U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-23163
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0494995
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)
101 Courageous Drive
League City Texas 77573-3925
(Address of principal executive offices, including zip code)
(281) 538-6000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 15, 2003, there were 125,931,965 shares of common stock outstanding.
1
EAGLE BROADBAND, INC. AND SUBSIDIARIES
INDEX
Part 1 - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at May 31, 2003, and August 31, 2002 3
Consolidated Statements of Earnings for the Three and Nine
Months Ended May 31, 2003 and 2002 4
Consolidated Statements of Changes in Shareholders' Equity for the
Nine Months Ended May 31, 2003, and Twelve Months Ended
August 31, 2002 5
Consolidated Statements of Cash Flows for the Nine Months Ended
May 31, 2003 and 2002 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures
Part 2 - Other Information
Item 1. Legal Proceedings 30
Item 2. Recent Sales of Unregistered Securities or Changes
in Securities and Use of Proceeds. 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
2
ASSETS
May 31, August 31,
2003 2002
(Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 2,284 $ 3,421
Accounts Receivable 3,494 5,028
Inventories 7,183 6,059
Prepaid Expenses 1,137 358
------------- ---------------
Total Current Assets 14,098 14,866
Property and Equipment:
Operating Equipment 40,805 34,509
Less: Accumulated Depreciation (4,554) (3,661)
------------- --------------
Total Property and Equipment 36,251 30,848
Other Assets:
Deferred Costs 334 334
Goodwill 7,916 7,916
Other Intangible Assets 80,109 79,900
Less: Accumulated Amortization (4,278) (4,278)
Other Assets 424 397
------------- --------------
Total Other Assets 84,505 84,269
------------- --------------
Total Assets $ 134,854 $ 129,983
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 5,838 $ 4,757
Accrued Expenses 2,925 2,873
Notes Payable 4,933 3,653
Capital Lease Obligations 80 48
------------- --------------
Total Current Liabilities 13,776 11,331
Long-Term Liabilities:
Capital Lease Obligations
(net of current maturities) 11 70
Long-Term Debt 1,202
------------- --------------
Total Long-Term Liabilities 11 1,272
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares --- ---
Common Stock - $.001 par value
Authorized 200,000,000 shares
Issued and Outstanding at May 31, 2003, and
August 31, 2002, 110,085,000 and 73,051,000, respectively 110 73
Paid in Capital 167,707 158,731
Retained Earnings (46,750) (41,424)
------------- --------------
Total Shareholders' Equity 121,067 117,380
------------- --------------
Total Liabilities and Shareholders' Equity $ 134,854 $ 129,983
============ ==============
See accompanying notes to consolidated financial statements.
3
For the Three Months ended May 31 For the Nine Months ended May 31
(Unaudited)
2003 2002 2003 2002
---- ---- ---- ----
Net sales:
Structured wiring 598 1,988 3,198 5,580
Broadband services 657 348 2,219 914
Products 527 3,278 2,722 14,491
Other 65 871 1,389 1,641
------------- ------------ ------------- ------------
Total sales 1,847 6,485 9,528 22,626
------------- ------------ ------------- ------------
Costs of Goods Sold:
Materials other than Cable and Wire 0 0 0 1
Direct Labor and Related Costs 245 670 993 2,108
Products and Integration Service 605 2,167 2,256 11,589
Structured Wiring Labor and Materials 326 691 984 1,387
Broadband Services Costs 152 266 682 641
Depreciation and Amortization 114 124 342 279
Other Manufacturing Costs 102 155 141
------------- ------------ ------------- ------------
Total Costs of Goods Sold 1,442 4,020 5,412 16,146
------------- ------------ ------------- ------------
Gross Profit 405 2,465 4,116 6,480
------------- ------------ ------------- ------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 413 2,442 3,276 6,791
Advertising and Promotion 21 118 77 381
Depreciation and Amortization 213 1,243 603 3,727
Other Support Costs 2,606 1,194 4,776 4,004
Research and Development 125 85 184 349
------------- ------------ ------------- ------------
Total Operating Expenses 3,378 5,082 8,916 15,252
------------- ------------ ------------- ------------
Earnings/(Loss) From Operations Before
Other Revenues/(Expenses), Income Taxes (2,973) (2,617) (4,800) (8,772)
and Other Comprehensive Income
Other Revenues/(Expenses):
Interest Income - net 52 49 69 324
Other Income --- --- --- ---
------------- ------------ ------------- ------------
Total Other Revenues 52 49 69 324
Earnings/(Loss) Before Minority Interest
in (2,921) (2,568) (4,731) (8,448)
Affiliate, Income Taxes and Other
Comprehensive Income
------------- ------------ ------------- ------------
Provisions For Income Taxes --- --- --- ---
------------- ------------ ------------- ------------
Net Earnings/(Loss) (2,921) (2,568) (4,731) (8,448)
------------- ------------ ------------- ------------
Other Comprehensive Income, Net of Tax
Unrealized Holding Gain/(Loss) 346 208 (595) (66)
------------- ------------ ------------- ------------
Other Comprehensive Income/(Loss) $ (2,575) $ (2,360) $ (5,326) $ (8,514)
============= ============ ============= ============
Net Earnings/(Loss) per Common Share:
Basic $ (0.04) $ (0.04) $ (0.06) $ (0.13)
Diluted $ (0.04) $ (0.04) $ (0.06) $ (0.13)
Comprehensive Income/(Loss) $ (0.04) $ (0.04) $ (0.06) $ (0.13)
See accompanying notes to consolidated
financial statements.
4
Additional Total
Common Stock Preferred Paid In Retained Shareholders'
Shares Value Stock Capital Earnings Equity
Total Shareholders' Equity
As of August 31, 2001 60,264 60 --- 153,426 (4,358) 149,128
-------- ------- ------------ --------- --------- ---------
Net Loss for Twelve Months
Ended August 31, 2002 --- --- --- --- (36,787) (36,787)
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 Gain --- --- --- --- (279) (279)
------- ------- --------- ----------- -------- --------
Total Shareholders' Equity
As of August 31, 2002 73,051 $ 73 $ --- $ 158,731 $ (41,424) $ 117,380
======== ====== ======== ========== ========= ========
Net Loss for Nine Months
Ended May 31, 2003 --- --- --- --- (4,731) (4,731)
New Stock Issued to Shareholders:
For Services and Compensation 6,258 6 --- 1,409 --- 1,415
For Property and Other Assets 14,938 16 --- 3,032 --- 3,048
For Retirement of
Debt and Liabilities 15,838 15 --- 4,903 --- 4,918
Syndication Costs --- --- --- (368) --- (368)
Unrealized Holding Gain --- --- --- --- (595) (595)
------- ------- --------- ---------- -------- --------
Total Shareholders' Equity
As of May 31, 2003 110,085 $ 110 $ --- $ 167,707 $ (46,750) $ 121,067
======== ====== ======== ========== ========== ========
See accompanying notes to consolidated financial statements.
5
For the Nine Months ended May 31,
2003 2002
---- ----
(Unaudited)
Cash Flows From Operating Activities
Net Earning/(Loss) $ (5,326)$ (8,514)
Adjustments to Reconcile Net Earnings to Net Cash
Used By Operating Activities:
Interest for Conversion Value 91 ---
Depreciation and Amortization 945 4,006
Stock Issued for Interest Expense 266 92
Allowance for Doubtful Accounts 102 138
Stock Issued for Services Rendered 1,060 243
(Increase)/Decrease in Accounts Receivable 1,432 1,411
(Increase)/Decrease in Inventories (1,124) 2,785
(Increase)/Decrease in Prepaid Expenses (777) 51
Increase/(Decrease) in Accounts Payable 1,284 (506)
Increase/(Decrease) in Accrued Expenses 1,456 (1,575)
----- -------
Total Adjustment 4,735 6,645
Net Cash Used by Operating Activities (591) (1,869)
Cash Flows From Investing Activities:
(Purchase)/Disposal of Property and Equipment (3,486) (13,633)
(Increase)/Decrease in Acquisition Costs --- 6
(Increase)/Decrease in Deferred Costs (52) ---
(Increase)/Decrease in Syndication Costs (368) (9)
(Increase)/Decrease in Other Assets --- (234)
------- -----
Net Cash Used by Investing Activities (3,906) (13,870)
Cash Flows From Financing Activities:
Increase/(Decrease) in Notes Payable & Long-Term Debt, net 3,360 552
Increase/(Decrease) in Capital Leases --- (56)
Increase/(Decrease) in Line of Credit --- (834)
Treasury Stock --- (783)
------- -----
Net Cash Provided By Financing Activities 3,360 (1,121)
----- -------
Net Increase/(Decrease) in Cash (1,137) (16,860)
Cash At The Beginning Of Period 3,421 23,843
----- ------
Cash At The End Of Period $2,284 $ 6,983
====== =======
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for Interest $ 286 $ 96
Supplemental non-cash investing activities (See Note 4) and changes in
shareholder's equity:
See accompanying notes to consolidated financial statements.
6
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 worldwide supplier of broadband products and
services, providing telecommunications equipment with related
software, broadband products, and fiber and cable as used by service
providers in the paging and other personal communications markets. The
Company designs, manufactures, markets and services its products under
the Eagle Broadband, Inc., and BroadbandMagic names. These products
include transmitters, receivers, controllers, software, convergent
set-top boxes, fiber, cable, and other equipment used in commercial
and personal communications systems and radio and telephone systems.
