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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[ X ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended August 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-23163
Texas 76-0494995
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
101 Courageous Drive, League City, Texas 77573
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(Address of Principal Executive Office) (Zip Code)
281-538-6000
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: Common
Stock
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
Issuer's revenues for its fiscal year ended August 31, 2003, were $11,593,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price of the common stock on the American Stock
Exchange on February 28, 2003, was $15,341,000. As of December 5, 2003,
registrant had 188,188,269 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant is incorporating by reference in Part III of this Form 10-K
certain information contained in the registrant's proxy statement for its annual
meeting of shareholders, which proxy statement will be filed by the registrant
on or before December 29, 2003.
This annual report contains forward-looking statements. These statements
relate to future events or future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause Eagle's or Eagle's
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward- looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's competitive pricing; the Company's relationship with its
suppliers; relations with the Company's employees; the Company's ability to
manage its operating costs; the continued availability of financing and working
capital to fund business operations; governmental regulations; risks associated
with regional, national, and world economies; and consummation of the merger and
asset purchase transactions. Any forward-looking statements should be considered
in light of these factors.
Although Eagle believes that the expectations reflected in the
forward-looking statements are reasonable, Eagle cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither
Eagle nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. Eagle is under no duty to
update any of the forward-looking statements after the date of this report to
conform its prior statements to actual results.
PART I
Item 1. Description of Business
Overview
Eagle Broadband, Inc., (the "Company" or "Eagle") is a worldwide supplier
of broadband, communications, project management and enterprise management
products and services. Eagle's exclusive "four-play" suite of very high-speed
Internet, cable-style television, voice and security monitoring Bundled Digital
Services (BDSSM), HDTV-ready multimedia set-top boxes, and turnkey suite of
financing, design, deployment and operational services enables municipalities,
real estate developers, hotels, multi-tenant owners and service providers to
deliver exceptional value, state-of-the-art entertainment and communications
choices and single-bill convenience to their residential and business customers.
Eagle has extensive "last mile" cable and fiber installation capabilities and
provides complete IT business integration, project management and enterprise
management solutions including network security, intrusion detection,
anti-virus, managed firewall and content filtering to Fortune 1000 companies.
Eagle also markets the Orb'Phone Exchange non-line-of-sight communications
system that provides true, "total" global voice, data and Internet
communications services through the Iridium Satellite network to Fortune 1000
enterprises, commercial aviation, government, the military and homeland security
customers.
As of August 31, 2003, the Company's active subsidiaries were: Eagle
Broadband Services, Inc. (EBS) - operating as Eagle BDS; DSS Security, Inc.
(DSS) - operating as Eagle Security Services; Atlantic Pacific Communications,
Inc. (APC) - operating as Eagle Communications Services; Etoolz, Inc. (ETI) -
Eagle's research and development subsidiary; Eagle Wireless International, Inc.
(EWI); and Contact Wireless, Inc. (CWI) - operated as Eagle Paging Services.
Additionally, Eagle has a number of inactive subsidiaries that had results in
one or more of the periods included in the financial statements covered by this
report. These inactive subsidiaries include: ClearWorks Communications, Inc.
(COMM) - formerly operated as BDS; ClearWorks.net, Inc. (.NET); ClearWorks Home
Systems, Inc. (HSI) - operated as Eagle Residential Structured Wiring; United
Computing Group, Inc. (UCG) - operated as Eagle Technology Services; and Link
Two Communications, Inc. (LINK II) - operated as Eagle Messaging Services. Eagle
has incorporated certain ongoing operations of the inactive subsidiaries into
the active subsidiaries listed above. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
inter-company transactions and balances have been eliminated in consolidation.
Eagle designs and manufactures a wide range of broadband products and
provides complete installation services for copper, fiber, and wireless to
commercial and residential markets. Core products offered by Eagle target end
users of broadband services and include Internet, telephone, cable television,
and security monitoring services, which services we refer to as bundled digital
services (or BDSSM). Each subscriber provides the company with the opportunity
to create a recurring revenue stream as well as up-front product revenues by
providing hardware, software and service products, such as Eagle's set-top-boxes
to existing customers. This balance of near-term and long-term recurring revenue
is a combination that in the opinion of management is highly desirable. The
combination of Eagle's convergent hardware products, network services, wireless
products, wireless network and spectrum services, strong manufacturing and R&D
capabilities and the BDSSM "last mile" cable and fiber installation should
provide a well-balanced revenue mix as the combined company offers a full
complement of broadband products and services to its customers.
