UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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EAGLE BROADBAND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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TEXAS 3663 76-0494995
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION CODE NUMBER)
OR ORGANIZATION)
101 COURAGEOUS DRIVE
LEAGUE CITY, TEXAS 77573-3925
(281) 538-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------
DAVID MICEK
PRESIDENT & CHIEF EXECUTIVE OFFICER
EAGLE BROADBAND, INC.
101 COURAGEOUS DRIVE
LEAGUE CITY, TEXAS 77573-3925
(281) 538-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------------
COPIES TO:
JEFFREY A. ADAMS, ESQ.
EAGLE BROADBAND, INC.
101 COURAGEOUS DRIVE
LEAGUE CITY, TEXAS 77573-3925
(281) 538-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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 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, please 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. |_|
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
1
SUBJECT TO COMPLETION, DATED OCTOBER ____, 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
- ----------
30,843,750 SHARES
EAGLE BROADBAND, INC.
COMMON STOCK
This prospectus relates to the offer and sale from time to time of up
to 30,843,750 shares of our common stock for the account of the shareholders
named in this prospectus. The selling shareholders acquired the shares directly
from us pursuant to a purchase agreement entered into in August 2005.
The prices at which the selling shareholders 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 of the proceeds from the
sale of these shares, although we have paid the expenses of preparing this
prospectus and the related registration statement.
Our common stock is listed on the American Stock Exchange under the
symbol "EAG." On October 24, 2005, the last sales price of our common stock as
reported on the American Stock Exchange was $0.16 per share.
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 October ____, 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
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Prospectus summary 3
Risk factors 6
Special note regarding forward-looking statements 9
Use of proceeds 9
Market price information and dividend policy 10
Management's discussion and analysis 11
Selected consolidated financial information 23
Selected consolidated quarterly financial information 24
Quantitative and qualitative disclosures about market risk 25
Our business 25
Selling shareholders 32
Plan of distribution 33
Management 34
Principal shareholders 41
Description of securities 42
Disclosure of SEC position on indemnification for
Securities Act liabilities 43
Experts 43
Legal matters 43
Change of accountants 43
Where you can find more information 44
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 IPTVComplete(TM), 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 SatMAX(TM) 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
In August 2005, the Company entered into a purchase agreement with
certain accredited investors for the sale of 30,000,000 shares of its common
stock, pursuant to Regulation D of the Securities Act of 1933, at a price of
$0.135 per share, and received total gross proceeds of $4,050,000. On August 26,
2005, the American Stock Exchange approved for listing 15,125,000 of these
shares and notified the Company that shareholder approval was required for the
issuance of the remaining 14,875,000 shares. The shareholders of the Company
approved the issuance of the 14,875,000 shares at a meeting held October 18,
2005. As of the date of this prospectus, all of the 30,000,000 shares
sold in this private placement are issued and outstanding.
The Company paid a placement agent a cash commission of 7% of the gross
dollar proceeds of the sale of the 30,000,000 shares and on October ____, 2005,
issued such agent a five-year warrant to purchase 843,750 shares of Company
common stock at an exercise price per share of $0.24 per share.
3
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 shareholders. We will not receive any
proceeds from the resale of common stock by the selling shareholders, but we may
receive gross proceeds of up to $202,500 from the exercise of a warrant.
o Number of shares offered for resale: Up to 30,843,750 shares
o Number of Shares of Common
Stock Outstanding, as of October __, 2005: 303,086,275 shares
o Number of Shares Outstanding
does not include the following: As of August 25, 2005,
13,048,016 shares reserved
for issuance pursuant to
outstanding options,
warrants, or other
derivative securities.
o American Stock Exchange Ticker Symbol EAG
o Risks We face risks in operating
our business, Including
risks that may prevent us
from achieving our business
objectives or that may
adversely affect our
business, financial
condition and operating
results. See "Risk Factors"
on Page 6 and other
information included in this
prospectus for a discussion
of factors you should
consider carefully before
deciding to invest in our
common stock.
4
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables show selected historical consolidated financial
information as of the end of each of the periods indicated. Our historical
results are not necessarily indicative of the results that may be expected for
any future period. The following should be read in conjunction with
"Management's Discussion and Analysis" and the historical and consolidated
financial statements and notes included in this prospectus.
Nine Months Ended May 31,
-----------------------------
2005 2004
-----------------------------
($ 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 Shareholders' Equity $ 57,458 $ 50,103
Year Ended August 31,
-----------------------------------
2004 2003 2002
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($ 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 Shareholders' 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 sold 30,000,000 shares of its common stock
for net proceeds of $3,766,500 in a private placement. 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.
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.
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. v. 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.
6
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;
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.
7
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:
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 shareholders 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 October 1, 2004, through
September 30, 2005, the highest sales price of our common stock was $0.90, and
the lowest sales price was $0.15. 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.
8
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 shareholders 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.
9
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.
High Low
Fiscal Year 2005 ------ ------
Quarter ended November 30 $ 0.90 $ 0.59
Quarter ended February 28 $ 0.82 $ 0.36
Quarter ended May 31 $ 0.40 $ 0.19
Quarter ended August 31 $ 0.30 $ 0.15
Fiscal Year 2004
Quarter ended November 30 $ 1.77 $ 0.43
Quarter ended February 29 $ 2.05 $ 1.18
Quarter ended May 31 $ 1.55 $ 0.79
Quarter ended August 31 $ 1.19 $ 0.75
Fiscal Year 2003
Quarter ended November 30 $ 0.52 $ 0.28
Quarter ended February 28 $ 0.43 $ 0.17
Quarter ended May 31 $ 0.35 $ 0.14
Quarter ended August 31 $ 0.59 $ 0.34
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.
10
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:
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 $755,000 in taxes.
During the quarter, the Company implemented a company-wide
restructuring which included the formation of the three main operating
divisions: IPTV Solutions, Satellite Communications and Broadband Services. Key
components of the restructuring included:
-- Reducing payroll-related expenses, lowering operational overhead and
carefully controlling expenditures.
-- Hiring of additional experienced sales staff to accelerate revenue
growth.
11
-- Realigning staff and resources to maximize efficiencies, better
serve customers and partners and concentrate on sales of the Company's three
core offerings: IPTVComplete, MediaPro IP set top boxes and SatMAX satellite
communications system as the Company shifts its emphasis to providing solutions
to broadband and service provider partners.
SALES INFORMATION
The following table sets forth summarized sales information for the
three months and nine months ended May 31, 2005, and May 31, 2004:
Three Months Ended May 31,
------------------------------------------------------------------
($ in thousands) 2005 % of Total 2004 % of Total $Change % Change
----------- ---------- ---------- ----------- --------- ----------
Structured wiring $ 369 12% $ 156 3% $ 213 136.5%
Broadband services 1,797 60% 709 14% 1,088 153.5%
Products 774 26% 4,226 83% (3,452) -81.7%
Other 36 1% - 0% 36 -100.0%
----------- ---------- ---------- ----------- --------- ----------
Total sales $ 2,976 100% $5,091 100% $(2,115) -41.5%
=========== ========== ========== =========== ========= ==========
Nine Months Ended May 31,
------------------------------------------------------------------
($ in thousands) 2005 % of Total 2004 % of Total $Change % Change
----------- ---------- ---------- ----------- --------- ----------
Structured wiring $ 1,002 14% $ 673 6% $ 329 48.9%
Broadband services 3,537 49% 4,805 43% (1,268) -26.4%
Products 2,553 36% 5,673 51% (3,120) -55.0%
Other 96 1% 81 1% 15 18.5%
----------- ---------- ---------- ----------- --------- ----------
Total sales $ 7,188 100% $ 11,232 100% $(4,044) -36.0%
=========== ========== ========== =========== ========= ==========
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 $329,000 in structured wiring sales is attributable to
the Company's increased sales force to pursue commercial structured wiring and
cabling opportunities.
12
COST OF GOODS SOLD
The following table sets forth summarized cost of goods sold
information for the three and nine months ended May 31, 2005, and May 31, 2004:
Three Months Ended May 31, Nine Months Ended May 31,
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
------- ------- -------- --------- ------- ------- -------- ---------
Direct labor and related costs $ 516 $ 226 $ 290 128.3% $1,300 $1,078 $ 222 20.6%
Products and integration service 799 3,937 $(3,138) -79.7% 3,002 4,375 $(1,373) -31.4%
Impairment slow moving and obsolete inventory 300 - $ 300 100.0% 300 - $ 300 100.0%
Structured wiring labor and material 270 115 $ 155 134.8% 776 376 $ 400 106.4%
Broadband services costs 207 304 $ (97) -31.9% 1,465 2,550 $(1,085) -42.5%
Depreciation and amortization 291 285 $ 6 2.1% 867 856 $ 11 1.3%
Other manufacturing costs - - $ - - 26 $ (26) -100.0%
------- ------- -------- -------- ------- ------- -------- ---------
Total operating expenses $2,383 $4,867 $(2,484) -51.0% $7,710 $9,261 $(1,551) -16.7%
======= ======= ======== ======== ======= ======= ======== =========
For the three months ended May 31, 2005, cost of goods sold decreased
by 51% to $2,383,000 from $4,867,000 as compared to the three months ended May
31, 2004. The overall decrease of $2,484,000 was primarily attributable to the
Company's cost associated with prior year product sales to a major customer. The
Company's overall gross profit percentage was 20% for the three months ended May
31, 2005, compared to an overall gross profit percentage of 4% for the three
months ended May 31, 2004. This increase in gross profit percentage is primarily
attributable the recognition of revenue from the sale of security monitoring
contracts of $1,390,000 to a major customer executed with the Company's
broadband services division.