Additionally, the Company provides cable television, telephone,
security, Internet connectivity, and related services under a bundled
digital services package, commonly known as "BDS," through single
source billing. Also provided is last mile cable and fiber
installation services as well as comprehensive IT products and
services. Manufacturing of the Eagle Wireless product line of wireless
infrastructure products was licensed to a third party company during
this reporting period.
A) Consolidation
At May 31, 2003, the Company's subsidiaries are: Atlantic Pacific
Communications, Inc. (APC); Etoolz, Inc. (ETI); Eagle Wireless
International, Inc. (EWI); Eagle Broadband Services, Inc.;
ClearWorks.net, Inc. (.NET); ClearWorks Communications, Inc. (COMM);
ClearWorks Home Systems, Inc. (HSI); Contact Wireless, Inc. (CWI); DSS
Security, Inc. (DSS); United Computing Group, Inc. (UCG); and Link Two
Communications, Inc. (LINK II). The consolidated financial statements
include the accounts of the Company and its subsidiaries. All
significant inter-company transactions and balances have been
eliminated in consolidation.
B) Cash and Cash Equivalents
The Company has $2,284,000 and $3,421,000 invested in interest bearing
accounts and marketable securities (Note 9) at May 31, 2003, and
August 31, 2002, 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
Head-End 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.
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:
May 31, August 31,
2003 2002
--------- ----------
Raw Materials $ 4,620 $ 4,515
Work in Process 2,359 1,262
Finished Goods 204 282
-------- ------
$ 7,183 $ 6,059
======== ======
7
E) Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; Eagle Broadband
Services, 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 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. Manufacturing of the Eagle Wireless product line of
wireless infrastructure products was licensed to a third party company
during this reporting period.
BroadbandMagic
BroadbandMagic designs, manufactures and markets the convergent
set-top boxes. Products are sent principally to commercial customers
for a pre-sale test period of ninety days. Upon the end of the
pre-sale test period, the customer either returns the product or
accepts the product, at which time the Company recognizes the revenue.
Eagle Broadband, Inc.
Eagle Broadband 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 distributors or sales
agents provide the companies with manufacturing business sales leads.
The transactions from these distributors and agents are subject to the
Company'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.
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.
Eagle Broadband Services, Inc.
Eagle Broadband Services, Inc. assumed the operations of ClearWorks
Communications, Inc. as of September 1, 2002, and 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.
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.
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 earned.
Etoolz, Inc.
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to
independent third parties.
Link Two Communications, Inc.
Link Two Communications, Inc., provides customers with one- and
two-way messaging systems. The revenue from these services is
recognized as it is earned from the customer.
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.
8
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.
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 as earned.
F) Research and Development Costs
For the three months ended May 31, 2003, and 2002, the Company
performed research and development activities for internal projects
related to its convergent set-top boxes as well as its multi-media
entertainment centers and Orb'Phone Exchange. Research and development
costs of $125,000 and $85,000 were expensed for the three months ended
May 31, 2003 and 2002, respectively. Research and development costs of
$184,000 and $349,000 were expensed for the nine months ended May 31,
2003 and 2002, respectively.
No research and development services were performed for outside
parties for the three and nine months ended May 31, 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:
May 31, August 31,
2003 2002
----------- -----------
Weighted Average Number of Common
Shares Outstanding Including
Primary Common Stock Equivalents 83,117 64,004
Fully Dilutive Common Stock Equivalents 83,271 64,158
I) Impairment of Long Lived and Identifiable Intangible Assets
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.
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 is
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 contract rights. Other intangible assets
consist of patents and licenses, which are being amortized using the
straight-line method over ten (10) years and twenty (20) years,
respectively.
9
K) Advertising Costs
Advertising costs have been capitalized and amortized on the basis of
contractual agreements entered into by the Company. These contracts are
amortized over the life of the individual contracts or expensed in the
period incurred. For the nine months ended May 31, 2003, the Company
has expensed $77,000 where $0 in costs has been deferred.
For the nine months ended, May 31, 2002, the Company expensed $381,000
whereas $0 in costs has been deferred.
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
In May 1993, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. This statement considers debt
securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that
the company does not have the positive intent and ability to hold to
maturity and all marketable equity securities are classified as
available-for-sale or trading securities and are carried at fair market
value. Unrealized holding gains and losses on securities classified as
trading are reported in earnings. Unrealized holding gains and losses
on securities classified as available-for-sale were previously carried
as a separate component of stockholders' equity. SFAS No. 115 as
amended by Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income."
Management determines the appropriate classification of marketable
equity and debt securities at the time of purchase and re-evaluates
such designation as of each balance sheet date.
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 nine months ended May 31,
2003 and 2002, the Company recorded an unrealized loss of $595,000 and
$66,000, respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
three and nine months ended May 31, 2003 to facilitate comparison to
the three and six months ended May 31, 2002.
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support costs for the nine months ending May 31, 2003 and 2002,
are as follows, in thousands:
10
2003 2002
--------- --------
Advertising/Conventions $ --- $ ---
Auto Related 43 119
Bad Debt 101 138
Contract Labor 1,312 257
Delivery/Postage 80 67
Fees 278 91
Interest 552 598
Office & Insurance 127 214
Other 158 196
Professional 424 453
Rent 709 1,099
Repairs and Maintenance 46 82
Travel 217 ---
Taxes 72 87
Telephone & Utilities 657 603
------ --------
Total $ 4,776 $ 4,004
====== ========
R) Recent Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets, which is effective for the Company in the
first quarter of fiscal year 2003 and for purchase business
combinations consummated after June 30, 2001. These standards change
the accounting for business combinations by, among other things,
eliminating pooling-of-interests accounting and requiring a change in
the method of expensing goodwill and certain intangible assets with an
indefinite useful life. Goodwill and intangible assets deemed to have
an indefinite useful life will be subject to an annual review for
impairment rather than periodic amortization. Finite lived intangibles
will continue to be amortized over their useful lives.
At May 31, 2003, the Company evaluated its existing goodwill and
intangible assets acquired in purchase business combinations completed
prior to July 1, 2001. The carrying amount of recognized intangible
assets that meet the criteria for recognition apart from goodwill or
any identifiable intangible assets that are presented with goodwill and
other intangible assets for financial reporting purposes have been
reclassified and reported separately from goodwill. The unamortized
balance of any negative goodwill will be recognized as the cumulative
effect of a change in accounting principle. The Company has also tested
goodwill for impairment at May 31, 2003, using the two-step process
prescribed in SFAS No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of impairment, if
any.
In October 2001, the FASB issued SFAS No. 144, Impairment of Long-Lived
Assets, SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 144 retains the requirements of SFAS No. 121 to
(a) recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flow and
(b) measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. SFAS No. 144 removes goodwill
from its scope. SFAS No. 144 is applicable to financial statements
issued for fiscal years beginning after December 15, 2001. The adoption
of SFAS No. 144 had a material impact on the financial position of the
Company.
Amortization expense related to goodwill and intangibles was
approximately $0 and $3,008,000 for the nine months ended May 31, 2003,
and 2002, respectively.
NOTE 2 - Accounts Receivable:
--------------------
Accounts receivable consist of the following, in thousands:
May 31, August 31,
2003 2002
----------- ------------
Accounts Receivable $ 3,778 $ 5,270
Allowance for Doubtful Accounts (284) (242)
----------- ------------
Net Accounts Receivable $ 3,494 $ 5,028
=========== ============
11
NOTE 3 - Property, Plant & Equipment and Intangible Assets:
-------------------------------------------------
Components of property, plant & equipment are as follows, in thousands:
May 31, August 31,
2003 2002
----------- ------------
Automobile $ 392 $ 392
Head-End Facility and Fiber Infrastructure 30,353 27,164
Furniture & Fixtures 578 634
Leasehold Improvements 272 216
Office Equipment 1,028 1,015
Property, Manufacturing & Equipment 8,182 5,088
----------- ------------
Total Property, Plant & Equipment $ 40,805 $ 34,509
Less: Accumulated Depreciation (4,554) (3,661)
----------- ------------
Net Property, Plant & Equipment $ 36,251 $ 30,848
=========== ============
Components of intangible assets are as follows, in thousands:
May 31, August 31,
2003 2002
----------- -----------
Goodwill $ 7,916 $ 7,916
Contract Rights 74,513 74,513
Licenses, Permits, Deferred Costs & Other Assets 6,354 6,118
----------- ------------
Total Intangible Assets $ 88,783 $ 88,547
Less: Accumulated Amortization (4,278) (4,278)
----------- ------------
Net Intangible Assets $ 84,505 $ 84,269
=========== ============
NOTE 4 - Business Combinations:
----------------------
Effective January 1, 2002, the Company acquired the assets of 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 to intangible assets. The intangible
assets include, among other things, approximately 4,000 current
customers being billed monthly for wireless messaging services. 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 May 31, 2003, the Company has an accrual for $921,000 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 5 - Notes Payable:
--------------
The following table lists the Company's note obligations as of May 31,
2003, and August 31, 2002, in thousands:
Annual
Interest May 31, August 31,
Rate Due Date 2003 2002
---------------- --------------- -------- ---------
Vehicles Various Various $ 21 $ 27
Convertible Debentures 2%-6% Demand 4,226 4,000
Other Various Various 686 828
-------- ---------
Total notes payable $ 4,933 $ 4,855
Less current portion 4,933 3,653
-------- ---------
Total long-term debt $ - $ 1,202
======== =========
NOTE 6 - Capital Lease Obligations:
-------------------------
The Company leases equipment from various companies under capital
leases with varying expiration dates. 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.