1
Eagle designs, manufactures, markets, and services its products under the
Eagle name. These products include transmitters, receivers, controllers,
software and other equipment used in personal communications systems and radio
and telephone systems. Most of Eagle's broad line of products, covering the
messaging spectrum as well as specific personal communication systems, and
specialized mobile radio products, have been tested and approved by the Federal
Communications Commission. Eagle provides service and support for its products,
as well as consulting and research development on a contract basis. In addition,
Eagle has introduced a completely new line of multi-media and Internet products
to the telecommunications industry, including a family of digital set-top-box
products and markets these products under the name of BroadbandMagic.
Eagle through its subsidiary, Atlantic Pacific Communications, Inc., is
engaged in the business of project management of professional quality data,
voice, and fiber optic cable installations and services for both re-sellers and
end-users.
Eagle was incorporated in May 1993 and changed its name in February 2002 to
Eagle Broadband, Inc., its current name. Eagle's principal place of business is
located at 101 Courageous Drive, League City, Texas 77573 and its telephone
number is (281) 538-6000.
Product and Service Categories
Eagle BDS Services
Eagle provides fiber-to-the-user ("FTTU") network services for
neighborhoods and businesses utilizing its Bundled Digital Services. These
services include high-speed Internet connectivity, home security, telephone
service, and cable-style TV service over fiber. Eagle's exclusive "four-play"
suite of very high-speed Internet, video/cable TV, voice and security monitoring
Bundled Digital Services, HDTV-ready multimedia set-top boxes, and turnkey suite
of financing, network design, deployment and operational services enables
municipalities, real-estate developers, hotels, multi-tenant owners and service
providers to deliver exceptional value, state-of-the-art entertainment and
communication choices and single-bill convenience to their residential and
business customers.
Eagle provides up to 100 Mbps switched service per home with up to six
drops per home wired by Eagle's wiring standards. Connections of up to 100 Mbps
are approximately 2,000 times faster than a 56K modem. The fiber optic networks
that Eagle deploys into residential communities and businesses consist of two
parts: (a) the headend facility and (b) the fiber optic cable installed into the
home.
Eagle also sells structured wiring and audio/video products to single and
multi-family units. These products and services are being made available to both
residential and commercial customers on a national basis.
Eagle's BDS Services revenues are reported under the category of Broadband
Services on the Company's Consolidated Statements of Operations included as page
F-4 of this report and also under the category EBS/DSS within Note 22 - Industry
Segments.
Eagle Security Services
Eagle, through its subsidiary, DSS Security, Inc., markets
security-monitoring services. DSS Security's principal business activity is the
providing of monthly security monitoring service to both commercial and
residential customers. Currently DSS Security is providing services to over
6,000 customers.
Eagle's Security Services revenues are reported under the category of
Broadband Services on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category EBS/DSS within
Note 22 - Industry Segments.
Eagle Satellite-Based Voice and Data Communications Services
The Orb'Phone Exchange
The Orb'Phone Exchange is the first and only non-line-of-sight
communications technology that enables users of the Iridium(R) satellite network
to quickly and easily establish highly reliable voice and data communications to
and from any location where the user is unable to gain line of sight to an
orbiting Iridium Satellite such as onboard in-flight aircraft, within buildings,
under ground or from obstructed areas. The technology enables truly global
communications that enhance user productivity, mobility, problem solving,
field-to-headquarters collaboration and emergency backup/response for a wide
range of mission-critical and everyday communications needs. By extending
coverage indoors to areas not traditionally served by satellite networks, the
Orb'Phone Exchange
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extends customers' usage area, while enhancing the utility and overall value for
both new and existing Iridium aviation, government, military, homeland security
and commercial/enterprise customers. The company has received certification by
both the Federal Communications Commission (FCC Certification Identifier #
LOKJHJLBT05A00021) and Iridium Satellite LLC for the Orb' Phone Exchange..
Subsequent to the fiscal year ending August 31, 2003, the Company announced
that General Dynamics Decision Systems, a business unit of General Dynamics,
signed a distribution agreement to sell and support Eagle's Orb'Phone Exchange
to customers in the U.S. Department of Defense (DOD), General Services
Administration (GSA), Defense Information Systems Agency (DISA), and other U.S.
and foreign government agencies.
Revenues for Eagle's Orb' Phone Exchange were not applicable in the fiscal
year ended August 31, 2003, as the product was released subsequent to year end
and in future periods will be reported under the category of Products on the
Company's Consolidated Statements of Operations included as page F-4 of this
report and also under the category Eagle within Note 22 - Industry Segments.
Broadband Multimedia and Internet Products
Eagle, under the brand BroadbandMagic, markets broadband multi-media
set-top-box products. These multimedia and Internet based products provide users
the ability to interface their Internet connection, broadcast video, cable or
DSL, or satellite video source directly to their television receiver. Eagle's
BroadbandMagic markets the set-top boxes to Internet service providers or ISP's,
systems integrators and OEM customers who typically bundle set-top-boxes with
their own products and/or services.