For the nine months ended May 31, 2005, cost of goods sold decreased by
17% to $7,710,000 from $9,261,000 as compared to the nine months ended May 31,
2004. The overall decrease of $1,551,000 was primarily attributable to the
Company's costs associated with prior year product sales to a major customer.
The Company's overall negative gross profit percentage is 7% for the nine months
ended May 31, 2005, compared to an overall gross profit percentage of 18% for
the nine months ended May 31, 2004. This decrease in gross profit percentage is
primarily attributable to (i) additional costs of $759,000 for design changes
and expedite charges incurred due to a change in product requirements from a key
customer and (ii) depreciation expenses associated with the buildout of the
Company's broadband services infrastructure.
OPERATING EXPENSES
The following table sets forth summarized operating expense information
for the three months and nine months ended May 31, 2005, and May 31, 2004:
Three Months Ended May 31, Nine Months Ended May 31,
($ 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%
========= ========= ========== ======== ========= ========= ========= =========
13
The following table breaks out "Other Support Costs" 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
----------- ---------- ---------- -------- ---------- ---------- ---------- --------
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, $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.
14
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%
============= ============== ============ =============
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.
15
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
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%
========= ========= ========= ========
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 $1,901,000, the decision to no longer pursue
structured wiring outside of its BDS model and an increase in depreciation
expenses associated with the build-out of the Company's BDS infrastructure.
16
OPERATING EXPENSES
The following table sets forth summarized operating expense information
for the fiscal years ended August 31, 2004 and 2003.
Fiscal Year Ended August 31,
-----------------------------------------------------------
($ 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
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.
17
NET LOSS
For the fiscal year ended August 31, 2004, Eagle's net loss was
$(39,005,000), compared to a net loss of $(36,501,000) during the fiscal year
ended August 31, 2003.
CHANGES IN CASH FLOW
Eagle's operating activities used net cash of $(3,784,000) in the
fiscal year ended August 31, 2004, compared to use of net cash of $(6,085,000)
in the fiscal year ended August 31, 2003. The decrease in net cash used by
operating activities was primarily attributable to fund an increase in the
Company's net loss, net of non-cash charges, totaling $27,512,000 combined with
$8,000,000 of cash provided by fluctuations in working capital requirements
consisting of the combination of accounts receivable, inventory, prepaid
expenses, accounts payable and accrued expenses. Eagle's investing activities
used net cash of $1,216,000 in the fiscal year ended August 31, 2004, compared
to $1,276,000 in the fiscal year ended August 31, 2003. The decrease was due
primarily to a significant decline in investment activities and purchase of
equipment associated with the prior years build out of Eagle's network and
infrastructure for the delivery of broadband services. Eagle's financing
activities provided cash of $5,936,000 in the fiscal year ended August 31, 2004,
compared to $6,912,000 of cash provided in the fiscal year ended August 31,
2003. The decrease resulted from less borrowing activities during the fiscal
year ended August 31, 2004.
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:
18
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.
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 sold 30,000,000 shares of its
common stock for net proceeds of $3,766,500 in a private placement. 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.
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.
19
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".
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.
20
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
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.
21
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.
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.
22
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 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 Shareholders' 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 Shareholders' Equity $ 50,103 $ 58,336 $ 76,548 $ 148,482 $ 54,073
23
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)
------- ------- ------- --------
24
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 IPTVComplete(TM), 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 SatMAX(TM) 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.
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.
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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.
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.
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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
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.
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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.
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.
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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.
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.
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.
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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
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.
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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.
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SELLING SHAREHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling shareholders. We will not receive any
proceeds from the resale of the common stock by the selling shareholders. We
will receive proceeds from the exercise of the warrant. Assuming all the shares
registered below are sold by the selling shareholders, none of the selling
shareholders 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
Shareholder Offering Offering Offered Offering Offering
- --------------------------------------------------------------------------------------------------------------
Frederick C. Applegate Trust (1) 1,481,481 * 1,481,481 -- --
- --------------------------------------------------------------------------------------------------------------
David Callan 3,703,704 1.2 3,703,704 -- --
- --------------------------------------------------------------------------------------------------------------
Frorer Partners, L.P. (2) 22,222,222 7.3 22,222,222 -- --
- --------------------------------------------------------------------------------------------------------------
W. Anthony Hitschler 1,481,481 * 1,481,481 -- --
- --------------------------------------------------------------------------------------------------------------
Keystone Group Holdings, L.P. (3) 843,750(4) * 843,750(4) -- --
- --------------------------------------------------------------------------------------------------------------
Bruce and Kathryn Evans 1,111,112 * 1,111,112 -- --
- --------------------------------------------------------------------------------------------------------------
Total 30,843,750 10.2 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) William Fretz exercises voting and dispositive power over all of the
shares beneficially owned by Keystone Group Holdings, L.P. The
shareholder received a warrant as compensation for assisting the
Company in the private sale of 30,000,000 shares of its common stock.
(4) 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.
None of the selling shareholders has 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 per share 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) Bruce and Kathryn 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 stock in February 2005, and
10,000,000 shares in April 2005, and received aggregate sales commissions of
$796,000 in connection therewith.
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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 shareholders has sole or shared voting power or investment power and
also any shares which the selling shareholders has the right to acquire within
60 days.
PLAN OF DISTRIBUTION
The selling shareholders 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 shareholders 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 shareholders 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 shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling shareholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling shareholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders 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 shareholders 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
shareholders 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
shareholders 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 shareholders 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 shareholders 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 shareholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
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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
David Micek 52 President & Chief Executive Officer
and Director
Eric Blachno 43 Chief Financial Officer
C. J. Reinhartsen 62 Chairman of the Board of Directors
Robert Bach 56 Director
Dr. H. Dean Cubley 63 Director
Dr. Glenn Goerke 73 Director
Lorne Persons, Jr. 58 Director
James D. Yarbrough 49 Director
The following is biographical information about each of our officers
and directors.
David Micek served as Chief Operating Officer from November 2004 to
April 2005, has served as President and Chief Executive Officer since April
2005, and was elected to the Board of Directors on October 18, 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.
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.
C. J. (Jim) Reinhartsen has served as a 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.
Robert L. Bach, elected to the Board of Directors on October 18, 2005,
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.
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.
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.
34
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.
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.
FAMILY RELATIONSHIPS
There are no family relationships between any of our executive officers
and directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of our executive officers or directors 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- 810,000 -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-
- -----------------------
(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.
35
(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 $85,865
Richard Royall -0- N/A N/A N/A N/A N/A
- --------------------------
* Less than 1%
(1) Percentages are based on 6,082,500 options issued and are rounded up to
the nearest whole number.
The following table sets forth information concerning option exercises
during the fiscal year ended August 31, 2004, and option holdings as of August
31, 2004, with respect to our named executive officers. No stock appreciation
rights were outstanding at the end of the fiscal year.
36
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Value Number of Securities Value of Unexercised
Shares Acquired Realized Underlying Unexercised In-the-Money
Name on Exercise (#) ($) 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 amended employment agreement provides for an annual salary
of $275,000, and is effective through May 2008, which shall be extended until
May 2010, 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 2008, which shall be extended until
November 2010, 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.
BOARD OF DIRECTORS
The Board of Directors currently consists of seven members: Messrs.
Bach, Cubley, Goerke, Micek, Persons, Reinhartsen and Yarbrough. 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 executive committee, an audit committee,
a compensation committee and a nominating committee.
EXECUTIVE COMMITTEE
-------------------
The Executive Committee of the Board consists of the Chairman of the
Board, the Chairman of the Audit Committee, and the Chief Executive Officer of
the Company. The Executive Committee has the authority to consider and make
decisions on all matters requiring Board approval that arise between scheduled
meetings of the Board, including the authority to authorize the sale and
issuance of shares of the Company. However, the Executive Committee has no
authority with respect to matters where action of the entire Board is required
to be taken by Article 2.36B of the Texas Business Corporation Act.
37
AUDIT COMMITTEE
The Audit Committee of the Board consists of three non-employee
directors: Messrs. Goerke, Bach and Yarbrough (Audit Committee Chair). Each of
Messrs. Goerke, Bach 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 three, non-employee directors: Messrs.
