of
the restructuring included:
-- Reducing payroll-related expenses, lowering operational overhead and
carefully controlling expenditures.
-- Hiring of additional experienced sales staff to accelerate revenue
growth.
-- Realigning staff and resources to maximize efficiencies, better serve
customers and partners and concentrate on sales of the Company's three core
offerings: IPTVComplete, MediaPro IP set top boxes and SatMAX satellite
communications system as the Company shifts its emphasis to providing solutions
to broadband and service provider partners.
Sales Information
The following table sets forth summarized sales information for the three
months and nine months ended May 31, 2005, and May 31, 2004:
12
Three Months Ended May 31,
------------------------------------------------------------------
($ 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%
=========== ========== ========== =========== ========= ==========
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 a 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 $329,000 in structured wiring sales is attributable to the
Company's increased sales force to pursue commercial structured wiring and
cabling opportunities.
Cost of Goods Sold
The following table sets forth summarized cost of goods sold information
for the three and nine months ended May 31, 2005, and May 31, 2004:
13
Three Months Ended May 31, Nine Months Ended May 31,
($ 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 $759,000 for design changes
and expedite charges incurred due to a change in product requirements from a key
customer and (ii) depreciation expenses associated with the buildout of the
Company's broadband services infrastructure.
Operating Expenses
The following table sets forth summarized operating expense information for
the three months and nine months ended May 31, 2005, and May 31, 2004:
Three Months Ended May 31, Nine Months Ended May 31,
($ 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 months and nine months ended May 31, 2005, and May 31, 2004:
14
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% - - - 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.
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,
15
$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 for property tax expense.
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 $1,949,000 from the exercise of stock
options.
Historical Results of Operations for Fiscal Year Ended August 31, 2004, Compared
to Fiscal Year Ended August 31, 2003
The following table sets forth summarized consolidated financial
information for the fiscal years ended August 31, 2004 and 2003:
Condensed Financial Information
Fiscal Year Ended August 31,
------------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- -------------- ------------ -------------
Total Sales $ 12,490 $ 11,593 $ 897 8%
Cost of Goods Sold 12,387 10,784 $ 1,603 15%
------------- -------------- ------------ -------------
Gross Profit 103 809 $ (706) -87%
------------- -------------- ------------ -------------
Percent of Total Sales 1% 7%
Operating Expenses 31,055 31,884 $ (829) -3%
------------- -------------- ------------ -------------
Loss from Operations (30,952) (31,075) $ 123 0%
------------- -------------- ------------ -------------
Other Income (Expense) (8,053) (5,426) $ (2,627) 48%
------------- -------------- ------------
Net Loss (39,005) (36,501) $ (2,504) 7%
Unrealized Holding Loss (321) (71) $ (250) 352%
------------- -------------- ------------ -------------
Comprehensive Loss $ (39,326) $ (36,572) $ (2,754) 8%
============= ============== ============ =============
16
Overview
For the fiscal year ended August 31, 2004, Eagle's business operations
reflected emphasis and further expansion of its IP set-top box and BDS business
segments including Eagle's broadband bundled digital services (Internet, video,
voice and security) for residential and business customers. The Company's
consolidated operations generated revenues of $12,490,000 with a corresponding
gross profit of $103,000 for the fiscal year ended August 31, 2004. The overall
increase of 8% in revenues for the fiscal year ended August 31, 2004, as
compared to the fiscal year ended August 31, 2003, was primarily attributable to
a $5,564,000 increase in the Company's sales of bundled digital services, IP
set-top boxes and ancillary equipment product shipments; offset by decreases of
$4,667,000 in structured wiring and other operations.
The Company incurred a net loss of $(39,005,000) for the fiscal year ended
August 31, 2004. The loss was attributable primarily to $26,212,000 of non-cash
charges and increased operating expenses.
The Company's net loss for the fiscal year ended August 31, 2004, included
approximately $5,097,000 in depreciation and amortization expenses and
$1,984,000 in expenses associated with a net increase in the Company's accounts
receivable allowances. Additionally, the Company's expenses included $18,472,000
of non-cash charges and stock issued to pay for interest expense and for
services rendered.
Sales Information
The following table sets forth summarized sales information for the fiscal
years ended August 31, 2004 and 2003:
Fiscal Year Ended August 31,
---------------------------------------------------------
($ in thousands) 2004 % of Total 2003 % of Total $ Change % Change
------------ ------------- ------------ ------------ -------- --------
Structured Wiring $ 678 5% $ 3,692 32% $(3,014) -81.6%
Broadband Services 5,525 44% 2,809 24% $ 2,716 96.7%
Products 6,190 50% 3,342 29% $ 2,848 85.2%
Other 97 1% 1,750 15% $(1,653) -94.5%
------------ ------------- ------------ ------------ ---------- -------
Total Sales $ 12,490 100% $ 11,593 100% $ 897 7.7%
============ ============= ============ ============ ========== =======
For the fiscal year ended August 31, 2004, net sales increased to
$12,490,000 from $11,593,000 during the fiscal year ended August 31, 2003. The
overall increase of 7.7% was attributable to a $1,389,000 increase in the
Company's product sales of IP set-top boxes and an increase of $2,716,000 in the
Company's BDS sales; offset by decreases of $3,014,000 in structured wiring
operations and a $1,653,000 decrease in other sales. The $2,848,000 increase in
the Company's product sales was primarily attributable to shipment of IP set-top
boxes and related equipment to a major customer. The $2,716,000 increase in
sales of the Company's broadband services was primarily attributable to
contracts valued at $3,111,000 executed by the Company's security-monitoring
subsidiary, DSS Security, Inc., against which the Company realized sales of
$2,874,000 during the fiscal year ended August 31, 2004. Without giving effect
to the security monitoring contract transactions of $2,874,000, the Company's
base broadband services sales decreased by approximately $158,000 in the fiscal
year ended August 31, 2004, primarily attributable to the exit from the
unprofitable Austin area BDS market discussed in prior periods and the decline
17
in recurring security monitoring sales resulting from the sale of certain
security monitoring contracts in the Company's portfolio to Sweetwater Capital,
LLC. The $3,014,000 decrease in structured wiring sales corresponded to the
Company's previously announced strategy to no longer pursue structured wiring
and commercial cabling opportunities on a direct basis outside of the its BDS
model. The $1,653,000 decrease in other sales was primarily attributable to the
other sales components from various operating segments that were divested or
phased out during fiscal 2004 including Contact Wireless, UCG, and Eagle
Wireless.
Cost of Goods Sold
Fiscal Year Ended August 31,
---------------------------------------------------
($ in thousands) 2004 2003 $ Change % Change
--------- --------- --------- --------
Direct Labor and Related Costs $ 1,244 $ 2,195 $ (951) -43.3%
Products and Integration Service 5,372 2,773 2,599 93.7%
Impairment Slow Moving &Obsolete Inventory 1,300 2,627 (1,327) -50.5%
Structured Wiring Labor and Material 448 1,774 (1,326) -74.7%
Broadband Services Costs 2,856 903 1,953 216.3%
Depreciation and Amortization 1,141 456 685 150.2%
Other Manufacturing Costs 26 56 (30) -53.6%
--------- --------- --------- --------
Total Operating Expenses $ 12,387 $ 10,784 $ 1,603 14.9%
========= ========= ========= ========
Cost of Goods Sold. For the fiscal year ended August 31, 2004, cost of
goods sold increased by 14.9% to $12,387,000 from $10,784,000 as compared to
fiscal year ended August 31, 2003. The overall increase of $1,603,000 was
primarily attributable to the shipment of IP set-top boxes and the purchase and
resale of certain related equipment. The Company's overall gross profit
percentage was 1% and 7% for the fiscal years ended August 31, 2004 and 2003,
respectively. This substantial decrease in gross profit percentage is primarily
attributable to a heavy sales mix of product shipments of IP set-top boxes and
the dilutive effect of the purchase and resale of certain related equipment
versus the prior fiscal year; the dilutive effect of the security monitoring
transactions recorded in the fiscal year ended August 31, 2004, i.e., sales
recorded of $2,873,000 with corresponding cost of sales of $1,901,000, the
decision to no longer pursue structured wiring outside of its BDS model and an
increase in depreciation expenses associated with the build-out of the Company's
BDS infrastructure.
Operating Expenses
The following table sets forth summarized operating expense information for
the fiscal years ended August 31, 2004 and 2003.
Fiscal Year Ended August 31,
-----------------------------------------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- ------------ ------------ -----------
Salaries and Related Costs $ 13,146 $ 6,102 $ 7,044 115%
Advertising and Promotion 29 247 (218) -88%
Depreciation and Amortization 3,943 4,776 (833) -17%
Research and Development 570 411 159 39%
Other Support Costs 13,367 12,737 630 5%
Impairment, Write-Downs &Restructuring Costs 7,611 (7,611) -100%
------------- ------------ ------------ --------
Total Operating Expenses $ 31,055 $31,884 $ (829) -3%
============= ============ ============ ========
The following table breaks out other support costs information for the
fiscal years ended August 31, 2004 and 2003:
Other Support Costs
18
Fiscal Year Ended August 31,
-----------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- ------------ ------------- -----------
Auto Related $ 22 $ 19 $ 3 16%
Bad Debt 2,643 2,177 466 21%
Delivery and Postage 47 95 (48) -51%
Fees 288 418 (130) -31%
Insurance and Office 425 437 (12) -3%
Professional and Contract Labor 6,818 6,129 689 11%
Rent 507 1,183 (676) -57%
Repairs and Maintenance 43 47 (4) -9%
Travel 237 377 (140) -37%
Taxes 1,474 170 1,304 767%
Telephone and Utilities 794 1,394 (600) -43%
Other 69 291 (222) -76%
------------- ------------ ------------- -----------
Total Operating Expenses $ 13,367 $ 12,737 $ 630 5%
============= ============ ============= ===========
For the fiscal year ended August 31, 2004, operating expenses decreased by
3% to $31,055,000 as compared to $31,884,000 for the fiscal year ended August
31, 2003. The primary fluctuations that occurred as evidenced by the two
preceding tables immediately above are discussed below:
o A $7,044,000 increase in salaries and related costs. The increase was
attributable to an expansion of executive and general management
compensation expenses, increased Board of Director compensation
expense, and compensation expense associated with stock option
exercises and severance. In addition, compensation for certain
officers and key employees under incentive clauses of their employment
contracts (i) includes a non-cash expense of $4,493,000 incurred upon
the modification of warrants for 4,200,000 common shares and (ii)
reflects a guaranteed compensation of the modified warrants equivalent
to $1.75 less the warrant strike price.
o An $833,000 decrease in depreciation and amortization, due principally
to the prior year disposition of assets in subsidiaries that are no
longer active.
o A $630,000 increase in other support costs, the components of which
are set forth on the table included immediately above. Included in
this increase was a $1,304,000 increase in property taxes recorded
against the Company's BDS infrastructure, a $687,000 increase in
professional and contract labor and a $466,000 increase in bad debt,
offset by a $676,000 decrease in rent expense and a $597,000 decrease
in telephone and utilities.
o A $159,000 increase in research and development expenses, primarily
consisting of the Company's continued investment in HDTV-ready IP
set-top boxes for hospitality and broadband customers and the SatMAX
satellite voice and data communications products for military,
government and commercial customers.
Net Loss
For the fiscal year ended August 31, 2004, Eagle's net loss was
$(39,005,000), compared to a net loss of $(36,501,000) during the fiscal year
ended August 31, 2003.
Changes in Cash Flow
Eagle's operating activities used net cash of $(3,784,000) in the fiscal
year ended August 31, 2004, compared to use of net cash of $(6,085,000) in the
fiscal year ended August 31, 2003. The decrease in net cash used by operating
activities was primarily attributable to fund an increase in the Company's net
loss, net of non-cash charges, totaling $27,512,000 combined with $8,000,000 of
cash provided by fluctuations in working capital requirements consisting of the
19
combination of accounts receivable, inventory, prepaid expenses, accounts
payable and accrued expenses. Eagle's investing activities used net cash of
$1,216,000 in the fiscal year ended August 31, 2004, compared to $1,276,000 in
the fiscal year ended August 31, 2003. The decrease was due primarily to a
significant decline in investment activities and purchase of equipment
associated with the prior years build out of Eagle's network and infrastructure
for the delivery of broadband services. Eagle's financing activities provided
cash of $5,936,000 in the fiscal year ended August 31, 2004, compared to
$6,912,000 of cash provided in the fiscal year ended August 31, 2003. The
decrease resulted from less borrowing activities during the fiscal year ended
August 31, 2004.
Historical Results of Operations For Fiscal Year Ended August 31, 2003, Compared
to Fiscal Year Ended August 31, 2002
Net Sales
For the year ended August 31, 2003, net sales declined to $11,593,000 from
$29,817,000 during the year ended August 31, 2002. The overall decrease of 61%
was primarily attributable to the Company's decision to no longer pursue direct
sales of low-margin commodity computer products in the Company's subsidiary
United Computing Group, Inc. Additionally, a decline in the sale of commercial
and residential home cabling occurred as a result of a deferral of
implementation of national contracts and the Company's decision to no longer
pursue Atlantic Pacific/Home Systems structured wiring opportunities on a direct
standalone model basis outside of its BDS model, including home cabling projects
in the Arizona, Houston, San Antonio and Austin, Texas, markets, partially
offset by increased sales of broadband products and services.
Cost of Goods Sold
For the year ended August 31, 2003, cost of goods sold declined to
$10,784,000 from $22,704,000 during the year ended August 31, 2002. The decrease
was primarily attributable to the Company's decision to no longer pursue the
direct sales of low-margin commodity computer products and commercial structured
wiring in the markets referenced above. Eagle's overall gross profit percentage
was 7% and 24% for the years ended August 31, 2003 and August 31, 2002. This
decrease is primarily attributable to write-downs of inventory of $2.6 million
in connection with impaired, slow moving and obsolete inventory.
Eagle's Structured Wiring cost of goods sold decreased to $1,774,000 from
$2,121,000 for the period ending August 31, 2003 and 2002, respectively, on
corresponding revenues for these same periods of $3,692,000 and $8,036,000;
thereby resulting in a gross margin decline to $1,918,000 from $5,915,000 for
the same periods. This gross margin decline is primarily attributable to the
Company's decision to no longer pursue the direct sales of commercial structured
wiring and inventory write-downs totaling $0.5 million.
Eagle's Broadband Services cost of goods sold increased to $903,000 from
$763,000 for the period ending August 31, 2003 and 2002, respectively, on
corresponding revenues for these same periods of $2,809,000 and $2,657,000;
thereby resulting in a gross margin increase to $1,906,000 from $1,894,000 for
the same periods. This gross margin increase is primarily attributable to the
increase in revenues for this sector.
Eagle's Products cost of goods sold decreased to $5,400,000 from
$15,250,000 for the period ending August 31, 2003 and 2002, respectively, on
corresponding revenues for these same periods of $3,342,000 and $16,108,000;
thereby resulting in a gross margin decline to a deficit $2,058,000 from
$858,000 for the same periods. This gross margin decline is primarily
attributable to the decline in revenues for this sector, resulting from Eagle's
decision to no longer pursue direct sales of low-margin commodity computer
products and inventory write-downs totaling $2.1 million .
Operating Expenses
For the year ended August 31, 2003, operating expenses decreased to
$31,884,000 from $83,821,000 for the year ended August 31, 2002. The primary
portions of the decrease are discussed below:
20
o A $57,054,000 decrease in non-cash impairment charges resulting from a
$7,611,000 non-cash impairment charge for the year ended August 31,
2003, associated with the Company's decision to no longer pursue the
direct sales of low-margin commodity products discussed above compared
to a $64,665,000 non-cash impairment charges for the year ended August
31, 2002, for the impairment of licenses and equipment in Eagle's Link
Two subsidiary and goodwill related to the Clearworks.net acquisition.
At August 31, 2003, management determined that a $7,611,000 non-cash
impairment charge was necessary for realigned, impaired and abandoned
operations including direct sales of low-margin commodity products,
residential and commercial structured wiring operations, and the
withdrawal from its Austin, Texas, area BDS development based on the
lack of demand for BDS services resulting from a slower build out of
the development than originally projected in conjunction with local
market competition. Included in the impairment was the write down of
goodwill associated with the Atlantic Pacific Comtel acquisition of
$1,878,000.
o A $1,693,000 decrease in salaries and related costs as a result of
overall staffing reductions across all business units, the majority of
which occurred in Atlantic Pacific/Home Systems and United Computing
Group operations.
o A $716,000 decrease in advertising and promotion, due primarily to
extensive cost reductions measures implemented in fiscal 2003 as the
Company placed more emphasis on directly marketing its products and
services to its customers as well as entering into business
relationships with financial and technology companies to provide BDS
services to cities and municipalities and decreased attendance at
conventions and tradeshows.
o A $1,244,000 decrease in depreciation and amortization, due
principally to the disposal of certain assets from the Company's
Austin area BDS operations.
o An $8,763,000 increase in other support costs, due to an increase in
litigation settlement costs of $3,650,000, bad debt expense of
$2,177,000 and various charges included in accrued expenses related to
costs associated with reserves for early terminations of certain
property leases totaling $171,000 and reserves for sales tax
liabilities that resulted from a sales tax audit of the Company's
United Computing Group operation for time periods that preceded the
acquisition date of this operation totaling $553,000.
Net Loss
For the year ended August 31, 2003, Eagle's net loss was $36,501,000,
compared to a net loss of $76,973,000 during the year ended August 31, 2002.
Liquidity and Capital Resources
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 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
as of May 31, 2005 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 at a penalty rate per the terms of the original
agreement. 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.
21
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. In August 2005, the Company privately placed the sale of
up to 30 million shares of its common stock for net proceeds of up to
$3,766,500. The Company will utilize these proceeds along with its cash and cash
equivalents to fund operations. We may need to raise additional capital to fund
working capital in the third quarter of fiscal 2006. If shareholder approval for
the issuance of the 14,875,000 shares is not obtained, we will only receive net
proceeds of $1,898,943 and we may need to raise additional capital to meet
working capital requirements in the second quarter of fiscal 2006.
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 as we have not generated positive cash
flows from operations. 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
may need to continue to rely upon financing from external sources to fund its
operations for the foreseeable future. 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.
Contractual Obligations
The following table sets forth contractual obligations as of May 31, 2005.
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 that with LLV Broadband, LLC. See "Prospectus
Summary - Recent Developments".
22
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.
Goodwill is primarily the Company's 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
23
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.
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.
24
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 to 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 planned. The
Company does not foresee 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
December 15, 2005. This standard 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 plans.
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
25
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 our financial position and results of
operations.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present our selected consolidated financial
information as of the end of the periods indicated. The selected consolidated
financial information for, and as of the end of, each of the twelve months ended
August 31, 2004, August 31, 2003, August 31, 2002, August 31, 2001 and August
31, 2000, are from our audited consolidated financial statements. The selected
consolidated financial information is not necessarily indicative of the results
that may be expected for any future period. The selected consolidated financial
information should be read in conjunction with "Management's Discussion and
Analysis" and the historical and consolidated financial statements and notes
included in this prospectus.
Nine Months Ended May 31,
-----------------------------
2005 2004
-----------------------------
($ in thousands, except per share amounts)
Net Sales $ 7,188 $ 11,232
Operating Expenses 17,844 17,632
Operating Income (Loss) (18,366) (15,661)
Other Income (Expense), Net 641 (7,944)
Income Tax Provision - -
---------- ----------
Net Income (Loss) $ (17,725) $ (23,605)
========== ==========
Earnings Per Share (Basic) (0.08) (0.13)
Cash Used by Operating Activities $ (9,200) $ (3,498)
Cash used by Investing Activities $ (1,151) $ (1,296)
Cash Provided (Used) by
Financing Activities $ 11,176 $ 5,597
Total Assets $ 70,642 $ 70,211
Long-Term Debt - -
Total Stockholders' Equity $ 57,458 $ 50,103
Year Ended August 31,
---------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
($ in thousands, ---------------------------------------------------------------------------------------
except per share amounts)
Net Sales $ 12,490 $ 11,593 $ 29,817 $ 28,110 $ 5,240
Operating Expenses 31,055 31,884 83,821 16,582 3,973
Operating Income (Loss) (30,952) (31,075) (76,708) (8,880) (1,215)
Other Income (Expense), Net (8,053) (5,426) (265) 2,348 1,516
Income Tax Provision - - - - 96
--------- --------- --------- --------- --------
Net Income (Loss) $ (39,005) $ (36,501) $ (76,973) $ (6,532) $ 187
========= ========= ========= ========= ========
Earnings Per Share (Basic) (0.21) (0.38) (1.20) (0.13) 0.01
Cash Used by Operating Activities $ (3,493) $ (6,085) $ (797) $ (699) $ (5,299)
Cash used by Investing Activities $ (1,216) $ (1,276) $ (13,668) $ (9,721) $ (2,224)
Cash Provided (Used) by
Financing Activities $ 5,936 $ 6,912 $ (2,342) $ (3,846) $ 39,681
Total Assets $ 70,211 $ 77,366 $ 89,151 $ 170,021 $ 57,653
Long-Term Debt - - $ 1,272 $ 2,136 $ 73
Total Stockholders' Equity $ 50,103 $ 58,336 $ 76,548 $ 148,482 $ 54,073
26
SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
The information below is from unaudited consolidated financial statements.