Host Pro
Service providers, such as hotels, broadcasters, DSL providers, and
healthcare facilities can take advantage of the Host Pro Web Flyer's full
complement of on-demand TV, Internet and entertainment services. The Host Pro is
specifically designed to allow service providers to generate additional revenues
by supplying their customers with a variety of entertainment, educational, and
business applications.
Computer Plus
The Computer Plus Web Flyer is a complete home entertainment system and
full function computer. Using a television set as a monitor, the Computer Plus
Web Flyer allows users to connect to the ISP of their choice and bring their
multimedia center into the comfort of their living room. Users can access the
Internet, play the latest video games, watch TV, listen to CDs, send and receive
email, and watch DVD movies. This unit combines several entertainment appliances
into a single, integrated unit.
IP Express
The IP Express provides users with either dial-up or high-speed Internet
access, the ability to check e-mail, surf the web, or play games. With the
built-in TV tuner card, users can auto-tune, have picture-in-picture
capabilities, and channel preview while connected to the Internet. This unit can
be attached either to a monitor or basic TV.
Media Pro
The Media Pro's architecture, which includes exceptional ED graphics, MPEG
2 hardware decoder and low-power CPU, makes it ideally suited for multimedia
environments such as Video-on-Demand (VOD) and Video Conferencing. This unit is
marketed to the hospitality market, hospitals, schools, and in Multiple Dwelling
Units (i.e. apartments, etc.).
The VP-2100 along with Eagle's Video-View software enables the consumer to
do point-to-point video conferencing, as well as have up to eight video
conferencing feeds using our advanced video multicasting. The VP-2100 provides
corporate executives and other customers a cost effective alternative to the
high cost and risk of travel, as well as eliminating the unproductive time
associated with long distance business meetings.
EZMagic-HD
EZMagic-HD is a software-based middleware platform capable of delivering
Eagle's complete "four-play" of voice, video, data, and security services over a
wide variety of standard hardware systems. EZMagic-HD expands Eagle Broadband's
advanced EZMagic middleware software platform to include a range of new
multi-media capabilities. The advanced capabilities made possible by EZMagic-HD
enable hotel and casino owners, municipalities, real estate developers, schools
and health care facilities to deliver
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enhanced high-demand multimedia services that can improve the satisfaction of
residents and guests, increase revenues, maximize occupancy rates and improve
brand loyalty.
EZMagic-HD features include high definition streaming video, improved
digital audio and Internet capabilities, easier navigation of hotel and
community services (e.g. concierge, local restaurants and events, etc.),
increased content and system security, and additional operating system support.
EZMagic-HD is designed for a range of higher margin applications and services
including (i) high-end hospitality systems requiring sophisticated secure video,
(ii) data and gaming services, (iii) educational distance learning systems to
improve both teacher and student education, (iv) on-demand entertainment
including concerts, movies, music videos, etc. with superior visual clarity, (v)
internet access, video programming and other patient services for health care
facilities, and (vi) Fiber-to-the-User IP-based entertainment terminals/media
centers.
Eagle's Broadband Multimedia and Internet Products revenues are reported
under the category of Products on the Company's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Eagle
within Note 22 - Industry Segments.
Eagle Communications Services
Eagle, through its Atlantic Pacific Communications, Inc., subsidiary,
provides data, telephony and fiber optic installation, project management and
support services from initial concept through engineering to completion and
documentation. Atlantic Pacific resells and installs fiber and cabling to
commercial and industrial clients throughout the United States. Services
include:
o Multi-site rollout installation
o Statement of Work/Request For Quotation preparation
o Installation supervision
o Structured wiring design
o Comprehensive project management
o Copper wiring configuration
o Fiber optic acceptance testing
o Aerial and underground OSP
o Fiber optic and copper cable
o Field service and support
Eagle's Communications Services revenues are reported under the category of
Structured Wiring on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category APC/HSI within
Note 22 - Industry Segments.
Eagle Technology Services
Eagle, through its United Computing Group, Inc., subsidiary, provides IT
Business Integration and Enterprise Management solutions to companies with
complex computing and communication systems and needs. Eagle helps its clients
integrate and deploy the latest technologies to help ensure they remain
competitive within their industry, while reducing the cost of integrating these
solutions in order to maximize the return on their technology investments.
Eagle has historically targeted medium-sized businesses and organizations
as its primary client base but has recently expanded its focus to include
Fortune 1000 enterprises. Medium-sized businesses tend to rely on specialized IT
service providers to help implement and manage their IT systems and complex
computing environments. Eagle believes its expertise will allow its clients to
address all or selected parts of the full, IT life cycle management, including
network management and monitoring, network design, security, anti-virus
protection, product fulfillment, configuration, implementation, fault diagnosis,
fault resolution, reporting, upgrading and documentation. Eagle accomplishes
this through its different service offerings that are managed by its Client Care
Center that is operated 24 hours per day, seven days per week in League City,
Texas.