Goerke, Persons and Reinhartsen (Compensation Committee Chair). Messrs. Goerke,
Persons and Reinhartsen 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 five non-employee directors: Messrs. Goerke (Nominating Committee Chair),
Persons, Bach, Reinhartsen and Yarbrough. Each of Messrs. Goerke, Persons, Bach,
Reinhartsen and Yarbrough are independent as defined in the listing standards of
the American Stock Exchange.
DIRECTOR COMPENSATION
Directors receive an annual fee of $20,000, which is paid quarterly.
The Chairman of the Board receives an additional fee of $55,000 annually, which
is paid monthly. Committee chairmen receive an annual fee of $5,000, with the
exception of the Audit Committee chairman, who receives an annual fee of
$10,000, which are all paid quarterly. Directors receive $1,500 for each of the
six regular meetings attended each year and $1,000 for each regularly scheduled
committee meeting attended. During the fiscal year ended August 31, 2004,
directors received options to purchase 50,000 shares of common stock. In October
2005, directors received options to purchase 100,000 shares of common stock.
Directors are also eligible to receive grants of restricted stock based on the
attainment of certain objectives by the Company. Company employees that also
serve as directors do not receive the abovementioned fees, stock options or
restricted stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of three, non-employee directors,
Messrs. Goerke, Persons and Reinhartsen (Compensation Committee Chair). 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, and the Company's shareholders have
approved, 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
shareholders 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.
38
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.
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.
39
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.
40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the date of this prospectus, a total of 303,086,275 shares of our common
stock were outstanding. The following table sets forth, as of the date of this
prospectus, 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 (c)
the executive officers named in the Summary Compensation Table above (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 OCTOBER __, 2005
------------------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- ---------------- ---------------- ----------------
Frorer Partners, L.P. 22,222,222 7.3%
David Weisman 2,638,585 *
David Micek 1,497,223 (1) *
H. Dean Cubley 1,204,833 (2) *
Randall Shapiro 789,600 (3) *
Robert Bach 618,179 (4) *
Lorne Persons, Jr. 397,991 (5) *
Eric Blachno 291,662 (6) *
Glenn Goerke 258,656 (7) *
C. J. Reinhartsen 206,547 (8) *
James Yarbrough 50,000 (9) *
Richard Royall 37,500 (10) *
All current directors and
executive officers as a group
(9 persons) 5,314,691 1.8%
- ---------------------------
* Less than 1%
(1) 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.
(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.
41
(3) These shares are deemed beneficially owned by Mr. Shapiro under options
granted to him pursuant to his employment agreement.
(4) Includes 20,000 shares held in a trust of which he is a trustee.
(5) 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.
(6) These shares are deemed beneficially owned by Mr. Blachno under options
granted to him pursuant to his employment agreement. See "Executive
Officers - Executive Employment Contracts."
(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) 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.
(9) Consists of an option to purchase 50,000 shares of common stock at an
exercise price of $0.78 per share.
(10) Consists of an option to purchase 37,500 shares of common stock at an
exercise price of $1.00 per share.
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 the
date of this prospectus, a total of 303,086,275 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 shareholders. 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
shareholders, 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.
42
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.
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 shareholders. 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 fiscal years
ended August 31, 2004 and 2003, appearing in this prospectus and the related
registration statement have been audited by Lopez, Blevins, Bork & Associates,
LLP, independent registered public accounting firm, as set forth in their report
on our audited consolidated financial statements appearing elsewhere in this
prospectus and the related registration statement, and are included in reliance
upon their report given upon the authority of Lopez, Blevins, Bork & Associates,
LLP, 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.
The Audit Committee selected Lopez & Associates as our independent
auditors for the fiscal year ended August 31, 2005, and this selection was
ratified by the shareholders on October 18, 2005.
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, shareholders' 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.
43
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
100 F Street, N.E., 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.
44
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 IPTVComplete(TM), 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
SatMAX(TM) satellite communications system that provides civilian
government, military, homeland security and corporate customers with
reliable, non-line-of-sight, satellite voice and data communications
from any location on Earth.
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.
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.
F-7
NOTE 7 - ASSETS HELD FOR SALE
The Company entered into an agreement to repurchase security contracts
for $1,003,316. Per the terms of the agreement, $985,000 of the
$1,003,316 was offset against a receivable the Company had from the
seller. These contracts are considered an asset held for sale and
included in other current assets. The company intends to resell the
security contracts in the fourth quarter. If the contracts are not
sold, the purchase price of the contracts will be amortized over their
remaining life.
NOTE 8 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
The options and warrants outstanding are segregated into two categories
(issued and outstanding, and exercisable):
Options/Warrants
Issued & Outstanding Options/Warrants
Exercisable
------------------------ ------------------------
Class of Expiration May 31, August 31, May 31, August 31,
Warrants Date 2005 2004 2005 2004
- --------- ---------- ----------- ---------- ----------- ----------
0.19 Oct-09 6,700,000 186,111
0.20 Jun-07 1,340,022 1,340,022
0.41 Sep-08 900,000 3,800,000 900,000 1,550,000
0.48 Oct-06 25,000 25,000 25,000 25,000
0.60 Sep-06 400,000 400,000 400,000 -
0.61 Oct-09 500,000 - 146,181 -
0.62 Oct-09 500,000 - 111,112 -
0.73 Oct-07 25,000 - - -
0.75 Sep-08 500,000 500,000 500,000 -
0.78 Various 424,991 - 424,991 -
0.97 Jul-07 25,000 25,000 - -
1.00 May-09 362,500 - 362,500 -
1.04 Apr-05 50,000 50,000 50,000 50,000
1.13 Sep-08 99,999 - 99,999 -
1.23 Apr-07 25,000 25,000 25,000 -
1.31 Jan-07 25,000 25,000 25,000 25,000
7.50 Apr-08 800,000 800,000 800,000 800,000
ESOP Various 516,120 * 346,002 * 346,002 346,002
----------- ---------- ----------- ----------
13,218,632 **5,996,002 ** 5,741,918 2,796,002
=========== ========== =========== ==========
* Denotes warrants which would have an anti-dilutive effect if
currently used to calculate earnings per share for the three
months ended May 31, 2005, and fiscal year ended August 31,
2004.
** The shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2005, none of these warrants have been exercised.
NOTE 9 - RISK FACTORS:
For the nine months ended May 31, 2005, substantially all of the
Company's business activities have remained within the United States
and have been extended to the wireless infrastructure, fiber, cabling,
computer services and broadband industries. Approximately 33% of the
Company's revenues and receivables were generated in the state of
Texas, 1% in the international market, and the approximate 66%
remainder relatively evenly over the rest of the nation during the nine
months ended May 31, 2005; whereas approximately 85% of the Company's
revenues and receivables were generated in the state of Texas, 0% in
the international market, and the approximate 15% remainder relatively
evenly over the rest of the nation during the nine months ended May 31,
2004. Through the normal course of business, the Company generally does
not require its customers to post any collateral.
F-8
NOTE 10 - FOREIGN OPERATIONS:
Although the Company is based in the United States, certain of its
products are sold in international markets. Presently, international
sales total approximately 1% and 0% for the nine months ended May 31,
2005, and May 31, 2004, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES:
LEASES
For the nine months ended May 31, 2005, and May 31, 2004, rental
expenses of approximately $345,000 and $464,000, respectively, were
incurred.
The Company renewed its primary office lease space in League City,
Texas, for $24,983 per month with South Shore Harbor Development, Ltd.
The renewal lease commenced on June 1, 2004, and expires on May 31,
2009. The Lessor agreed to grant the Company a one-time option to
terminate the lease at 36 months by paying an unamortized leasing
commission of $35,000 and a penalty of 1.5 months rent of $37,000 for a
combined total of $72,000.
Period Ending
August 31 Amount
---------------------------------
2005 $ 74,950
2006 299,801
2007 306,180
2008 325,316
2009 243,987
-------------
Total $ 1,250,234
=============
LLV BROADBAND, LLC, AGREEMENT
In November 2004, the Company entered into a Limited Liability Company
Agreement with Neva Holdings, LLC ("Neva"), whereby both parties are
members of LLV Broadband, LLC ("LLV"), and a Delaware limited liability
company. The purpose of LLV is to construct, develop, and operate a
system for the provision of television, video-on-demand, audio,
broadband data and Internet, telephone, and security monitoring
services to commercial, recreational, and residential facilities
located within the Lake Las Vegas Resort in Clark County, Nevada, and
the surrounding geographic areas.
LLV currently owns cable television assets including, without
limitation, cable real property easements, franchises and governmental
and third-party consents necessary for the operation of the system
(collectively the "Existing System Assets"). Neva's capital account
shall consist of the initial capital contribution of the "Existing
System Assets" and existing system documents having an aggregate net
fair value of $3,000,000 plus amounts funded by Neva or its affiliates
to or for the benefit of LLV between January 1, 2004, and the effective
date of this agreement.
The Company's capital account shall be an initial cash contribution of
$3,000,000 plus amounts funded by the Company or its affiliates to, or
for the benefit of LLV between January 1, 2004, and the effective date
of this agreement.