Three Months Ended,
($ in thousands, except 5/31/05 2/28/05 11/30/04
- ----------------------- ------- ------- --------
per share amounts)
- -----------------------
Total Sales $ 2,976 $ 2,683 $ 1,528
Cost of Goods Sold 2,383 3,643 1,685
Gross Profit 593 (960) (157)
Operating Expenses 5,573 7,928 4,342
Loss from Operations (4,980) (8,888) (4,499)
Other Income/(Expense) 1,029 (438) 51
Net Gain/(Loss) (3,951) (9,326) (4,448)
======= ======= ========
Earnings Per Share (Fully Diluted) (0.02) (0.04) (0.02)
------- ------- --------
Three Months Ended,
($ in thousands, except 8/31/04 5/31/04 2/28/04 11/30/03
- ------------------------- ------- ------- ------- --------
per share amounts)
- ------------------------
Total Sales $ 1,258 $ 5,091 $ 3,744 $ 2,397
Cost of Goods Sold 3,126 4,867 3,099 1,295
Gross Profit (1,868) 224 645 1,102
Operating Expenses 14,797 4,467 8,952 2,839
Loss from Operations (16,665) (4,243) (8,307) (1,737)
Other Income/(Expense) (108) (130) (1,091) (6,724)
Net Gain/(Loss) (16,773) (4,373) (9,398) (8,461)
======= ======= ======= ========
Earnings Per Share (Fully Diluted) (0.08) (0.02) (0.05) (0.05)
------- ------- ------- --------
Three Months Ended,
($ in thousands, except 8/31/03 5/31/03 2/28/03 11/30/02
- ------------------------- ------- ------- ------- --------
per share amounts)
- ------------------------
Total Sales $ 2,065 $1,847 $ 3,063 $ 4,618
Cost of Goods Sold 5,372 1,442 1,344 2,626
Gross Profit (3,307) 405 1,719 1,992
Operating Expenses 22,607 3,998 2,615 2,664
Loss from Operations (25,914) (3,593) (896) (672)
Other Income/(Expense) (4,944) (240) (83) (159)
Net Gain/(Loss) (30,858) (3,833) (979) (831)
======= ======= ======= ========
Earnings Per Share (Fully Diluted) (0.23) (0.05) (0.01) (0.01)
------- ------- ------- --------
27
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Equity Market Risks
The Company is exposed both to market risk from changes in interest rates
on funded debt and changes in equity values on common stock investments it holds
in publicly traded companies. The Company also previously had exposure that
related to the Company's revolving credit facility. The Company fully retired
its revolving credit facility in September 2003, and thus no longer has such
exposure related to interest rate risk. Borrowings under the credit facility
bear interest at variable rates based on the bank prime rate. The extent of this
risk with respect to interest rates on funded debt is not quantifiable or
predictable due to the variability of future interest rates; however, the
Company does not believe a change in these rates would have a material adverse
effect on the Company's operating results, financial condition, and cash flows.
The Company's cash and cash equivalents 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.
OUR BUSINESS
Overview
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 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 fast, low cost way for broadband providers to deliver
competitive IP video services; the MediaPro 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-based voice and data communications from any
location on Earth.
During the third quarter ended May 31, 2005, the Company implemented a
corporate restructuring designed to reduce costs, focus company resources to
drive revenue growth and position the Company to better compete in the
broadband, IP and communications markets. This has aligned our resources to
better capitalize on potential revenue opportunities for the Company's core
IPTV, IP set top boxes, satellite communications and broadband services
offerings. This restructuring included the formation of three main operating
divisions:
o IPTV Solutions Division - focused on the Company's IPTVComplete and
Media Pro IP set top box product offerings.
o Satellite Communications Division - includes the SatMAX
non-line-of-sight satellite communications technology.
28
o Broadband Services Division - focused on offering broadband, security
and managed services.
Key components of the restructuring included:
o Reducing payroll-related expenses, lowering operational overhead and
controlling expenditures.
o Hiring of additional experienced sales staff to accelerate revenue
growth.
o 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.
In August 2005, the Company announced that it was further concentrating its
efforts on delivering IP-based video and set-top box solutions to broadband and
hospitality providers and satellite communications solutions to government,
military and commercial customers.
Product and Service Categories
Eagle IPTV Solutions
Eagle's IPTV solutions include its IPTVComplete video solution and MediaPro
IP set top boxes.
IPTVComplete Video Solution
IPTVComplete is a turnkey video solution that provides new and incumbent
broadband providers a faster, lower cost way to quickly and easily launch and
deliver high-quality entertainment services to their customers over their fiber
or DSL broadband networks. IPTVComplete leverages Eagle's video content rights,
expertise delivering video services and IP set-top boxes, along with Eagle
partner GlobeCast's satellite distribution capabilities, to provide what we
believe to be a unique combination of video content, headend infrastructure,
satellite distribution and set-top boxes. The solution provides all of the
components broadband providers need to deliver an attractive bundle of video and
interactive entertainment services.
The Company launched IPTVComplete during the second quarter of fiscal 2005
and is actively marketing the solution to broadband providers nationwide.
IP Set-Top Box Products
Eagle designs and markets a complete line of advanced MediaPro IP set-top
box products. Either standalone or in conjunction with the Company's EZ-Magic
middleware software, the products enable hotel and casino owners, hospitals,
apartment owners, municipalities, real estate developers and schools to deliver
a full range of high-quality standard and high definition entertainment and
information services that can generate revenues for these operators. Media Pro
IP set-top boxes also enable incumbent and competitive telecommunications
service providers to cost effectively deploy IP-based broadband and video
services to their customers.
The Media Pro line of IP set-top boxes delivers full computing and video
functionality in a compact footprint with a very quiet, fan-less design that
enables a wide range of on-demand IP-based applications including high-speed
Internet access, streaming IP video, digital audio/music, video-on-demand, 3D
gaming, video conferencing and more. The Company also markets its customizable
EZ-Magic middleware software platform that delivers high definition streaming
video, superior digital audio, easier navigation of hotel and community services
(i.e. concierge, local restaurants and events, etc.), advanced content and
system security for a wide variety of hardware platforms.
29
Eagle's IP set-top box and middleware software products revenues are
reported under the category "Products" on the Company's Consolidated Statements
of Operations.
Eagle Satellite Communications Solutions
SatMAX Satellite-Based Voice and Data Communications
Eagle's SatMAX non-line-of-sight repeater system is an innovative and
proprietary non-line-of-sight communications technology that enables users of
the Iridium satellite network to establish reliable voice and data
communications to and from any location where the user is unable to gain line of
sight to an orbiting Iridium Satellite such as onboard in-flight aircraft,
within buildings, under ground or from obstructed areas. The technology provides
global communications that enhance user productivity, mobility, problem solving,
field-to-headquarters collaboration and emergency backup/response for a wide
range of mission-critical and everyday communications needs. By extending
coverage indoors to areas not traditionally served by satellite networks, the
SatMAX extends customers' usage area, while enhancing the utility and overall
value for both new and existing Iridium aviation, government, military, homeland
security and commercial/enterprise customers. The Company has received
certification by both the Federal Communications Commission (FCC Certification
Identifier # LOKJHJLBT05A00021) and Iridium Satellite LLC for the SatMAX.
Eagle's SatMAX revenues are reported under the category "Products" on the
Company's Consolidated Statements of Operations.
Eagle Broadband Services Solutions
Eagle's Broadband Services solutions include the Company's bundled
broadband services, security services and managed services (structured wiring,
etc.).
Eagle Bundled Broadband Services (BDS Services)
Historically, Eagle focused on assisting municipalities, utilities, real
estate developers and service providers provide IP-based broadband services to
their customers including high-speed Internet, home security monitoring,
telephone service, and cable TV services over fiber and IP networks. In August
2005, the Company announced that it was shifting its focus to further
concentrate its efforts on delivering IP-based video and set-top box solutions
to broadband and hospitality providers and satellite communications solutions to
government, military and commercial customers. While the Company continues to
provide bundled broadband services to a select number of communities in Texas,
the Company believes that the IPTV, set top box and satellite communications
markets offer greater opportunities in the future.
Eagle's bundled broadband services revenues are reported under the category
"Broadband Services" on the Company's Consolidated Statements of Operations.
Eagle Security Services
Eagle, through its subsidiary DSS Security, Inc., markets
security-monitoring services. DSS Security's principal business activity is
providing monthly security monitoring service to both commercial and residential
customers.
Eagle's Security Services revenues are reported under the category
"Broadband Services" on the Company's Consolidated Statements of Operations.
Eagle Managed Services
30
Eagle provides data, telephony and fiber optic installation, project
management and support services from initial concept through engineering to
completion and documentation. Eagle Managed Services team installs fiber and
cabling to commercial and industrial clients throughout the United States.
Services include:
o Multi-site rollout installation
o Statement of work/request for quotation preparation
o Installation supervision
o Structured wiring design
o Comprehensive project management
o Copper wiring configuration
o Fiber optic acceptance testing
o Aerial and underground OSP
o Fiber optic and copper cable
o Field service and support
Eagle's Communications Services revenues are reported under the category
"Structured Wiring" on the Company's Consolidated Statements of Operations.
Eagle Consulting Services
Eagle routinely provides consulting services on a contract basis to support
the sale of its main product lines. Examples of these consulting services
include design and engineering support for fiber-to-the-user headend and optical
network integration. Eagle also performs research and development on a contract
basis.
Eagle's Consulting Services revenues are reported under the category
"Other" on the Company's Consolidated Statements of Operations.
Eagle Service and Support
Eagle provides service and support to customers on an on-going basis
including installation, project management of turnkey systems, training, and
service or extended warranty contracts with Eagle. Eagle believes that it is
essential to provide reliable service to customers in order to solidify customer
relationships and be the vendor of choice when a customer seeks new services or
system expansions.
This relationship is further developed as customers come to depend upon
Eagle for installation, system optimization, warranty and post-warranty
services.
Eagle has a warranty and maintenance program for both its hardware and
software products and maintains customer service facilities. Eagle's standard
warranty provides its customers with repair or replacement of any defective
Eagle manufactured equipment. The warranty is valid on all products for the
period of one year from the later of the date of shipment or the installation by
an Eagle qualified technician.
Eagle's Service and Support Services revenues are reported under the
category "Other" on the Company's Consolidated Statements of Operations.
Customers
IPTV, IP set-top box, satellite communications and broadband products and
services are sold to a broad range of customers. These include residential,
commercial, enterprise, military, government and service provider customers.
Eagle's IPTVComplete video solution is sold to new and incumbent broadband
providers including telephone companies, fiber broadband providers,
municipalities, real estate developers, etc.
31
Eagle's MediaPro IP set top box products are sold to a range of customers
nationwide including hotel and casino owners, telephone companies and other
broadband providers, hospitals, apartment/condominium owners, municipalities,
real estate developers, corporations and schools.
Eagle's SatMAX non-line-of-sight, satellite communications systems are sold
to civilian government, military, homeland security and Fortune 1000
corporations.
Eagle Broadband and Security Services have primarily been sold in select
Texas and Nevada communities.
Eagle Managed Services sells its structured wiring and project management
services to a wide range of customers including telecommunications, hospitality,
industrial and petrochemical, oil/gas companies and government sectors.
Marketing and Sales
The majority of the Company's products and services are marketed through
its employees using direct sales, channel marketing and various types of direct
marketing techniques.
Eagle IPTV and IP set top box solutions are marketed through Eagle's direct
sales staff and select reseller/channel partners.
Eagle Managed Services are marketed through Eagle's direct sales staff and
select reseller/channel partners.
Eagle's SatMAX global non-line-of-sight communications system is marketed
through Eagle's direct sales staff and select resellers and channel partners to
Fortune 1000 enterprises, commercial aviation, government, the military and
homeland security customers.
Eagle BDS Broadband Services, Security Services and Managed Services are
marketed through Eagle's direct sales and customer service staff.
Research and Development
Eagle believes that a strong commitment to research and development is
essential to the continued growth of its business. One of the key components of
Eagle's development strategy is the promotion of a close relationship between
its development staff, internally with Eagle manufacturing and marketing
personnel, and externally with Eagle customers. We believe that this strategy
has allowed Eagle to develop and bring to the market customer-driven products
that meet real customer needs.
Eagle has focused a large portion of its new product development resources
on the development of the new broadband, video, entertainment and communications
products and services. In addition, Eagle has formed a number of strategic
relationships with other large suppliers and manufacturers that will allow the
latest in technology and techniques to be utilized in the Company's IP
set-top-box product line. Eagle will continue to incur research and development
expenses with respect to its IPTVComplete, IP set-top-box and satellite
communications product lines during the current fiscal year.
Eagle has extensive expertise in the technologies required to develop
advanced broadband, video, entertainment, communications and satellite
communications/radio frequency. Eagle believes that by having a research and
development staff with expertise in these key areas, it is well positioned to
develop enhancements for its existing products as well as the next generation of
broadband, entertainment and communications products. Investment in advanced
computer-aided design tools for simulation and analysis has allowed Eagle to
reduce the time for bringing new products to market. Research and development
expenditures incurred by Eagle for the fiscal years ended August 31, 2004, 2003
and 2002 were $557,000, $411,000 and $404,000, respectively.
32
Manufacturing
Eagle currently subcontracts and/or provides limited manufacturing of its
satellite-based communications and wireless products at its facilities in League
City, Texas. Some subassemblies are manufactured for Eagle by subcontractors at
various locations throughout the world. Eagle's manufacturing expertise resides
in assembling subassemblies and final systems that are configured to its
customers' specifications. The components and assemblies used in Eagle's
products include electronic components such as resistors, capacitors,
transistors, and semiconductors such as field programmable gate arrays, digital
signal processors and microprocessors, and mechanical materials such as cabinets
in which the systems are built.
Substantially all of the components and parts used in Eagle's products are
available from multiple sources. In those instances where components are
purchased from a single source, the supplier is reviewed for stability and
performance and the Company also strives to have secondary suppliers as well.
Additionally, as necessary, Eagle purchases sufficient quantities of components
that have long-lead requirements in the world market. Eagle ensures that all
products are tested, tuned and verified prior to shipment to the customer.
Eagle has determined that the most cost effective manufacturing method for
its IP set top box product line is to utilize offshore contract production
facilities supplemented with high volume United States based contract
facilities. The Company has established relationships with manufacturers in Asia
capable of producing a wide range of products, and that are recognized as
pioneers in the field and are both ISO-9001 and ISO-9002 certified.
Competition
The IPTV market is projected to grow rapidly in the coming years as
broadband providers face increasing competitive pressure to offer high quality
video and entertainment services to meet the demand from their customers.
Because the IPTV market is expected to be very lucrative for companies providing
IPTV products, services and technology, it has attracted a range of large and
small, new and established companies that are competing for IPTV business. Many
of these companies have greater resources than Eagle. Because we believe our
IPTVComplete video solution offers unique capabilities, we believe Eagle can
effectively compete in the IPTV market. However there can be no assurance that
these conclusions are correct and that the IPTV market will grow as projected
and that Eagle can gain significant market share in this new market.
Eagle competes with many established companies in the set-top-box business
including Scientific Atlanta, Motorola, and a number of smaller companies. Most
of these companies have greater resources than Eagle. The markets that are
currently developing for set-top box products are large and rapidly growing.
Eagle has studied these markets and is of the belief, based on this research,
that it can effectively compete in these markets with its new IP set-top-box
product line. However, there can be no assurance that these conclusions are
correct and that the set top box markets will continue to expand at their
current rates and that Eagle can gain significant market share, if any, in the
future.
Eagle SatMAX satellite communications system is a proprietary,
non-line-of-sight communications system. The Company is not currently aware of
other companies in the U.S. that offer products that can provide similar
non-line-of-sight, satellite-based voice and data communications services.
However, the satellite communications market has many large and small companies
that provide satellite communications products and services and there can be no
assurance that these companies will not develop products that could provide
similar functions as the SatMAX or that the Company can gain significant market
share, if any, in the future.
Eagle's Broadband and Security Services compete directly and indirectly
with many established companies and service providers that provide fiber and
cable, structured wiring, broadband data/Internet, security monitoring, cable
television and telephone services. Most of these companies have greater
resources than Eagle. Certain of Eagle's residential customers are subject to
developer and homeowner association agreements that allow Eagle BDS to be the
primary single-source provider of these services. However, there can be no
assurance that these conclusions are correct and that the broadband and security
services markets will continue to expand at the current rates and that Eagle
Broadband and Security Services can effectively compete in this market.
Eagle Managed Services competes with many established companies in the
fiber and cable, structured wiring and project management services areas. Most
of these companies have greater resources available than Eagle Managed Services.
33
Eagle has studied these markets and is of the belief that the offering of the
collective services on a nationwide scale is a competitive advantage for Eagle
Managed Services. The use of the sub-contractors located across the nation
allows Eagle Managed Services to complete large projects in a cost effective and
efficient manner. However, there can be no assurance that these conclusions are
correct and that these services will continue to expand at their current rates
and that Eagle Managed Services can effectively compete in this market.
Proprietary Information
Eagle attempts to protect its proprietary technology through a combination
of trade secrets, non-disclosure agreements, patent applications, copyright
filings, technical measures, and common law remedies with respect to its
proprietary technology. Eagle has filed a number of patent applications but has
not yet been issued any patents on its products, technology or processes against
such patent applications. This protection may not preclude competitors from
developing products with features similar to Eagle's products. The laws of some
foreign countries in which Eagle sells or may sell its products do not protect
Eagle's proprietary rights in the products to the same extent as do the laws of
the United States. Although Eagle believes that its products and technology do
not infringe on the proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims against Eagle in the future.
If litigation resulted in Eagle's inability to use technology, Eagle might be
required to expend substantial resources to develop alternative technology.
There can be no assurance that Eagle could successfully develop alternative
technology on commercially acceptable terms.
Regulation
Several of Eagle's products operate on radio frequencies. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States and internationally. Regulatory approvals
generally must be obtained by Eagle in connection with the manufacture and sale
of its products and by customers to operate Eagle's products. There can be no
assurance that appropriate regulatory approvals will continue to be obtained or
that approvals required with respect to products being developed for the IPTV,
set-top box, satellite communications and/or broadband services markets will be
obtained. The enactment by federal, state, local or international governments of
new laws or regulations or a change in the interpretation of existing
regulations could affect the markets for Eagle's products. Although recent
deregulation of international telecommunications industries along with recent
radio frequency spectrum allocations made by the FCC have increased the demand
for Eagle's products, there can be no assurance that the trend toward
deregulation and current regulatory developments favorable to the promotion of
new and expanded IPTV, broadband and communications services will continue or
that future regulatory changes will have a positive impact on Eagle.
Employees
As of August 21, 2005, Eagle employed approximately 104 persons and
retained independent contractors as necessary. Eagle believes its employee
relations to be good. Eagle enters into independent contractual relationships
with various individuals, from time to time, as needed.
Description of Property
Eagle's headquarters are located in League City, Texas, and include
approximately 25,550 square feet of leased office, production, and storage
space. The lease expires in June 2007. Eagle believes that its rental rates are
at market prices. Eagle has insured its facilities in an amount that it believes
is adequate and customary in the industry.
Legal Proceedings
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
34
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 July 2003, Eagle became a defendant in Cornell Capital Partners, L.P.
vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), in the United
States District Court for the District of New Jersey. The suit presents claims
for breach of contract, state and federal securities fraud and negligent
misrepresentation. Plaintiff has also alleged that Eagle has defaulted on a
convertible debenture for failing to timely register the shares of common stock
underlying the convertible debenture and is seeking to accelerate the maturity
date of the debenture. In November 2003, the principal balance of the debenture
was repaid, although the suit remains outstanding. Cornell claims damages of
approximately $1,000,000. The Company denies the claims and intends to
vigorously defend this lawsuit and the claims against it. Eagle has asserted
counterclaims against Cornell for fraud and breach of contract in the amount of
$2,000,000. The Company has not accrued any expenses against this lawsuit, as
the outcome cannot be predicted at this time.
In September 2003, Enron sued United Computing Group, Inc., in Enron Corp.
(Debtors/Plaintiff) vs. United Computing Group, Inc.; Case No. 01-16034 in the
United States Bankruptcy Court for the Southern District of New York. The suit
presents claims pursuant to sections 547 and 550 of the Bankruptcy Code to avoid
and recover a transfer in the amount of approximately $1,500,000.00. Defendant
has filed an answer, denies the claims, and intends to vigorously defend this
lawsuit and claims against it. The Company has not accrued any expenses against
this lawsuit, as the outcome cannot be predicted at this time.
In fiscal 2004, The Tail Wind Fund Ltd. sued Link Two Communications, Inc.,
and Eagle Broadband, Inc., Civil Action 04-CV-05776, in the United States
District Court for the Southern District of New York. Tail Wind claims breach of
contract seeking $25 million. The Company intends to vigorously defend this
claim. The Company has accrued $500,000 in expenses against this lawsuit,
although the outcome cannot be predicted at this time.
Eagle is involved in lawsuits, claims, and proceedings, including those
identified above, which arise in the ordinary course of business. In accordance
with SFAS No. 5, "Accounting for Contingencies," Eagle makes a provision for a
liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Eagle believes it has adequate
provisions for any such matters. Eagle reviews these provisions at least
quarterly and adjusts these provisions to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel, and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, Eagle believes that it has valid defenses with respect to legal matters
pending against it. Nevertheless, it is possible that cash flows or results of
operations could be materially affected in any particular period by the
unfavorable resolution of one or more of these contingencies.
We intend to vigorously defend these and other lawsuits and claims against
us. However, we cannot predict the outcome of these lawsuits, as well as other
legal proceedings and claims with certainty. An adverse resolution of pending
litigation could have a material adverse effect on our business, financial
condition and results of operations. The Company is subject to legal proceedings
and claims that arise in the ordinary course of business. The Company's
management does not expect that the results in any of these legal proceedings
will have adverse affect on the Company's financial condition or results of
operations.
35
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. In the event that the
shareholders do not approve the issuance of the 14,875,000 shares of common
stock, the aggregate number of shares for resale will be 15,125,000, resulting
in a 49.6% reduction in the number of shares held by, and to be resold by, each
selling shareholder. See "Prospectus Summary - Recent Developments." We will not
receive any proceeds from the resale of the common stock by the selling
stockholders. We will receive proceeds from the exercise of the warrant.
Assuming all the shares registered below are sold by the selling stockholders,
none of the selling stockholders will continue to own any shares of our common
stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
Shares % Shares %
Beneficially Ownership Beneficially Ownership
Owned Before Before Amount Owned After After
Stockholder Offering Offering Offered Offering Offering
- --------------------------------------------------------------------------------------------------------------
Frederick C. Applegate Trust (1) 1,481,481 * 1,481,481 -- --
- --------------------------------------------------------------------------------------------------------------
David Callan 3,703,704 * 3,703,704 -- --
- --------------------------------------------------------------------------------------------------------------
Frorer Partners, L.P. (2) 22,222,222 7.3(3) 22,222,222 -- --
- --------------------------------------------------------------------------------------------------------------
W. Anthony Hitschler 1,481,481 * 1,481,481 -- --
- --------------------------------------------------------------------------------------------------------------
Keystone Group Holdings, L.P. (4) 843,750(5) * 843,750(5) -- --
- --------------------------------------------------------------------------------------------------------------
Robert Evans 1,111,112 * 1,111,112 -- --
- --------------------------------------------------------------------------------------------------------------
Total 30,843,750 10.2(6) 30,848,750 -- --
- --------------------------------------------------------------------------------------------------------------
- ------------
(1) Frederick C. Applegate exercises voting and dispositive power over all
of the shares beneficially owned by Frederick C. Applegate Trust.