Eagle's Technology Services revenues are reported under the category of
Products on the Company's Consolidated Statements of Operations included as page
F-4 of this report and also under the category UCG within Note 22 - Industry
Segments.
Eagle Consulting Services
Eagle routinely provides consulting services on a contract basis to support
the sale of its main product lines. Examples of these consulting services
include the design and installation of radio messaging systems and technology
and engineering support for fiber-to-the-user (FTTU) headend and optical network
integration. Eagle also performs research and development on a contract basis.
4
Eagle's Consulting Services revenues are reported under the category of
Other on the Company's Consolidated Statements of Operations included as page
F-4 of this report and also under the category Other within Note 22 - Industry
Segments.
Eagle Service and Support
Eagle provides service and support to customers on an on-going basis
including installation, project management of turnkey systems, training, service
or extended warranty contracts with Eagle. Eagle believes that it is essential
to provide reliable service to customers in order to solidify customer
relationships and be the vendor of choice when a customer seeks new services or
system expansions. This relationship is further developed as customers come to
depend upon Eagle for installation, system optimization, warranty and
post-warranty services.
Eagle has a warranty and maintenance program for both its hardware and
software products and maintains customer service facilities. Eagle's standard
warranty provides its customers with repair or replacement of any defective
Eagle manufactured equipment. The warranty is valid on all products for the
period of one year from the later of the date of shipment or the installation by
an Eagle qualified technician.
Eagle's Service and Support Services revenues are reported under the
category of Other on the Company's Consolidated Statements of Operations
included as page F-4 of this report and also under the category Other within
Note 22 - Industry Segments.
Eagle Paging Services.
Eagle, through its subsidiary Contact Wireless, Inc., markets paging and
mobile telephone solutions. Eagle acquired Contact Wireless in January 2001.
Contact Wireless provides customers with paging and mobile telephone products
and related monthly services in San Antonio and Houston areas. Subsequent to the
fiscal year ended August 31, 2003, Eagle intends to divest this operating
subsidiary in a related-party transaction.
Eagle's Paging Services revenues are reported under the category of Other
on the Company's Consolidated Statements of Operations included as page F-4 of
this report and also under the category Other within Note 22 - Industry
Segments.
Eagle Messaging Services
Eagle, through its subsidiary Link Two Communications, Inc., markets
messaging network services. Eagle is a common carrier of exclusively wholesale
one-way messaging and two-way messaging network services. Its customers purchase
messaging network services as an aggregator and resell Link Two Communication's
network services to individual subscribers and other communications providers.
Link Two Communications has been classified as an incumbent carrier by the FCC
and has secured the rights to use or options to purchase spectrum in all of the
major metropolitan U.S. cities on five PCP frequencies. Link Two Communications
has also secured several exclusive RCC frequencies providing regional coverage
in two of the top ten markets. Link Two Communications has secured an exclusive
block of FCC spectrum covering a majority of the population centers in the
southern and western United States in a successful bidding at the FCC auction.
Link Two Communications competes with many established companies in the
nationwide one- and two-way messaging services area. The paging industry has
declined over the past year and several major paging companies have undergone
significant beneficial financial restructurings. These companies are able to
offer products and related services at more favorable rates than Link Two.
Because the paging industry and related financial credit availability from banks
for financing emerging nationwide networks has been declining over the last
year, Link Two has been unable to obtain significant funding to expand and
provide cost effective service to its customers. Accordingly, Link Two has had
to curtail its development on a nationwide basis and restricted its operations
to serve the Houston and Dallas, Texas, markets. The equipment servicing the
nationwide network is inactive and has been impaired as well as the value of the
related FCC licenses. At August 31, 2002, management estimated through recent
sales of equipment and industry pricing of FCC licenses that an impairment
charge of $27,100,000 was necessary to reflect the ongoing value of its assets
and licenses.
Eagle's Messaging Services revenues are reported under the category of
Other on the Company's Consolidated Statements of Operations included as page
F-4 of this report and also under the category Eagle within Note 22 - Industry
Segments.