If at any time LLV's Board determines that additional funds are needed
as set forth in the approved budget and plan for the development,
construction or marketing of the system for any direct out-of-pocket
costs and expenses incurred by LLV in connection with the formation,
financing and operation of LLV or normal day-to-day business affairs of
LLV, then the Company shall be required to make additional cash
contributions in the amount of such deficit not to exceed $2 million.
The Company shall act as the initial Manager of LLV. The Manager shall
be responsible for the conduct of the business of LLV including without
limitation the design, construction and operation of the system. The
Manager shall have full power, authority and duty to manage the
operations and affairs of LLV and to act for and to bind LLV to the
extent provided by the Act, and shall have the duty and authority to do
all things appropriate to the accomplishment of the purposes of LLV.
The Manager shall be reimbursed for the direct costs and expenses of
its employees and agents who provide services to LLV.
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 shareholders (18,773) 230,439 (0.08)
Effect of dilutive securities warrants -- -- --
Diluted EPS:
-------- -------- --------
Income available to common shareholders
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 shareholders (23,605) 179,228 (0.13)
Effect of dilutive securities warrants -- -- --
Diluted EPS:
-------- -------- --------
Income available to common shareholders
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 shareholders 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:
May 31, May 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2005 2004
---------- ----------
Net loss, as reported $ (18,773) $ (23,605)
Add: Stock-based employee compensation
included in reported net earnings/(loss),
net of related tax effects
Less: Stock-based employee
compensation expense determined
under fair-value based method for
all awards, net of related tax effects (61) --
---------- ---------
Pro forma net earnings/(loss) $ (18,834) $ (23,605)
========== =========
Net loss per share:
As reported $ (0.08) $ (0.13)
Pro forma $ (0.08) $ (0.13)
Diluted net loss per share:
As reported $ (0.08) $ (0.13)
Pro forma $ (0.08) $ (0.13)
Option activity was as follows for the nine months ended May 31, 2005:
F-11
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.
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.
F-12
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 Settlements 14,726
---------------------
NOTE 19 - EQUITY FINANCING
On February 14, 2005, the Company completed the sale of 20 million
shares of its common stock to certain investors at a price of $0.41 per
share. The net proceeds to the Company from this offering, after
placement agent fees and offering expenses were $7,504,000.
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.
F-14
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
In August 2005, the Company entered into a purchase agreement with certain
accredited investors for the sale of 30,000,000 shares of its common stock,
pursuant to Regulation D of the Securities Act of 1933, at a price of $0.135 per
share, and received total gross proceeds of $4,050,000. On August 26, 2005, the
American Stock Exchange approved for listing 15,125,000 of the 30,000,000 shares
sold in the private placement, and notified the Company that shareholder
approval was required for the issuance of the remaining 14,875,000 shares. The
shareholders of the Company approved the issuance of the 14,875,000 shares at a
meeting held October 18, 2005. All 30,000,000 shares sold in this private
placement are issued and outstanding.
The Company paid placement agent a cash commission of 7% of the gross dollar
proceeds of the sale of the 30,000,000 shares and on October ____, 2005, issued
such agent a five-year warrant to purchase 843,750 shares of Company common
stock at an exercise price per share of $0.24 per share.
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, 1993, and commenced business in April of 1996. The
Company is a leading provider of broadband, Internet protocol (IP) and satellite
communications technology and services. The Company is focused on three core
businesses: broadband bundled services, IP set-top boxes and satellite
communications technology. The Company's product offerings include an exclusive
"four-play" suite of IP-based broadband bundled services with high-speed
Internet, cable TV, telephone and security monitoring, and a turnkey suite of
financing, network design, operational and support services that enables
municipalities, utilities, real estate developers, hotels, multi-tenant owners
and service providers to deliver exceptional value, state-of-the-art
entertainment and communications choices and single-bill convenience to their
residential and business customers. Eagle offers the HDTV-ready Media Pro IP
set-top box product line that enables hotel operators and service providers to
maximize revenues by offering state-of-the-art in-room entertainment and video
services. The Company also develops and markets the SatMAX satellite
communications system that allows government, military, homeland security,
aviation, maritime and enterprise customers to deliver reliable,
non-line-of-sight, voice and data communications services via the Iridium
satellite network from any location on Earth.
A) Consolidation
At August 31, 2004, 2003 and 2002, the Company's subsidiaries were:
Atlantic Pacific Communications, Inc. (APC) - operated as Eagle Communication
Services; Etoolz, Inc. (ETI); Eagle Wireless International, Inc. (EWI);
ClearWorks.net, Inc. (.NET); ClearWorks Communications, Inc. (COMM) - operated
as Eagle BDS Services; ClearWorks Home Systems, Inc. (HSI) - operated as Eagle
Residential Structured Wiring; Contact Wireless, Inc. (CWI) - operating as Eagle
Paging Services; DSS Security, Inc., (DSS) - operated as Eagle Security
Services; United Computing Group, Inc. (UCG) - operated as Eagle Technology
Services; and Link Two Communications, Inc. (LINK II) - operated as Eagle
Messaging Services. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation.
B) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with
original maturities of three months or less to be cash equivalents. The Company
maintains cash deposits in banks which from time to time exceed the amount of
deposit insurance available. Management periodically assesses the financial
condition of the institutions and believes that any potential credit loss is
minimal.
The Company has $2,051,000 and $824,000 of cash and cash equivalents
invested in interest bearing accounts at August 31, 2004, and August 31, 2003,
respectively.
C) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated by using the straight-line method for
financial reporting and accelerated methods for income tax purposes. The
recovery classifications for these assets are listed as follows:
Years
--------------------------
Headend Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized. Eagle has acquired all of
its property and equipment with either cash or stock and has not capitalized any
interest expenses in its capital assets.
F-22
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the following items,
in thousands:
August 31,
2004 2003
---------- ----------
Raw Materials $ 294 $ 1,826
Work in Process 108 1,237
Finished Goods 1 136
---------- ----------
$ 403 $ 3,199
========== ==========
E) Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle Wireless
International, Inc., Atlantic Pacific Communications, Inc.; Link Two
Communications, Inc.; United Computing Group, Inc.; Contact Wireless, Inc.; and
DSS Security, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of adopting EITF
00-21 did not have a material effect to Eagle's results of operations. Eagle's
contracts that contain multiple elements as of August 31, 2004, or prior were
immaterial. When elements such as hardware, software and consulting services are
contained in a single arrangement, or in related arrangements with the same
customer, Eagle allocates revenue to each element based on its relative fair
value, provided that such element meets the criteria for treatment as a separate
unit of accounting. The price charged when the element is sold separately
generally determines fair value. In the absence of fair value for a delivered
element, Eagle allocates revenue first to the fair value of the undelivered
elements and allocates the residual revenue to the delivered elements. In the
absence of fair value for an undelivered element, the arrangement is accounted
for as a single unit of accounting, resulting in a delay of revenue recognition
for the delivered elements until the undelivered elements are fulfilled. Eagle
limits the amount of revenue recognition for delivered elements to the amount
that is not contingent on the future delivery of products or services or subject
to customer-specified return or refund privileges.
DEFERRED REVENUES
Revenues that are billed in advance of services being
completed are deferred until the conclusion of the period of the service for
which the advance billing relates. Deferred revenues are included on the balance
sheet as a current liability until the service is performed and then recognized
in the period in which the service is completed. Eagle's deferred revenues
primarily consist of billings in advance for cable, Internet, security and
telephone services, which generally are between one and three months of
services. Eagle had deferred revenues of $353,000 and $230,000 as of August 31,
2004 and 2003, respectively.
EAGLE WIRELESS INTERNATIONAL, INC.
Eagle designs, manufactures and markets transmitters,
receivers, controllers and software, along with other equipment used in
commercial and personal communication systems, radio and telephone systems.
Revenues from these products are recognized when the product is shipped. Eagle's
Wireless International Product revenues are reported under the category
"Products" on Eagle's Consolidated Statements of Operations included as page F-4
of this report and also under the category "Eagle" within Note 22 - Industry
Segments.
BROADBANDMAGIC
BroadbandMagic designs, manufactures and markets the IP
set-top boxes. Products are sent principally to commercial customers for a
pre-sale test period of ninety days. Upon the end of the pre-sale test period,
the customer either returns the product or accepts the product, at which time
Eagle recognizes the revenue. Eagle's Broadband Multimedia and Internet Products
revenues are reported under the category "Products" on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category "Eagle" within Note 22 - Industry Segments. Revenue from software
consists of software licensing. There is no post-contract customer support.
Software revenue is allocated to the license using vendor specific objective
evidence of fair value ("VSOE") or, in the absence of VSOE, the residual method.
The price charged when the element is sold separately generally determines VSOE.
In the absence of VSOE of a delivered element, Eagle allocates revenue to the
fair value of the undelivered elements and the residual revenue to the delivered
elements. Eagle recognizes revenue allocated to software licenses at the
inception of the license.
F-23
EAGLE BROADBAND, INC.