(2) Peter Frorer exercises voting and dispositive power over all of the
shares beneficially owned by Frorer Partners, L.P.
(3) Assuming shareholder approval of the 14,875,000 shares so that
303,086,275 shares are outstanding. In the event the shareholders do
not approve the issuance of the 14,875,000 shares issuable pursuant to
the August 2005 offering, the common stock ownership will be reduced to
11,199,999 or 3.9%.
(4) William Fretz exercises voting and dispositive power over all of the
shares beneficially owned by Keystone Group Holdings, L.P. The
stockholder received a warrant as compensation for assisting the
Company in the private sale of 30,000,000 shares of its common stock.
(5) Represents 843,750 shares of common stock underlying a five year
warrant that is currently exercisable at an exercise price of $0.24
per share. The shares underlying this warrant are being registered
today.
(6) Assuming shareholder approval of the 14,875,000 shares so that
303,086,275 shares are outstanding. In the event the shareholders do
not approve the issuance of the 14,875,000 shares issuable pursuant to
the August 2005 offering, the common stock ownership will be reduced to
15,968,750 or 5.5%.
Each of Frederick C. Applegate Trust, David Callan, Frorer Partners,
L.P. W. Anthony Hitschler and Robert Evans has not had a material relationship
with us or any of our affiliates within the past three years except that:
1) Frederick C. Applegate Trust purchased 1,097,561 shares of Company
common stock at $0.41 per share from the Company on February 14,
2005;
2) David Callan purchased 2,804,879 shares of Company common stock at
$0.41 per share from the Company on February 14, 2005;
3) Frorer Partners, L.P. purchased 7,317,074 shares of Company common
stock at $0.41 per share from the Company on February 14, 2005, and
10,000,000 shares at $0.2035 from the Company on April 15, 2005;
4) W. Anthony Hitschler purchased 1,000,000 shares of Company common
stock at $0.41 per share from the Company on February 14, 2005; and
5) Robert Evans purchased 350,000 shares of Company common stock at
$0.41 per share from the Company on February 14, 2005.
The Keystone Equities Group previously served as placement agent for
the sale of 20,000,000 shares of Company common in February 2005, and 10,000,000
shares in April 2005, and received aggregate sales commissions of $796,000 in
connection therewith.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares which the selling stockholders has the right to acquire within
60 days.
36
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The selling stockholders have informed us
that they do not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock being registered for resale in
this prospectus.
We are required to pay the fees and expenses incident to the registration
of the shares. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.
37
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information about our directors and
executive officers as of the consummation of this offering, together with their
positions and ages. Each of our executive officers holds office until his or her
successor is duly elected or appointed and qualified or until his or her death,
retirement, resignation or removal, if earlier. Each of our directors holds
office until his or her successor is duly elected or appointed and qualified or
until his or her death, retirement, disqualification, resignation or removal, if
earlier.
Name Age Position
Robert Bach 56 Director Nominee (1)
Eric Blachno 43 Chief Financial Officer
Dr. H. Dean Cubley 63 Director
Christopher Futer 66 Director (2)
Dr. Glenn Goerke 73 Director
David Micek 52 President & Chief Executive Officer and
Director Nominee (1)
Lorne Persons, Jr. 58 Director
C. J. Reinhartsen 62 Director
Randall Shapiro 45 Vice President of Marketing
James D. Yarbrough 49 Director
(1) Messrs. Bach and Micek have each been nominated as director for
election at the Company's annual meeting of the shareholders to be
held on September 20, 2005.
(2) Mr. Futer, currently a director, will not stand for re-election at the
Company's annual meeting of the shareholders to be held on September
20, 2005.
The following is biographical information about each of our officers,
directors and nominees.
Eric Blachno has served as Chief Financial Officer since November, 2004.
From 2003 to 2004, Mr. Blachno served as Vice President of Finance and Chief
Financial Officer at Cascade Microtech, Inc, a manufacturer of electrical
metrology semiconductor equipment. From 2000 to 2003, Mr. Blachno served as Vice
President of Finance and Chief Financial Officer at Luminent, Inc., a fiber
optic components provider which was acquired by MRV Communications. From 1998 to
2000, Mr. Blachno served as managing director at PMG Capital, an investment
banking firm which was acquired by Investec. From 1995 to 1998, Mr. Blachno
served as managing director and senior communications equipment analyst at
investment bank Bear Stearns & Co, Inc. From 1986 to 1995, Mr. Blachno held
various management and staff positions in software development, communications
systems, sales and marketing, and finance at International Business Machines
Corporation. Mr. Blachno holds an MBA in Finance from the Wharton School,
University of Pennsylvania, an MS in Telecommunications from Pace University,
and a BS with High Honors in Computer Science from the University of Florida.
Dr. H. Dean Cubley has served as a director since March 1996, was chief
executive officer from March 1996 to October 2003 and president from March 1996
until September 2001. Dr. Cubley has served as chairman of ERF Wireless, Inc.
since 2004. From 1965 to 1984, Dr. Cubley worked for the NASA Manned Spacecraft
Center in the Electromagnetic Systems Branch of the Engineering and Development
Directorate. Dr. Cubley holds a Ph.D. in electrical engineering from the
University of Houston and B. S. and M. S. in electrical engineering from the
University of Texas.
38
Christopher W. "James" Futer has served as a director and company secretary
of Eagle since March 1996, and served as vice president of Eagle from 1996 to
July 2002 when he retired. Before that, Mr. Futer served as sales manager of
Eagle Aerospace, Inc., Telecom Division from November 1994 until February 1996.
Mr. Futer's spectrum of experience has included work in the fields of hi-tech
flight simulation and display technologies (especially those of light emitting
diodes and liquid crystal displays) and in consumer electronics. Most recently,
he has been involved in pager design, manufacture and marketing, as well as the
wider field of messaging equipment. His international background includes work
with Hatfield Instrument, Canadian Aviation Electronics (located in Montreal,
Canada), General Instruments, Litronix, and Siemens. In 1975, he was
instrumental in implementing a major "turn-key" technology transfer from Canada
to the (then) Soviet Union for the manufacture of hand-held electronic
calculators, an operation which the Soviets then improved from the consumer
level and adapted to suit their particular requirements. Since 1975, Mr. Futer
has had extensive in-depth experience of interfacing with Pacific Rim countries.
In 1992 and 1993, he spent time in the People's Republic of China coordinating a
successful technology transfer for one of the first pager manufacturing
facilities.
Dr. Glenn Goerke has served as a director since March 2000. Dr. Goerke is
president emeritus of the University of Houston and currently serves as a
director of The Institute for the Future of Higher Education. He has served as
vice president of Edusafe Systems, Inc. since 1996. From 1995 to 1997, Dr.
Goerke served as president of the University of Houston. From 1991 to 1995, he
served as president of the University of Houston - Clear Lake. Dr. Goerke holds
a Ph.D. in Adult and Higher Education from Michigan State University and M.A.
and B.A. degrees from Eastern Michigan University.
David Micek served as Chief Operating Officer from November 2004 to April
2005, and has served as President and Chief Executive Officer since April 2005.
From 2002 to 2003, Mr. Micek was president at Internet search company AltaVista
Software. From 2000 to 2001, Mr. Micek was president and CEO of wireless
networking company Zeus Wireless. From 1999 to 2000, he was president and CEO of
broadband video applications company iKnowledge. From 1995 to 1997, Mr. Micek
was vice president and general manager at Texas Instruments Software. From 1985
to 1995, he held various senior marketing, product management and general
management positions at enterprise and applications software companies Neuron
Data, Borland International and Ashton-Tate. He holds an MBA from the University
of Southern California.
Lorne Persons, Jr. has served as Director since March 2003. He has been a
sales executive in the Insurance Industry since 1975. Since 1995, Mr. Persons
has served as President of National Insurance Marketing Corporation, Aurora,
Colorado, and is currently contracted to National States Insurance Company as a
regional sales and recruiting director in a five-state area.
C. J. (JIM) Reinhartsen has served as Director since November 2002 and
Chairman since April 2005. Since 1993, Mr. Reinhartsen has served as President
of the Clear Lake Area Economic Development Foundation (CLAEDF), which in 2003
he renamed the Bay Area Houston Economic Partnership. From 1988 to 1993, when he
retired with 30 years service at Grumman, Mr. Reinhartsen was Vice President and
General Manager for the Grumman Houston Corporation headquartered in Houston,
Texas.
Randall Shapiro has served as Vice President of Marketing since October,
2003. From 2002 to 2003, Mr. Shapiro was responsible for all marketing functions
at security software startup IP Dynamics. From 2000 to 2001, Mr. Shapiro managed
overall marketing functions for telecommunications equipment provider Canyon
Networks. From 1997 to 1999, Mr. Shapiro was Director, Product Marketing for
networking equipment provider Thomson Enterprise Networks. From 1994 to 1997,
Mr. Shapiro was Director, Marketing and Business Development at technology
training and marketing services company, Wave Technologies. From 1983 to 1994,
Mr. Shapiro held senior sales and marketing management positions with enterprise
software companies Novasoft Systems and Metaphor Computer Systems, as well as
IBM Corporation. He holds a B.S. in Business & Marketing from the University of
Arizona.
39
Judge James D. Yarbrough has served as a Director of Eagle since October
2004. Since 1995, Judge Yarbrough has served as Chief Executive Officer and
County Judge of Galveston County. From 1989 to 1994, Judge Yarbrough was the
founder and President of James D. Yarbrough & Company. He also serves as a
Director at American National Insurance Company, where he is Chairman of its
Compensation Committee, and a member and financial expert for its Audit
Committee.
Director Nominees
Robert L. Bach is an attorney with the Minneapolis, Minnesota law firm of
Felhaber, Larson, Fenlon & Vogt, P.A., where he has practiced for 28 years. Mr.
Bach is a civil trial specialist certified by the Minnesota State Bar
Association. He received his J.D. from the University of Minnesota Law School
and his B.A. from the University of Iowa.
Please see "Directors and Executive Officers" for biographical information
for David Micek.
Family Relationships
There are no family relationships between any of our executive officers,
directors and nominees.
Involvement in Certain Legal Proceedings
None of our executive officers, directors or nominees were involved in any
legal proceeding as described in Item 401(f) of Regulation S-K.
Related Party Transactions
There are no related party transactions other than what is disclosed in
"Management."
Executive Compensation
The following table contains compensation data for our named executive
officers for the fiscal years ended August 31, 2004, 2003 and 2002.
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM
COMPENSATION COMPENSATION AWARDS
------------ ---------------------
Securities Underlying ALL OTHER
NAME AND Salary Bonus Options COMPENSATION
PRINCIPAL POSITIONS YEAR ($) ($) (#) ($)
------------------- ---- --------- --- --------------------- ------------
H. Dean Cubley,(1) 2004 $275,558 -0- 2,037,500 (2)
(former CEO) 2003 $275,000 -0- 300,000 -0-
2002 $275,000 -0- 300,000 -0-
David Weisman, (3) 2004 $345,120(4) -0- 1,237,500 (5)
(former CEO) 2003 -0- -0- -0- -0-
2002 -0- -0- -0- -0-
Randall Shapiro, 2004 $166,931 -0- -0- -0-
Vice President, Marketing 2003 -0- -0- -0- -0-
2002 -0- -0- -0- -0-
Richard Royall, 2004 $60,001 -0- -0- -0-
(Former CFO) (6) 2003 $227,344 -0- 37,500 -0-
2002 $75,450 -0- -0- -0-
- -----------------------
40
(1) Dr. Cubley served as chief executive officer from March 1996 until October
2003.
(2) In December 2003, Dr, Cubley agreed to cancel options to purchase an
aggregate of 9,975,000 shares of common stock at an exercise price of $0.41
per share, in exchange for an exchangeable promissory note in the amount of
$2,689,000, representing the difference between the market price and
exercise price on the date of cancellation of the vested options and to
include any amount that became vested subsequent thereto ("Guaranteed
Value"). Pursuant to the terms of the note, the Company re-issued options
to Dr. Cubley in 2004 to purchase 9,975,000 shares at an exercise price of
$.41 per share and continued to guarantee Dr. Cubley the Guaranteed Value,
less any profit obtained from the sale of the vested options. In December
2004 and January 2005, Dr. Cubley exercised options to purchase 2,000,000
shares (representing all of the options then owned by Dr. Cubley, except
for the right to purchase 37,500 shares at $1.00 per share), obligating the
Company under the Guarantee obligation in the note to pay Dr. Cubley.
(3) Mr. Weisman was elected CEO in October, 2003 and was succeeded by Mr.
Micek, who was appointed President and CEO April, 2005.
(4) Mr. Weisman's total compensation for fiscal year ending August 31, 2004
includes salary and consulting fees.
(5) In December 2003, Mr. Weisman agreed to cancel options to purchase an
aggregate of 3,200,000 shares of common stock at an exercise price of $.41
per share, in exchange for an exchangeable promissory note in the amount of
$1,362,000, representing the difference between the market price and
exercise price on the date of cancellation of the vested options and to
include any amount that became vested subsequent thereto ("Guaranteed
Value"). Pursuant to the terms of the note, the Company re-issued options
to Mr. Weisman in 2004 to purchase 3,200,000 shares at an exercise price of
$.41 per share and continued to guarantee Mr. Weisman the Guaranteed Value,
less any profit obtained from the sale of the vested options. In January
2005, Mr. Weisman exercised options to purchase shares (representing all of
the options then owned by Mr. Weisman), obligating the Company under the
Guarantee obligation in the note to pay Mr. Weisman. In June 2005, Mr.
Weisman entered a note exchange agreement with the Company where the
Company issued 3,377,778 shares of Company common stock to Mr. Weisman to
fully satisfy the Company's outstanding Guarantee obligation under the
note.
(6) Mr. Royall resigned as the chief financial officer in November 2004.
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended August 31, 2004, to our named
executive officers. No stock appreciation rights were issued during the fiscal
year.
Option Grants for Fiscal Year Ending August 31, 2004
Potential Realizable
Value At Assumed
Individual Grants Annual Rates of Stock
Appreciation for Option
% of Total Term (a)
Number of Options Exercise/
Securities Granted To Base
Options Fiscal Price Expiration
Name Granted Year(1) ($/Share) Date 5% ($)(b) 10% ($)(b)
H.Dean Cubley 2,000,000 33% $0.41 9/1/08 $3,470,145 $4,121,063
37,500 * $1.00 6/15/09 $1,875 $2,250
David Weisman 300,000 5% $0.41 9/1/08 $520,580 $618,159
400,000 7% $0.60 9/1/08 $600,574 $713,148
500,000 9% $0.75 9/1/08 $658,416 $781,833
37,500 * $1.00 6/15/09 $1,875 $2,250
Randall Shapiro 75,000 2% $0.41 9/1/08 $129,827 $153,903
150,000 3% $0.41 9/1/08 $6,426 $6,852
100,000 2% $1.13 9/1/08 $0 $0
100,000 2% $1.10 9/1/08 $29,464 $34,928
100,000 2% $1.00 9/1/08 $41,741 $49,482
100,000 2% $0.90 9/1/08 $54,018 $64,035
85,000 2% $0.60 9/1/08 $77,221 $91,541
100,000 2% $0.75 9/1/08 $72,432 $85,865
Richard Royall -0- N/A N/A N/A N/A N/A
- --------------------------
* Less than 1%
(1) Percentages are based on 6,082,500 options issued and are rounded up to the
nearest whole number.
41
The following table sets forth information concerning option exercises
during the fiscal year ended August 31, 2004, and option holdings as of August
31, 2004, with respect to our named executive officers. No stock appreciation
rights were outstanding at the end of the fiscal year.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Value Number of Securities Value of Unexercised
Shares Acquired Realized Underlying Unexercised In-the-Money
Name on Exercise (#) ($) Options at FY-End (#) Options at FY-End ($)(*)
---- --------------- -------- -------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- ------------
H. Dean Cubley -0- -0- 2,037,500 (1) -0- $ 920,000 (1) -0-
David Weisman -0- -0- 1,237,500 (2) -0- $ 306,000 (2) -0-
Randall Shapiro -0- -0- 710,000 300,000 $ 617,700 $261,000
Richard Royall -0- -0- 37,500 -0- (3) -0-
-------------------
* The fair market value of our common stock at August 31, 2004 was $0.87 per
share.
(1) See footnote #2 under "Summary Compensation Table" above.
(2) See footnote #4 under "Summary Compensation Table" above.
(3) The exercise price is $1.00 per share which at fiscal year end 2004
was not in-the-money.
Executive Employment Contracts
Mr. Micek's employment agreement provides for an annual salary of $275,000,
and is effective through November 2007, which shall be extended until November
2009, if agreed by both parties. Under the terms of his original employment
agreement, Mr. Micek was granted the right to purchase 500,000 shares of Company
common stock at a price per share of $0.61, which vests over 36 months (13,889
shares per month). In April 2005, Mr. Micek's employment agreement was amended
and he was granted the right to (i) purchase 6,700,000 shares at an exercise
price of $.19 per share, vesting on a 36 month term (186,111 shares per month)
which vesting accelerates upon a change of control or termination of employee
without cause and (ii) granted 2,000,000 shares of restricted stock upon Mr.
Micek's or the Company's attainment of certain objectives and/or Company
milestones, which to date have not been satisfied. Mr. Micek receives customary
fringe benefits.
Mr. Blachno's employment agreement provides for an annual salary of
$200,000, and is effective through November 2007, which shall be extended until
November 2009, if agreed by both the Company and him. Under the terms of his
employment agreement, Mr. Blachno was granted the right to purchase 500,000
shares of Company common stock exercisable at a price per share of $0.61, which
vests over 24 months (20,833 shares per month). Additionally, Mr. Blachno has a
right to receive 200,000 shares of Company common stock upon the satisfaction of
certain objectives and/or Company milestones, which to date have not been
satisfied.
42
Mr. Shapiro's employment agreement provides for an annual base salary of
$190,000, and is effective through November 30, 2005. Mr. Shapiro is owed a
bonus of $146,000 pursuant to the terms of his employment agreement. As of the
Record Date, Mr. Shapiro has options that have vested which allow him to
purchase 710,000 shares of Company common stock at exercise prices ranging from
$0.41 to $1.13, with an expiration date of September 1, 2008. Additionally, Mr.
Shapiro has unvested options which allow him to purchase 300,000 shares of
Company common stock at exercise prices ranging from $0.90 to $1.10, with an
expiration date of September 1, 2008.
Board of Directors
The Board of Directors currently consists of six members: Messrs. Cubley,
Futer, Goerke, Persons, Reinhartsen and Yarbrough. Christopher Futer, currently
a director, will not stand for re-election. Each member of our Board of
Directors is elected annually at an annual meeting of shareholders or at a
special meeting of shareholders in lieu of an annual meeting.
Board Committees
Our Board of Directors has an audit committee, a compensation committee and
a nominating committee.
Audit Committee
The Audit Committee of the Board consists of three non-employee directors:
Messrs. Goerke, Reinhartsen and Yarbrough (Audit Committee Chair). Each of
Messrs. Goerke, Reinhartsen and Yarbrough are independent as defined in the
listing standards of the American Stock Exchange. The Audit Committee engages
the Company's independent auditors, reviews the Company's financial controls,
evaluates the scope of the annual audit, reviews audit results, consults with
management and the Company's independent auditors prior to the presentation of
financial statements to shareholders and, as appropriate, initiates inquiries
into aspects of the Company's internal accounting controls and financial
affairs.
Compensation Committee
The Compensation Committee of the Board reviews and approves salaries and
incentive compensation for the Company's executive officers. The Compensation
Committee consists of four, non-employee directors: Messrs. Goerke, Persons,
Reinhartsen (Compensation Committee Chair) and Yarbrough. Messrs. Goerke,
Persons, Reinhartsen and Yarbrough are independent as defined in the listing
standards of the American Stock Exchange.
Nominating Committee
The Nominating Committee is a new standing committee of the Board effective
as of October, 2004 created to review and approve candidates for election and to
fill vacancies on the Board. The Nominating Committee consists of four
non-employee directors: Messrs. Goerke, Persons (Nominating Committee Chair),
Reinhartsen and Yarbrough. Each of Messrs. Goerke, Persons, Reinhartsen and
Yarbrough are independent as defined in the listing standards of the American
Stock Exchange.
Director Compensation
Directors receive $4,500 for regular meetings whether attended in person or
via teleconference, and $2,250 for special meetings whether attended in person
or via teleconference. Directors receive $1,000 for each committee meeting
attended, whether in person or via teleconference. The secretary receives $1,000
for attending meetings of the Board of Directors. During the fiscal year ended
August 31, 2004, and ending August 31, 2005, directors received a five year
option to purchase 8,333 shares of common stock at an exercise price of $0.78
per share for each of the six, regularly scheduled board meetings per year that
they attend.
43
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of four, non-employee directors,
Messrs. Goerke, Persons, Reinhartsen (Compensation Committee Chair) and
Yarbrough. None of the members of the Compensation Committee has been or is an
officer or employee of the Company. None of the Company's executive officers
serves on the Board of Directors or compensation committee of a company that has
an executive officer that serves on the Company's Board or Compensation
Committee. No member of the Company's Board is an executive officer of a company
in which one of the Company's executive officers serves as a member of the Board
of Directors or Compensation Committee of that company.
2005 Employee Stock Option Plan
The board of directors has adopted, subject to stockholder approval at the
annual meeting of stockholders to be held on September 20, 2005, the Company's
2005 Employee Stock Option Plan (the "Plan"). The purpose of the Plan is to
promote the interests of the Company and its stockholders and give it a
competitive advantage by: (i) attracting and retaining executive personnel and
other key employees of outstanding ability; (ii) motivating executive personnel
and other key employees, by means of performance--related incentives, to achieve
longer-range performance goals; and (iii) enabling such employees to participate
in the long-term growth and financial success of the Company by acquiring a
proprietary interest in the Company.