12
Minimum future lease payment under capital lease as of May 31, 2003,
and August 31, 2002, for each of the next five years and in the
aggregate are (in thousands):
May 31, 2003 August 31, 2002
------------- --------------
Total minimum lease payments $ 101 $ 128
Less : Amount representing interest 10 10
------------- ----------
Present value of net minimum lease payments 91 118
Less: Current maturity capital lease 80 48
obligation
------------- ----------
Long-term capital lease obligation 11 70
============= ==========
Future obligations under the lease terms are as follows (in thousands):
Period Ended Amount
---------
2004 89
2005 12
---------
Total $ 101
=========
NOTE 7 - Line of Credit:
---------------
During the Company's first fiscal quarter ended November 30, 2002, APC
entered into a new credit facility with SWBT to provide working capital
and fund ongoing operations. The new credit facility is a purchase and
sale agreement against accounts receivable, provides for borrowings up
to $1,000,000 based on eligible accounts receivable and is secured by
APC accounts receivable and guaranteed by Eagle Broadband, Inc. As of
May 31, 2003, APC reflected as a note payable $320,469 to reflect the
gross sale of $377,022 in accounts receivable to SWBT less $56,553 of
reserves held by SWBT against such purchases.
The Company, through its subsidiary United Computing Group, Inc. (UCG),
entered into a credit facility in July 2002 with Southwest Bank of
Texas (SWBT) to provide working capital, repay the prior credit line
and fund ongoing operations. The new credit facility is a purchase and
sale agreement against accounts receivable, provides for borrowings up
to $3,000,000 based on eligible accounts receivable and is secured by
UCG accounts receivable and guaranteed by Eagle Broadband, Inc. As of
May 31, 2003, UCG reflected as a note payable $129,955 to reflect the
gross sale of $152,888 in accounts receivable to SWBT less $22,933 of
reserves held by SWBT against such purchases.
NOTE 8 - Convertible Debentures:
- --------------------------------
During October 2002, the Company entered into a $3,000,000 convertible debenture
agreement with Cornell Capital Partners, LP (CCP). At the Company's option, the
entire principal amount and all accrued interest shall be either (a) paid to CCP
on the third year anniversary from the date of the debenture or (b) converted.
The three-year debenture bears interest at 5% and is repayable in stock or cash.
The method of repayment is determined by the Company. The significant conversion
terms are that CCP is entitled, at its option, to convert, and sell on the same
day, at any time and from time to time subject to the terms of the agreement,
until payment in full of the debenture, all or any part of the principal amount
of the debenture, plus accrued interest, into shares of the Company's common
stock at the price per share equal to either (a) $1.00 or (b) 90% of the average
of the four lowest closing trade prices of the common stock, for the five
trading days immediately preceding the conversion date. CCP shall not be
entitled to convert the debenture for a period of 180 days from the date of the
debenture. After 180 days, if the conversion price is below $1.00, CCP shall be
entitled, at its option, to convert, and sell on the same day up to $50,000
every five business days. After 12 months from the date of the debenture, if the
conversion price is below $1.00, CCP shall be entitled, at its option, to
convert and sell on the same day up to $75,000 every five business days.
Notwithstanding the foregoing, after 180 days from the date of the debenture,
CCP shall be entitled, at its option, to convert and sell on the same day
without restriction if the conversion price is above $1.00. Under the terms of
this agreement Eagle received $2,500,000 in cash and a $500,000 secured
convertible debenture from Celerity Systems, Inc.(CCI) bearing interest at ten
percent due September 19, 2007. Eagle is entitled, at its option, to convert,
and sell on the same day, at any time, until payment in full of this debenture,
all or any part of the principal amount of the debenture, plus accrued interest,
into CCI shares. The conversion price is equal to either $.06 or eighty-seven
and one-half percent (87.5%) of the lowest bid price of the common stock for the
preceding five trading days. At May 31, 2003, Eagle has converted $75,000 of the
bond into 65,598,524 shares of CCI. Eagle intends to liquidate the bond into
cash through the conversion process and immediate sale of CCI shares. This
investment is recorded at a cost of $500,000 until the debenture or converted
shares are sold. At May 31, 2003, the underlying value of this debenture is
approximately $850,000. Subsequent to May 31, 2003, Eagle has submitted
additional bond conversion notices of $75,000 which will convert into 80,486,740
shares of CCI common stock. Eagle is in discussions with CCP to amend certain
provisions of the debenture as it relates to shares currently issued and stock
payments for accrued interest.
13
At August 31, 2002, $2,000,000 in principal plus $600,000 of accrued
interest and fees was outstanding to Candlelight Investors, LLC. In
November 2002, the Company issued 3,000,000 shares of stock to settle
this debt.
During 2001, the Company acquired ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. Link Two
Communications, Inc., is a subsidiary of ClearWorks, and as a result of
the acquisition, is now a secondary subsidiary of Eagle. Link Two
entered an agreement with The Tail Wind Fund Ltd., under which Tail
Wind purchased from Link Two a 2% convertible note in the initial
amount of $5,000,000 (the "First Note"), and Link Two has the ability
to require Tail Wind to purchase additional convertible notes in the
amount of $4,000,000 (the "Second Note") and $3,000,000 (the "Third
Note"). The conversion terms of the convertible debentures become
effective after ninety days of the initial closing date. The note
balance will be due in fiscal 2003. Link Two may require Tail Wind to
purchase the Second Note if: (a) the price of Eagle's common stock is
above $5.00 per share for 20 consecutive trading days during calendar
2001, and other various terms are met. Link Two may require Tail Wind
to purchase the Third Note if the price of Eagle's common stock is
above $8.00 per share for 20 consecutive trading days during calendar
2001, and the agreed upon covenants are met. In conjunction with the
issuance of the First Note, Link Two issued Tail Wind a warrant, and if
Link Two chooses to issue the Second and Third Notes, it will issue
Tail Wind additional warrants.
As a result of the 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 at a rate
of $1.79 per share. The agreement also permits Tail Wind to convert the
Link Two warrant into Eagle warrants to purchase shares of our common
stock. Tail Wind would have a warrant to purchase 1,396,648 shares of
our common stock at an exercise price of $1.83 per share, exercisable
between August 2002 and September 2006. If Link Two requires Tail Wind
to purchase the Second and Third Note, the additional warrants it
issues will also be convertible into shares of our common stock. The
number of shares that the additional warrants may be converted into
will depend on the price of our common stock, and cannot be determined
at this time. However, the exercise price of the additional warrants
may not be less than $1.83 per share.
The Company has agreed to pre-pay the notes at the rate of a minimum of
$250,000 per month and a maximum of $500,000 per month. The pre-payment
may be in cash or in shares of our common stock at the rate of 90% of
the average of the two lowest market prices of our common stock for the
applicable month. However, the Company may not issue shares of our
common stock for pre-payment purposes if the total number of shares
exceeds the aggregate trading volume of our common stock for the twelve
trading days preceding the date of payment, in which case we must pay
the difference in cash. As the number of shares to be issued for
pre-payment purposes is dependent on the price and trading volume of
our common stock, there is no way to determine the number of shares
that may be issued at this time. Eagle has filed a registration
statement for the potential conversion shares for the note and warrants
exercise. As of May 31, 2002, the Company has paid to Tail Wind
$2,000,000 towards the reduction of debt. The current financial
statements have recorded as current maturity for this debt, $2,000,000.
As part of the above agreements, the Company entered into a
registration rights agreement with Tail Wind, and the Company filed a
registration statement, in order to permit Tail Wind to resell to the
public the shares of common stock that it may acquire upon any
conversion of the First Note and exercise of the warrant associated
with the First Note. The Company have registered for resale 5,000,000
shares of common stock, which represents 122% of the shares to be
issued upon conversion of the First Note at $1.79 per share and 100% of
the exercise of the warrant associated with the First Note at $1.83 per
share. The additional shares registered is to account for the shares
that may be issued for pre-payment as described in the above paragraph,
or upon the exercise of the anti-dilution rights provided for in the
following paragraph. If Link Two chooses to require Tail Wind to
purchase the Second and Third Notes, we will file another registration
statement covering the resale of the shares that may be issued on
conversion of the Second and Third Notes and upon the exercise of the
warrants associated with the Second and Third Notes.
In our agreement with Tail Wind, the Company granted Tail Wind
anti-dilution rights. If the Company sells common stock or securities
exercisable for or convertible into shares of our common stock for less
than $1.79 per share, the Company must reduce the conversion price of
the notes and the exercise price of the warrants to the price the
Company sold the common stock or the exercise or conversion price the
Company issued the convertible securities. The Company has agreed to
register for resale any additional shares that will be issued pursuant
to these anti-dilution rights on a future registration statement,
unless such additional shares are available in the current registration
statement. In addition, under the terms of the agreement, without Tail
Wind's approval, the Company may not issue Tail Wind shares of common
stock such that Tail Wind would ever be considered to beneficially own
greater than 4.99% of the outstanding common stock. In connection with
this transaction, Link Two Communications, Inc., has paid Ladenburg
Thalman and Co. a fee of 5% of the purchase price of the notes.