Eagle Broadband, Inc., engages independent agents for sales
principally in foreign countries and certain geographic regions in the United
States. Under the terms of these one-year agreements the distributor or sales
agents provide the companies with manufacturing business sales leads. The
transactions from these distributors and agents are subject to Eagle's approval
prior to sale. The distributorship or sales agent receives commissions based on
the amount of the sales invoice from the companies to the customer. The sale is
recognized at the time of shipment to the customer. These sales agents and
distributors are not a significant portion of total sales in any of the periods
presented. Eagle's Broadband, Inc. revenues are reported under the category
"Products" on Eagle's Consolidated Statements of Operations included as page F-4
of this report and also under the category "Eagle" within Note 22 - Industry
Segments.
EAGLE BDS SERVICES - DBA CLEARWORKS COMMUNICATIONS, INC.
ClearWorks Communications, Inc., provides Bundled Digital
Services to business and residential customers, primarily in the Texas market.
Revenue is derived from fees charged for the delivery of Bundled Digital
Services, which includes telephone, long distance, Internet, security monitoring
and cable services. This subsidiary recognizes revenue and the related costs at
the time the services are rendered, Installation fees are recognized upon
completion and acceptance. Eagle's BDS Services revenues are reported under the
category "Broadband Services" on Eagle's Consolidated Statements of Operations
included as page F-4 of this report and also under the category "EBS/DSS" within
Note 22 - Industry Segments.
EAGLE RESIDENTIAL STRUCTURED WIRING - DBA CLEARWORKS HOME SYSTEMS, INC.
ClearWorks Home Systems, Inc., sells and installs structured
wiring, audio and visual components to homes. This subsidiary recognizes revenue
and the related costs at the time the services are performed. Revenue is derived
from the billing of structured wiring to homes and the sale of audio and visual
components to the homebuyers. Eagle's Residential Structured Wiring revenues are
reported under the category "Structured Wiring" on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category "APC/HSI" within Note 22 - Industry Segments.
EAGLE COMMUNICATION SERVICES - DBA ATLANTIC PACIFIC COMMUNICATIONS, INC.
Atlantic Pacific Communications, Inc., provides project
planning, installation, project management, testing and documentation of fiber
and cable to commercial and industrial clients throughout the United States. The
revenue from the fiber and cable installation and services is recognized upon
percentage of completion of the project. Most projects are completed in less
than one month, therefore, matching revenue and expense in the period incurred.
Service, training and extended warranty contract revenues are recognized as
services are completed. Eagle's Communications Services revenues are reported
under the category "Structured Wiring" on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category
"APC/HSI" within Note 22 - Industry Segments.
ETOOLZ, INC.
Etoolz, Inc., provides research and development support for
all Eagle companies and does not currently provide billable services to
independent third parties.
EAGLE MESSAGING SERVICES - DBA LINK TWO COMMUNICATIONS, INC.
Link Two Communications, Inc., provides customers with one-
and two-way messaging systems. The revenue from the sale of these products is
recognized at the time the services are provided. Eagle's Messaging Services
revenues are reported under the category "Other" on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category "Eagle" within Note 22 - Industry Segments.
EAGLE PAGING SERVICES - DBA CONTACT WIRELESS, INC.
Contact Wireless, Inc., provides customers with paging and
mobile telephone products and related monthly services. Revenue from product
sales is recorded at the time of shipment. Revenue for the mobile phone and
paging service is billed monthly as the service is provided. Eagle's Paging
Services revenues are reported under the category "Other" on Eagle's
Consolidated Statements of Operations included as page F-4 of this report and
also under the category "Other" within Note 22 - Industry Segments.
EAGLE SECURITY SERVICES - DBA DSS SECURITY, INC.
DSS Security, Inc., provides monthly security monitoring
services to residential customers. The customers are billed three months in
advance of service usage. The revenues are deferred at the time of billing and
ratably recognized over the prepayment period as service is provided.
Installation fees are recognized upon completion and acceptance. Eagle's
Security Services revenues are reported under the category "Broadband Services"
on Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category "EBS/DSS" within Note 22 - Industry Segments.
F-24
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:
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.
F-25
The Company evaluates the carrying value of long-lived assets
and identifiable intangible assets for potential impairment on an ongoing basis.
An impairment loss would be deemed necessary when the estimated non-discounted
future cash flows are less than the carrying net amount of the asset. If an
asset were deemed to be impaired, the asset's recorded value would be reduced to
fair market value. In determining the amount of the charge to be recorded, the
following methods would be utilized to determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
At August 31, 2002, Eagle determined that an impairment of
Link Two paging network equipment and nationwide licenses existed. Link Two
Communications competes with many established companies in the nationwide one
and two-way messaging services area. The paging industry has declined over the
past year and the major paging companies have undergone significant beneficial
financial restructurings. These companies are able to offer products and related
services at more favorable rates than Link Two. Because the paging industry and
related financial credit availability from banks for financing emerging
nationwide networks has been declining over the last year, Link Two has been
unable to obtain significant funding to expand and provide cost effective
service to its customers. Accordingly, Link Two has had to curtail its
development on a nationwide basis and restricted its operations to serve the
Houston and Dallas, Texas, markets. The equipment servicing the nationwide
network has been inactive and is being dismantled. The equipment servicing the
nationwide network is inactive and has been impaired as well as the value of the
related FCC licenses. At August 31, 2002, management estimated through recent
sales of equipment and industry pricing of FCC licenses that an impairment
charge of $27,100,000 was necessary to reflect the ongoing value of its assets
and licenses.
At August 31, 2003, management determined that a $7,611,000 non-cash
impairment charge was necessary against realigned operations and the
discontinued sale of low margin commodity products, residential and commercial
structured wiring operations and the withdrawal from its Austin area BDS
development based on the lack of demand for BDS services resulting from a slower
build out of the development than originally projected in conjunction with local
market competition. Included in the impairment was the write down of goodwill
associated with the Comtel acquisition of $1,878,000.
J) Intangible Assets
Goodwill represents the excess of the cost of companies
acquired over the fair value of their net assets at the dates of acquisition and
were being amortized using the straight-line method over twenty (20) years for
Atlantic Pacific Communications, Inc., and twenty-five (25) years for Bundled
Digital Services through June 30, 2001.
Contract rights and customer relationships relate to the
Company rights to deliver bundled digital services such as Internet, telephone,
cable television and security monitoring services to certain residential and
business users that were acquired in the Clearworks.net, Inc. merger and are
being amortized over the lives of the contracts which is fifteen (15) years.
Other intangible assets consist of licenses and permits and
other acquired contracts, which are being amortized using the straight-line
method over their estimated useful lives of 1 to twenty (20) years. Eagle's
licenses include FCC licenses for designated narrowband personal communications
services, radio frequencies or spectrum to service providers. Prior to the
adoption of FAS 142, Eagle amortized these licenses using the straight line
method over twenty years. At August 31, 2002, management estimated through
recent sales of equipment and industry pricing of FCC licenses that an
impairment charge of $27,100,000 was necessary to reflect the ongoing value of
its assets and licenses; thereby leaving an unamortized balance of licenses on
its books of $1,562,000. Eagle does not maintain that these licenses have an
indefinite life, but rather has ceased amortizing the remaining balance of
$1,562,000 as management believes that this balance represents the salvage value
of such assets. Eagle, to date, has maintained all operational requirements to
keep its licenses current, and periodically assesses both future operating
requirements as well as the salvage of such assets.
During the fiscal year ended August 31, 2004, and subsequent
to the issuance of the Company's financial statements as of August 31, 2003, it
was determined that the allocation of the purchase price to net assets acquired
in connection with its acquisition of ClearWorks.net, Inc., and certain other
classifications of intangible assets had not been appropriately classified.
Eagle also determined that goodwill was impaired at August 31, 2002, and
recorded an impairment charge of $37,565,000, Goodwill is carried at cost less
accumulated amortization. Intangible assets were amortized on a straight-line
basis over the economic lives of the respective assets, generally ten to
twenty-five years. Prior to July 1, 2001, goodwill was amortized over 20 to 25
years. The Company's adoption of SFAS 142 eliminated the requirement to amortize
goodwill subsequent to the fiscal year ending August 31, 2001. Under the
provisions of SFAS 142, the Company is required to periodically assess the
carrying value of goodwill associated with each of its distinct business units
that comprise its business segments of the Company to determine if impairment in
value has occurred. Impairment tests completed as of August 31, 2002 and August
31, 2001 concluded that the carrying amount of goodwill for each acquired
business unit did not exceed its net realizable value based on the Company's
estimate of expected future cash flows to be generated by its business units,
except as described above in Note I. The Company updated its assessment as of
August 31, 2003 and concluded that based on a valuation model incorporating
expected future cash flows in consideration of historical cash flows and results
to date, no impairment charge was necessary.