General Administration of the Plan
The Plan will be administered by the Compensation Committee of the board of
directors (the "Committee"). The Committee will be authorized to grant to key
employees of the Company awards in the form of stock options, performance
shares, and restricted stock. In addition, the Committee will have the authority
to grant other stock-based awards in the form of stock appreciation rights,
restricted stock units, and stock unit awards.
Each member of the Committee must be a "non-employee director" within the
meaning of Rule 16b-3 promulgated by the SEC under the Exchange Act, an
"independent director" as defined by American Stock Exchange rules and an
"outside director" within the meaning of the Code. The Committee will select
persons to receive grants from among the eligible participants, determine the
types of grants and number of shares to be awarded to grantees, and set the
terms, conditions, and provisions of the grants consistent with the Plan. The
Committee has authority to amend awards and to accelerate vesting and/or
exercisability of awards, provided that it cannot amend an outstanding option to
reduce its exercise price or cancel an option and replace it with an option with
a lower exercise price. The Committee may also establish rules for
administration of the Plan.
Eligibility
The Committee will select grantees from among the key employees, officers,
directors and consultants of the Company and its subsidiaries. The eligible
participants will be those who, in the opinion of the Committee, have the
capacity for contributing in a substantial measure to the successful performance
of the Company. All awards and the terms of any award to eligible participants
who are members of the Committee must also be approved by the board of
directors.
Shares Subject to the Plan
Subject to adjustment as described below, a maximum of 30,000,000 shares of
Company common stock may be issued under the Plan. Any shares of Company common
stock subject to awards that are forfeited or withheld in payment of any
exercise price or taxes will again be available for grant. Also, if an award
terminates without shares of Company common stock being issued, then the shares
that were subject to the award will again be available for grant. The shares may
be authorized and unissued shares or treasury shares. In the event of a stock
split, stock dividend, spin-off, or other relevant change affecting the
Company's common stock, the Committee shall make appropriate adjustments to the
number of shares available for grants and to the number of shares and price
under outstanding grants made before the event.
44
Types of Awards Under the Plan
Stock Options
The Committee may grant awards in the form of options to purchase shares of
the Company's common stock. With regard to each such option, the Committee will
determine the number of shares subject to the option, the manner and time of the
exercise of the option, and the exercise price per share of stock subject to the
option; provided, however, that the exercise price of any "Incentive Stock
Option" (as defined in the Plan) may not be less than 100% of the fair market
value of the shares of Company common stock on the date the option is granted.
The exercise price may, at the discretion of the Committee, be paid by a
participant in cash, shares of Company common stock or a combination thereof.
The period of any option shall be determined by the Committee, but no Incentive
Stock Option may be exercised later than 10 years after the date of grant. The
aggregate fair market value, determined at the date of grant of the Incentive
Stock Option, of Company common stock for which an Incentive Stock Option is
exercisable for the first time during any calendar year as to any participant
shall not exceed the maximum limitation as provided in Section 422 of the Code.
The effect of a grantee's termination of employment by reason of death,
retirement, disability, or otherwise will be specified in the option agreement
evidencing the grant of the option.
Stock Appreciation Rights
The Plan also authorizes the Committee to grant stock appreciation rights
("SARs"). Upon exercising an SAR, the holder receives for each share with
respect to which the SAR is exercised, an amount equal to the difference between
the exercise price (which may not be less than the fair market value of such
share on the date of grant unless otherwise determined by the Committee) and the
fair market value of the Company common stock on the date of exercise. At the
Committee's discretion, payment of such amount may be made in cash, shares of
Company common stock, or a combination thereof. Each SAR granted will be
evidenced by an agreement specifying the terms and conditions of the award,
including the effect of termination of employment (by reason of death,
disability, retirement or otherwise) on the exercisability of the SAR. No SAR
may have a term of greater than 10 years.
Performance Shares
The Plan permits the Committee to grant awards of performance shares to
eligible employees from time to time. These awards are contingent upon the
achievement of certain performance goals established by the Committee. The
length of time over which performance will be measured, the performance goals,
and the criteria to be used in determining whether and to what degree the goals
have been attained will be determined by the Committee. The Committee will also
determine the effect of termination of employment of a grantee (by reason of
death, retirement, disability or otherwise) during the performance period.
Restricted Stock and Restricted Stock Units
Under the Plan, the Committee may award restricted shares of the Company's
common stock and restricted stock units to eligible employees from time to time
and subject to certain restrictions as determined by the Committee. The nature
and extent of restrictions on such shares and units, the duration of such
restrictions, and any circumstance which could cause the forfeiture of such
shares or units shall be determined by the Committee. The Committee will also
determine the effect of the termination of employment of a recipient of
restricted stock or restricted stock units (by reason of retirement, disability,
death or otherwise) prior to the lapse of any applicable restrictions.
Other Stock Based Awards
In addition, the Committee shall have authority under the Plan to grant
stock unit awards, which can be in the form of common stock or units, the value
of which is based, in whole or in part, on the value of the Company's common
stock. Such stock unit awards will be subject to such terms, restrictions,
conditions, vesting requirements and payment rules as the Committee may
determine. Stock unit awards may not be assigned, sold, transferred, pledged or
otherwise encumbered prior to the date shares are issued or, if later, the date
provided by the Committee at the time of grant of the stock unit award. Stock
unit awards may relate in whole or in part to certain performance criteria
established by the Committee at the time of grant. The Committee will also
determine the effect of termination of employment of a stock unit award
recipient (by reason of death, retirement, disability or otherwise) during any
applicable vesting period.
45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 26, 2005, a total of 288,211,275 shares of our common
stock were outstanding. The following table sets forth, as of August 26, 2005,
certain information with respect to shares beneficially owned by: (a) each
person who is known by us to be the beneficial owner of more than 5% of our
outstanding shares of common stock, (b) each of our current directors and
director nominees, (c) the executive officers named in the Summary Compensation
Table below (as of August 31, 2004), and (d) all current directors and executive
officers as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act. Under this rule, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share the
power to vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire shares (for example, upon exercise of an option or warrant) within sixty
days of the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares is deemed to include
the amount of shares beneficially owned by such person by reason of such
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in the following table does not necessarily reflect the person's
actual voting power at any particular date.
To our knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. Unless otherwise indicated, the
business address of the individuals listed is Eagle Broadband, Inc., 101
Courageous Drive, League City, Texas 77573.
SHARES BENEFICIALLY OWNED AS OF AUGUST 26, 2005
-----------------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- ---------------- ---------------- ----------------
Robert Bach 618,179 (1) *
H. Dean Cubley 1,204,833 (2) *
Christopher Futer 250,638 (3) *
Glenn Goerke 258,656 (4) *
David Micek 883,334 (5) *
Lorne Persons, Jr. 397,991 (6) *
C. J. Reinhartsen 206,547 (7) *
Richard Royall 37,500 (8) *
Randall Shapiro 789,600 (9) *
David Weisman 2,638,585 1%
James Yarbrough 50,000 (10) *
Frorer Partners, L.P. 22,222,222 (11)(12) 7.3% (11)(12)
All current directors and
executive officers as a group
(9 persons) 4,249,933 (13) 1.5%
- ---------------------------
* Less than 1%
(1) Includes 20,000 shares held in a trust of which he is a trustee.
(2) Includes options to purchase 37,500 shares of common stock at an
exercise price of $1.00 per share and an option to purchase 50,000
shares of common stock at an exercise price of $0.78 per share.
(3) Includes options to purchase 50,000 shares of common stock at an
exercise price of $1.00 per share and an option to purchase 50,000
shares of common stock at an exercise price of $0.78 per share.
(4) Includes options to purchase 50,000 shares of common stock at an
exercise price of $1.00 per share and an option to purchase 50,000
shares of common stock at an exercise price of $0.78 per share.
(5) These shares are deemed beneficially owned by Mr. Micek under two
options granted to him pursuant to his employment agreement. Please see
the Executive Employment Contracts section for more details.
(6) Includes options to purchase 50,000 shares of common stock at an
exercise price of $1.00 per share and an option to purchase 50,000
shares of common stock at an exercise price of $0.78 per share.
(7) Includes options to purchase 50,000 shares of common stock at an
exercise price of $1.00 per share and an option to purchase 50,000
shares of common stock at an exercise price of $0.78 per share.
(8) Consists of an option to purchase 37,500 shares of common stock at an
exercise price of $1.00 per share.
(9) These shares are deemed beneficially owned by Mr. Shapiro under options
granted to him pursuant to his employment agreement. See "Executive
Officers - Executive Employment Contracts."
(10) An option to purchase 50,000 shares of common stock at an exercise
price of $0.78 per share.
(11) This calculation assumes that all 30,000,000 shares committed for
purchase in the August 2005 offering have been issued and that
303,086,275 shares are outstanding.
(12) In the event the shareholders do not approve the issuance of the
14,875,000 shares issuable pursuant to the August 2005 offering, the
common stock ownership will be reduced to 11,199,999 or 3.9%.
(13) Includes an option to purchase an aggregate of 208,334 shares of common
stock at $0.61.
46
DESCRIPTION OF SECURITIES
General
We are authorized to issue up to 350,000,000 shares of common stock, $.001
par value per share, and 5,000,000 shares of preferred stock. As of August 26,
2005, a total of 288,211,275 shares of common stock and no shares of preferred
stock were issued and outstanding.
Common Stock
The holders of shares of common stock are entitled to one vote per share on
each matter submitted to a vote of stockholders. In the event of liquidation,
holders of common stock are entitled to share ratably in the distribution of
assets remaining after payment of liabilities and liquidation preferences on the
preferred stock, if any. Holders of common stock have no cumulative voting
rights, and, accordingly, the holders of a majority of the outstanding shares
have the ability to elect all of the directors. Holders of common stock have no
preemptive or other rights to subscribe for shares. Subject to the prior rights
of any series of preferred stock which may from time to time be outstanding, if
any, holders of common stock are entitled to such dividends as may be declared
by the board of directors out of funds legally available. The outstanding common
stock is, and the common stock to be outstanding upon completion of this
offering will be, validly issued, fully paid and non-assessable.
Preferred Stock
The board of directors has the authority, without action by our
stockholders, to issue preferred stock and to fix voting powers for each class
or series of preferred stock, and to provide that any class or series may be
subject to redemption, entitled to receive dividends, entitled to rights upon
dissolution or convertible or exchangeable for shares of any other class or
classes of capital stock. The rights with respect to a series or class of
preferred stock may be greater than the rights attached to our common stock. It
is not possible to state the actual effect of the issuance of any shares of our
preferred stock on the rights of holders of our common stock until our board of
directors determines the specific rights attached to that preferred stock. The
effect of issuing preferred stock could include one or more of the following:
o restricting dividends in respect of our common stock;
o diluting the voting power of our common stock or providing that
holders of preferred stock have the right to vote on matters as a
class;
o impairing the liquidation rights of our common stock; or
o delaying or preventing a change of control of Eagle.
Warrants and Options
As of August 25, 2005, we had outstanding options and warrants to purchase
13,048,016 shares of our common stock at exercise prices ranging from $0.135 to
$7.50 per share, expiring on various dates through October 2009. As of August
25, 2005, of the outstanding options and warrants, there were options to
purchase 516,120 shares of our common stock issued under our employee stock
option plan, of which options to purchase 516,120 shares were exercisable. The
exercise prices of the vested employee stock options range from $0.38 to $7.13
per share, expiring on various dates through October 2009.
Transfer Agent
Registrar & Transfer Company, located in
Crawford, New Jersey, is our transfer agent.
47
DISCLOSURE OF SEC POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation provides our directors with protection for
breaches of their fiduciary duties to us or our stockholders. In addition, we
have entered into indemnification agreements with our directors and officers
that would indemnify them against liability arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons as provided in
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is unenforceable.
In the event that a claim for indemnification against such liabilities,
other than the payment by us of expenses incurred or paid by a director, officer
or controlling person in the successful defense of any action, suit or
proceeding, is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
EXPERTS
Our consolidated financial statements as of and for the years ended August
31, 2004 and 2003, appearing in our annual report on Form 10-K for the year
ended August 31, 2004, have been audited by Lopez, Blevins, Bork and Associates,
LLP independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. Our consolidated financial statements as
of and for the year ended August 31, 2002, appearing in our annual report on
Form 10-K for the year ended August 31, 2004, have been audited by McManus &
Co., P.C., independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference.
The consolidated financial statements are incorporated herein by reference
in reliance upon the report of Malone & Bailey, P.L.L.C., and McManus & Co.,
P.C., pertaining to such financial statements given upon the authority of such
firms as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the securities being offered hereby has
been passed upon for us by Brewer & Pritchard, P.C., Houston, Texas.
CHANGE OF ACCOUNTANTS
In August 2004, we engaged Lopez, Blevins, Bork & Associates, LLP ("Lopez &
Associates") as our independent auditors for the fiscal year ended August 31,
2004. Mr. Lopez was previously the audit manager primarily responsible for
auditing our company when he was employed with Malone & Bailey, P.C. ("Malone &
Bailey"). Mr. Lopez resigned from Malone & Bailey in August 2004 and formed his
new accounting firm, Lopez & Associates. Malone & Bailey audited our financial
statements for the fiscal year ended August 31, 2003.
The Audit Committee has selected Lopez & Associates as our independent
auditors for the fiscal year ended August 31, 2005, subject to shareholder
ratification. In the event this ratification is not approved by our
shareholders, the Audit Committee will review their future selection of
auditors.
We expect that a representative of Lopez & Associates will attend the
Annual Meeting, and the representative will have an opportunity to make a
statement if she or he so desires. The representative will also be available to
respond to appropriate questions from shareholders.
Malone & Bailey's report dated December 5, 2003, except as to Note 2 on
which date is July 27, 2004, on the Company's balance sheet as of August 31,
2003, and the related statement of operations, stockholders' equity, and cash
flows for the year ended, did not contain an adverse opinion or disclaimer of
opinion, or qualification or modification as to uncertainty, audit scope, or
accounting principles. In connection with the audit of the Company's financial
statements, and in the subsequent interim period, there were no disagreements
with Malone & Bailey on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Malone & Bailey would have caused Malone &
Bailey to make reference to the matter in their report.
During the year ended August 31, 2003, and subsequent to August 31, 2003,
through August 23, 2004, neither the Company nor anyone on its behalf consulted
with Lopez & Associates regarding either the application of accounting
principals to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered in the Company's financial statement,
nor had Lopez & Associates provided the Company a written report or oral advise
regarding such principles or audit opinion or any matter that was the subject of
a disagreement or reportable event set forth in Item 304(a)(iv) and (v),
respectively, of Regulation S-K with Malone & Bailey.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
Security and Exchange Commission's ("SEC") public reference room located at 450
Fifth Street, N.W., Washington, D.C.20549. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room. Our SEC filings are also
available to the public from the SEC's web site at http://www.sec.gov.
48
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.
F-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.
F-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 147,447 $ 147 - $ 177,017 $ (118,101) $ (727) $ 58,336
--------- ------- ---------- --------- ------------ ------------ --------------
as of August 31, 2003
Net loss - - - - (39,005) - (39,005)
New stock issued to shareholders: -
For services and compensation 11,016 12 - 6,335 - - 6,347
For retirement of debt and liabilities 47,046 47 - 13,294 - - 13,341
Stock-based compensation - - - 4,493 - - 4,493
Beneficial conversion features on
convertible debentures - - - 6,912 - - 6,912
Unrealized holding loss - - - - (321) (321)
--------- ------- ---------- --------- ------------ ------------ --------------
Total shareholders' equity 205,509 $ 206 $ - $208,051 $ (157,106) $ (1,048) $ 50,103
========= ======= ========== ========= ============ ============ ==============
as of August 31, 2004
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 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 260,642 $ 261 - $233,076 $ (175,879) - $ 57,458
========= ======= ========== ========= ============ ============ ==============
as of May 31, 2005
See accompanying notes to consolidated financial statements.
F-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.
F-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
MediaPro 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%
F-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
=============== ==============
F-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):
Annual Amount
Interest ---------------------------
Rate Due Date May 31, 2005 August 31, 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, 2005 August 31, 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, 2005 August 31, 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.
F-7
May 31, 2005 August 31, 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
F-8
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.
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.
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.
F-9
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.
F-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:
F-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 forna $ (0.08) $ (0.13)
Diluted net loss per share:
As reported $ (0.08) $ (0.13)
Pro forna $ (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.
F-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
F-13
Reconciliation of Segment Loss from
Operations to Net May 31, 2005 May 31, 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 Setlements 14,726
---------------------
F-14
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.
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.
RECENT DEVELOPMENTS
On August 10, 2005, the Company entered into a purchase agreement with certain
accredited investors for the sale of up to 30 million shares of its common stock
, pursuant to Regulation D of the Securities Act of 1933, at a price per share
of $0.135, for total gross proceeds of up to $4,050,000. The Company has agreed
to pay a placement agent a cash commission 7% of the gross dollar proceeds of
the sale of the shares in this placement and issue such agent a five year
warrant to purchase a number of shares of Company common stock equal to 5% of
the gross proceeds of the offering, divided by $0.24, at an exercise price per
share of $0.24. The American Stock Exchange is requiring shareholder approval
for the issuance of 14,875,000 of the 30,000,000 shares of our common stock
committed for purchase in this offering. For purposes of this registration
statement, unless otherwise stated, we have assumed that we will receive
shareholder approval of the issuance of the 14,875,000 shares on September 20,
2005 and that the American Stock Exchange will approve such listing. However, we
have only treated the 15,125,000 shares as issued and outstanding as of August
26, 2005.
On August 5, 2005, the Company and Neva Holdings, LLC ("Neva") executed an
agreement whereby the parties agreed to terminate the Restated Limited Liability
Company Agreement (the "LLC Agreement") that the parties entered into on
November 23, 2004. The termination of the agreement provides for the Company's
withdrawal as a member of LLV Broadband, LLC (the "LLC") and complete release
from any future obligations under the LLC Agreement.
The terms and conditions of the LLC Agreement called for the Company to
participate in the construction, development and operation of a system for the
provision of a range of broadband, entertainment and communications services to
the commercial, recreational, and residential buildings located within the Lake
Las Vegas Resort and surrounding geographical areas. Under the terms of the LLC
Agreement, the Company was required to make a capital contribution of between $3
million and $5 million to fund ongoing development and operating activities. The
parties initially estimated that the LLC's gross revenues would be approximately
$15.5 million over a 6 year period through the year 2010. As a result of the
termination, the Company will not be required to make any additional capital
contributions to the LLC and will not recognize its allocation of any revenues
associated with membership in the LLC. The Company will not incur any early
termination penalties associated with the termination of the LLC Agreement.
F-15
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Eagle Broadband, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of Eagle Broadband,
Inc. as of August 31, 2004 and 2003, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of Eagle Broadband, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Broadband,
Inc. as of August 31, 2004 and 2003, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/S/ Lopez, Blevins, Bork and Associates, LLP
- --------------------------------------------
Lopez, Blevins, Bork and Associates, LLP
Houston, Texas
November 15, 2004
F-16
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF EAGLE BROADBAND, INC.:
We have audited the accompanying consolidated balance sheets of Eagle Broadband,
Inc. and subsidiaries as of August 31, 2002, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of Eagle Broadband,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Eagle Broadband, Inc. and subsidiaries as of August 31, 2002, and
the results of their earnings, shareholders' equity, and their cash flows for
each of the year then ended are in conformity with generally accepted accounting
principles.
/S/ McManus & Co., P.C.
- -----------------------------------
McManus & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
ROCKAWAY, NEW JERSEY
December 13, 2002
F-17
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
ASSETS
August 31,
2004 2003
--------- ----------
Current Assets
Cash and Cash Equivalents $ 2,051 $ 824
Securities Available for Sale 551 1,714
Accounts Receivable, net 1,470 1,704
Inventories 403 3,199
Net investment in direct financing leases 291 -
Prepaid Expenses 327 668
--------- ----------
Total Current Assets 5,093 8,109
--------- ----------
Property and Equipment
Operating Equipment 36,415 36,422
Less: Accumulated Depreciation (7,837) (5,689)
--------- ----------
Total Property and Equipment 28,578 30,733
--------- ----------
Other Assets:
Deferred Costs --- 334
Net investment in direct financing leases 623 ---
Goodwill, net 4,095 4,095
Contract rights, net 21,678 23,590
Customer relationships, net 5,431 5,912
Other Intangible assets, net 4,034 4,366
Other Assets 679 227
--------- ----------
Total Other Assets 36,540 38,524
--------- ----------
Total Assets $ 70,211 $ $77,366
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 4,445 $ $5,461
Accrued Expenses 9,647 7,560
Notes Payable 5,920 5,779
Deferred revenue 96 230
--------- ----------
Total Current Liabilities 20,108 19,030
--------- ----------
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares -- --
Common Stock - $.001 par value
Authorized 350,000,000 shares
Issued and Outstanding at August 31, 2004
and 2003, 205,509,000 and 147,447,000,
respectively 206 147
Additional Paid in Capital 208,051 177,017
Accumulated Deficit (157,106) (118,101)
Accumulated Comprehensive Income (Loss) (1,048) (727)
--------- ----------
Total Shareholders' Equity 50,103 58,336
--------- ----------
Total Liabilities and Shareholders' Equity $ 70,211 $ 77,366
========= ==========
See accompanying notes to consolidated financial statements.