Additionally, the Company has valued the conversion feature of the
convertible debenture and warrants at $1,648,045 and $1,270,995,
respectively; the amounts were determined by using the Black-Scholes
calculation. These amounts have been capitalized as part of the cost of
developing the wireless infrastructure. At August 31, 2002, Eagle and
Tail Wind were renegotiating the terms of this note. During the
renegotiation period, the Company has agreed to pay interest until all
new terms and conditions have been resolved.
14
NOTE 9 - Marketable Securities:
----------------------
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 May
31, 2003 and August 31, 2001, all of the Company's marketable equity
securities are classified as available-for-sale; with the intent to
dispose of them within the next year.
At May 31, 2003, the securities had an original basis of $1,250,000
determined by multiplying the number of shares acquired by the fair
market value of those shares. At the May 31, 2003 balance sheet date,
the fair market value of these securities was $1,163,000; determined by
multiplying the number of shares held by the fair market value of those
shares at the balance sheet date. The difference between the cost and
fair market value represents an unrealized holding gain (loss) and is
included below current earnings in "Other Comprehensive Income."
NOTE 10 - 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.
A) The effective tax rate for the Company is reconcilable to statutory
tax rates as follows:
May 31, August 31,
2003 2002
---- ----
% %
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 apply the U.S. Federal
income tax rate of 34% to pretax income from continuing operations as a
result of the following: (in thousands)
May 28, August 31,
2003 2002
--------- ---------
Computed expected tax benefit $ (333) $ (12,508)
Increase in valuation allowance 333 12,508
--------- ---------
$ --- $ ---
========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May
31, 2003, and August 31, 2002, are presented below, in thousands, and
include the balances of the acquired company ClearWorks.Net.
May 31, August 31,
2003 2002
--------- ---------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ --- $ ---
Net operating loss carry-forwards 25,656 24,047
Less valuation allowance (25,656) (24,047)
--------- ---------
Net deferred tax assets --- ---
Deferred tax liabilities:
Differences in depreciation --- ---
--------- ---------
Net deferred tax liabilities $ --- $ ---
========= =========
The valuation allowance for deferred tax assets of May 31, 2003, and
August 31, 2002, was $24,663,000 and $24,047,000, respectively. At May
31, 2003, the Company has net operating loss carry-forwards of
$36,403,000, which are available to offset future federal taxable
income, if any, with expirations from 2020 to 2021.
15
NOTE 11 - Issuance of Common Stock:
-------------------------
For the nine months ended May 31, 2003, the Company issued shares of
common stock. The following table summarizes the shares of common stock
issued, in thousands.
Shares Outstanding August 31, 2002 73,051
----------------
Shares issued for Retirement of Debt and Liabilities 15,838
Shares issued for Services, Compensation, Property and 21,196
Other Assets
----------------
Shares Outstanding May 31, 2003 110,085
================
NOTE 12 - Preferred Stock, Stock Options and Warrants:
-------------------------------------------
In July 1996, the Board of Directors and majority shareholders adopted
an employee stock option plan under which 400,000 shares of Common
Stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for issuance.
As of May 31, 2003, options to purchase 447,264 are outstanding and
952,736 are available to be issued.
The Company has issued (or has acquired through its acquisitions) and
has outstanding the following warrants which have not yet been
exercised at May 31, 2003:
50,000 stock purchase options issued to L.A. Delmonico
Consulting, Inc., expiring April 4, 2005 The warrants are to
purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $1.04
per share. The shares of common stock underlying these
warrants were registered for resale on August 9, 2002, under
the Securities Act of 1933. As of May 31, 2003, none of these
options have been exercised
50,000 stock purchase warrants issued to Weed & Co. L.P.
expiring December 10, 2002. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $1.55 per share. The
shares of common stock underlying the warrants were registered
for resale on August 3, 2000, under the Securities Act of
1933. As of May 31, 2003, 25,000 warrants have been exercised
resulting in cash proceeds of $38,750 and the balance of the
warrants expired unexercised.
20,000 stock purchase warrants issued to Kason, Inc., expiring
October 7, 2002. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $1.75 per share. The shares of
common stock underlying these warrants were registered for
resale on November 30, 2000, under the Securities Act of 1933.
As of May 31, 2003, 6,234 warrants have been exercised
resulting cash proceeds of $10,910 and the balance of warrants
expired unexercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring January 1, 2004. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $2.00 per share. The
shares of common stock underlying these have not been
registered as of November 30, 2002, under the Securities Act
of 1933. As of May 31, 2003, none of these warrants have been
exercised.
41,667 stock purchase warrants issued to Peter Miles expiring
July 20, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $2.00 per share. The shares of
common stock underlying these have not been registered as of
November 30, 2002, under the Securities Act of 1933. As of May
31, 2003, none of these warrants have been exercised.
41,667 stock purchase warrants issued to Peter Miles expiring
July 20, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $2.25 per share. The shares of
common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring April 1, 2004. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $1.10 per share. The
shares of common stock underlying these warrants were
registered for resale on August 9, 2002, under the Securities
Act of 1933. As of May 31, 2003, none of these warrants have
been exercised.
58,333 stock purchase warrants issued to Peter Miles expiring
July 20, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $3.00 per share. The shares of
common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
16
50,000 stock purchase warrants issued to Weed & Co. L.P.
expiring June 10, 2002. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $3.00 per share. The
shares of common stock underlying these warrants were
registered for resale on August 3, 2000, under the Securities
Act of 1933. As May 31, 2003, all of these warrants have
expired unexercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring July 1, 2004. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $1.35 per share. The shares
of common stock underlying these warrants were registered for
resale on August 9, 2002, under the Securities Act of 1933. As
of May 31, 2003, none of these warrants have been exercised.
40,000 stock purchase warrants issued to Rachel McClere 1998
Trust expiring April 24, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $3.75 per share.
The shares of common stock underlying these warrants have not
been registered or issued, under the Securities Act of 1933.
As May 31, 2003, all of these warrants have expired
unexercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring October 1, 2004. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $0.69 per share. The
shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2003. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $3.75 per share. The
shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As May
31, 2003, all of these warrants have expired unexercised.
232,000 stock purchase warrants issued to Shannon D. McLeroy
expiring April 24, 2003. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $3.75 per share. The
shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As May
31, 2003, all of these warrants have expired unexercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring January 1, 2005. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $0.61 per share. The
shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
176,000 stock purchase warrants issued to Tech Technologies
Services, LLC expiring April 24, 2003. The warrants are to
purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $3.75
per share. The shares of common stock underlying these
warrants have not been registered or issued, under the
Securities Act of 1933. As May 31, 2003, all of these warrants
have expired unexercised.
328,000 stock purchase warrants issued to Candlelight
Investors, LLC. Expiration of warrants is as follows: 104,000
on December 31, 2002, 112,000 on February 15, 2003 and the
remaining 112,000 on April 19, 2003. The warrants are to
purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $3.95
per share. The shares of common stock underlying these
warrants have not been registered or issued, under the
Securities Act of 1933. As May 31, 2003, all of these warrants
have expired unexercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring October 1, 2003. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $4.50 per share. The
shares of common stock underlying these warrants were
registered for resale on August 3, 2000, under the Securities
Act of 1933. As of May 31, 2003, none of these warrants have
been exercised.
100,000 stock purchase warrants issued to National Financial
Communications Corp. expiring June 2003. The warrants are to
purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $7.00
per share. As of May 31, 2003, the underlying shares of common
stock have not yet been registered for resale under the
Securities Act of 1933.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring April 1, 2005. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $0.38 per share. The
shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
17
250,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $7.49 per share.
As of May 31, 2003, the underlying shares of common stock have
not yet been registered for resale under the Securities Act of
1933.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring July 1, 2003. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $7.50 per share. The shares
of common stock underlying these warrants were registered for
resale on August 3, 2000, under the Securities Act of 1933. As
May 31, 2003, none of these warrants have been exercised.
192,000 stock purchase warrants issued to Tech Technologies
Services, LLC, expiring April 24, 2008. The warrants are to
purchase fully paid and non-assessable shares of the common
stock, par value $.001 per share at a purchase price of $7.50
per share. The shares of common stock underlying these
warrants have not been registered or issued, under the
Securities Act of 1933. As of May 31, 2003, none of these
warrants have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring July 1, 2005. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001
per share at a purchase price of $0.39 per share. The shares
of common stock underlying these warrants were not registered
for resale under the Securities Act of 1933. As of May 31,
2003, none of these warrants have been exercised.
240,000 stock purchase warrants issued to Shannon D. McLeroy
expiring April 24, 2008. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $7.50 per share. The
shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As May
31, 2003, none of these warrants have been registered, issued
or exercised.