5
Eagle Wireless International
Wireless Messaging Hardware
Messaging is a method of wireless communications, which uses an assigned
radio frequency to contact a messaging subscriber anywhere within a service
area. A messaging system is generally operated by a service provider that incurs
the cost of building and operating the system. Each service provider in the
United States licenses spectrum from the FCC and elsewhere from the authorized
government body to operate a messaging frequency within either a local,
regional, or national geographical area. Each messaging subscriber is assigned a
distinct telephone number that a caller dials to activate the subscriber's
pager, a pocket-sized radio receiver carried by the subscriber. A messaging
switch receives telephone calls by the subscriber. The transmitters manufactured
by Eagle are specifically designed to simulcast, which is the transmission of
the same signal over two or more transmitters on the same channel at the same
time in an overlap area, resulting in superior voice and data quality and
coverage area. The radio signal causes the messaging device to emit a beep or to
vibrate, and to provide the subscriber with information from the caller in the
form of a voice, tone, numeric, or alphanumeric message.
A messaging device has an advantage over a landline telephone in that the
messaging device's reception is not restricted to a single location, and has an
advantage over a cellular portable telephone in that a messaging device is
smaller, has a much longer battery life, has excellent coverage, and is less
expensive to use. Historically, the principal disadvantage of traditional
messaging service in comparison to landline telephones or cellular portable
telephones has been that messaging provided only one-way communication
capabilities.
However, this limitation may have been overcome in the United States as a
result of the auction in 1994 by the FCC of nationwide and regional licenses for
designated narrowband personal communication services, radio frequencies or
spectrum to service providers. Many of the nationwide license holders and many
of the regional license holders are current Eagle customers, directly or
indirectly. The cost of the licenses to the narrowband personal communication
services auction winners in 1994 was approximately $1 billion. The FCC
anticipates that these narrowband personal communication services licenses will
be used to provide such new services as pager location, two-way acknowledgment
messaging, advanced voice messaging and data services.
The narrowband personal communication services radio frequencies or
spectrum are located at three separate points within the total radio spectrum,
at 902-928 MHz, 930-931 MHz and 940-941 MHz. Initially, the radio frequencies
located at 930-931 MHz and 940-941 MHz have been designated for outbound message
transmission, to the pager, and the 902-928 MHz have been designated response
channels, from the pager. This application is similar to traditional messaging
except that these license holders have been granted wider frequency bandwidth
permitting the user to transmit substantially more information. In addition,
Eagle manufactures other messaging infrastructure products that cater to the VHF
and UHF messaging frequencies in the United States and other areas of the world
as well as supporting most international messaging brands.
The narrowband personal communication services nationwide licenses cover
all fifty states, the District of Columbia, American Samoa, Guam, the Northern
Marianas Islands, Puerto Rico and the United States Virgin Islands. These
licenses are divided into 50 kHz paired and unpaired channel categories. Paired
channels permit both outbound and inbound signals while unpaired channels are
limited to only outbound signals. The FCC has imposed infrastructure
construction or build-out requirements on all narrowband personal communication
services license holders. Each narrowband personal communication services
license holder must establish minimum service availability for at least 37.5% of
the population in its geographic region within five years after receiving the
license. After ten years, each narrowband personal communication services
license holder must make the service available to at least 75% of the area's
population. If a narrowband personal communication services license holder fails
to achieve these build-out requirements, it risks cancellation by the FCC of its
narrowband personal communication services license and a forfeiture of any
auction monies paid.
Eagle manufactures products that will enable messaging license holders to
legally put their systems into operation at a low cost, a strategy adopted by
Eagle to create a "captive" customer in terms of future build-out.
Eagle offers its customers an end-to-end solution for narrowband personal
communication services applications. Eagle has developed new technology based
products with enhanced architecture and technology from its existing messaging
systems to accommodate the advanced services available through messaging and
PCS. This system approach includes full product lines of radio frequency network
controllers, transmitters, receivers, and a special satellite receiver system,
to receive the response message from the end-user.
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The design of a messaging system is customer specific and depends on:
o The number of messaging subscribers the service provider desires to
accommodate,
o The operating radio frequency,
o The geography of the service area,
o The expected system growth, and
o Specific features desired by the customer.
Messaging equipment hardware and software developed by Eagle may be used
with all types of messaging service, including voice, tone numeric (telephone
number display) or alphanumeric messaging (words and numbers display).
Switches
Eagle is involved at an early stage in the development of industry wide
technology standards and is familiar with developments in messaging protocol
standards throughout the world. Eagle works closely with its customers in the
design of large, complex messaging networks. Eagle believes that its customers'
purchasing decisions are based, in large part, on the quality and technological
capabilities of such networks. Eagle believes that the advanced hardware and
software features of its switches ensure high reliability and high volume call
processing.
Radio Frequency Equipment, Transmitters and Receivers
Transmitters are available in frequency ranges of 70 MHz to 960 MHz and in
power levels of 2 Watts to 500 Watts. Radio link receivers are available in
frequency ranges of 70 MHz to 960 MHz. Satellite link receivers are available
for integration directly with the transmitters at both Ku- and C- band
frequencies.