F-18
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
For the years ended August 31,
---------------------------------------
2004 2003 2002
-------- -------- --------
Net Sales:
Structured wiring $ 678 $ 3,692 $ 8,036
Broadband services 5,525 2,809 2,657
Products 6,190 3,342 16,108
Other 97 1,750 3,016
-------- -------- --------
Total Sales 12,490 11,593 29,817
-------- -------- --------
Costs of Goods Sold:
Direct Labor and Related Costs 1,244 2,195 3,160
Products and Integration Service 5,372 2,773 15,250
Impairment Slow Moving &
Obsolete Inventory 1,300 2,627 --
Structured Wiring Labor and
Materials 448 1,774 2,121
Broadband Services Costs 2,856 903 763
Depreciation and Amortization 1,141 456 377
Other Manufacturing Costs 26 56 1,033
-------- -------- --------
Total Costs of Goods Sold 12,387 10,784 22,704
-------- -------- --------
Gross Profit 103 809 7,113
-------- -------- --------
Operating Expenses:
Selling, General and
Administrative:
Salaries and Related Costs 13,146 6,102 7,795
Advertising and Promotion 29 247 963
Depreciation and Amortization 3,956 4,776 6,020
Other Support Costs 13,367 12,737 3,974
Research and Development 557 411 404
Impairment, Write-Downs &
Restructuring Costs -- 7,611 64,665
-------- -------- --------
Total Operating Expenses 31,055 31,884 83,821
-------- -------- --------
Loss from Operations (30,952) (31,075) (76,708)
-------- -------- --------
Other Income/(Expenses):
Interest Income, 32 68 360
Interest Expense (8,325) (5,494) (625)
Gain (Loss) on Sale of Assets 240 -- --
-------- -------- --------
Total Other Income (Expense) (8,053) (5,426) (265)
-------- -------- --------
Net Loss (39,005) (36,501) (76,973)
-------- -------- --------
Other Comprehensive Loss:
Unrealized Holding Loss (321) (71) (279)
-------- -------- --------
Total Other Comprehensive Loss $ (321) (71) (279)
======== ======== ========
Comprehensive Losses $(39,326) $(36,572) $(77,252)
======== ======== ========
Net Loss per Common Share:
Basic (0.21) (0.38) (1.20)
Diluted (0.21) (0.38) (1.20)
Comprehensive Loss (0.21) (0.38) (1.20)
See accompanying notes to consolidated financial statements.
F-19
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Additional Accumulated Total
Common Stock Preferred Paid in Retained Comprehensive Shareholders'
-------------- --------- --------- -------- ------------- -------------
Shares Value Stock Capital Earnings Income Equity
------- ----- -------- --------- -------- ------------- -------------
Total Shareholders' Equity 60,264 60 -- 153,426 (4,627) (377) 148,482
As of August 31, 2001
Net Loss -- - -- -- (76,973) -- (76,973)
New Stock Issued to Shareholders
For Services and Compensation 1,648 2 -- 880 -- -- 882
For Property and Other Assets 2,867 2 -- 591 -- -- 593
For Retirement of Debt and
Liabilities 7,846 9 -- 3,577 -- -- 3,586
For Acquisitions 2,002 2 -- 1,079 -- -- 1,081
For Licenses and Investments - - -- 100 -- -- 100
Treasury Stock (1,576) (2) -- (922) -- -- (924)
Unrealized Holding Loss -- - -- -- -- (279) (279)
--------------------------------------------------------------------------
Total Shareholders' Equity 73,051 73 158,731 (81,600) (656) 76,548
--------------------------------------------------------------------------
As of August 31, 2002
Net Loss -- -- -- -- (36,501) -- (36,501)
New Stock Issued to Shareholders
For Services and Compensation 7,437 7 -- 1,813 -- -- 1,820
For Property and Other Assets 14,938 15 -- 3,032 -- -- 3,047
For Retirement of Debt and
Liabilities 50,816 51 -- 13,827 -- -- 13,878
For Employee Stock Option Plan 1,647 2 -- 180 -- -- 182
Syndication Costs -- - -- (368) -- -- (368)
Treasury Stock and Cost (442) (1) -- (198) -- -- (199)
Unrealized Holding Loss -- - -- -- (71) (71)
--------------------------------------------------------------------------
Total Shareholders' Equity 147,447 147 177,017 (118,101) (727) 58,336
--------------------------------------------------------------------------
As of August 31, 2003
Net Loss -- - -- -- (39,005) -- (39,005)
New Stock Issued to Shareholders: --
For Services and Compensation 11,016 12 -- 6,335 -- -- 6,347
For Retirement of Debt and
Liabilities 47,046 47 -- 13,294 -- -- 13,341
Stock-Based Compensation -- - -- 4,493 -- -- 4,493
Beneficial Conversion Features on
Convertible Debentures -- - -- 6,912 -- -- 6,912
Unrealized Holding Loss -- - -- -- (321) (321)
-------------------------------------------------------------------------
Total Shareholders' Equity
As of August 31, 2004 205,509 $206 $ -- $ 208,051 $(157,106) $(1,048) $ 50,103
=========================================================================
See accompanying notes to consolidated financial statements.
F-20
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
For the years ended August 31,
-----------------------------------
2004 2003 2002
---------- --------- ----------
Cash Flows from Operating Activities
Net Loss $(39,005) $(36,501) $(76,973)
---------- --------- ----------
Adjustments to Reconcile Net Loss to Net
Cash
Used by Operating Activities:
Impairment, write-downs &restructuring
costs 1,300 10,238 64,665
Gain (Loss) on sale of Assets 611 -- --
Interest for beneficial conversion value 6,912 91
Depreciation and Amortization 5,097 5,232 6,397
Stock Issued for Interest Expense 108 2,477 100
Stock Issued for Services Rendered 10,841 1,820 882
Provision for bad debt 2,643 2,177 (363)
(Increase)/Decrease in Accounts Receivable (1,750) 124 2,479
(Increase)/Decrease in Inventories 1,496 (910) 4,578
(Increase)/Decrease in Prepaid Expenses 341 (311) 386
Increase/(Decrease) in Accounts Payable (1,016) 921 232
Increase/(Decrease) in Accrued Expenses 8,929 8,557 (3,180)
---------- --------- ----------
Total Adjustment 35,512 30,416 76,176
---------- --------- ----------
Net Cash Used by Operating Activities (3,493) (6,085) (797)
---------- --------- ----------
Cash Flows from Investing Activities
(Purchase)/Disposal of Property and
Equipment (729) (2,121) (12,886)
Increase/(Decrease) Deferred Costs 334 -- --
Increase/(Decrease) in Intangible Costs (40) -- --
Increase/(Decrease) in Marketable
Securities 842 434 87
(Increase)/Decrease in Other Assets (452) 411 --
(Purchase)/Disposal of Contact Wireless &
DSS Security, -- -- (869)
Net of Cash Acquired
Gross Equipment Purchase for Direct
Financing Leases (1,212) -- --
Principal Collections on Direct Financing
Leases 41 -- --
---------- --------- ----------
Net Cash Used by Investing Activities (1,216) (1,276) (13,668)
---------- --------- ----------
Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable &
Long-Term Debt 5,936 7,297 387
Increase/(Decrease) in Capital Leases -- -- 3
Increase/(Decrease) in Line of Credit -- -- (1,846)
Increase/(Decrease) in Deferred Taxes -- -- 32
Proceeds from Sale of Common Stock, Net -- 182 --
Syndication costs -- (368) --
Treasury Stock -- (199) (918)
---------- --------- ----------
Net Cash Provided (Used) by Financing
Activities 5,936 6,912 (2,342)
---------- --------- ----------
Net Increase/(Decrease) in Cash 1,227 (449) (16,807)
Cash at the Beginning of the Year 824 1,273 18,080
---------- --------- ----------
Cash at the End of the Year $ 2,051 $ 824 $ 1,273
========== ========= ==========
Supplemental Disclosure of Cash Flow
Information:
Net Cash Paid During the Year for:
Interest $ 1,305 $ 3,288 $ 165
See accompanying notes to consolidated financial statements.
F-21
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 1 - Basis of Presentation and Significant Accounting Policies:
Eagle Broadband, Inc. (the "Company" or "Eagle"), incorporated as a
Texas corporation on May 24, 2993, and commenced business in April of 1996. The
Company is a leading provider of broadband, Internet protocol (IP) and satellite
communications technology and services. The Company is focused on three core
businesses: broadband bundled services, IP set-top boxes and satellite
communications technology. The Company's product offerings include an exclusive
"four-play" suite of IP-based broadband bundled services with high-speed
Internet, cable TV, telephone and security monitoring, and a turnkey suite of
financing, network design, operational and support services that enables
municipalities, utilities, real estate developers, hotels, multi-tenant owners
and service providers to deliver exceptional value, state-of-the-art
entertainment and communications choices and single-bill convenience to their
residential and business customers. Eagle offers the HDTV-ready Media Pro IP
set-top box product line that enables hotel operators and service providers to
maximize revenues by offering state-of-the-art in-room entertainment and video
services. The Company also develops and markets the SatMAX satellite
communications system that allows government, military, homeland security,
aviation, maritime and enterprise customers to deliver reliable,
non-line-of-sight, voice and data communications services via the Iridium
satellite network from any location on Earth.
A) Consolidation
At August 31, 2004, 2003 and 2002, the Company's subsidiaries were:
Atlantic Pacific Communications, Inc. (APC) - operated as Eagle Communication
Services; Etoolz, Inc. (ETI); Eagle Wireless International, Inc. (EWI);
ClearWorks.net, Inc. (.NET); ClearWorks Communications, Inc. (COMM) - operated
as Eagle BDS Services; ClearWorks Home Systems, Inc. (HSI) - operated as Eagle
Residential Structured Wiring; Contact Wireless, Inc. (CWI) - operating as Eagle
Paging Services; DSS Security, Inc., (DSS) - operated as Eagle Security
Services; United Computing Group, Inc. (UCG) - operated as Eagle Technology
Services; and Link Two Communications, Inc. (LINK II) - operated as Eagle
Messaging Services. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation.
B) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with
original maturities of three months or less to be cash equivalents. The Company
maintains cash deposits in banks which from time to time exceed the amount of
deposit insurance available. Management periodically assesses the financial
condition of the institutions and believes that any potential credit loss is
minimal.
The Company has $2,051,000 and $824,000 of cash and cash equivalents
invested in interest bearing accounts at August 31, 2004, and August 31, 2003,
respectively.
C) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated by using the straight-line method for
financial reporting and accelerated methods for income tax purposes. The
recovery classifications for these assets are listed as follows:
Years
--------------------------
Headend Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized. Eagle has acquired all of
its property and equipment with either cash or stock and has not capitalized any
interest expenses in its capital assets.
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the following items,
in thousands:
August 31,
2004 2003
---------- ----------
Raw Materials $ 294 $ 1,826
Work in Process 108 1,237
Finished Goods 1 136
---------- ----------
$ 403 $ 3,199
========== ==========
F-22
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
E) Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle Wireless
International, Inc., Atlantic Pacific Communications, Inc.; Link Two
Communications, Inc.; United Computing Group, Inc.; Contact Wireless, Inc.; and
DSS Security, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of adopting EITF
00-21 did not have a material effect to Eagle's results of operations. Eagle's
contracts that contain multiple elements as of August 31, 2004, or prior were
immaterial. When elements such as hardware, software and consulting services are
contained in a single arrangement, or in related arrangements with the same
customer, Eagle allocates revenue to each element based on its relative fair
value, provided that such element meets the criteria for treatment as a separate
unit of accounting. The price charged when the element is sold separately
generally determines fair value. In the absence of fair value for a delivered
element, Eagle allocates revenue first to the fair value of the undelivered
elements and allocates the residual revenue to the delivered elements. In the
absence of fair value for an undelivered element, the arrangement is accounted
for as a single unit of accounting, resulting in a delay of revenue recognition
for the delivered elements until the undelivered elements are fulfilled. Eagle
limits the amount of revenue recognition for delivered elements to the amount
that is not contingent on the future delivery of products or services or subject
to customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed are
deferred until the conclusion of the period of the service for which the advance
billing relates. Deferred revenues are included on the balance sheet as a
current liability until the service is performed and then recognized in the
period in which the service is completed. Eagle's deferred revenues primarily
consist of billings in advance for cable, Internet, security and telephone
services, which generally are between one and three months of services. Eagle
had deferred revenues of $353,000 and $230,000 as of August 31, 2004 and 2003,
respectively.
Eagle Wireless International, Inc.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial and
personal communication systems, radio and telephone systems. Revenues from these
products are recognized when the product is shipped. Eagle's Wireless
International Product revenues are reported under the category "Products" on
Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category "Eagle" within Note 22 - Industry Segments.
BroadbandMagic
BroadbandMagic designs, manufactures and markets the IP set-top boxes.
Products are sent principally to commercial customers for a pre-sale test period
of ninety days. Upon the end of the pre-sale test period, the customer either
returns the product or accepts the product, at which time Eagle recognizes the
revenue. Eagle's Broadband Multimedia and Internet Products revenues are
reported under the category "Products" on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category
"Eagle" within Note 22 - Industry Segments. Revenue from software consists of
software licensing. There is no post-contract customer support. Software revenue
is allocated to the license using vendor specific objective evidence of fair
value ("VSOE") or, in the absence of VSOE, the residual method. The price
charged when the element is sold separately generally determines VSOE. In the
absence of VSOE of a delivered element, Eagle allocates revenue to the fair
value of the undelivered elements and the residual revenue to the delivered
elements. Eagle recognizes revenue allocated to software licenses at the
inception of the license.
F-23
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Eagle Broadband, Inc.
Eagle Broadband, Inc., engages independent agents for sales principally
in foreign countries and certain geographic regions in the United States. Under
the terms of these one-year agreements the distributor or sales agents provide
the companies with manufacturing business sales leads. The transactions from
these distributors and agents are subject to Eagle's approval prior to sale. The
distributorship or sales agent receives commissions based on the amount of the
sales invoice from the companies to the customer. The sale is recognized at the
time of shipment to the customer. These sales agents and distributors are not a
significant portion of total sales in any of the periods presented. Eagle's
Broadband, Inc. revenues are reported under the category "Products" on Eagle's
Consolidated Statements of Operations included as page F-4 of this report and
also under the category "Eagle" within Note 22 - Industry Segments.
Eagle BDS Services - dba ClearWorks Communications, Inc.
ClearWorks Communications, Inc., provides Bundled Digital Services to
business and residential customers, primarily in the Texas market. Revenue is
derived from fees charged for the delivery of Bundled Digital Services, which
includes telephone, long distance, Internet, security monitoring and cable
services. This subsidiary recognizes revenue and the related costs at the time
the services are rendered, Installation fees are recognized upon completion and
acceptance. Eagle's BDS Services revenues are reported under the category
"Broadband Services" on Eagle's Consolidated Statements of Operations included
as page F-4 of this report and also under the category "EBS/DSS" within Note 22
- - Industry Segments.
Eagle Residential Structured Wiring - dba ClearWorks Home Systems, Inc.
ClearWorks Home Systems, Inc., sells and installs structured wiring,
audio and visual components to homes. This subsidiary recognizes revenue and the
related costs at the time the services are performed. Revenue is derived from
the billing of structured wiring to homes and the sale of audio and visual
components to the homebuyers. Eagle's Residential Structured Wiring revenues are
reported under the category "Structured Wiring" on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category "APC/HSI" within Note 22 - Industry Segments.
Eagle Communication Services - dba Atlantic Pacific Communications, Inc.
Atlantic Pacific Communications, Inc., provides project planning,
installation, project management, testing and documentation of fiber and cable
to commercial and industrial clients throughout the United States. The revenue
from the fiber and cable installation and services is recognized upon percentage
of completion of the project. Most projects are completed in less than one
month, therefore, matching revenue and expense in the period incurred. Service,
training and extended warranty contract revenues are recognized as services are
completed. Eagle's Communications Services revenues are reported under the
category "Structured Wiring" on Eagle's Consolidated Statements of Operations
included as page F-4 of this report and also under the category "APC/HSI" within
Note 22 - Industry Segments.
Etoolz, Inc.
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to independent third
parties.
Eagle Messaging Services - dba Link Two Communications, Inc.
Link Two Communications, Inc., provides customers with one- and two-way
messaging systems. The revenue from the sale of these products is recognized at
the time the services are provided. Eagle's Messaging Services revenues are
reported under the category "Other" on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category
"Eagle" within Note 22 - Industry Segments.
F-24
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Eagle Paging Services - dba Contact Wireless, Inc.
Contact Wireless, Inc., provides customers with paging and mobile
telephone products and related monthly services. Revenue from product sales is
recorded at the time of shipment. Revenue for the mobile phone and paging
service is billed monthly as the service is provided. Eagle's Paging Services
revenues are reported under the category "Other" on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category "Other" within Note 22 - Industry Segments.
Eagle Security Services - dba DSS Security, Inc.
DSS Security, Inc., provides monthly security monitoring services to
residential customers. The customers are billed three months in advance of
service usage. The revenues are deferred at the time of billing and ratably
recognized over the prepayment period as service is provided. Installation fees
are recognized upon completion and acceptance. Eagle's Security Services
revenues are reported under the category "Broadband Services" on Eagle's
Consolidated Statements of Operations included as page F-4 of this report and
also under the category "EBS/DSS" within Note 22 - Industry Segments.
Eagle Technology Services - dba United Computing Group, Inc.
United Computing Group, Inc., provides business-to-business hardware
and software network solutions and network monitoring services. The revenue from
the hardware and software sales is recognized at the time of shipment. The
monitoring services recognition policy is to record revenue on completion.
Eagle's Technology Services product revenues are reported under the category
"Products" while the services components are reported under the category "Other"
on Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category "UCG" within Note 22 - Industry Segments.
F) Research and Development Costs
Research and development expenditures are generally charged to
operations as incurred. For the years ended August 31, 2004, 2003 and 2002, the
Company performed research and development activities for internal projects
related to its SatMAX global non-line-of-sight communications system, IP set-top
boxes as well as its multi-media entertainment centers. Research and development
costs of $557,000, $411,000, and $404,000, were expensed for the years ended
August 31, 2004, 2003, and 2002, respectively.
No research and development services were performed for outside parties
for the year ended August 31, 2004, 2003 and 2002.
G) Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires a change
from the deferral method to assets and liability method of accounting for income
taxes. Timing differences exist between book income and tax income, which relate
primarily to depreciation methods.
H) Net Earnings Per Common Share
Net earnings per common share are shown as both basic and diluted.
Basic earnings per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average number of
shares of common stock outstanding. Diluted earnings per common share are
computed by dividing net income less any preferred stock dividends (if
applicable) by the weighted average number of shares of common stock outstanding
plus any dilutive common stock equivalents. The components used for the
computations are shown as follows, in thousands:
F-25
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
2004 2003 2002
---------- ----------- ----------
Weighted Average Number of Common
Shares Outstanding Including:
Basic Common Stock Equivalents 185,046 95,465 64,004
Fully Diluted Common Stock Equivalents 185,046 95,465 64,158
I) Impairment of Long-Lived Assets and Goodwill
Our long-lived assets primarily include goodwill, contract rights and
customer relationships. Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142") requires that goodwill and
intangible assets be tested for impairment at the reporting unit level
(operating segment or one level below an operating segment) on an annual basis
and between annual tests in certain circumstances. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
and intangible assets to reporting units, and determining the fair value of each
reporting unit. Significant judgments required to estimate the fair value of
reporting units include estimating future cash flows, determining appropriate
discount rates and other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value for each reporting unit.
The intangible assets primarily are the Company rights to deliver
bundled digital services such as, Internet, telephone, cable television and
security monitoring services to residential and business users. The Company
assessed the fair value of the intangible assets. There were a number of
significant and complex assumptions used in the calculation of the fair value of
the intangible assets. If any of these assumptions prove to be incorrect, the
Company could be required to record a material impairment to its intangible
assets. The assumptions include significant market penetration in its current
markets under contract and significant market penetration in markets where they
are currently negotiating contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing basis. An
impairment loss would be deemed necessary when the estimated non-discounted
future cash flows are less than the carrying net amount of the asset. If an
asset were deemed to be impaired, the asset's recorded value would be reduced to
fair market value. In determining the amount of the charge to be recorded, the
following methods would be utilized to determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
At August 31, 2002, Eagle determined that an impairment of Link Two
paging network equipment and nationwide licenses existed. Link Two
Communications competes with many established companies in the nationwide one
and two-way messaging services area. The paging industry has declined over the
past year and the major paging companies have undergone significant beneficial
financial restructurings. These companies are able to offer products and related
services at more favorable rates than Link Two. Because the paging industry and
related financial credit availability from banks for financing emerging
nationwide networks has been declining over the last year, Link Two has been
unable to obtain significant funding to expand and provide cost effective
service to its customers. Accordingly, Link Two has had to curtail its
development on a nationwide basis and restricted its operations to serve the
Houston and Dallas, Texas, markets. The equipment servicing the nationwide
network has been inactive and is being dismantled. The equipment servicing the
nationwide network is inactive and has been impaired as well as the value of the
related FCC licenses. At August 31, 2002, management estimated through recent
sales of equipment and industry pricing of FCC licenses that an impairment
charge of $27,100,000 was necessary to reflect the ongoing value of its assets
and licenses.
F-26
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
At August 31, 2003, management determined that a $7,611,000 non-cash
impairment charge was necessary against realigned operations and the
discontinued sale of low margin commodity products, residential and commercial
structured wiring operations and the withdrawal from its Austin area BDS
development based on the lack of demand for BDS services resulting from a slower
build out of the development than originally projected in conjunction with local
market competition. Included in the impairment was the write down of goodwill
associated with the Comtel acquisition of $1,878,000.
J) Intangible Assets
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at the dates of acquisition and were being
amortized using the straight-line method over twenty (20) years for Atlantic
Pacific Communications, Inc., and twenty-five (25) years for Bundled Digital
Services through June 30, 2001.
Contract rights and customer relationships relate to the Company rights
to deliver bundled digital services such as Internet, telephone, cable
television and security monitoring services to certain residential and business
users that were acquired in the Clearworks.net, Inc. merger and are being
amortized over the lives of the contracts which is fifteen (15) years.
Other intangible assets consist of licenses and permits and other
acquired contracts, which are being amortized using the straight-line method
over their estimated useful lives of 1 to twenty (20) years. Eagle's licenses
include FCC licenses for designated narrowband personal communications services,
radio frequencies or spectrum to service providers. Prior to the adoption of FAS
142, Eagle amortized these licenses using the straight line method over twenty
years. At August 31, 2002, management estimated through recent sales of
equipment and industry pricing of FCC licenses that an impairment charge of
$27,100,000 was necessary to reflect the ongoing value of its assets and
licenses; thereby leaving an unamortized balance of licenses on its books of
$1,562,000. Eagle does not maintain that these licenses have an indefinite life,
but rather has ceased amortizing the remaining balance of $1,562,000 as
management believes that this balance represents the salvage value of such
assets. Eagle, to date, has maintained all operational requirements to keep its
licenses current, and periodically assesses both future operating requirements
as well as the salvage of such assets.
During the fiscal year ended August 31, 2004, and subsequent to the
issuance of the Company's financial statements as of August 31, 2003, it was
determined that the allocation of the purchase price to net assets acquired in
connection with its acquisition of ClearWorks.net, Inc., and certain other
classifications of intangible assets had not been appropriately classified.