168,000 stock purchase warrants issued to Michael T. McClere
expiring April 24, 2008. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $7.50 per share. The
shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As May
31, 2003, none of these warrants have been registered, issued
or exercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring October 1, 2005. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $0.35 per share. The
shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
40,000 stock purchase warrants issued to Rachel McClere 1998
Trust expiring April 24, 2008. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $7.50 per share.
The shares of common stock underlying these warrants have not
been registered or issued, under the Securities Act of 1933.
As of May 31, 2003, none of these warrants have been
registered, issued or exercised.
160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2008. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $7.50 per share. The
shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As May
31, 2003, none of these warrants have been registered, issued
or exercised.
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring January 1, 2006. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $0.28 per share. The
shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
50,000 stock purchase warrants issued to Weed & Co. L.P.
expiring June 10, 2003. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $9.68 per share. The
shares of common stock underlying these warrants were
registered for resale on August 3, 2000, under the Securities
Act of 1933. As of May 31, 2003, none of these warrants have
been exercised.
250,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $10.00 per share.
These warrants are not exercisable until and unless the
closing price of Common Stock at any time during the exercise
period reaches $10.00 per share. As of May 31, 2003, the
underlying shares of common stock have not yet been registered
for resale under the Securities Act of 1933. As of May 31,
2003, none of these warrants have been exercised.
18
25,000 stock purchase warrants issued to Synchton, Inc.,
expiring April 1, 2006. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $0.26 per share. The
shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
250,000 stock purchase warrants issued to Hampton-Porter
Investment Bankers LLC expiring June 27, 2003. The warrants
are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share at a purchase price of
$12.00 per share. The shares of common stock underlying these
warrants were registered for resale on August 3, 2000, under
the Securities Act of 1933. As of May 31, 2003, none of these
warrants have been exercised.
1,230,000 stock purchase warrants issued to Eagle Broadband
employees under incentive clauses of employment contracts
expiring September 1, 2008. The warrants are to purchase fully
paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $0.41 per share. The
shares of common stock underlying these warrants were not
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
350,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $14.00 per share.
These warrants, however, are not exercisable until and unless
the closing price of the Common Stock at any time during the
exercise period reaches $14.00 per share. As of May 31, 2003,
the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933. As of
May 31, 2003, none of these warrants have been exercised.
250,000 stock purchase warrants issued to Hampton-Porter
Investment Bankers LLC expiring June 27, 2003. The warrants
are to purchase fully paid and non-assessable shares of the
common stock, par value $.001 per share at a purchase price of
$18.00 per share. The shares of common stock underlying these
warrants were registered for resale on August 3, 2000, under
the Securities Act of 1933. As of May 31, 2003, none of these
warrants have been exercised.
150,000 stock purchase warrants issued to Sands Brothers &
Co., LTD. expiring July 13, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par
value $.001 per share at a purchase price of $25.00 per share.
These warrants, however, are not exercisable until and unless
the closing price of the Common Stock at any time during the
exercise period reaches $25.00 per share. As of May 31, 2003,
the underlying shares of common stock have not yet been
registered for resale under the Securities Act of 1933. . As
of May 31, 2003, none of these warrants have been exercised.
1,000,000 stock purchase warrants issued to MJK., expiring
February 27, 2006. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $0.18 per share. The shares of
common stock underlying these warrants have been registered
for resale under the Securities Act of 1933. As of May 31,
2003, none of these warrants have been exercised.
The warrants outstanding are segregated into four categories
(exercisable, non-exercisable, non-registered, and expired).
19
Warrants Issued Warrants Exercisable Warrants
Class of May 31, May 31, Non- Non-
Warrants 2003 2002 2003 2002 Exercisable Registered
- ----------------------------------------------- --------------------------------------------------
0.18 1,000,000 - 1,000,000 - - -
0.26 25,000 - - - - 25,000
0.28 25,000 - - - - 25,000
0.35 25,000 25,000 25,000 - - 25,000
0.38 25,000 25,000 25,000 - - 25,000
0.39 25,000 25,000 25,000 - - 25,000
0.41 1,230,000 - 1,230,000 - - 1,230,000
0.61 25,000 25,000 25,000 - - 25,000
0.69 25,000 25,000 25,000 - - 25,000
1.04 50,000 50,000 50,000 - 50,000 50,000
1.10 25,000 25,000 25,000 25,000 - -
1.35 25,000 25,000 25,000 25,000 - -
1.55 Cancelled 50,000 - 25,000 - -
1.75 45,000 45,000 - 13,766 - -
2.00 25,000 25,000 25,000 25,000 - -
2.00 41,667 41,667 41,667 41,667 - -
2.25 41,667 41,667 41,667 41,667 - -
3.00 Cancelled 50,000 - 50,000 - -
3.00 58,333 58,333 58,333 58,333 - -
3.75 Cancelled 40,000 - 40,000 - -
3.75 Cancelled 160,000 - 160,000 - -
3.75 Cancelled 232,000 - 232,000 - -
3.75 Cancelled 176,000 - 176,000 - -
3.95 Cancelled 328,000 - 328,000 - -
4.50 25,000 25,000 25,000 - - -
7.00 100,000 100,000 100,000 - - 100,000
7.49 250,000 250,000 250,000 - - 250,000
7.50 25,000 25,000 25,000 25,000 - -
7.50 192,000 192,000 192,000 192,000 - 192,000
7.50 240,000 240,000 240,000 240,000 - 240,000
7.50 168,000 168,000 168,000 168,000 - 168,000
7.50 200,000 200,000 200,000 200,000 - 200,000
9.68 Cancelled 50,000 - 50,000 - -
10.00 250,000 275,000 250,000 25,000 - 250,000
12.00 250,000 250,000 250,000 250,000 - -
14.00 350,000 350,000 350,000 - - 350,000
18.00 250,000 250,000 250,000 250,000 - -
25.00 150,000 150,000 150,000 250,000 - 150,000
2.00 - Expired * - - - -
ESOP 447,264 * 437,264 * 437,264 322,125 - -
ESOP - - - - - -
-------------------- ----------- --------------------------------------------------
5,613,931 4,434,931 5,508,931 3,213,558 50,000 3,355,000
================================= ==================================================
An asterisk (*) denotes warrants which would have an anti-dilutive effect if
currently used to calculate earnings per share for the months ended February
28, 2003 and 2002, respectively.
NOTE 13 - Capitalization Activities:
--------------------------
The Company is currently offering up to $10,000,000 in "Units", each
Unit consisting of a $25,000, 12% five-year Q-series bond ("Bonds") to
a limited number of Accredited Investors. 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 Eagle 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. Eagle may redeem the Bonds at
any time after the first year but not before. The issuance of the
Bonds, or any share of the common stock to be issued in payment of the
Bonds, has not been registered or approved by the Securities and
Exchange Commission ("SEC") or any state securities commission nor has
the SEC or any state securities commission passed on the accuracy of
the Confidential Private Placement Memorandum under which these Bonds
are being offered. Furthermore, the Bonds may not be assigned,
transferred, sold, or otherwise hypothecated. Any representation to the
contrary is a criminal offense. The Confidential Private Placement
Memorandum does not constitute any offer in any jurisdiction in which
an offer is not authorized. The Bonds, and any share of common stock to
be issued in payment of the Bonds, are "restricted securities" as that
term is defined in Rule 144 of the Securities Act of 1933, and may not
be sold or otherwise disposed of except in transactions that are
subsequently registered under applicable federal and state securities
laws, or in transactions exempt from such registration.
20
NOTE 14 - Risk Factors:
-------------
For the nine months ended May 31, 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 industry. Approximately,
seventy-six percent of the Company's revenues and receivables have been
created solely in the state of Texas, zero percent have been created in
the international market, and the approximate twenty-four percent
remainder have been created relatively evenly over the rest of the
nation during the nine months ended May 31, 2003. Whereas approximately
seventy-six percent of the Company's revenues and receivables have been
created solely in the state of Texas, one percent have been created in
the international market, and the approximate twenty-three percent
remainder has been created relatively evenly over the rest of the
nation for the nine months ended May 31, 2002. Through the normal
course of business, the Company generally does not require its
customers to post any collateral.
Although the Company had previously concentrated its efforts in the
wireless infrastructure industry and has since expanded into the fiber,
cable and broadband markets for the nine months ended May 31, 2003 and
2002, it is management's belief that the Company's diversification into
other products and services reduces its credit and economic risk
exposures in the technology and manufacturing sectors.
NOTE 15 - 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% and 1% at May 31, 2003 and 2002, respectively.
NOTE 16 - Commitments and Contingent Liabilities:
---------------------------------------
Leases
The Company leases its primary office space in League City, Texas, for
$36,352 per month with Gateway Park Joint Venture. This non-cancelable
lease commenced on January 1, 2002, and expires on May 31, 2004.
For the nine months ending May 31, 2003 and 2002, rental expenses of
approximately $709,000 and $1,099,000 respectively, were incurred.
The Company also leases office space in Oxnard, California with Tiger
Ventura County, L.P. This three-year non-cancelable lease commenced
August 1, 2000,and expires July 31, 2004. Under the terms of the lease,
monthly payments will be $2,130 for the first twelve months whereas the
monthly payments will increase by 3.5% at the beginning of both the
second and third years.
The Company's wholly owned subsidiary, Atlantic Pacific, leases office
space in Houston, Texas, with Houston Industrial Partners, Ltd. This
non-cancelable lease expires December 2005. The monthly payments are
$6,345 per month.