F-26
Goodwill and other intangibles of $35,238,000 net of prior
impairments and amortization were recorded under the purchase method for the
purchases of ClearWorks.net, Inc., Atlantic Pacific, Inc., DSS Security, Inc.,
Contact Wireless, Inc., and Comtel, Inc. The majority of the intangibles were
from the ClearWorks acquisition. ClearWorks was in the business of selling
telecommunications services to residential neighborhoods. In fiscal 2003, Eagle
realized it had failed to successfully achieve profits using the ClearWorks
model of installing fiber optic cable to neighborhoods under the speculative
attempt to capture enough individual homeowners in each neighborhood via
individual selling methods to pay for the cable infrastructure. In early 2003,
Eagle modified its strategy to deliver the ClearWorks developed bundled digital
services approach including Internet, telephone, cable television and security
monitoring services to residential and business users by targeting
municipalities, homebuilders and residential real estate developers that finance
and install the fiber optic cable backbone in every lot and offer Eagle
exclusive rights to deliver digital bundled services to homeowners, using
pre-selling promotions and other low cost mass marketing techniques.
Eagle assessed the fair value of the intangible assets as of
August 31, 2004, and concluded that the goodwill and other intangible assets
valuations remain at an amount greater than the current carrying and other
intangible assets value.
There were a number of significant and complex assumptions
used in the calculation of the fair value of the goodwill. If any of these
assumptions prove to be incorrect, Eagle could be required to record a material
impairment to its goodwill. The assumptions include significant market
penetration in its current markets under contract and significant market
penetration in markets where they are currently negotiating contracts.
K) Advertising Costs
Advertising costs are expensed when incurred. For the year
ended August 31, 2004, 2003, and 2002, the Company expensed $29,000, $247,000
and $963,000, respectively.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures
incurred that are directly attributable to fundraising and the collection
thereto. Upon successful collection of the funds, all expenses incurred will be
reclassified to additional paid in capital and treated as syndication costs;
netted against the funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent asset and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
N) Marketable Securities
Eagle holds minority equity investments in companies having
operations or technology in areas within Eagle's strategic focus. Eagle applies
the equity method of accounting for minority investments when Eagle has the
ability to exert significant influence over the operating and financial policies
of an investment. In the absence of such ability, Eagle accounts for these
minority investments under the cost method. Certain investments carry
restrictions on immediate disposition. Investments in public companies
(excluding those accounted for under the equity method) with restrictions of
less than one year are classified as available-for-sale and are adjusted to
their fair market value with unrealized gains and losses, net of tax, recorded
as a component of accumulated other comprehensive income. Upon disposition of
these investments, the specific identification method is used to determine the
cost basis in computing realized gains or losses, which are reported in other
income and expense. Declines in value that are judged to be other than temporary
are reported in other income and expense.
The Company has Securities Available for Sale that include
shares of common stock and bonds. These investments have a fair market value of
$551,000 and of $1,714,006 and are included in the Balance Sheet category
"Securities Available for Sale" as of August 31, 2004 and 2003. (See Note 10.)
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Other Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
statement considers the presentation of unrealized holding gains and losses
attributable to debt and equity securities classified as available-for-sale. As
stated, any 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-27
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-28
In April 2004, the Emerging Issues Task Force ("EITF") issued
Statement No. 03-06 "Participating Securities and the Two-Class Method Under
FASB Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses
a number of questions regarding the computation of earnings per share by
companies that have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the Company when,
and if, it declares dividends on its common stock. The issue also provides
further guidance in applying the two-class method of calculating earnings per
share, clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 became effective during the quarter ended June 30,
2004, the adoption of which did not have an impact on the calculation of
earnings per share of the Company. In July 2004, the EITF issued a draft
abstract for EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt
on Diluted Earnings per Share" ("EITF 04-08"). EITF 04-08 reflects the Task
Force's tentative conclusion that contingently convertible debt should be
included in diluted earnings per share computations regardless of whether the
market price trigger has been met. If adopted, the consensus reached by the Task
Force in this Issue will be effective for reporting periods ending after
December 15, 2004. Prior period earnings per share amounts presented for
comparative purposes would be required to be restated to conform to this
consensus and the Company would be required to include the shares issuable upon
the conversion of the Notes in the diluted earnings per share computation for
all periods during which the Notes are outstanding. Currently, there would be no
effect of this proposed statement on our financial position and results of
operations.
In September 2004, the EITF delayed the effective date for the
recognition and measurement guidance previously discussed under EITF Issue No.
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. Currently, there would be no
effect of this proposed statement on its financial position and results of
operations.
S) Product Warranties
The Company warrants its products against defects in design,
materials and workmanship generally for six months to a year. Other warranties
from our vendors which are incorporated in our products are passed on to the
customer at the completion of the sale. Provision for estimated warranty costs
is made in the period in which such costs become probable. Historically, Eagle
has not incurred any material warranty costs and, accordingly, Eagle has not
accrued for these costs at August 31, 2004 and 2003. Eagle provides for the
estimated cost of product warranties at the time it recognizes revenue. Eagle
engages in product quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers; however, ongoing product
failure rates, material usage and service delivery costs incurred in correcting
a product failure, as well as specific product class failures outside of Eagle's
baseline experience, affect the estimated warranty obligation. If actual product
failure rates, material usage or service delivery costs differ from estimates,
revisions to the estimated warranty liability would be required.
T) Beneficial Conversion Values:
Beneficial conversion values are calculated at the difference
between the conversion price and the fair value of the common stock into which
the debt is convertible, multiplied by the number of shares into which the debt
is convertible. The beneficial conversion value is charged to interest expense
because the debt is convertible at the date of issuance. The value is limited to
the total proceeds received.
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.
F-29
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
============ ============
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.
F-30
Components of intangible assets are as follows, in thousands:
August 31,
-------------------------
2004 2003
------- -------
Goodwill $ 5,596 $ 5,596
Accumulated Amortization (1,501) (1,501)
------- -------
$ 4,095 $ 4,095
------- -------
Contract Rights $28,691 $28,691
Accumulated Amortization (7,013) (5,101)
------- -------
$21,678 $23,590
------- -------
Customer Relationships $ 7,189 $ 7,189
Accumulated Amortization (1,758) (1,277)
------- -------
$ 5,431 $ 5,912
------- -------
Other Intangible Assets $ 6,839 $ 6,839
Accumulated Amortization (2,805) (2,473)
------- -------
$ 4,034 $ 4,366
------- -------
NOTE 5 - BUSINESS COMBINATIONS:
Effective January 1, 2002, the Company acquired DSS Security, Inc., and
Contact Wireless in a business combination accounted for as a purchase. DSS
Security, Inc., provides security monitoring to business and residential
customers. Contact Wireless sells and services mobile phones and one- and
two-way messaging devices. The Company paid cash of $450,000 and issued a
short-term note payable of $130,000 for the assets of Contact Wireless for a
total purchase price of $580,000. Additionally, the Company acquired DSS
Security, Inc., for $2,002,147. In this transaction, the Company issued
2,002,147 shares of its common stock with a guaranteed value of $1 per share.
The Company allocated $51,595 to the fair value of the property and equipment
and $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 $ -- $ --
====== =======
F-31
NOTE 7 - CAPITAL LEASE OBLIGATIONS:
The Company historically has leased equipment from various companies
under capital leases. The assets and liabilities under the capital lease are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are depreciated over the estimated useful
life with the value and depreciation being included as a component of Property
and Equipment under operating equipment. As of August 31, 2004, there was no
equipment under capital lease.
NOTE 8 - LINES OF CREDIT:
On July 16, 2002, the Company entered into a $20,000,000 line of credit
with Cornell Capital Partners, LP (CCP). The Company has not drawn on the line
of credit and currently has no plans to do so. One of the issues in the
litigation between CCP and the Company (see Legal Proceedings below) is whether
the Company owes CCP a commitment fee for this line of credit. Cornell contends
that the Company owes $395,000 of stock; the Company denies the liability.
NOTE 9 - CONVERTIBLE DEBENTURES:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). During the three
month period ended November 30, 2003, the principal balance of the debenture was
repaid, although a lawsuit remains outstanding - see Legal Proceedings. On July
16, 2002, the Company entered into a $20,000,000 line of credit with Cornell
Capital Partners, LP (CCP). The Company has not drawn on the line of credit and
currently has no plans to do so. One of the issues in the litigation between CCP
and the Company (see Legal Proceedings below) is whether the Company owes CCP a
commitment fee for this line of credit. Cornell contends that the Company owes
$395,000 of stock; the Company denies the liability. The Company is currently
negotiating to settle this contested liability and the cancellation of the line
of credit.
During 2001, the Company acquired ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. Link Two
Communications, Inc., is a subsidiary of ClearWorks. Link Two entered an
agreement with The Tail Wind Fund Ltd., under which Tail Wind purchased from
Link Two a 2% convertible note in the initial amount of $5,000,000. As a result
of the acquisition, Eagle the parent of Link Two, has guaranteed the Link Two
notes issued to Tail Wind and allowed Tail Wind to convert the above mentioned
debt into Eagle common stock and warrants at various rates. During fiscal 2002
Eagle made payments of $500,000 in cash and converted $2,500,000 into common
stock. During fiscal 2003, Tail Wind converted $405,169 into common stock and
during fiscal 2004 Eagle made the final payment of $1,594,831 in cash.