Eagle's range of receivers detects the responses back from the two-way
narrowband personal communication services subscriber devices. The receivers
take advantage of Digital Sound Processing demodulation techniques that maximize
receiver performance. Depending upon frequency, antenna height, topography and
power, Eagle transmitter systems are designed to cover broadcast cells with a
diameter from 3 to 100 miles. Typical simulcast systems have broadcast cells
that vary from 3 to 15 miles in diameter. Eagle transmitters are designed
specifically for the high performance and reliability required for high speed
simulcast networks.
Controllers
Eagle currently offers products for transmitter control known as Eagle's
L20X transmitter control system, which is a medium-feature transmitter control
system used in domestic and international markets.
The principal products and enhancements currently being manufactured and
sold by Eagle relate to its wireless messaging products and include the
following:
Base Stations and Transmitters
Transmitters and full-featured transmitters called Base Stations are used
by messaging carriers to broadcast radio-frequency messages to subscribers
carrying pagers. Eagle offers a slimline Stealth and a larger Quantum
transmitter that is available in the 72MHz, VHF, UHF, and 900MHz broadcast
frequency ranges. Each unit can be equipped to provide an output power ranging
from 15 Watts up to 500 Watts on almost any domestic or international messaging
frequency.
Radio Frequency Power Amplifiers
Radio-frequency power amplifiers are a sub-component of both messaging and
SMR transmitters and base stations. The high, medium and low power base station
and link transmitter power amplifiers are designed to operate with any FCC type
accepted exciter or may be combined with an Eagle optional plug-in base station
in the same space as the power amplifier. All Eagle power amplifiers above 100
Watts are equipped with Eagle "Heat Trap"(TM) design to provide the user with
long life and high reliability performance.
Extend-A-Page
Extend-a-Page is a compact lower-power transmitter and receiver set
designed to provide fill-in coverage in fringe locations where normal messaging
service from a wide-area messaging system is not adequate. The Extend-a-Page
receives the messaging data
7
on either a radio frequency control link or wireline link and converts this
information into low power simulcast compatible messaging transmissions on any
of the common messaging frequencies. The Extend-a-Page transmits the messaging
information at a one to two Watt level directly into hard to reach locations
such as hospitals, underground structures, large industrial plants, and many
locations near the outer coverage contour of messaging systems.
Link Products
Radio frequency and wireline communication links are needed to connect
multiple transmitters within a messaging network. Eagle provides both Link
equipment (the Link 20TX, 20RX, 20GX and 20PX) and the Link 20 software to
facilitate this interconnection. Major competitors have licensed the Eagle Link
20 software and have incorporated it as an industry standard into their
radio-messaging terminals. Customers may also purchase the same software
directly from Eagle as part of an Eagle system at a lesser cost. Management
believes that its software allows the user to mix and match the products of
different vendors on a common radio-messaging system.
In December 2002, the Company entered into a 4-year agreement, licensing
its wireless infrastructure products and service technology to DX Radio Systems,
Inc., of Sun Valley, California. The contract allows DX Radio to manufacture and
market the wireless infrastructure products and services that Eagle Wireless
International has been supplying for several years to the paging and specialized
mobile radio (SMR) markets. Eagle Wireless products covered under this agreement
include transmitters, base stations, paging terminals, controllers, repeaters
and receivers in all three major paging frequency bands. These products are now
being sold under the DX Eagle trade name. Additionally, Eagle consigned certain
inventory, sold certain trade booth assets and subleased certain facility space
as a part of the agreement. The agreement allows Eagle Wireless to derive
monthly revenue through the licensing agreement over the life of the contract,
while totally eliminating the overhead associated in its Eagle Wireless
subsidiary.
Eagle's Wireless International Products and Services revenues are reported
under the category of Products on the Company's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Eagle
within Note 22 - Industry Segments.
Customers
Eagle sells to a broad range of customers worldwide.
BroadbandMagic sells to customers worldwide. These customers are primarily
within the hospitality industry, business-to-business and the government
sectors.
Eagle BDS Services historically sold its products and services primarily in
the Houston, San Antonio, Austin and Phoenix markets although today markets such
products and services nationwide. Eagle BDS Services markets these products and
services through direct marketing efforts and via Eagle's sales staff and
service centers. The majority of its customers historically have been real
estate developers, which required the structured wiring component in addition to
the BDS services. Today, the Company has experienced significant success in
marketing the BDS Services to municipalities, real estate developers,
hospitality operators and public utility districts with residential and
commercial customers typically subscribing to one or more bundled digital
services such as voice, video, data/Internet and security monitoring.
Eagle Technology Services markets its products and services nationwide to a
wide range of companies including small to medium sized businesses as well as
Fortune 1000 enterprises. The primary industries are oil / gas, medical,
hardware / software, real estate, staff leasing and government.