Atlantic Pacific also leases office space in Chicago, Illinois with
Lasalle Bank National Association. This twenty-nine month lease
commenced on October 1, 2000,and expires February 28, 2003. Under the
terms of the lease, monthly payments will be $2,220 for the first
twelve months whereas they will increase by 3.2% at the thirteenth and
twenty-fifth months.
Atlantic Pacific also leased office space in Houston, Texas, with W L
and Deborah Miller in the amount of $4,500 per month. This
non-cancelable lease expired September 2002 and maintained a five-year
renewal option. The renewal option was waived in September 2002.
The Company's subsidiary, ClearWorks.net, Inc., leases office space in
Houston, Texas, with 2000 North Loop. This non-cancelable lease expires
on April 30, 2003. The monthly payments will increase from $7,306 to
$11,091 on April 30, 2000,and again on May 1, 2002, to $11,217 for the
remaining twelve months.
Also, ClearWorks.net, Inc., leases office space in Phoenix, Arizona
with Airpark Holdings. This non-cancelable lease expires on July 31,
2003. The monthly payments are variable.
Also, ClearWorks.net, Inc., leases office space in San Antonio, Texas,
with Wade Holdings. This is a month-to-month lease. The monthly
payments are $3,300.
21
The Company's subsidiary, United Computing Group, leases office space
in Houston, Texas, with Eastgroup Properties, L.P. This non-cancelable
lease expires on August 31, 2003. The current monthly payments are
$8,570. UCG previously leased office space with Techdyne, Inc., that
expired August 31, 2002.
The Company's subsidiary, ClearWorks Home Systems, leases office space
in Austin, Texas, with Ditto Communications Technologies, Inc. This
non-cancelable lease commenced on September 1, 2002, and expires
January 31, 2005. The monthly payments are $5,876.
The Company's subsidiary, United Computing Group, leases office space
in Dallas, Texas, with AMB Property II, LP. This non-cancelable lease
commenced on June 19, 2000, expired on June 30, 2002, and was extended
to expire on June 30, 2003. The monthly payments are $2,794.
Future obligations under the non-cancelable lease terms are:
Period Ending (000's)
August 31, Amount
------------- --------------
2003 $ 850
2004 571
2005 146
2006 36
--------------
Total $1,603
Legal Proceedings
ClearWorks is a defendant in State Of Florida Department Of
Environmental Protection Vs. Reco Tricote, Inc. And Southeast Tire
Recycling, Inc., A/K/A ClearWorks.net, Inc.; In The Circuit Court Of
The Tenth Judicial Circuit In And For Polk County, Florida. On December
13, 2000, Florida EPA sued the Company 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. The Company immediately filed a
Motion to Strike Portions of the Complaint/or for a More Definite
Statement and a Motion to Dismiss. The Florida EPA has amended the
petition. 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. No discovery
has been conducted in this lawsuit.
ClearWorks was a defendant in Candlelight Investors LLC v.
ClearWorks.net, Inc., Eagle Wireless International, Inc., and H. Dean
Cubley. Subsequent to August 31, 2002, Eagle settled the lawsuit with
Candlelight Investors LLC for $2,600,000.
ClearWorks is a defendant in Kaufman Bros., LLP v. ClearWorks.net,
Inc., and Eagle Wireless, Inc., (Index No. 600939/01), which is
pending in the Supreme Court of the State of New York, County of New
York. In this action, plaintiff alleges that defendants have breached
an agreement with ClearWorks to pay plaintiff a fee for financial
advice and services allegedly rendered by plaintiff. The complaint
seeks compensatory damages of $4,000,000, plus attorneys' fees and
costs. This suit is scheduled for trial on September 16, 2003. The
defendants deny the allegations of the complaint.
On December 17, 2001, Kevan Casey and Tommy Allen sued ClearWorks.net,
Inc., ClearWorks Integration, Inc., and Eagle Wireless International,
Inc., (the petition was later amended to include the following
defendants: Michael T. McClere, H. Dean Cubley, Link Two
Communications, Inc., A. L. Clifford, Jim Futer and McManus & Company,
P.C. d/b/a E. McManus & Co., P.L.L.C.) for breach of contract and
other related matters in Cause No. 2001-64056; In the 281st Judicial
District Court of Harris County, Texas. The suit seeks recovery of
damages in excess of $10,000,000 plus attorney's fees and court costs.
The court granted ClearWorks a temporary restraining order, wherein
the Court enforced a covenant against competition provision found in
the individual's employment contracts with the Company. Such order
restrains these individuals from competing against ClearWorks for a
period of six months. This lawsuit is currently in the discovery
phase. The defendants deny the allegations of the complaint. This
lawsuit is scheduled for the two week trial docket beginning December
1, 2003.
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.
Other Commitments
On July 13, 2000, the Company entered into an agreement with Sands
Brothers & Co., LTD. (Sands) whereby Sands will perform financial
advisory services and assist the Company with mergers and acquisitions,
corporate finances and other related matters for a period of two years.
As compensation for these services, the Company will immediately pay
Sands $50,000 and issue them 10,000 shares of the Company's common
stock. As an additional inducement, the Company has issued Sands
1,000,000 stock purchase warrants to be exercisable for a three-year
period expiring July 13, 2003. These warrants shall vest and be
exercisable as follows: 25% of such warrants shall vest upon execution
of this agreement and shall have an exercise price per share of $7.49;
an additional 25% shall vest when and if the closing price of the
common stock at any time during the exercise period reaches $10.00 per
share and shall be exercisable at $10.00 per share; an additional 35%
shall vest when and if the closing price of the common stock at any
time during the exercise period reaches $14.00 per share and shall be
exercisable at $14.00 per share; an additional 15% shall vest at any
time during the exercise period when the closing price of the common
stock at any time reaches $25.00 per share and shall be exercisable at
$25.00 per share. Additionally, Sands shall receive further
compensation for other activities such as fund raising based upon a
percent of all monies raised. This agreement expired July 13, 2002.
22
NOTE 17 - 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, 2003
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------------
Net Loss $(4,731)
Basic EPS:
Income available to
common stockholders $(4,731) 83,117 $(0.06)
Effect of Dilutive Securities
Warrants 154
-------- ----------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(4,731) 83,271 $(0.06)
======== ============= ======
For the nine months ended May 31, 2002
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- ------------
Net Income $ (8,448)
Basic EPS:
Income available to
common stockholders (8,448) 63,455 $(0.13)
Effect of Dilutive Securities
Warrants 154
-------- ----------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $ (8,448) 63,609 $(0.13)
========= ====== ======
For the nine months ended May 31, 2003 and 2002, anti-dilutive securities
existed (see Note 12).
NOTE 18 - Employee Stock Option Plan:
---------------------------
In July 1996, the Board of Directors and majority stockholders adopted
a stock option plan under which 400,000 shares of the Company's common
stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for issuance.
Under this plan, as of May 31, 2003 and 2002, 416,474 and 416,474
warrants have been issued to various employees. Of these outstanding
warrants, 0 and 0 were exercised for the months ended May 31, 2003 and
2002, respectively. Additionally, 10,350 warrants have expired as of
May 31, 2003.
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
granted during 2000 is estimated as $0.58 on the date of grant. A
meaningful weighted average fair value of the individual options
granted during 2000 using the method prescribed by SFAS 123 could not
be determined due to the volatility of the share price during the
measurement period. Management estimates the average fair value for
options granted during 2001 to be comparable to those granted in 2000.
The impact on net income 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:
23
2003 2002
---------- --------
Dividend Yield 0.00% 0.00%
Volatility 0.91 0.91
Risk-free Interest Rate 7.00% 7.00%
Expected Life 5 5
NOTE 19 - Retirement Plans:
-----------------
During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its
participants. This plan maintains that the Company will match up to 3%
of each participant's contribution. The Company temporarily suspended
all activity associated with its 401(k) plan in February 2003. The
Company resumed employee contributions and loan repayments for
applicable participants in July 2003 and has elected not to match
participant's contributions at this time.
NOTE 20 - Major Customer:
---------------
The Company had gross revenues of $1,847,000 and $6,485,000 for the
three months ended May 31, 2003 and 2002, respectively. The following
parties individually represent a greater than ten percent of these
revenues.
May 31, 2003 May 31, 2002
Customer Amount Percentage Amount Percentage
------ ---------- ------ ----------
Customer A $ 0.00% $ 0.00%
Customer B $ 0.00% $ 0.00%
Customer C $ 0.00% $ 713,000 11.00%
During the nine months ended May 31, 2002, the Company had outstanding
accounts receivable with Enron Corporation and many of its'
subsidiaries. The exposure from the bankruptcy totals approximately
$205,000, which has been accounted for through allowance of doubtful
accounts in these financials.
NOTE 21 - Industry Segments:
------------------
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". At August 31,
2001, the Company's seven business units have separate management teams
and infrastructures that offer different products and services. The
business units have been aggregated into two 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 worldwide 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. As of
September 1, 2002, Atlantic Pacific Communications, Inc. has assumed
the operations of ClearWorks Home Systems, Inc. and for purposes of
segment reporting previously reported segment HSI has been combined
with APC for comparative purposes.