Between November 25, 2002, and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45 accredited
investors. The securities consisted of $25,000, 12% five-year bonds. The bonds
are due and payable upon maturity at the end of the five-year period. Interest
on the bonds is payable at the rate of 12% per annum, and is payable
semiannually. The bondholder may require the Company to convert the bond
(including any unpaid interest) into shares of the Company's common stock at any
time 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-32
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
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 $ -- $ -- $ --
==============================================
F-33
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
==========
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.
F-34
NOTE 14 - CAPITALIZATION ACTIVITIES:
Between November 25, 2002 and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45 accredited
investors. The securities consisted of $25,000, 12% five-year bonds. The bonds
are due and payable upon maturity at the end of the five-year period. Interest
on the bonds is payable at the rate of 12% per annum, and is payable
semiannually. The bondholder may require the Company to convert the bond
(including any unpaid interest) into shares of the Company's common stock at any
time during the first year but not thereafter. The conversion rates vary from
$0.16 to $0.34 per share. The Company may redeem the bonds at any time after the
first year.
Between October 30, 2003 and November 5, 2003, the Company sold
approximately $4.1 million of convertible debt securities to 36 accredited
investors. The securities consisted of $25,000, 12% five-year bonds. The bonds
are due and payable upon maturity at the end of the five-year period. Interest
on the bonds is payable at the rate of 12% per annum, and is payable
semiannually. The bondholder may require the Company to convert the bond
(including any unpaid interest) into shares of the Company's common stock at any
time during the first year but not thereafter. The conversion rates vary from
$0.50 to $0.75 per share. The Company may redeem the bonds at any time after the
first year.
Eagle Broadband, Inc. ("Eagle" or "Company") entered into a Securities
Purchase Agreement dated June 2, 2004, (the "Agreement") with four accredited
investors (collectively, the "Investors"), pursuant to which Eagle agreed to
sell, and the Investors agreed to purchase, debentures in the principle amount
of $4,888,400 bearing interest at the rate of 8% per annum, maturing in June
2007 ("Debentures"), convertible into an aggregate of 5,360,088 shares of Eagle
common stock, par value $.001 per share (the "Common Stock"), together with
five-year warrants to purchase an aggregate of 1,340,022 shares of Common Stock
at an exercise price of $1.265 per share (the " Warrants") ( the funding of the
Debentures and issuance of the Warrants referred to as the "Financing").
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.
F-35
Period Ending
August 31, Amount
- ---------------- ----------------
2005 $ 299,801
2006 299,801
2007 306,180
2008 325,316
2009 243,987
----------------
Total $ 1,475,085
================
LEGAL PROCEEDINGS
In July 2003, Eagle became a defendant in Cornell Capital
Partners, L.P. vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860
(KSH), in the United States District Court for the District of New Jersey. The
suit presents claims for breach of contract, state and federal securities fraud
and negligent misrepresentation. Plaintiff has also alleged that Eagle has
defaulted on a convertible debenture for failing to timely register the shares
of common stock underlying the convertible debenture and is seeking to
accelerate the maturity date of the debenture. In November 2003, the principal
balance of the debenture was repaid, although the suit remains outstanding.
Cornell claims damages in excess of $1,000,000. The Company denies the claims
and intends to vigorously defend this lawsuit and the claims against it. Eagle
has asserted counterclaims against Cornell for fraud and breach of contract in
the amount of $2,000,000. The Company has not accrued any expenses against this
lawsuit, as the outcome cannot be predicted at this time.
In December 2000, ClearWorks became a defendant in State Of
Florida Department Of Environmental Protection vs. Reco Tricote, Inc. And
Southeast Tire Recycling, Inc. A/K/A Clearwork.net, Inc.; In the Circuit Court
of The Tenth Judicial Circuit In And For Polk County, Florida. The Florida EPA
sued ClearWorks.net presenting claims for recovery costs and penalties for a
waste tire processing facility. The suit seeks recovery of costs and penalties
in a sum in excess of $1,000,000, attorneys' fees and cost of court. ClearWorks
denies the claims and intends to vigorously contest all claims in this case and
to enforce its indemnification rights against the principals of Southeast Tire
Recycling. The Company has not accrued any expenses against this lawsuit, as the
outcome cannot be predicted at this time.
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 June 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, Inc., 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-36
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 Shareholders (39,005) 185,046 (0.21)
Effect of Dilutive Securities Warrants -- -- --
Diluted EPS:
---------- --------------- --------------
Income Available to Common Shareholders (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 Shareholders (36,501) 95,465 (0.38)
Effect of Dilutive Securities Warrants -- -- --
Diluted EPS:
---------- --------------- -------------
Income Available to Common Shareholders $ (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 shareholders adopted
a stock option plan under which 400,000 shares of the Company's common stock
have been reserved for issuance. Since that time, the Board of Directors have
amended the July 1996, employee stock option plan under which 1,000,000 shares
of Common Stock have been reserved for issuance. Under this plan, as of August
31, 2004, a total of 346,002 options have been issued to various employees.
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees." Accordingly, since employee stock options are granted at market
price on the date of grant, no compensation expense is recognized. However, SFAS
123 requires presentation of pro forma net income and earnings per share as if
the Company had accounted for its employee stock options granted under the fair
value method of that statement. The weighted average fair value of the
individual options issued and granted during 2003 is estimated as $0.58 on the
date of grant. Management estimates the average fair value for options granted
during 2003, to be comparable to those granted in 2002. The impact on net loss
is minimal; therefore, the pro forma disclosure requirements prescribed by SFAS
123 are not significant to the Company. The fair values were determined using a
Black-Scholes option-pricing model with the following assumptions:
August 31,
----------------------
2004 2003
--------- --------
U. S. Federal Statutory Tax Rate 0.00% 0.00%
U.S. Valuation Difference 0.91% 0.91%
Effective U. S. Tax Rate 4.00% 4.00%
Foreign Tax Valuation 4.00% 7.00%
Effective Tax Rate 5 years 5 years
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a straight-line
basis over the vesting period of the stock option or purchase right was as
follows for the years ended August 31, 2004, 2003 and 2002:
F-37
(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 forma $ (0.21) $ (0.38) $ (1.20)
Diluted net loss per share:
As reported $ (0.21) $ (0.38) $ (1.20)
Pro forma $ (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
========= ========= ========== ======== ========== ==========
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.
F-38
NOTE 21 - MAJOR CUSTOMER:
The Company had gross revenues of $12,490,000 and $11,593,000 for the
year ended August 31, 2004 and 2003, respectively. The fiscal year ended August
31, 2004, included $3,103,937 or 25% of the fiscal year total sales from
Sweetwater Security Capital, LLC, that were executed with the Company's
security-monitoring service subsidiary, DSS Security, Inc. Also during this
period, Eagle Broadband Inc, had sales of $3,806,806 or 30% sales to a major
customer for shipment of IP set-top boxes and related equipment. There were no
other customers individually that represented greater than 10% of the revenues
in the fiscal year ended August 31, 2003.
NOTE 22 - INDUSTRY SEGMENTS:
The Company has seven business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into five reportable segments (as described below) since
the long-term financial performance of these reportable segments is affected by
similar economic conditions.
Eagle Broadband, Inc., (Eagle) is a supplier of broadband and
telecommunications equipment with related software and broadband products.
(Including Eagle Wireless International, Inc.; BroadbandMagic; and Etoolz, Inc.,
for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in providing
professional data and voice cable and fiber optic installations through project
management services on a nationwide basis for multiple site-cabling
installations for end users and re-sellers.
ClearWorks Communications, Inc., (EBS) provides solutions to consumers
by implementing technology both within the residential community and home. This
is accomplished through the installation of fiber optic backbones to deliver
voice, video and data solutions directly to consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber
optic and copper based structured wiring solutions and audio and visual
equipment to single-family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT maintain a national market
presence.
Link Two Communications, Inc., (Link II) is in the development and
delivery of one- and two-way messaging systems.
DSS Security, Inc., (DSS) is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt related
expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services
provider and reseller.
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)
=============== ============== ============
F-39
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of its
operating segments based on income before net interest expense, income taxes,
depreciation and amortization expense, accounting changes and non-recurring
items.
NOTE 23 - QUARTERLY FINANCIAL DATA.
Nov. 30 Feb. 28 May 31 Aug. 31
--------- -------- -------- -----------
Year Ended August 31,
2004
Revenues $ 2,397 $ 3,744 $ 5,091 $ 1,258
Net Earnings (Loss) (8,461) (9,398) (4,373) (16,773)
Basic Loss per Share (0.05) (0.05) (0.02) (0.08)
Diluted Loss per Share (0.05) (0.05) (0.02) (0.08)
2003
Revenues 4,618 3,063 1,947 1,965
Net Earnings (Loss) (1,533) (2,012) (3,833) (29,123)
Basic Loss per Share (0.02) (0.03) (0.05) (0.28)
Diluted Loss per Share (0.02) (0.03) (0.05) (0.28)
NOTE 24 - SUPPLEMENTAL NON-CASH DISCLOSURES:
During the fiscal year ended August 31, 2004, the Company issued
$3,000,000 of convertible debt which was retired through the issuance of
2,000,000 shares of Series A Preferred Stock which was concurrently converted to
29,500,000 shares of the Company's common stock. Additionally, the Company
received proceeds of $3,912,000 from the sale of convertible bonds.