Eagle Communications Services sells its project management services on a
nationwide basis to a wide range of customers including telecommunications,
hospitality, industrial and petrochemical, oil / gas companies and government
sectors.
Eagle Messaging Services sells its messaging products and services to both
individual consumers and businesses.
Eagle markets the Orb' Phone Exchange non-line-of-sight communications
system to Fortune 1000 enterprises, commercial aviation, government, the
military and homeland security customers.
The Company did not have any customers that aggregated ten percent or more
of consolidated revenues in fiscal year 2003 and 2002; and had two customers in
fiscal year 2001 that accounted for 30% and 15% of consolidated revenues.
8
Marketing and Sales
The majority of the company's products and services are marketed through
its employees using direct sales and various types of direct marketing
techniques.
Eagle BDS Services sells its products and services on a nationwide basis
through direct marketing efforts of its sales staff and service centers. For the
years ended August 31, 2003, 2002, and 2001, Eagle BDS Services, represented
15%, 7%, and 2% of consolidated revenues, respectively.
Eagle Technology Services are marketed through direct sales staff and
through various types of direct marketing. For the years ended August 31, 2003,
2002, and 2001, Eagle Technology Services represented 21%, 54%, and 65% of
consolidated revenues, respectively.
Eagle Communications Services are marketed through Eagle's direct sales
staff. For the years ended August 31, 2003, 2002, and 2001, Eagle Communications
Services, represented 34%, 18%, and 20% of consolidated revenues, respectively.
Eagle Messaging Services marketed through Eagle's direct sales staff and
publication advertising.
Eagle also markets the Orb'Phone Exchange non-line-of-sight communications
system directly to Fortune 1000 enterprises, commercial aviation, government,
the military and homeland security customers. Subsequent to the fiscal year
ending August 31, 2003, the Company announced that General Dynamics Decision
Systems, a business unit of General Dynamics, signed a five-year distribution
agreement to sell and support Eagle's breakthrough Orb'Phone Exchange
communications platform to customers in the U.S. Department of Defense (DOD),
General Services Administration (GSA), Defense Information Systems Agency
(DISA), and other U.S. and foreign government agencies.
Eagle Paging Services products and services are marketed through Eagle's
direct sales staff.
Eagle Security Services, are marketed through Eagle's direct sales staff.
Eagle maintains an Internet web site at, www.eaglebroadband.com; where
information can be found on Eagle and its subsidiaries products and services.
The web site provides customers with a mechanism to request additional
information on products and allows the customer to quickly identify and obtain
contact information for their regional sales representative. Information on the
web site of Eagle or any of its subsidiaries is not part of this annual report.
Research and Development
Eagle believes that a strong commitment to research and development is
essential to the continued growth of its business. One of the key components of
Eagle's development strategy is the promotion of a close relationship between
its development staff, internally with Eagle manufacturing and marketing
personnel, and externally with Eagle customers. This strategy has allowed Eagle
to develop and bring to market customer-driven products that meet real customer
needs.
From 1999 to 2003, Eagle has focused a large portion of its new development
resources on the development of the new broadband multimedia and Internet
product line. In addition, Eagle has formed a number of strategic relationships
with other large suppliers and manufacturers that will allow the latest in
technology and techniques to be utilized in the company's convergence
set-top-box product line. Eagle will continue to incur research and development
expenses with respect to the convergence set-top-box product line during the
current fiscal year.
Eagle has extensive expertise in the technologies required to develop
wireless communications systems and products including high power, high
frequency RF design digital signal processing, real-time software, high-speed
digital logic, wireless DSL products, radio frequency and data network design.
Eagle believes that by having a research and development staff with expertise in
these key areas, it is well positioned to develop enhancements for its existing
products as well as the next generation of personal communication products.
Investment in advanced computer-aided design tools for simulation and analysis
has allowed Eagle to reduce the time for bringing new products to market.
Research and development expenditures incurred by Eagle for the fiscal years
ended August 31, 2003, 2002, and 2001 were $411,000, $404,000 and $1,276,000
respectively.
Manufacturing
Eagle currently manufactures its satellite-based communications and
wireless products at its facilities in League City, Texas. Some subassemblies
are manufactured for Eagle by subcontractors at various locations throughout the
world. Eagle's manufacturing
9
expertise resides in assembling subassemblies and final systems that are
configured to its customers' specifications. The components and assemblies used
in Eagle's products include electronic components such as resistors, capacitors,
transistors, and semiconductors such as field programmable gate arrays, digital
signal processors and microprocessors, and mechanical materials such as cabinets
in which the systems are built. Substantially all of the components and parts
used in Eagle's products are available from multiple sources. In those instances
where components are purchased from a single source, the supplier is reviewed
frequently for stability and performance. Additionally, as necessary, Eagle
purchases sufficient quantities of components that have long-lead requirements
in the world market. Eagle ensures that all products are tested, tuned and
verified prior to shipment to the customer.