ClearWorks Communications, Inc., (COMM) provides solutions to consumers
by implementing technology both within the residential community and
home. This is accomplished through the installation of fiber optic
backbones to deliver voice, video and data solutions directly to
consumers.
Eagle Broadband Services, Inc.
Eagle Broadband Services, Inc., initiated its delivery of Bundled
Digital Services to business and residential customers as of September
1, 2002. 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.
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. As of
September 1, 2002, Atlantic Pacific Communications, Inc. has assumed
the operations of ClearWorks Home Systems, Inc. and for purposes of
segment reporting previously reported segment HSI has been combined
with APC for comparative purposes.
24
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT maintains a national
market presence.
Link Two Communications, Inc., (Link II) is in the development and
delivery of one and two way messaging systems.
DSS Security, Inc., is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt related
expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services
provider and reseller.
For the nine month period ending May 31, 2003
(in thousands) Eagle APC EBS UCG Link II .Net Contact DSS Elim. Consol.
---------- --------- -------- --------- --------- -------- --------- -------- ---------- ----------
Revenue 1,612 3,456 1,502 1,938 --- --- 303 717 --- 9,528
Segment Profit/(Loss) (3,168) (882) (538) (821) (116) --- (164) 363 --- (5,326)
Total Assets 162,536 11,950 35,472 310 17,725 54,403 926 858 (149,326) 134,854
Capital Expenditures --- 11 6,070 1 86 --- 72 56 --- 6,296
Dep. And Amort. 166 169 431 62 --- --- 86 31 --- 945
For the nine month period ending May 31, 2002
(in thousands) Eagle APC EBS UCG Link II .Net Contact DSS Elim. Consol.
---------- --------- -------- --------- --------- -------- --------- -------- ---------- ----------
Revenue 478 6,277 1,811 13,582 39 --- 288 226 (75) 22,626
Segment Profit/(Loss) (5,522) (425) (277) (744) (1,644) (130) 150 90 (12) (8,514)
Total Assets 166,169 11,012 29,283 2,847 42,026 64,950 735 412 (155,993) 161,441
Capital Expenditures 152 75 12,647 40 1 --- --- 309 (11) 13,213
Dep. And Amort. 2,474 153 393 8 918 60 --- --- --- 4,006
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 22 - Subsequent Events.
-----------------
None.
Item 2. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in
this Form 10-Q. Information included herein relating to projected
growth and future results and events constitutes forward-looking
statements. Actual results in future periods may differ materially from
the forward-looking statements due to a number of risks and
uncertainties, including but not limited to fluctuations in the
construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the
success of the Company's competitive pricing; the Company's
relationship with its suppliers; relations with the Company's
employees; the Company's ability to manage its operating costs; the
continued availability of financing; governmental regulations; risks
associated with regional, national, and world economies; and
consummation of the merger and asset purchase transactions. Any
forward-looking statements should be considered in light of these
factors.
Overview
For the quarter and nine month period ended May 31, 2003, Eagle's
business operations reflected Eagle's business objective of moving
toward profitability through further expansion into the broadband
products and services that generate recurring revenues while migration
away from the lower gross margin product fulfillment line of business.
In addition, during the first nine months of fiscal 2003, the Company
conducted extensive cost reduction activities. We believe that the
effects of these cost reduction measures will significantly reduce our
fiscal 2003 ongoing expenses as evidenced by a $6,336,000 or 42%
decline in operating expenses in the first nine months ended May 31,
2003, as compared to the same nine month period in 2002. The Company's
consolidated operations generated revenues of $1,847,000 and $9,528,000
while achieving corresponding gross profits of $405,000 or 22% and
$4,116,000 or 43%; respectively for the quarter and nine-month period
ended May 31, 2003. The decline in revenues in the third fiscal quarter
and nine-month period ending May 31, 2003 is primarily attributable to
the discontinuance of direct sales of low-margin computer products in
the Company's subsidiary United Computing Group, Inc. consistent with
their previously announced strategy of concentrating UCG's
going-forward efforts as a Service Provider including but not limited
to configuration solutions, network services, network application
services, repair and warranty services and professional support
services including Client Help Desk, Deskside Support, and Professional
and Managed Services versus its historical emphasis on direct product
fulfillment. Additionally, a decline in the sale of commercial and home
cabling occurred as a result of a deferral of implementation of
national contracts and a discontinuance of home cabling projects in
Arizona and Austin, Texas. Also, during this quarter additional
expenses were incurred to reorganize the management and on-going
operations of Atlantic Pacific Communications, Inc. and United
Computing Group, Inc.
25
During the quarter ended May 31, 2003, we continued the implementation
of cost reductions in various operating segments that were not expected
to provide significant long-term revenues and profitability. These
reductions will impact the expense categories of salaries and benefits,
rents, travel, research and development and other support expenses on a
run-rate basis. We anticipate that additional cost reduction efforts
will continue into the fourth fiscal quarter of 2003. Also, the company
is continuing the development of the "technology center" for
distribution on a nationwide basis of voice, video and data content;
increased sales efforts in the telephone, cable, internet, security
services and wireless segments; and securing of long-term relationships
for content for the bundled digital services activities; and
marketing/sales agreements with other companies for the sale of
broadband products and services. On a nationwide basis, we are
negotiating and preparing to enter into business relationships with
financial and technology companies to provide bundled digital services
(digital content) to cities and municipalities that currently have
constructed their own fiber infrastructure to the home. We believe that
our companies have the technology, products and capabilities to provide
these fiber-ready cities with digital content set-top boxes and
structured wiring services.
During the nine month period ended May 31, 2003, we began shipments of
our set-top box product line for installation in hospitality properties
under our ongoing relationship with General Dynamics. We expect these
shipments to continue throughout the remaining quarter of 2003.
Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; BroadbandMagic; Atlantic
Pacific Communications, Inc.; United Computing Group, Inc.; Contact
Wireless, Inc.; and DSS Security, Inc., names.
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. Manufacturing of the Eagle Wireless product line of wireless
infrastructure products was licensed to a third party company during
this reporting period.
BroadbandMagic
BroadbandMagic designs, manufactures and markets the convergent set-top
boxes. Products are sent principally to commercial customers for a
pre-sale test period of ninety days. Upon the end of the pre-sale test
period, the customer either returns the product or accepts the product,
at which time the Company recognizes the revenue.
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 the Company'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.
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.
Eagle Broadband Services, Inc.
Eagle Broadband Services, Inc. assumed the operations of ClearWorks
Communications, Inc. as of September 1, 2002, and 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.
26
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.
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 earned.
Etoolz, Inc.
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to
independent third parties.
Link Two Communications, Inc.
Link Two Communications, Inc., provides customers with one- and
two-way messaging systems. The revenue from these services is
recognized as it is earned from the customer.
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.
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.
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 as earned.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of
accounts receivable. Accounts receivable deemed uncollectable are
charged against the allowance for doubtful accounts.
Receivables
For the nine months ended May 31, 2003, Eagle accounts receivables
decreased to $3,494,000 from $5,028,000 at August 31, 2002. The
majority of this decrease is due to the corresponding revenue decrease
of lower margin product fulfillment sales, decreases in commercial
cabling projects, and the shift to more "recurring revenue" type of
business.
Marketable Securities
Eagle has adopted the provisions of SFA No. 115, as amended by SFAS No.
130, which provides that all marketable equity securities be classified
as available-for-sale or trading securities, and be carried on the
balance sheet at fair market value. Any unrealized holding gains or
losses affiliated to these securities are carried below net income
under the caption "Other Comprehensive Income," net of tax.
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, 2003,
Eagle's inventory total of $7,183,000 as compared to $6,059,000 at
August 31, 2002. The additional inventory is primarily attributable to
the purchase of components for increased demand of the Company's
digital set-top boxes.
27
Results Of Operations
For the Three Months and Nine Months Ended May 31, 2003 and 2002
Net Sales. For the three months ended May 31, 2003, net sales decreased
to $1,847,000 from $6,485,000 as compared to the three months ended May
31, 2002. For the nine months ended May 31, 2003, net sales decreased
to $9,520,000 from $22,626,000 as compared to the nine months ended May
31, 2002. The corresponding declines in revenues for these periods is
primarily attributable to a decrease in sales of computer products in
the Company's subsidiary United Computing Group, Inc. consistent with
their previously announced strategy of concentrating on service
offerings, a decrease in sales of structured wiring in the Company's
Atlantic Pacific Communications subsidiary with partial offset by
continued increase in the Company's broadband services.
Cost Of Goods Sold. For the three months ended May 31, 2003, cost of
goods sold decreased to $1,442,000 from $4,020,000 for the comparable
three months ended May 31, 2002. For the nine months ended May 31,
2003, cost of goods sold decreased to $5,412,000 from $16,146,000 for
the nine months ended May 31, 2002. These declines were primarily
associated with the decrease in lower gross margin product fulfillment
sales. As a result of the Company's shift in strategy away from such
lower margin product fulfillment, the Company's gross profit percentage
were 22% and 43%, respectively for the three and nine months ended May
31, 2003 from 38% and 29%, respectively during the three and nine
months ended May 31, 2002.