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-40
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.
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.
F-41
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-42
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended August 31, 2004, 2003, and 2002 (amounts in thousands):
Additions
Balance at Charged to Balance at
Beginning of Expenses/ End of
Description Period Revenues Deductions Period
- -------------------------- --------- --------- ---------- ----------
Allowance for Doubtful
Accounts:
2004 $ 412 $ 2,643 $ (659) $ 2,396
2003 242 2,177 (2,007) 412
2002 480 125 (363) 242
F-43
Up To
30,843,750
Shares Common Stock
EAGLE BROADBAND, INC.
PROSPECTUS
October __, 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
II-1
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."
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 30,000,000 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 $4,050,000. The Company paid a
placement agent a cash commission of 7% of the gross dollar proceeds of the sale
of the 30,000,000 shares, and on October ____, 2005, issued such agent a
five-year warrant to purchase 843,750 shares of Company common stock at an
exercise price per share of $0.24 per share.
In August 2005, the Company issued 1,157,895 shares of common stock to
an individual pursuant to a settlement agreement to resolve a litigation claim.
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, David Weisman, and three non-executive
officers, Billie Mize, John Nagel and Jon Hayden, to satisfy obligations in the
aggregate amount of $2,086,251 for contingent guaranty obligations with respect
to unexercised options and notes 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
Capital, LLC to resolve a debt of $6,190,760. 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.
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 investors
promissory notes and preferred stock convertible into 29,500,000 shares of
common stock for $3,000,000. 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.
II-2
In September 2003, the Company issued 2,490,466 shares of common stock
to satisfy Company debts owed to various third parties in the aggregate amount
of $328,650. 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits filed as part of this registration
statement:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- -------------- -------------------------
Exhibit 3.1(a) Articles of Incorporation.
Exhibit 3.1(b) Articles of Amendment to the Articles of
Incorporation.
Exhibit 3.1(c) Articles of Amendment to the Articles of
Incorporation.
Exhibit 3.1(d) Articles of Amendment to the Articles of
Incorporation.
Exhibit 3.1(e) Articles of Amendment to the Articles of
Incorporation.
Exhibit 3.1(f) Articles of Amendment to the Articles of
Incorporation.
Exhibit 3.2 Amended and Restated 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 of Brewer & Pritchard, P.C.
II-3
Exhibit 10.1 Securities Purchase Agreement between Eagle
Broadband, Inc., and the Purchasers identified
on the signature pages thereto, dated August
2005 (Incorporated by reference to Exhibit 10.1
of Form 8-K, filed August 18, 2005).
Exhibit 10.2 Registration Rights Agreement between Eagle
Broadband, Inc., and the Purchasers identified
on the signature pages thereto (Incorporated by
reference to Exhibit 10.2 of Form 8-K, filed
August 18, 2005).
Exhibit 10.3 Securities Purchase Agreement between Eagle
Broadband, Inc., and the Purchasers identified
on the signature pages thereto (Incorporated by
reference to Exhibit 10.1 of Form 8-K, filed
February 18, 2005).
Exhibit 10.4 1996 Incentive Stock Option Plan (Incorporated
by reference to Exhibit 10.1 of Form S-8, file
no. 333-72645).
Exhibit 10.5 2002 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of Form S-8, file no.
333-97901).
Exhibit 10.6 2003 Stock Incentive and Compensation Plan
(Incorporated by reference to Exhibit 10.1 of
Form S-8, file no. 333-103829).
Exhibit 10.7 2003 Stock Incentive and Compensation Plan, as
Amended (Incorporated by reference to Exhibit
10.1 of Form S-8, file no. 333-105074).
Exhibit 10.8 2003 Stock Incentive and Compensation Plan, as
Amended (Incorporated by reference to Exhibit
10.1 of Form S-8, file no. 333-109339).
Exhibit 10.9 2004 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 of Form S-8, file no.
333-110309).
Exhibit 10.10 2005 Employee Stock Option Plan.
Exhibit 10.11 Employment Agreement between Eagle Broadband,
Inc. and Eric Blachno (Incorporated by reference
to Exhibit 10.13 of Form 10-K/A for the fiscal
year ended August 31, 2004, filed December 29,
2004).
Exhibit 10.12 Amended and Restated Employment Agreement
between Eagle Broadband, Inc. and David Micek.
Exhibit 21.1 List of Subsidiaries
Exhibit 23.1* Consent of Lopez, Blevins, Bork and Associates,
LLP
Exhibit 23.2 Consent of Brewer & Pritchard, P.C. (included in
Exhibit 5.1)
* To be filed by amendment
(b) The following is a list of financial statement schedules required by
Regulation S-X and Item 11(e) of Form S-1:
Schedule No. Identification of Schedule Page
II Valuation and Qualifying Accounts F-43
II-4
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-5
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 October 24, 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 and Director Oct. 24, 2005
David Micek (Principal Executive Officer)
/s/ Eric Blachno
- ---------------------- Chief Financial Officer Oct. 24, 2005
Eric Blachno (Principal Financial and Accounting Officer)
/s/ Robert Bach
- ---------------------- Director Oct. 24, 2005
Robert Bach
/s/ H. Dean Cubley
- ---------------------- Director Oct. 24, 2005
H. Dean Cubley
/s/ Glenn A. Goerke
- ---------------------- Director Oct. 24, 2005
Glenn A. Goerke
/s/ C. J. Reinhartsen
- ---------------------- Director Oct. 24, 2005
C. J. Reinhartsen
/s/ Lorne E. Persons, Jr.
- ---------------------- Director Oct. 24, 2005
Lorne E. Persons
/s/ James D. Yarbrough
- ---------------------- Director Oct. 24, 2005
James D. Yarbrough
EXHIBIT INDEX
Exhibit
Number Description
- --------- ----------------------------------------------------------------
3.1(a) Articles of Incorporation.
3.1(b) Articles of Amendment to the Articles of Incorporation.
3.1(c) Articles of Amendment to the Articles of Incorporation.
3.1(d) Articles of Amendment to the Articles of Incorporation.
3.1(e) Articles of Amendment to the Articles of Incorporation.
3.1(f) Articles of Amendment to the Articles of Incorporation.
3.2 Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2 of Form 10-KSB for the fiscal year ended August 31,
2001, filed November 16, 2001).
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4 of Form S-3, file no. 333-111160).
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).
4.3 Q-Series Bond Agreement (Incorporated by reference to Exhibit
10.3 of Form S-3, file no. 333-106074).
4.4 Addendum to Q-Series Bond Agreement (Incorporated by reference
to Exhibit 10.4 of Form S-3, file no. 333-106074).
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)
5.1 Opinion of Brewer & Pritchard, P.C.
10.1 Securities Purchase Agreement between Eagle Broadband, Inc., and
the Purchasers identified on the signature pages thereto, dated
August 2005 (Incorporated by reference to Exhibit 10.1 of Form
8-K, filed August 18, 2005).
10.2 Registration Rights Agreement between Eagle Broadband, Inc., and
the Purchasers identified on the signature pages thereto
(Incorporated by reference to Exhibit 10.2 of Form 8-K, filed
August 18, 2005).
10.3 Securities Purchase Agreement between Eagle Broadband, Inc., and
the Purchasers identified on the signature pages thereto
(Incorporated by reference to Exhibit 10.1 of Form 8-K, filed
February 18, 2005).
10.4 1996 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.1 of Form S-8, file no. 333-72645).
10.5 2002 Stock Incentive Plan (Incorporated by reference to Exhibit
10.1 of Form S-8, file no. 333-97901).
10.6 2003 Stock Incentive and Compensation Plan (Incorporated by
reference to Exhibit 10.1 of Form S-8, file no. 333-103829).
10.7 2003 Stock Incentive and Compensation Plan, as Amended
(Incorporated by reference to Exhibit 10.1 of Form S-8, file no.
333-105074).
10.8 2003 Stock Incentive and Compensation Plan, as Amended
(Incorporated by reference to Exhibit 10.1 of Form S-8, file no.
333-109339).
10.9 2004 Stock Incentive Plan (Incorporated by reference to Exhibit
10.1 of Form S-8, file no. 333-110309).
10.10 2005 Employee Stock Option Plan
10.11 Employment Agreement between Eagle Broadband, Inc. and Eric
Blachno (Incorporated by reference to Exhibit 10.13 of Form
10-K/A for the fiscal year ended August 31, 2004, filed December
29, 2004).
10.12 Amended and Restated Employment Agreement between Eagle
Broadband, Inc. and David Micek.
21.1 List of Subsidiaries
23.1* Consent of Lopez, Blevins, Bork and Associates, LLP
23.2 Consent of Brewer & Pritchard, P.C. (included in Exhibit 5.1)
* To be filed by amendment