Eagle also determined that goodwill was impaired at August 31, 2002, and
recorded an impairment charge of $37,565,000, Goodwill is carried at cost less
accumulated amortization. Intangible assets were amortized on a straight-line
basis over the economic lives of the respective assets, generally ten to
twenty-five years. Prior to July 1, 2001, goodwill was amortized over 20 to 25
years. The Company's adoption of SFAS 142 eliminated the requirement to amortize
goodwill subsequent to the fiscal year ending August 31, 2001. Under the
provisions of SFAS 142, the Company is required to periodically assess the
carrying value of goodwill associated with each of its distinct business units
that comprise its business segments of the Company to determine if impairment in
value has occurred. Impairment tests completed as of August 31, 2002 and August
31, 2001 concluded that the carrying amount of goodwill for each acquired
business unit did not exceed its net realizable value based on the Company's
estimate of expected future cash flows to be generated by its business units,
except as described above in Note I. The Company updated its assessment as of
August 31, 2003 and concluded that based on a valuation model incorporating
expected future cash flows in consideration of historical cash flows and results
to date, no impairment charge was necessary.
Goodwill and other intangibles of $35,238,000 net of prior impairments
and amortization were recorded under the purchase method for the purchases of
ClearWorks.net, Inc., Atlantic Pacific, Inc., DSS Security, Inc., Contact
Wireless, Inc., and Comtel, Inc. The majority of the intangibles were from the
ClearWorks acquisition. ClearWorks was in the business of selling
telecommunications services to residential neighborhoods. In fiscal 2003, Eagle
realized it had failed to successfully achieve profits using the ClearWorks
model of installing fiber optic cable to neighborhoods under the speculative
attempt to capture enough individual homeowners in each neighborhood via
individual selling methods to pay for the cable infrastructure. In early 2003,
Eagle modified its strategy to deliver the ClearWorks developed bundled digital
services approach including Internet, telephone, cable television and security
monitoring services to residential and business users by targeting
municipalities, homebuilders and residential real estate developers that finance
and install the fiber optic cable backbone in every lot and offer Eagle
exclusive rights to deliver digital bundled services to homeowners, using
pre-selling promotions and other low cost mass marketing techniques.
F-27
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Eagle assessed the fair value of the intangible assets as of August 31,
2004, and concluded that the goodwill and other intangible assets valuations
remain at an amount greater than the current carrying and other intangible
assets value.
There were a number of significant and complex assumptions used in the
calculation of the fair value of the goodwill. If any of these assumptions prove
to be incorrect, Eagle could be required to record a material impairment to its
goodwill. The assumptions include significant market penetration in its current
markets under contract and significant market penetration in markets where they
are currently negotiating contracts.
K) Advertising Costs
Advertising costs are expensed when incurred. For the year ended August
31, 2004, 2003, and 2002, the Company expensed $29,000, $247,000 and $963,000,
respectively.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that
are directly attributable to fundraising and the collection thereto. Upon
successful collection of the funds, all expenses incurred will be reclassified
to additional paid in capital and treated as syndication costs; netted against
the funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent asset and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
N) Marketable Securities
Eagle holds minority equity investments in companies having operations
or technology in areas within Eagle's strategic focus. Eagle applies the equity
method of accounting for minority investments when Eagle has the ability to
exert significant influence over the operating and financial policies of an
investment. In the absence of such ability, Eagle accounts for these minority
investments under the cost method. Certain investments carry restrictions on
immediate disposition. Investments in public companies (excluding those
accounted for under the equity method) with restrictions of less than one year
are classified as available-for-sale and are adjusted to their fair market value
with unrealized gains and losses, net of tax, recorded as a component of
accumulated other comprehensive income. Upon disposition of these investments,
the specific identification method is used to determine the cost basis in
computing realized gains or losses, which are reported in other income and
expense. Declines in value that are judged to be other than temporary are
reported in other income and expense.
The Company has Securities Available for Sale that include shares of
common stock and bonds. These investments have a fair market value of $551,000
and of $1,714,006 and are included in the Balance Sheet category "Securities
Available for Sale" as of August 31, 2004 and 2003. (See Note 10.)
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income," effective
for fiscal years beginning after December 15, 1997. This statement considers the
presentation of unrealized holding gains and losses attributable to debt and
equity securities classified as available-for-sale. As stated, any unrealized
holding gains or losses affiliated to these securities are carried below net
income under the caption "Other Comprehensive Income." For the fiscal year ended
August 31, 2004, 2003, and 2002 other comprehensive loss was ($321, 000),
($71,000) and ($279,000), respectively.
F-28
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
years ended August 31, 2004, 2003 and 2002, to facilitate comparisons.
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support costs for the twelve months ended August 31, 2004, 2003,
and 2002 are as follows, in thousands: -
2004 2003 2002
-------------- -------------- ----------
Advertising/Conventions $ -- $ -- $ 8
Auto Related 22 19 111
Bad Debt 2,643 2,177 --
Delivery/Postage 47 95 162
Fees 288 418 --
Insurance and Office 425 437 191
Professional and Contract Labor 6,818 6,129 514
Rent 507 1,183 1,052
Repairs and Maintenance 43 47 63
Travel 237 377 459
Taxes 1,474 170 53
Telephone and Utilities 794 1,394 1,340
Other 69 291 21
------------ ------------ ----------
Total $ 13,367 $ 12,737 $ 3,974
============ ============ ==========
R) Recent Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or
Disposal Activities," which nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146
requires that costs associated with an exit or disposal activity be recognized
only when the liability is incurred (that is, when it meets the definition of a
liability in the FASB's conceptual framework). SFAS 146 also establishes fair
value as the objective for initial measurement of liabilities related to exit or
disposal activities. SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company adopted SFAS in the first
quarter of fiscal 2003.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which requires the
Company to consolidate variable interest entities for which it is deemed to be
the primary beneficiary and disclose information about variable interest
entities in which it has a significant variable interest. FIN 46 became
effective immediately for variable interest entities formed after January 31,
2003 and effective for periods ending after December 15, 2003, for any variable
interest entities formed prior to February 1, 2003. The Company does not believe
that this Interpretation will have a material impact on its consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," which requires
that the extinguishment of debt not be considered an extraordinary item under
APB Opinion No. 30 ("APB 30"), "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," unless the debt extinguishment
meets the "unusual in nature and infrequent of occurrence" criteria in APB 30.
SFAS 145 is effective for fiscal years beginning after May 15, 2002, and, upon
adoption, companies must reclassify prior period items that do not meet the
extraordinary item classification criteria in APB 30. The Company adopted SFAS
145 and related rules as of August 31, 2002. The adoption of SFAS 145 had no
effect on the Company's financial position or results of operations. In March
2004, the FASB issued a proposed Statement, "Share-Based Payment, an amendment
of FASB Statements Nos. 123 and 95," that addresses the accounting for
share-based payment transactions in which a Company receives employee services
in exchange for either equity instruments of the Company or liabilities that are
based on the fair value of the Company's equity instruments or that may be
settled by the issuance of such equity instruments. The proposed statement would
eliminate the ability to account for share-based compensation transactions using
the intrinsic method that the Company currently uses and generally would require
that such transactions be accounted for using a fair-value-based method and
recognized as expense in the consolidated statement of operations. The effective
date of the proposed standard is for periods beginning after June 15, 2005. It
is expected that the final standard will be issued before December 31, 2004 and
should it be finalized in its current form, it will have a significant impact on
the consolidated statement of operations as the Company will be required to
expense the fair value of stock option grants and stock purchases under employee
stock purchase plan.
F-29
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
In April 2004, the Emerging Issues Task Force ("EITF") issued Statement
No. 03-06 "Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a
number of questions regarding the computation of earnings per share by companies
that have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the Company when, and if,
it declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 became effective during the quarter ended June 30,
2004, the adoption of which did not have an impact on the calculation of
earnings per share of the Company. In July 2004, the EITF issued a draft
abstract for EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt
on Diluted Earnings per Share" ("EITF 04-08"). EITF 04-08 reflects the Task
Force's tentative conclusion that contingently convertible debt should be
included in diluted earnings per share computations regardless of whether the
market price trigger has been met. If adopted, the consensus reached by the Task
Force in this Issue will be effective for reporting periods ending after
December 15, 2004. Prior period earnings per share amounts presented for
comparative purposes would be required to be restated to conform to this
consensus and the Company would be required to include the shares issuable upon
the conversion of the Notes in the diluted earnings per share computation for
all periods during which the Notes are outstanding. Currently, there would be no
effect of this proposed statement on our financial position and
results of operations.
In September 2004, the EITF delayed the effective date for the
recognition and measurement guidance previously discussed under EITF Issue No.
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. Currently, there would be no
effect of this proposed statement on its financial position and results of
operations.
S) Product Warranties
The Company warrants its products against defects in design, materials
and workmanship generally for six months to a year. Other warranties from our
vendors which are incorporated in our products are passed on to the customer at
the completion of the sale. Provision for estimated warranty costs is made in
the period in which such costs become probable. Historically, Eagle has not
incurred any material warranty costs and, accordingly, Eagle has not accrued for
these costs at August 31, 2004 and 2003. Eagle provides for the estimated cost
of product warranties at the time it recognizes revenue. Eagle engages in
product quality programs and processes, including actively monitoring and
evaluating the quality of its component suppliers; however, ongoing product
failure rates, material usage and service delivery costs incurred in correcting
a product failure, as well as specific product class failures outside of Eagle's
baseline experience, affect the estimated warranty obligation. If actual product
failure rates, material usage or service delivery costs differ from estimates,
revisions to the estimated warranty liability would be required.
F-30
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
T) Beneficial Conversion Values:
Beneficial conversion values are calculated at the difference between
the conversion price and the fair value of the common stock into which the debt
is convertible, multiplied by the number of shares into which the debt is
convertible. The beneficial conversion value is charged to interest expense
because the debt is convertible at the date of issuance. The value is limited to
the total proceeds received.
NOTE 2 - RELATED PARTY TRANSACTIONS:
Sale of Assets:
During the fiscal year ended August 31, 2004, the Company completed a
transaction with an effective date of October 1, 2003, with Eagle RF
International, Inc. (dba ERF), to sell certain assets of its subsidiary Contact
Wireless, Inc. Eagle RF International, Inc., is a private company engaged in
providing products and services to the wireless industry. ERF has a board member
who is also a member of the Company's board of directors, namely H. Dean Cubley.
The assets sold related to the Contract Wireless paging network business and
included a switch center lease and tower lease, network equipment, network
contracts, paging licenses, accounts receivable, inventory, furniture and
fixtures. The Company had downsized this subsidiary during the course of fiscal
2003 and during the three months ended February 29, 2004, elected to exit this
business segment. The Company has recorded approximately $329,000 in revenues
with a corresponding segment loss of approximately $387,000 from this business
segment in fiscal 2003 and recorded approximately $80,000 in revenues with a
corresponding loss of $25,000 in the first quarter of fiscal 2004. The Company
had no competing offers with respect to the sale of assets and/or sale of the
business and the Company's board of directors determined that the offer from ERF
represented fair value. The Company terminated its remaining employees
associated with this subsidiary and ERF entered into new employment arrangements
with certain of these employees. Additionally, ERF assumed certain liabilities
and subleased certain property from the Company in Houston and San Antonio. In
conjunction with this transaction, the Company recorded a loss of $642,000 on
the sale of assets and certain other costs incurred in the exit from this line
of business.
Compensation
Eagle renewed a professional service agreement effective April 1, 2004,
with the son of a director. The agreement states that consulting services
provided will include support in the areas of management information systems,
investor relations, and corporate finance and accounting. Compensation includes
monthly salary of $10,000 and quarterly issuance of stock options to purchase
common stock of Eagle Broadband.
In addition, compensation for certain officers and key employees under
incentive clauses of their employment contracts (i) includes a non-cash expense
of $4,493,000 incurred upon the modification of warrants for 4,200,000 common
shares and (ii) reflects a guaranteed compensation of the modified warrants
equivalent to $1.75 less the warrant strike price.
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following, in thousands:
August 31,
---------------------------------
2004 2003
------------ ------------
Accounts Receivable $ 3,866 $ 2,116
Allowance for Doubtful Accounts (2,396) (412)
------------ ------------
Accounts Receivable, Net $ 1,470 $ 1,704
============ ============
F-31
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 4 - PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS:
Components of property, plant & equipment are as follows, in thousands:
August 31,
--------------------------------
2004 2003
------------ -------------
Automobile $ 143 $ 143
Headend facility and fiber infrastructure 27,146 26,688
Furniture and fixtures 516 565
Leasehold improvements 133 122
Office equipment 7,454 979
Property, manufacturing and equipment $ 1,023 $ 7,925
------------ -------------
Total Property, Plant and Equipment 36,415 36,422
Less accumulated depreciation $ (7,837) $ (5,689)
------------ -------------
Net property, plant and equipment $ 28,578 $ 30,733
============ =============
Eagle expenses repairs and maintenance against income as incurred
whereas major improvements are capitalized. Eagle defines major improvements as
those assets acquired that extend the life of the underlying base asset while
defining other improvements that do not extend the life as repairs and
maintenance. Eagle expensed repairs and maintenance of $43,000, $47,000 and
$63,000 for the three years ended August 31, 2004, 2003 and 2002, respectively,
whereas it did not have any capitalized major improvements for the same time
periods.
Eagle's headend facility and fiber infrastructure consist primarily of
digital computing and telecommunications equipment that comprise Eagle's main
headend facility at it headquarters, wireless headend equipment, a digital
headend facility and a fiber backbone in the master planned communities in which
it operates and a fiber ring connecting the various master planned communities
in the Houston area. These fiber and headend infrastructures are similar to
those that would exist in a major telecommunications or cable television
provider that offers digital services for Internet, cable TV, telephone and
security monitoring services. Eagle determined that a twenty-year straight line
depreciation method is appropriate for its Headend Facility and Fiber
Infrastructure based on industry standards for these asset types.
Components of intangible assets are as follows, in thousands:
August 31,
-------------------------
2004 2003
------- -------
Goodwill $ 5,596 $ 5,596
Accumulated Amortization (1,501) (1,501)
------- -------
$ 4,095 $ 4,095
------- -------
Contract Rights $28,691 $28,691
Accumulated Amortization (7,013) (5,101)
------- -------
$21,678 $23,590
------- -------
Customer Relationships $ 7,189 $ 7,189
Accumulated Amortization (1,758) (1,277)
------- -------
$ 5,431 $ 5,912
------- -------
Other Intangible Assets $ 6,839 $ 6,839
Accumulated Amortization (2,805) (2,473)
------- -------
$ 4,034 $ 4,366
------- -------
F-32
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 5 - BUSINESS COMBINATIONS:
Effective January 1, 2002, the Company acquired DSS Security, Inc., and
Contact Wireless in a business combination accounted for as a purchase. DSS
Security, Inc., provides security monitoring to business and residential
customers. Contact Wireless sells and services mobile phones and one- and
two-way messaging devices. The Company paid cash of $450,000 and issued a
short-term note payable of $130,000 for the assets of Contact Wireless for a
total purchase price of $580,000. Additionally, the Company acquired DSS
Security, Inc., for $2,002,147. In this transaction, the Company issued
2,002,147 shares of its common stock with a guaranteed value of $1 per share.
The Company allocated $51,595 to the fair value of the property and equipment
and $1,950,552 in goodwill. The allocation of the purchase price is based on the
fair value of the assets acquired based on management's estimates and existing
contracts. At August 31, 2003 and 2002, the Company has accruals for $573,000
and $921,000; respectively for the portion of the purchase that represents the
difference between purchase price and market value of the Company's common stock
on the date of purchase.
NOTE 6 - NOTES PAYABLE:
The following table lists the Company's note obligations as of August 31,
2004 and 2003, in thousands:
Annual Amount
Interest --------------------
Rate Due Date 2004 2003
---------- ---------- ------ -------
Vehicles Various Various $ -- $ 4
5% Convertible Debenture (Note 9) Tail Wind 5.0% Demand -- 1,200
Convertible Debenture 2.0% Demand -- 1,595
Notes Payable: Investor Group 10.0% Oct. 2003 -- 900
Notes Payable: Investor Group 8.0% Demand 4,888 --
Notes Payable: Q Series Bonds 12.0% Various 744 1,363
Other Various Various 288 717
------ --------
Total Notes Payable $5,920 $ 5,779
------ --------
Less Current Portion 5,920 5,779
------ --------
Total Long-Term Debt $ -- $ --
====== ========
NOTE 7 - CAPITAL LEASE OBLIGATIONS:
The Company historically has leased equipment from various companies
under capital leases. The assets and liabilities under the capital lease are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are depreciated over the estimated useful
life with the value and depreciation being included as a component of Property
and Equipment under operating equipment. As of August 31, 2004, there was no
equipment under capital lease.
NOTE 8 - LINES OF CREDIT:
On July 16, 2002, the Company entered into a $20,000,000 line of credit
with Cornell Capital Partners, LP (CCP). The Company has not drawn on the line
of credit and currently has no plans to do so. One of the issues in the
litigation between CCP and the Company (see Legal Proceedings below) is whether
the Company owes CCP a commitment fee for this line of credit. Cornell contends
that the Company owes $395,000 of stock; the Company denies the liability.
F-33
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 9 - CONVERTIBLE DEBENTURES:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). During the three
month period ended November 30, 2003, the principal balance of the debenture was
repaid, although a lawsuit remains outstanding - see Legal Proceedings. On July
16, 2002, the Company entered into a $20,000,000 line of credit with Cornell
Capital Partners, LP (CCP). The Company has not drawn on the line of credit and
currently has no plans to do so. One of the issues in the litigation between CCP
and the Company (see Legal Proceedings below) is whether the Company owes CCP a
commitment fee for this line of credit. Cornell contends that the Company owes
$395,000 of stock; the Company denies the liability. The Company is currently
negotiating to settle this contested liability and the cancellation of the line
of credit.
During 2001, the Company acquired ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. Link Two
Communications, Inc., is a subsidiary of ClearWorks. Link Two entered an
agreement with The Tail Wind Fund Ltd., under which Tail Wind purchased from
Link Two a 2% convertible note in the initial amount of $5,000,000. As a result
of the acquisition, Eagle the parent of Link Two, has guaranteed the Link Two
notes issued to Tail Wind and allowed Tail Wind to convert the above mentioned
debt into Eagle common stock and warrants at various rates. During fiscal 2002
Eagle made payments of $500,000 in cash and converted $2,500,000 into common
stock. During fiscal 2003, Tail Wind converted $405,169 into common stock and
during fiscal 2004 Eagle made the final payment of $1,594,831 in cash.
Between November 25, 2002, and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45 accredited
investors. The securities consisted of $25,000, 12% five-year bonds. The bonds
are due and payable upon maturity at the end of the five-year period. Interest
on the bonds is payable at the rate of 12% per annum, and is payable
semiannually. The bondholder may require the Company to convert the bond
(including any unpaid interest) into shares of the Company's common stock at any
time during the first year but not thereafter. The conversion rates vary from
$0.16 to $0.34 per share. The Company may redeem the bonds at any time after the
first year.
Between October 30, 2003, and November 5, 2003, the Company sold
approximately $4.1 million of convertible debt securities to 36 accredited
investors. The securities consisted of $25,000, 12% five-year bonds. The bonds
are due and payable upon maturity at the end of the five-year period. Interest
on the bonds is payable at the rate of 12% per annum, and is payable
semiannually. The bondholder may require the Company to convert the bond
(including any unpaid interest) into shares of the Company's common stock at any
time during the first year but not thereafter. The conversion rates vary from
$0.50 to $0.75 per share. The Company may redeem the bonds at any time after the
first year.
Eagle Broadband, Inc. ("Eagle" or "Company") entered into a Securities
Purchase Agreement dated June 2, 2004, (the "Agreement") with four accredited
investors (collectively, the "Investors"), pursuant to which Eagle agreed to
sell, and the Investors agreed to purchase, debentures in the principle amount
of $4,888,400 bearing interest at the rate of 8% per annum, maturing in June
2007 ("Debentures"), convertible into an aggregate of 5,360,088 shares of Eagle
common stock, par value $.001 per share (the "Common Stock"), together with
five-year warrants to purchase an aggregate of 1,340,022 shares of Common Stock
at an exercise price of $1.265 per share (the " Warrants") ( the funding of the
Debentures and issuance of the Warrants referred to as the "Financing").
The Debentures are convertible immediately. Subject to certain
exceptions, in the event that on or before the date on which the Debentures are
converted, Eagle issues or sells, or is deemed to have issued or sold in
accordance with the terms of the Debentures, any shares of Common Stock for
consideration per share less than the conversion price of the Debentures as then
in effect (a "Dilutive Issuance"), then the conversion price of the Debentures
will be adjusted to equal the consideration per share of Common Stock issued or
sold or deemed to have been issued and sold in such Dilutive Issuance.
F-34
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
All of the Warrants are exercisable immediately. Subject to certain
exceptions, in the event that on or before the date on which the Warrants are
exercised, Eagle issues or sells, or is deemed to have issued or sold in
accordance with the terms of the Warrants, a Dilutive Issuance, then the
exercise price of the Warrants will be adjusted to equal the consideration per
share of Common Stock issued or sold or deemed to have been issued and sold in
such Dilutive Issuance.
Eagle also granted the Investors a right to participate in subsequent
private offerings of its equity or equity equivalent securities undertaken by
Eagle for the purpose of raising capital (each, a "Subsequent Placement"). The
Investors' right of participation is subject to certain additional limitations
and expires 6 months from the effective date of the registration statement filed
to register the resale of the shares of Common Stock underlying the Debentures
and Warrants ("Shares").
Eagle has agreed to file a registration statement with the Securities
and Exchange Commission within 40 days after the closing of the Financing in
order to register the resale of the Shares. If Eagle fails to meet this
deadline, if the registration statement is not declared effective prior to the
90th day after the closing date, if Eagle fails to respond to comments made by
the SEC within 10 days, if the registration statement ceases to remain
effective, or certain other events occur, Eagle has agreed to pay the Investors
2.0% of the aggregate purchase price for each month of such event.
NOTE 10 - SECURITIES HELD FOR RESALE:
As discussed in Note 1, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" and SFAS
No. 130, "Accounting for Other Comprehensive Income." At August 31, 2004 and
2003, all of the Company's marketable equity securities are classified as
available-for-sale; they were acquired with the intent to dispose of them within
the next year.