Operating Expenses. For the three months ended May 31, 2003, operating
expenses decreased to $3,378,000 from $5,082,000 as compared to the
three months ended May 31, 2002. For the nine months ended May 31,
2003, operating expenses decreased to $8,916,000 from $15,252,000 as
compared to the nine months ended May 31, 2002. The primary portions of
the increase are discussed below:
A $2,029,000 and $3,515,000 decrease in salaries, as a result of the
personnel reductions completed as a component of the extensive cost
reduction activities for the three and nine months ended May 31, 2003.
A $97,000 and $304,000 decrease in advertising
and promotion, due primarily to decreases in product introductions for
the three and nine months ended May 31, 2003 and 2002, respectively.
A $1,030,000 and $3,124,000 decrease in depreciation and amortization
for the three and nine months ended May 31, 2003 and 2002,
respectively, due to the non-cash impairment charge against FCC
licenses and equipment taken in the fourth fiscal quarter of fiscal
2002.
A $1,412,000 and $772,000 increase in other support costs for the three
and nine months ended May 31, 2003 and 2002, respectively, due to
increases in contract labor, interest, professional fees, rents and bad
debt costs.
Net Earnings. For the three and nine months ended May 31, 2003, Eagle's
net loss was $2,921,000 and $4,731,000, respectively, compared to a net
loss of $2,568,000 and $8,448,000 for the three and nine months ended
May 31,2002.
Changes In Cash Flow. Eagle's operating activities used net cash of
$591,000 in the nine months ended May 31, 2003, compared to $1,869,000
of cash used in the nine months ended May 31, 2002. The decrease in net
cash used by operating activities was primarily attributable to a
significant decline in net loss, an increase in inventory and accounts
payable, offset by reductions in account receivable, and depreciation
and amortization. Eagle's investing activities used net cash of
$3,906,000 in the nine months ended May 31, 2003, compared to
$13,870,000 in the nine months ended May 31, 2002. The decrease was due
primarily attributable to decreases of purchase of equipment for
building out the bundled digital services infrastructure. Eagle's
financing activities provided net cash of $3,360,000, in the nine
months ended May 31, 2003, compared to cash used of $1,121,000 in the
nine months ended May 31, 2002. The increase in cash flows from
financing activities at May 31, 2003, is attributable to cash raised
from convertible debenture funding agreements with an investment bank
for general working capital purposes and proceeds from borrowings
against short-term notes as compared to a pay off of the Atlantic
Pacific's line of credit, pay down on United Computing Group's line of
credit and continued repurchase of shares in the open market for
retirement in the quarter ended May 31, 2002.
Liquidity And Capital Resources.
Current assets for the period ended May 31, 2003, totaled $14,098,000
(includes cash and cash equivalents of $2,284,000) as compared to
$14,866,000 (including cash and cash equivalents of $3,421,000)
reported for the year ended August 31, 2002. During the first fiscal
quarter of 2003, Eagle entered into a debt funding arrangement with an
investment bank to provide up to $3,000,000 in working capital. This
debt is unsecured and bears interest at 5% per annum maturing in one
year from the initial funding and is fully repayable in stock at
Eagle's option. Eagle received $2,500,000 in cash and a $500,000
secured debenture in this transaction. Eagle has repaid $1,800,000 on
this debenture through May 31, 2003. Eagle is continuing the sale of Q
Series Five Year Bonds. Through July 15, 2003, Eagle has sold
$2,922,000. Eagle engaged an investment-banking firm to provide a
$20,000,000 equity line of credit. This line of credit can be activated
upon Eagle filing a registration statement that complies with the terms
and conditions of the agreement.
28
Working capital for the period ended May 31, 2003, totaled $322,000 as
compared to $3,535,000 reported for the year ended August 31,2003.
Eagle believes that its working capital of $322,000 as of May 31, 2003,
plus additional funds from bank lines of credit, exercise of warrants,
sale of Q Series bonds and the anticipated closing of funding
transactions that are in various stages of negotiations as of the date
of this report should be sufficient to fund operations through the end
of August 31, 2003. Historically, Eagle has financed its operations
through the sale of debt and equity securities. As of May 31, 2002,
Eagle has a limited amount of cash and cash equivalents. As such, if
its current cash is insufficient to fund its operating and long-term
capital needs, Eagle will rely on future bests-efforts financing for
capital. The Company will need to raise additional capital to fund
ongoing operations and long-term capital needs. The Company is
currently in final negotiations with a corporation to provide a minimum
of $10,000,000 in financing. If the company is not successful in
raising additional capital, it may have to curtail or suspend or sell
certain operations. As more fully described in Note 7 to the financial
statements, Eagle's subsidiaries Atlantic Pacific and United Computing
Group maintain an aggregate of up to $4,000,000 in credit facilities
with a bank to provide working capital based on eligible accounts
receivable. Refer to Note 7 for descriptions of lines of credit and
other immediate forms of funding the Company has available
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate and Equity Market Risks
The Company is exposed both to market risk from changes in interest
rates on funded debt and changes in equity values on common stock
investments it holds in publicly traded companies. The Company also has
exposure that relates to the Company's revolving credit facility.
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, however; the
company does have both significant cash and liquidity risks associated
with its common stock investments aggregating $1,163,000 in market
value as of May 31, 2003.
Credit Risks
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, but does not require collateral from
these parties. The company did not have any customers that represented
greater than 10% of its revenues during the first fiscal quarter of
2003 and, as such, does not believe that the credit risk posed by any
specific customer would have a material adverse affect on its financial
condition.
Item 4. Controls and Procedures
Based on the Company's most recent evaluation, which was completed
within 90 days of the filing of the Company's Form 10-K, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that
the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934, as
amended) are effective. There have been no significant changes in
internal controls or in other factors that could significantly affect
these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
29
Part 2. - Other Information
Item 1 - Legal Proceedings
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 a
material adverse effect on the Company's financial condition or results
of operations (Note 16).
Item 2 - Recent Sales of Unregistered Securities or Changes in Securities and
Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its annual shareholders meeting at 2500 South Shore
Blvd., League City, Texas 77573, at 10:00 a.m., May 8, 2003, for the
following purposes with the corresponding results of voting:
1. Approval of a Classified Board of Directors. To approve an
amendment to Eagle's Articles of Incorporation to provide for the
classification of the Board of Directors into three classes of
directors with staggered three-year terms of office
- Not Passed
2. Election of Directors. To elect six (6) directors to the Board of
Directors to serve for terms of one to three years, respectively,
or until their successors are elected and qualified if Proposal
No. 1 is approved, or to elect the same persons as directors for a
term of one year if Proposal No. 1 is not approved.
- All Directors Elected
3. Approval of Amendment of Voting Percentages. To approve an
addition to Eagle's Articles of Incorporation to permit
shareholder approval of future amendments to the Articles of
Incorporation to be accomplished through the vote of 51% of the
shares entitled to vote, as opposed to 66 2/3% of the shares
entitled to vote.
- Not Passed
4. Approval of Amendment of Special Meeting Rules. To approve an
amendment to Eagle's Articles of Incorporation to provide that
special meetings of the shareholders may only be called by a
majority of the Board of Directors, the Chairman of the Board, the
Chief Executive Officer, or the holders of at least 50% of the
outstanding shares of common stock of the company.
- Not Passed
5. Approval of Temporary Empowerment of Board. To approve an
amendment to Eagle's Articles of Incorporation to empower the
Board of Directors to take any and all actions necessary without
further vote to enable the company to (a) comply with all current
as well as any newly enacted SEC regulations that may be enacted
prior to the next annual meetings; (b) comply with all current as
well as any new American Stock Exchange requirements that may
become effective prior to the next annual meeting; (c) maintain
its common stock valuation in a range that will insure the
continued listing of its common stock on a national exchange and
protect the common interests of all of its stockholders
- Passed
6. Ratification of Auditors. To ratify the selection of McManus &
Co., P.C., as auditors for Eagle for the fiscal year ending August
31, 2003.
- Passed
Shareholders of record at the close of business on March 27, 2003, were
entitled to notice of, and to vote at, this meeting.
Item 5 - Other Information
None
30
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
(i) The Company filed a Current Report on Form 8-K on April 28,
2003, reporting under item 5 that Mr. Manny Carter's status
had changed from employee to contract consultant for personal
reasons.
(ii) The Company filed a Current Report on Form 8-K on May 12,
2003, reporting under item 9 the actions taken and material
presented at the annual meeting of shareholders held May 8,
2003.
(iii) The Company filed a Current Report on Form 8-K on June 30,
2003, reporting under item 5 that it had entered into a
Letter of Intent with Aggregate Networks, LLC, to provide an
investment into Eagle Broadband of ten million dollars for
general operational purposes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EAGLE BROADBAND, INC.
Date: July 18, 2003 By: /s/ H. Dean Cubley
--------------------------
Dr. H. Dean Cubley
Chief Executive Officer
/s/ Richard R. Royall
--------------------------
Richard R. Royall
Chief Financial Officer
31
CERTIFICATIONS
I, H. Dean Cubley, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Broadband, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the annual
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 18, 2003
/S/ H. Dean Cubley
- ---------------------------------
H. Dean Cubley,
Chief Executive Officer
32
CERTIFICATIONS
I, Richard R. Royall, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Broadband, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the annual
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 18, 2003
/S/Richard R. Royall
- -----------------------------
Richard R. Royall,
Chief Financial Officer