At August 31, 2004, securities available for sale include 580,000
shares of Burst.com with a cost basis of $127,832 and a fair market value of
$551,000.
At August 31, 2003, securities available for sale include 1,480,000
shares of common stock of Burst.com, 146,085,264 shares of Celerity Systems
common stock and $350,000 Celerity Systems Bonds. These common stock and bond
investments have an aggregate cost basis of $1,075,000 and an aggregate fair
market value of $1,714,006.
NOTE 11 - INCOME TAXES:
As discussed in note 1, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Implementation of SFAS 109 did not have a material cumulative effect on prior
periods nor did it result in a change to the current year's provision.
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
August 31,
-----------------------------------
2004 2003 2002
(%) (%) (%)
-------- ------- --------
U. S. Federal Statutory Tax Rate 34 34 34
U.S. Valuation Difference (34) (34) (34)
Effective U. S. Tax Rate 0 0 0
Foreign Tax Valuation 0 0 0
Effective Tax Rate 0 0 0
F-35
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Income tax expense (benefit) attributable to income from continuing operations
differed from the amounts computed by apply the U.S. Federal income tax rate of
34% to pretax income from continuing operations as a result of the following (in
thousands):
August 31,
----------------------------------------------
2004 2003 2002
---------- ----------- ---------
Computed Expected Tax Benefit $ (13,262) $ (12,410) $ (26,171)
Increase in Valuation Allowance 13,262 12,410 26,171
----------------------------------------------
Income Tax Expense $ -- $ -- $ --
==============================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 2004 and
2003, are presented below (in thousands) and include the balances of the merged
company ClearWorks.net.
August 31,
-------------------------------
2004 2003
----------- ------------
Deferred Tax Assets:
Net Operating Loss Carry Forwards $ 63,606 $ 50,344
Less Valuation Allowance (63,606) (50,344)
----------- ------------
Net Deferred Tax Assets $ -- $ -
=========== ============
The valuation allowance for deferred tax assets of August 31, 2004, 2003 and
2002, was $63,606,000, $50,344,000 and $25,162,000, respectively. At August 31,
2003 and 2002, the Company has net operating loss carry-forwards of $110,507,000
and $74,006,000, respectively, which are available to offset future federal
taxable income, if any, with expirations from 2020 to 2022.
NOTE 12 - ISSUANCE OF COMMON STOCK:
During the fiscal year ended August 31, 2004, the Company issued shares
of common stock. The following table summarizes the shares of common stock
issued, in thousands.
Shares Outstanding August 31, 2003 147,447
Shares Issued for Retirement of Debt and Liabilities 47,046
Shares Issued for Service, Compensation Property and Other Assets 11,016
----------
Shares Outstanding August 31, 2004 205,509
==========
F-36
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 13 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
The warrants outstanding are segregated into two categories (issued and
outstanding and exercisable):
Warrants Issued & Outstanding Warrants Exercisable
Class of Expiration August 31, August 31,
Warrants Date 2004 2003 2004 2003
- -------- ---------- ----------------------- -----------------------
0.41 Sep-08 3,800,000 3,800,000 1,550,000 1,550,000
0.48 Oct-06 25,000 25,000 25,000 25,000
0.60 Sep-06 400,000 400,000 - -
0.61 Jan-05 25,000 25,000 25,000 25,000
0.69 Oct-04 25,000 25,000 25,000 25,000
0.75 Sep-08 500,000 500,000 - -
0.97 Jul-07 25,000 - - -
1.04 Apr-05 50,000 50,000 50,000 50,000
1.23 Apr-07 25,000 - - -
1.31 Jan-07 25,000 - 25,000 -
7.50 Apr-08 800,000 800,000 800,000 800,000
ESOP Various 346,002 * 406,131 346,002 406,131
----------------------- -----------------------
6,046,002 **6,031,131 2,846,002 2,881,131
======================= =======================
*Denotes warrants which would have an anti-dilutive effect if currently used
to calculate earnings per share for the years ended August 31, 2004 and 2003.
**Denotes 12,700,000 warrants for shares that have been excluded from this
table that are subject to issuance to certain employees under incentive clauses
of employment contracts expiring 5 years from the date of issuance. The warrants
vest based on accumulated revenue targets ranging from $50 million to $500
million and on market performance of Eagle's common stock at market
capitalization between $450 million and $1 billion. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value $0.001 per
share at purchase prices ranging from $0.41 to $1.50 per share. The Company has
determined that the probability of the achievement of such targets is remote as
of the date of the issuance of the Company's financial statements and thus has
not included them in the outstanding warrant table above. The shares of common
stock underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2004, none of these warrants have been
exercised.
NOTE 14 - CAPITALIZATION ACTIVITIES:
Between November 25, 2002 and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45 accredited
investors. The securities consisted of $25,000, 12% five-year bonds. The bonds
are due and payable upon maturity at the end of the five-year period. Interest
on the bonds is payable at the rate of 12% per annum, and is payable
semiannually. The bondholder may require the Company to convert the bond
(including any unpaid interest) into shares of the Company's common stock at any
time during the first year but not thereafter. The conversion rates vary from
$0.16 to $0.34 per share. The Company may redeem the bonds at any time after the
first year.
Between October 30, 2003 and November 5, 2003, the Company sold
approximately $4.1 million of convertible debt securities to 36 accredited
investors. The securities consisted of $25,000, 12% five-year bonds. The bonds
are due and payable upon maturity at the end of the five-year period. Interest
on the bonds is payable at the rate of 12% per annum, and is payable
semiannually. The bondholder may require the Company to convert the bond
(including any unpaid interest) into shares of the Company's common stock at any
time during the first year but not thereafter. The conversion rates vary from
$0.50 to $0.75 per share. The Company may redeem the bonds at any time after the
first year.
F-37
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Eagle Broadband, Inc. ("Eagle" or "Company") entered into a Securities
Purchase Agreement dated June 2, 2004, (the "Agreement") with four accredited
investors (collectively, the "Investors"), pursuant to which Eagle agreed to
sell, and the Investors agreed to purchase, debentures in the principle amount
of $4,888,400 bearing interest at the rate of 8% per annum, maturing in June
2007 ("Debentures"), convertible into an aggregate of 5,360,088 shares of Eagle
common stock, par value $.001 per share (the "Common Stock"), together with
five-year warrants to purchase an aggregate of 1,340,022 shares of Common Stock
at an exercise price of $1.265 per share (the " Warrants") ( the funding of the
Debentures and issuance of the Warrants referred to as the "Financing").
NOTE 15 - RISK FACTORS:
For the years ended August 31, 2004, 2003, and 2002, substantially all
of the Company's business activities have remained within the United States and
have been extended to the wireless infrastructure, fiber, cabling, computer
services and broadband industries. Approximately, 83% of the Company's revenues
and receivables have been created solely in the state of Texas, 0% have been
created in the international market, and the approximate 17% remainder have been
created relatively evenly over the rest of the nation during the year ended
August 31, 2004. Approximately, 74% of the Company's revenues and receivables
have been created solely in the state of Texas, 0% have been created in the
international market, and the approximate 26% remainder have been created
relatively evenly over the rest of the nation during the year ended August 31,
2003. Whereas, approximately 84% of the Company's revenues and receivables have
been created solely in the state of Texas, 0% has been created in the
international market, and the approximate 16% remainder has been created
relatively evenly over the rest of the nation for the year ended August 31,
2002. Through the normal course of business, the Company generally does not
require its customers to post any collateral.
NOTE 16 - FOREIGN OPERATIONS:
Although the Company is based in the United States, its product is sold
on the international market. Presently, international sales total approximately
0%, 0% and 0% at August 31, 2004, 2003, and 2002, respectively.
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES:
Leases
For the years ending August 31, 2004 and 2003, rental expenses of
approximately $507,000 and $1,183,000, respectively, were incurred.
The Company renewed its primary office lease space in League City,
Texas, for $24,983 per month with South Shore Harbor Development, Ltd. The
renewal lease commenced on June 1, 2004, and expires on May 31, 2009. The Lessor
agreed to grant the Company a one-time option to terminate the lease at 36
months by paying an unamortized leasing commission of $35,000 and a penalty of
1.5 months rent of $37,000 for a combined total of $72,000.
Period Ending
August 31, Amount
---------------- ----------------
2005 $ 299,801
2006 299,801
2007 306,180
2008 325,316
2009 243,987
----------------
Total $ 1,475,085
================
Legal Proceedings
In July 2003, Eagle became a defendant in Cornell Capital Partners,
L.P. vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), In the
United States District Court for the District of New Jersey. The suit presents
claims for breach of contract, state and federal securities fraud and negligent
misrepresentation. Plaintiff has also alleged that Eagle has defaulted on a
convertible debenture for failing to timely register the shares of common stock
underlying the convertible debenture and is seeking to accelerate the maturity
date of the debenture. In November 2003, the principal balance of the debenture
was repaid, although the suit remains outstanding. Cornell claims damages in
excess of $1,000,000. The Company denies the claims and intends to vigorously
defend this lawsuit and the claims against it. Eagle has asserted counterclaims
against Cornell for fraud and breach of contract in the amount of $2,000,000.
The Company has not accrued any expenses against this lawsuit, as the outcome
cannot be predicted at this time.
F-38
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
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.
In November 2004, Palisades Master Fund L.P. sued Eagle Broadband,
Ind., and David Weisman, Civil Action 04603626, in New York County, New York
Supreme Court. Palisades seeks an injunction setting a conversion price on
certain convertible debt and warrants at $0.4456 per share of Eagle common stock
and seeks damages in excess of $3.1 million. The Company intends to vigorously
defend this claim. The Company has not accrued any expenses against the lawsuit,
as the outcome cannot be predicted at this time.
Eagle is involved in lawsuits, claims, and proceedings, including those
identified above, which arise in the ordinary course of business. In accordance
with SFAS No. 5, "Accounting for Contingencies," Eagle makes a provision for a
liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Eagle believes it has adequate
provisions for any such matters. Eagle reviews these provisions at least
quarterly and adjusts these provisions to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel, and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, Eagle believes that it has valid defenses with respect to legal matters
pending against it. Nevertheless, it is possible that cash flows or results of
operations could be materially affected in any particular period by the
unfavorable resolution of one or more of these contingencies.
We intend to vigorously defend these and other lawsuits and claims
against us. However, we cannot predict the outcome of these lawsuits, as well as
other legal proceedings and claims with certainty. An adverse resolution of
pending litigation could have a material adverse effect on our business,
financial condition and results of operations. The Company is subject to legal
proceedings and claims that arise in the ordinary course of business. The
Company's management does not expect that the results in any of these legal
proceedings will have adverse affect on the Company's financial condition or
results of operations.
F-39
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 18 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share, in thousands except per-share amount:
For the year ended August 31, 2004
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- --------------- --------------
Net Loss $ (39,005) $ -- $ --
Basic EPS:
Income Available to Common Stockholders (39,005) 185,046 (0.21)
Effect of Dilutive Securities Warrants - -- --
Diluted EPS:
---------- --------------- --------------
Income Available to Common Stockholders (39,005) 185,046 $ (0.21)
and Assumed Conversions ========== =============== ==============
For the year ended August 31, 2003
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- --------------- -------------
Net Loss $ (36,501) $ -- $ --
Basic EPS:
Income Available to Common Stockholders (36,501) 95,465 (0.38)
Effect of Dilutive Securities Warrants -- -- --
Diluted EPS:
---------- --------------- --------------
Income Available to Common Stockholders $ (36,501) $ 95,465 $ (0.38)
and Assumed Conversions ========== =============== ==============
For the year ended August 31, 2004, anti-dilutive securities existed. (see Note
13).
NOTE 19 - EMPLOYEE STOCK OPTION PLAN:
In July 1996, the Board of Directors and majority stockholders adopted
a stock option plan under which 400,000 shares of the Company's common stock
have been reserved for issuance. Since that time, the Board of Directors have
amended the July 1996, employee stock option plan under which 1,000,000 shares
of Common Stock have been reserved for issuance. Under this plan, as of August
31, 2004, a total of 346,002 options have been issued to various employees.
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees." Accordingly, since employee stock options are granted at market
price on the date of grant, no compensation expense is recognized. However, SFAS
123 requires presentation of pro forma net income and earnings per share as if
the Company had accounted for its employee stock options granted under the fair
value method of that statement. The weighted average fair value of the
individual options issued and granted during 2003 is estimated as $0.58 on the
date of grant. Management estimates the average fair value for options granted
during 2003, to be comparable to those granted in 2002. The impact on net loss
is minimal; therefore, the pro forma disclosure requirements prescribed by SFAS
123 are not significant to the Company. The fair values were determined using a
Black-Scholes option-pricing model with the following assumptions:
August 31,
----------------------
2004 2003
--------- --------
U. S. Federal Statutory Tax Rate 0.00% 0.00%
U.S. Valuation Difference 0.91% 0.91%
Effective U. S. Tax Rate 4.00% 4.00%
Foreign Tax Valuation 4.00% 7.00%
Effective Tax Rate 5 years 5 years
F-40
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a straight-line
basis over the vesting period of the stock option or purchase right was as
follows for the years ended August 31, 2004, 2003 and 2002:
(thousands, except share amounts) 2004 2003 2002
-------- -------- --------
Net loss, as reported $(39,005) $(36,501) $(76,973)
Add: Stock-based employee compensation
included in reported net earnings
(loss), net of related tax effects -- -- --
Less: Stock-based employee compensation
expense determined under fair-value based
method for all awards, net of related tax
effects (9) (20) (50)
-------- -------- --------
Pro forma net earnings (loss) $(39,014) $(36,521) $(77,023)
======== ======== ========
Net loss per share:
As reported $ (0.21) $ (0.38) $ (1.20)
Pro forna $ (0.21) $ (0.38) $ (1.20)
Diluted net loss per share:
As reported $ (0.21) $ (0.38) $ (1.20)
Pro forna $ (0.21) $ (0.38) $ (1.20)
Option activity was as follows for the years ended August 31, 2004, 2003 and
2002:
2004 2003 2002
-------------------- --------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- --------- ---------- ----------
Outstanding at
Beginning of Year 406,131 $ 1.27 355,170 $ 2.32 355,170 $ 2.32
Granted 20,907 0.60 50,961 0.45 -- --
Assumed through
Acquisitions -- -- -- --
Exercised 81,036 0.61 -- -- -- --
Forfeited/Cancelled -- -- -- --
--------- --------- ---------- --------- ---------- ----------
Outstanding at End of Year 346,002 $ 1.27 406,131 $ 1.27 355,170 $ 2.32
========= ========= ========== ======== ========== ==========
Exercisable at Year-End 346,002 $ 1.27 406,131 $ 1.27 355,170 $ 2.32
========= ========= ========== ======== ========== ==========
F-41
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Information about options outstanding was as follows at August 31, 2004:
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- ---------------- ------------ ------------- ------------ ------------ ----------
$0 - $1.00 209,160 4.00 0.55 209,160 0.55
$1.01 - $2.00 111,342 4.00 1.73 111,342 1.73
$2.01 - $7.50 25,500 4.50 6.55 25,500 6.55
----------- -----------
346,002 1.27 346,002 1.27
=========== ===========
NOTE 20 - RETIREMENT PLANS:
During October 1997, the Company initiated a 401(k) plan for its
employees which is funded through the contributions of its participants. Prior
to March 2003, the Company matched the participant's contribution up to 3% of
their salary. Subsequent to March 2003, the plan was amended and the Company
match became elective. For the year ended August 31, 2004 and 2003, employee
contributions were approximately $109,000 and $279,000, respectively. The
Company matched approximately $0 and $67,850, respectively, for those same
periods.
NOTE 21 - MAJOR CUSTOMER:
The Company had gross revenues of $12,490,000 and $11,593,000 for the
year ended August 31, 2004 and 2003, respectively. The fiscal year ended August
31, 2004, included $3,103,937 or 25% of the fiscal year total sales from
Sweetwater Security Capital, LLC, that were executed with the Company's
security-monitoring service subsidiary, DSS Security, Inc. Also during this
period, Eagle Broadband Inc, had sales of $3,806,806 or 30% sales to a major
customer for shipment of IP set-top boxes and related equipment. There were no
other customers individually that represented greater than 10% of the revenues
in the fiscal year ended August 31, 2003.
NOTE 22 - INDUSTRY SEGMENTS:
The Company has seven business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into five reportable segments (as described below) since
the long-term financial performance of these reportable segments is affected by
similar economic conditions.
Eagle Broadband, Inc., (Eagle) is a supplier of broadband and
telecommunications equipment with related software and broadband products.
(Including Eagle Wireless International, Inc.; BroadbandMagic; and Etoolz, Inc.,
for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in providing
professional data and voice cable and fiber optic installations through project
management services on a nationwide basis for multiple site-cabling
installations for end users and re-sellers.
ClearWorks Communications, Inc., (EBS) provides solutions to consumers
by implementing technology both within the residential community and home. This
is accomplished through the installation of fiber optic backbones to deliver
voice, video and data solutions directly to consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber
optic and copper based structured wiring solutions and audio and visual
equipment to single-family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT maintain a national market
presence.
F-42
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Link Two Communications, Inc., (Link II) is in the development and
delivery of one- and two-way messaging systems.
DSS Security, Inc., (DSS) is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt related
expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services
provider and reseller.
For the year ending August 31, 2004
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------------------------
Revenue 678 5,525 445 5,761 81 12,490
Segment Loss (827) (2,483) (58) (27,534) (50) (30,952)
Total Assets 148 28,204 32 127,896 56,956 (142,768) 70,468
Capital Expenditures 0 729 0 0 0 729
Depreciation 176 1,565 62 3,196 98 5,097
For the year ending August 31, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------------------------
Revenue 4,220 2,809 2,433 1,803 328 -- 11,593
Segment Loss (4,500) (6,083) (2,279) (17,849) (364) -- (31,075)
Total Assets 8,929 31,316 114 97,948 83,852 (144,793) 77,366
Capital Expenditures 11 6,254 1 --- 158 -- 6,424
Depreciation 372 1,351 72 3,184 253 -- 5,232
For the year ending August 31, 2002
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------------------------------------------------------------------------------------
Revenue 8,767 2,657 16,143 1,699 551 -- 29,817
Segment Loss (279) (193) (1,304) (45,740) (29,192) -- (76,708)
Total Assets 5,114 30,980 853 121,458 68,528 (137,782) 89,151
Capital Expenditures 125 12,034 --- 562 156 (11) 12,866
Depreciation 208 715 166 4,039 1,269 -- 6,397
Reconciliation of Segment Loss from
Operations to Net Loss August 31, 2004 August 31, 2003 August 31, 2002
- -------------------------------------- --------------- --------------- ---------------
Total segment loss from operations $ (30,952) $ (31,075) $ (76,708)
Total Other Income (Expense) (8,053) (5,426) (265)
--------------- -------------- ------------
Net Loss $ (39,005) $ (36,501) $ (76,973)
=============== ============== ============
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of its
operating segments based on income before net interest expense, income taxes,
depreciation and amortization expense, accounting changes and non-recurring
items.
F-43
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
NOTE 23 - QUARTERLY FINANCIAL DATA.
Nov. 30 Feb. 28 May 31 Aug. 31
--------- -------- -------- -----------
Year Ended August 31,
2004
Revenues $ 2,397 $ 3,744 $ 5,091 $ 1,258
Net Earnings (Loss) (8,461) (9,398) (4,373) (16,773)
Basic Loss per Share (0.05) (0.05) (0.02) (0.08)
Diluted Loss per Share (0.05) (0.05) (0.02) (0.08)
2003
Revenues 4,618 3,063 1,947 1,965
Net Earnings (Loss) (1,533) (2,012) (3,833) (29,123)
Basic Loss per Share (0.02) (0.03) (0.05) (0.28)
Diluted Loss per Share (0.02) (0.03) (0.05) (0.28)
NOTE 24 - SUPPLEMENTAL NON-CASH DISCLOSURES:
During the fiscal year ended August 31, 2004, the Company issued
$3,000,000 of convertible debt which was retired through the issuance of
2,000,000 shares of Series A Preferred Stock which was concurrently converted to
29,500,000 shares of the Company's common stock. Additionally, the Company
received proceeds of $3,912,000 from the sale of convertible bonds.
The beneficial conversion values associated with these financings
aggregating $6,912,000 are calculated at the difference between the conversion
price and the fair value of the common stock into which the debt is convertible,
multiplied by the number of shares into which the debt is convertible. Since the
beneficial conversion value exceeded the $6,912,000 raised on these convertible
instruments, the value charged to interest expense during the quarter was
limited to $6,912,000 raised on these convertible instruments, the value charged
to interest expense during the fiscal year ended August 31, 2004, was limited to
$6,912,000. This non-cash charge comprises $6,912,000 of the $8,325,000 interest
expense on the Company's Statement of Operations as is shown as an adjustment to
reconcile net loss to net cash on the Company's Statement of Cash Flows.
In addition, compensation for certain officers and key employees under
incentive clauses of their employment contracts (i) includes a non-cash expense
of $4,493,000 incurred upon the modification of warrants for 4,200,000 common
shares and (ii) reflects a guaranteed compensation of the modified warrants
equivalent to $1.75 less the warrant strike price.
NOTE 25 - EXIT ACTIVITIES:
During the fiscal year ended August 31, 2003, we implemented cost
reductions in various operating segments. In the aggregate, the Company reduced
its overall personnel by 114 headcount or a 50% reduction for the fiscal year
ended August 31, 2003 as compared to the fiscal year ended August 31, 2002. The
predominate reduction in headcount related to the Company's Atlantic Pacific /
Homes Systems structured wiring and commercial cabling segment with headcount
reductions of nine, six and 57 personnel in the first three quarters of fiscal
2003; aggregating an overall headcount reduction of 72 or 71% of this segments
workforce. Additionally, the Company reduced its United Computing Group computer
hardware sales segment by 18, nine, and two personnel in the first three
quarters of fiscal 2003; aggregating an overall reduction of 29 or 59% of this
segments workforce. These two operating segments accounted for 101 of the 114
headcount reductions affected in fiscal 2003. Specifically, certain components
of these operating segments, i.e., home systems structured wiring, commercial
cabling and computer hardware sales, were not expected to provide significant
long-term revenues and profitability, and therefore were reduced. Following the
series of cost reduction activities implemented during the first three quarters
of fiscal 2003, Eagle's management assessed the viability of continued financial
investment in these unprofitable segments in the fourth quarter of fiscal 2003
and into early first quarter of fiscal 2004 and made further reductions. In
conjunction with the appointment of , Mr. Weisman as our new Chief Executive
Officer, in early October 2003, the Company completed the final consolidation of
the United Computing Group segment into other Eagle operations while further
reducing the Atlantic Pacific / Home Systems operations to an outsource
commercial cabling and structured wiring operation that project manages
affiliate contractors.
F-44
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Additionally, in conjunction with the appointment of Mr. Weisman as
Chief Executive Officer, the Company made certain decisions during the
preparation of its Form 10-K in our first quarter of fiscal 2004 that affected
the value of certain assets as of August 31, 2003. These decisions included:
o A revised collection assessment of certain accounts receivables from
these and other down-sized Eagle business segments.
o The decision to no longer pursue new commercial structured cabling
opportunities on a direct basis versus the outsource model; thereby resulting in
the impairment of goodwill from its Atlantic Pacific operations.
o The decision to no longer pursue Home Systems structured wiring
opportunities on a direct standalone model basis outside its BDS model; thereby
resulting in the impairment of its Home Systems inventory.
o The decision to withdraw from certain unprofitable BDS projects, namely
its Austin area BDS developments; thereby impairing certain assets including
property, plant and equipment.
o The decision to settle numerous existing and threatened legal proceedings
versus continuing the timing consuming and costly process of defending such
proceedings; thereby resulting in the accrual of numerous reserves for such
settlements.
o The decisions to consolidate its operating segments into its corporate
lease space; thereby resulting in reserves for property lease settlements.
o The decision to negotiate the settlement of certain sales tax liabilities
that resulted from a sales tax audit of United Computing Group operations for
periods that preceded the acquisition date of this subsidiary.
Accordingly, Eagle incurred certain asset impairments and operating
charges in the fourth quarter associated with these decisions. These asset
impairment charges, allowances, write-off's and reserves included the following:
o Accounts receivable write-off's and reserves aggregating $2,177,000; of
which $1,348,000 was attributable to the decisions affecting the Company's
Atlantic Pacific / Home Systems operations, $15,000 attributable to the
decisions affecting its United Computing Group operations and $814,000
attributable to the Company's Eagle, EBS and Other segment operations.
o Inventory impairment charges of $2,627,000; of which $501,000 was
attributable to the decisions affecting the Company's Atlantic Pacific/ Home
Systems operations and $74,000 attributable to the decisions affecting its
United Computing Group operations. Additionally, the Company recorded an
impairment charge of $1,125,000 for slow-moving and obsolete inventory in its
Eagle operations. This charge primarily resulted from a major client's decision
to upgrade from a 400 MHz chip to a 500 MHz chip for the Company's IP set top
box.
o Litigation settlement costs and reserves of $3,650,000 against certain of
the legal proceedings previously discussed in Item 3.
F-45
Eagle Broadband, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2004
Legal Proceedings. Additionally, the Company recorded charges
aggregating $2,274,000 to settle threatened and existing legal proceeding
associated with prior financing transactions, including the Kaufman litigation.
o Lease settlement costs and reserves of $171,000 were attributable to the
decision to consolidate various operating segments into its corporate lease
space; thereby resulting in reserves for early exit of such leases.
o Impairment, write-down's and restructuring costs aggregating $7,611,000;
of which $1,878,000 was attributable to an impairment of goodwill in the
Company's Atlantic Pacific operations following the Company's decision to no
longer pursue commercial cabling opportunities on a direct basis versus an
outsource model. These costs were also comprised of $3,412,000 in impairment of
property and equipment following the Company's decision to withdraw from certain
unprofitable BDS projects, namely in the Austin area, and $323,000 of impairment
of property and equipment from the Company's Atlantic Pacific / Home Systems
operations following the decision to no longer pursue structured wiring
opportunities on a direct standalone basis outside of its BDS model.
Additionally, the aggregate total included a $553,000 charge for certain sales
tax liabilities that resulted from an audit of the Company's United Computing
Group operations for time periods that preceded the acquisition date of this
operation.
Eagle incurred approximately $96,000 for severance and accrued vacation
related to employees terminated in fiscal 2003. Eagle does not expect to incur
any additional future period costs associated with such restructuring activities
other than those accrued for and recorded in the fourth quarter of fiscal 2003.
An analysis of accrued costs and amounts charged against the provision
are as follows:
Beginning Ending
Balance Period Costs Balance
8/31/2003 (Additional) Payments 8/31/2004
--------- ------------ ----------- ---------
Accrued Exit Expenses:
Severance $ -- $ -- $ -- $ --
Terminated Lease Costs 171,000 -- -- $ 171,000
--------- ------------ ----------- ---------
$ 171,000 $ -- $ -- $ 171,000
========= ============ =========== =========
For the year ended August 31, 2003, the Company incurred exit costs of
$267,000 which are principally severance and lease termination costs. The total
expected exit costs for severance and terminated leases are $96,000 and
$171,000, respectively. These costs are included in the consolidated statement
of income under the categories of salaries and related costs and other support
costs.
These period and accumulated costs are included in the segment
reporting as follows:
Costs APC/HIS KBS/DSS UCG Eagle Other Total
- ------------------------- ---------- --------- ---------- ---------- --------- ------------
Severance $ 37,000 $ 24,000 $ 14,000 $ 21,000 $ -- $ 96,000
Terminated Lease Costs 50,000 -- 44,000 -- 7,700 101,700
---------- --------- ---------- ---------- --------- ------------
Total $ 87,000 $ 24,000 $ 58,000 $ 21,000 $ 7,700 $ 197,700
========== ========= ========== ========== ========= ============
F-46
Up To
30,843,750 Shares
Common Stock
EAGLE BROADBAND, INC.
--------------------
Prospectus
--------------------
August __, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all estimated
expenses in connection with the issuance and distribution of the securities
being registered:
SEC Registration Fee........................ $ 625.26
Legal Fees and Expenses..................... $25,000.00
Accounting Fees and Expenses................ $ 5,000.00
Miscellaneous............................... $10,000.00
----------
TOTAL $40,625.26
==========
The amounts set forth above, except for the SEC registration fee, are
in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation provide that: "No director of the
Corporation shall be liable to the Corporation or its shareholders or members
for monetary damages for any act or omission in such director's capacity as a
director, except for (i) a breach of such director's duty of loyalty to the
Corporation or its shareholders or members; (ii) an act or omission not in good
faith that constitutes a breach of duty of the director to the Corporation, or
an act or omission that involves intentional misconduct or a knowing violation
of the law; (iii) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action taken within the
scope of the director's office; or (iv) an act or omission for which the
liability of a director is expressly provided by an applicable statute."
Our Articles further provide that: "The Corporation shall indemnify all
current and former directors and officers of the Corporation to the fullest
extent of the applicable law, including, without limitation, Article 2.02-1 of
the Texas Business Corporation Act." The Texas Business Corporation Act
generally provides that a director may not be indemnified in respect of a
proceeding (1) in which the person is found liable on the basis that personal
benefit was improperly received by him, whether or not the benefit resulted from
an action taken in the person's official capacity; or (2) in which the person is
found liable to the corporation.
Section 10.2 of our Bylaws provide that "The Company shall indemnify
every Indemnitee [which includes officers and directors] against all judgments,
penalties (including excise and similar taxes), fines, amounts paid in
settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he was, is or is threatened to be named
defendant or respondent, or in which he was or is a witness without being named
a defendant or respondent, by reason, in whole or in part, of his serving or
having served, or having been nominated or designated to serve, in any of the
capacities referred to in Section 10.1, if it is determined in accordance with
Section 10.4 that the Indemnitee (a) conducted himself in good faith, (b)
reasonably believed, in the case of conduct in his Official Capacity, that his
conduct was in the Company's best interests and, in all other cases, that his
conduct was at least not opposed to the Company's best interests, and (c) in the
case of any criminal proceeding, had no reasonable cause to believe that his
conduct was unlawful; provided, however, that in the event that an Indemnitee is
found liable to the Company or is found liable on the basis that personal
benefit was improperly received by the Indemnitee the indemnification (i) is
limited to reasonable expenses actually incurred by the Indemnitee in connection
with the Proceeding and (ii) shall not be made in respect of any Proceeding in
which the Indemnitee shall have been found liable for willful or intentional
misconduct in the performance of his duty to the Company. Except as provided in
the immediately preceding proviso to the first sentence of this Section 10.2, no
indemnification shall be made under this Section 10.2 in respect of any
Proceeding in which such Indemnitee shall have been (x) found liable on the
basis that personal benefit was improperly received by him, whether or not the
benefit resulted from an action taken in the Indemnitee's Official Capacity, or
(y) found liable to the Company. The termination of any Proceeding by judgment,
order, settlement or conviction, or on a plea of nolo contendere or its
equivalent, is not of itself determinative that the Indemnitee did not meet the
requirements set forth in clauses (a), (b) or (c) in the first sentence of this
Section 10.2. An Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after the Indemnitee shall have been so
adjudged by a court of competent jurisdiction after exhaustion of all appeals
therefrom. Reasonable expenses shall, include, without limitation, all court
costs and all fees and disbursements of attorneys for the Indemnitee. The
indemnification provided herein shall be applicable whether or not negligence or
gross negligence of the Indemnitee is alleged or proven." Section 10.4 referred
to above provides that: "Any indemnification under Section 10.2 (unless ordered
by a court of competent jurisdiction) shall be made by the Company only upon a
determination that indemnification of the Indemnitee is proper in the
circumstances because he has met the applicable standard of conduct. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of Directors who, at the time of such vote, are not named
defendants or respondents in the Proceeding; (b) if such a quorum cannot be
obtained, then by a majority vote of a committee of the Board of Directors, duly
designated to act in the matter by a majority vote of all Directors (in which
designated Directors who are named defendants or respondents in the Proceeding
may participate), such committee to consist solely of two (2) or more Directors
who, at the time of the committee vote, are not named defendants or respondents
in the Proceeding; (c) by special legal counsel selected by the Board of
Directors or a committee thereof by vote as set forth in clauses (a) or (b) of
this Section 10.4 or, if the requisite quorum of all of the Directors cannot be
obtained therefor and such committee cannot be established, by a majority vote
of all of the Directors (in which Directors who are named defendants or
respondents in the Proceeding may participate); or (d) by the shareholders in a
vote that excludes the shares held by Directors that are named defendants or
respondents in the Proceeding. Determination as to reasonableness of expenses
shall be made in the same manner as the determination that indemnification is
permissible, except that if the determination that indemnification is
permissible is made by special legal counsel, determination as to reasonableness
of expenses must be made in the manner specified in clause (c) of the preceding
sentence for the selection of special legal counsel. In the event a
determination is made under this Section 10.4 that the Indemnitee has met the
applicable standard of conduct as to some matters but not as to others, amounts
to be indemnified may be reasonably prorated."
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In August 2005, the Company entered into a purchase agreement with
certain accredited investors for the sale of up to 30 million shares of its
common stock, pursuant to Regulation D of the Securities Act of 1933, at a price
per share of $0.135, for total gross proceeds of up to $4,050,000. The Company
has agreed to pay a placement agent a cash commission of 7% of the Sales price
and to issue such agent a five year warrant to purchase a number of shares of
common stock equal to 5% of the gross proceeds at an exercise price per share of
$0.24.
In August 2005, the Company issued 1,157,895 shares of common stock to
an individual pursuant to a settlement agreement. The issuance of these shares
was exempt from registration pursuant to Section 3(a)(10) of the Securities Act.
No sales commissions were paid.
In June 2005, the Company issued 7,954,085 shares of common stock to a
former executive officer and director and three non-executive officers to
satisfy the Company's contingent guaranty obligations with respect to
unexercised options and a note held by these individuals. This issuance of these
shares is exempt from registration under Section 3(a)(9) of the Securities Act.
No sales commissions were paid.
In April 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 issuance was exempt from
registration pursuant to Section 3(a)(10) of the Securities Act. There was no
underwriter employed and no sales commissions were paid in connection with the
sales and issuances of the unregistered securities in the transaction set forth
above.
In December 2004, the Company issued 10 million shares to Jango for
debt resolution. No sales commission was paid. This transaction was completed
pursuant to Regulation D of the Securities Act.
In October 2004, 6,983,806 shares of common stock were issued upon
conversion of $2,500,000 of debt. The original issuance of debt, as well as the
issuance of the shares of debt, was pursuant to Section 4(2) of the Securities
Act. No sales commissions were paid.
In June 2004, the Company entered into a securities purchase agreement
with four accredited investors, pursuant to which the Company sold notes in an
aggregate principal amount of $4,880,400, maturing in June 2007, and initially
convertible into an aggregate of 5,360,088 shares of Company common stock.
Additionally, the Company issued five year warrants to each of the four
accredited investors to purchase an aggregate of 1,340,022 shares of common
stock at an exercise price of $1.265 per share. This transaction was completed
pursuant to Regulation D of the Securities Act. A commission in the amount of
$150,000 was paid on this transaction. With respect to the issuance, the Company
determined that the purchasers were "accredited investors" as defined in Rule
501(a) under the Securities Act.
II-2
In October 2003, 4,756,249 shares were issued pursuant to a merger
agreement, such issuance was pursuant to Section 4(2) of the Securities Act. No
sales commissions were paid.
In October 2003, the Company issued to two accredited investor
promissory notes and preferred stock convertible into 29,500,000 shares of
common stock. There was no commission paid. This transaction was completed
pursuant to Regulation D of the Securities Act.
In September 2003, the Company established a line of credit with a
financial institution. The Company cancelled the agreement, and 840,425 shares
of common stock were issued pursuant to the cancellation. This transaction was
completed pursuant to Section 4(2) of the Securities Act. No sales commissions
were paid.
In September 2003, the Company issued 2,490,466 shares of common stock
to satisfy Company debts owed to various third parties. This transaction was
completed pursuant to Section 4(2) of the Securities Act. No sales commissions
were paid.
In August 2003, the Company offered $7,000,000 in convertible debt,
convertible into 31,620,049 shares, to a limited number of accredited investors
pursuant to Regulation D of the Securities Act. The Company received proceeds of
$2,866,000 from the sale of such bonds.
In July 2003, 6,885,203 shares were issued upon conversion of
$1,846,541 of debt. Such issuance was pursuant to Section 4(2) of the Securities
Act. No sales commissions were paid.
In September 2002, the Company issued 7,371,434 shares of common stock
as settlement for various litigation claims. This transaction was completed
pursuant to Section 4(2) of the Securities Act. No sales commissions were paid.
In September 2002, the Company issued 1, 628,947 shares to various
individuals to whom it owed fees for professional services performed. This
transaction was completed pursuant to Section 4(2) of the Securities Act. No
sales commissions were paid.
In September 2002, the Company issued $3 million of 5% convertible debt
convertible into 15,000,000 shares of common stock. This transaction was
completed pursuant to Regulation D of the Securities Act. No sales commissions
were paid.
II-3
ITEM 16. EXHIBITS.
(a) The following is a list of exhibits filed as part of this registration
statement:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- -------------- -------------------------
Exhibit 3.1(a) Eagle Broadband, Inc. Articles of Incorporation, as
Amended and Restated, dated February 13, 2002.
(Incorporated herein by reference to Exhibit 3.1 of Form
SB-d file No. 333-20011.)
Exhibit 3.1(b) Eagle Broadband, Inc. Articles of Incorporation, as
Amended, dated February 17, 2004. (Incorporated herein
by reference to Exhibit 3.1 of Form 10-K/A filed May 30,
2004.)
Exhibit 3.2 Amended and Restated Eagle Broadband, Inc. Bylaws
(Incorporated by reference to Exhibit 3.2 of Form 10-KSB
for the fiscal year ended August 31, 2001, filed
November 16, 2001).
Exhibit 4.1 Form of Common Stock Certificate (Incorporated by
reference to Exhibit 4 of Form S-3, file no.
333-111160).
Exhibit 4.2 Purchase Agreement by and between Eagle Broadband and
Investors dated August 23, 2003, including registration
rights and security agreement attached as an exhibit
thereto (Incorporated by reference to Exhibit 10.1 of
Form S-3 file no. 333-109481).
Exhibit 4.3 Q-Series Bond Agreement (Incorporated by reference to
Exhibit 10.3 of Form S-3, file no. 333-106074).
Exhibit 4.4 Addendum to Q-Series Bond Agreement (Incorporated
by reference to Exhibit 10.4 of Form S-3,
file no. 333-106074).
Exhibit 4.5 Form of Subscription Agreement for Q Series Bond,
between Eagle Broadband and certain investors
(Incorporated by reference to Exhibit 10.5 of Form S-3,
file no. 333- 106074)
Exhibit 5.1 Opinion Regarding Legality (to be filed by amendment)
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).
II-4
Exhibit 10.2 1996 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.1 of Form S-8 file no.
333-72645).
Exhibit 10.3 2002 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.1 of Form S-8 file no. 333-97901).
Exhibit 10.4 2002 Stock Incentive Plan, as Amended (Incorporated by
reference to Exhibit 10.1 of Form S-8
file no. 333-102506).
Exhibit 10.5 2003 Stock Incentive and Compensation Plan
(Incorporated by reference to Exhibit 10.1
of Form S-8 file no. 333-103829).
Exhibit 10.6 2003 Stock Incentive and Compensation Plan, as Amended
(Incorporated by reference to Exhibit 10.1 of Form S-8
file no. 333-105074).
Exhibit 10.7 2003 Stock Incentive and Compensation Plan, as Amended
(Incorporated by reference to Exhibit 10.1 of Form S-8
file no. 333-109339).
Exhibit 10.8 2004 Stock Incentive Plan (Incorporated by reference
to Exhibit 10.1 of Form S-8 file no. 333-110309).
Exhibit 10.9 Agreement and Plan of Reorganization by and between
Eagle Wireless International, Inc., Clearworks.net,
Inc., and Eagle Acquisition Corporation dated September
15, 2000 (Incorporated by reference to Exhibit 10.1 of
Form S-4 file no. 333- 49688).
Exhibit 10.10 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Comtel
Communications, Inc. (Incorporated by reference to
Exhibit 10.4 of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000).
Exhibit 10.11 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Atlantic
Pacific Communications, Inc. (Incorporated by reference
to Exhibit 10.5 of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000).
Exhibit 10.12 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Etoolz, Inc.
(Incorporated by reference to Exhibit 10.6 of Form
10-KSB for the fiscal year ended August 31, 2000, filed
December 13, 2000).
Exhibit 21.1 List of Subsidiaries (Incorporated by reference to
Exhibit 21.1 of Form S-4 file no. 333- 49688)
Exhibit 23.1 Consent of McManus & Co., P.C.
Exhibit 23.2 Consent of Lopez, Blevins, Bork and Associates, LLP
Exhibit 23.3 Consent of Brewer & Pritchard, P.C. (included in Exhibit
5.1)
II-5
(b) The following is a list of financial statement schedules required by
Regulation S-X and Item II(e) of Form S-1:
SCHEDULE NO. IDENTIFICATION OF SCHEDULE
1.1 Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the 1933 Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement; provided, however, that
notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar
value of securities offered would not exceed that which
was registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(b) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement to include any additional or changed material information
with respect to the plan of distribution or any material change to
such information in the registration statement;
(c) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof;
(d) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering;
(e) That, for purposes of determining any liability
under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in League City, Texas on August 26, 2005.
Eagle Broadband, Inc.
By: /S/ DAVID MICEK
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ David Micek
- ---------------------- Chief Executive Officer Aug. 26, 2005
David Micek (Principal Executive Officer)
/s/ Eric Blachno
- ---------------------- Chief Financial Officer Aug. 26, 2005
Eric Blachno (Principal Financial and Accounting Officer)
/s/ H. Dean Cubley
- ---------------------- Director Aug. 26, 2005
H. Dean Cubley
/s/ Christopher W. Futer
- ------------------------- Director Aug. 26, 2005
Christopher W. Futer
/s/ Glenn A. Goerke
- ---------------------- Director Aug. 26, 2005
Glenn A. Goerke
/s/ C. J. Reinhartsen
- ---------------------- Director Aug. 26, 2005
C. J. Reinhartsen
/s/ Lorne E. Persons
- ---------------------- Director Aug. 26, 2005
Lorne E. Persons
/s/ James D. Yarbrough
- ---------------------- Director Aug. 26, 2005
James D. Yarbrough
EXHIBIT INDEX
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
------------- ----------------------------------------
Exhibit 23.1 Consent of McManus & Co., P.C.
Exhibit 23.2 Lopez, Blevins, Bork and Associates, LLP
Exhibit 23.1
Consent of McManus & Company, PC
Independent Public Accountants
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Regarding this registration statement of Eagle Broadband, Inc., on Form S-1, we
consent to the reference of our firm under the caption Experts and the inclusion
of our report dated December 13, 2002, (except as to Note 2 on which the date is
July 27, 2004) relating to the consolidated financial statements, which appear
in the Annual Report on Form10-K for the year ended August 31, 2002.
McManus & Company, PC
Rockaway, New Jersey
August 26, 2005
Exhibit 23.2
Consent of Lopez, Blevins, Bork and Associates, LLP
Independent Public Accountants
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Regarding this registration statement of Eagle Broadband, Inc., on Form S-1, we
consent to the reference of our firm under the caption Experts and the inclusion
of our report dated November 30, 2004, relating to the consolidated financial
statements, which appear in the Annual Report on Form10-K for the years ended
August 31, 2004 and 2003.
Lopez, Blevins, Bork and Associates, LLP
Houston, Texas
August 26, 2005
SCHEDULE INDEX
SCHEDULE NO. IDENTIFICATION OF SCHEDULE
1.1 Valuation and Qualifying Accounts
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended August 31, 2004, 2003, and 2002 (amounts in
thousands):
Additions
Balance at Charged to Balance at
Beginning of Expenses/ End of
Description Period Revenues Deductions Period
- -------------------------- --------- --------- ---------- ----------
Allowance for Doubtful
Accounts:
2004 $ 412 $ 2,643 $ (659) $ 2,396
2003 242 2,177 (2,007) 412
2002 480 125 (363) 242