Eagle has determined that the most cost effective manufacturing method for
its high volume multimedia and Internet product line is to utilize offshore
contract production facilities supplemented with high volume United States based
contract facilities. The high volume requirements of the company's convergence
set-top-box product line are well beyond the capabilities of the current
facilities and would be cost prohibitive to construct. However, in the selection
of a high volume international manufacturer, Eagle has selected EpoX, a Taiwan
Stock Exchange company with established subsidiaries in the USA, Netherlands,
China and Germany. With a strong research and development team, EpoX is not only
able to produce a wide range of products, but also has been recognized as a
pioneer in the field. EpoX is both ISO-9001 and ISO-9002 certified. The
manufacturing location for the convergence set-top-box is the EpoX facility in
Taiwan.
Competition
Eagle competes with many established companies in the set-top-box business
including Scientific Atlanta, General Instrument, and many smaller companies.
Most of these companies have greater resources available than Eagle. The markets
that are currently developing for multimedia and other Internet related products
are extremely large and rapidly growing. Eagle has studied these markets and is
of the belief based on this research that it can effectively compete in these
markets with its new convergence set-top-box product line. However, there can be
no assurance that these conclusions are correct and that the multimedia and
Internet markets will continue to expand at their current rates and that Eagle
can gain significant market share in the future.
Eagle BDS competes indirectly with many established companies and service
providers that provide fiber and cable, structured wiring, broadband
data/Internet, security monitoring, cable television and telephone services.
Most of these companies have greater resources than Eagle BDS. Eagle has studied
these markets, and is of the belief that the bundled digital services offered to
its customers as a complete package with one source billing, is a competitive
advantage for Eagle BDS. Eagle's residential customers are subject to developer
and homeowner association agreements that allow Eagle BDS to be the primary
single source provider of these services. However, there can be no assurance
that these conclusions are correct and that the bundled digital services market
will continue to expand at their current rates and that Eagle BDS can gain
significant market share in the future.
Eagle Technology Services competes with many established companies in the
enterprise integration and network management solutions markets. Historically,
this business unit also participated in product fulfillment by reselling
hardware. Most of these companies have greater resources available than Eagle
Technology Services. Eagle has studied these markets and is of the belief that
by offering enterprise and network management and product fulfillment as a
turnkey solution, to medium sized companies and Fortune 1000 enterprises with
competitive pricing is a competitive advantage for Eagle Technology Services.
However, there can be no assurance that these conclusions are correct and that
the demand for these products and services will continue to expand at their
current rates and that Eagle Technology Services can gain significant market
share in the future.
Eagle Communications Services competes with many established companies in
the fiber and cable, structured wiring and project management services areas.
Most of these companies have greater resources available than Eagle
Communications Services. Eagle has studied these markets and is of the belief
that the offering of the collective services on a nationwide scale is a
competitive advantage for Eagle Communications Services. The use of the
sub-contractors located across the nation allows Eagle Communications Services
to complete large projects in an efficient manner, which is a valuable tool.
However, there can be no assurance that these conclusions are correct and that
these services will continue to expand at their current rates and that Eagle
Communications Services can gain significant market share in the future.
Eagle Messaging Services competes with many established companies in the
nationwide one and two-way messaging services area. Most of these companies have
greater resources available than Eagle Messaging Services.
Proprietary Information
Eagle attempts to protect its proprietary technology through a combination
of trade secrets, non-disclosure agreements, patent applications, copyright
filings, technical measures, and common law remedies with respect to its
proprietary technology. This protection may not preclude competitors from
developing products with features similar to Eagle's products. The laws of some
foreign countries in which Eagle sells or may sell its products do not protect
Eagle's proprietary rights in the products to the same extent as do
10
the laws of the United States. Although Eagle believes that its products and
technology do not infringe on the proprietary rights of others, there can be no
assurance that third parties will not assert infringement claims against Eagle
in the future. If litigation resulted in Eagle's inability to use technology,
Eagle might be required to expend substantial resources to develop alternative
technology. There can be no assurance that Eagle could successfully develop
alternative technology on commercially acceptable terms. Eagle has registered
and trademarked the name of BroadbandMagic for this wholly owned subsidiary.
This name is thought by Eagle to be a valuable addition to the intellectual
property rights of Eagle.
Regulation
Many of Eagle's products operate on radio frequencies. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States and internationally. Regulatory approvals
generally must be obtained by Eagle in connection with the manufacture and sale
of its products, and by customers to operate Eagle's products. There can be no
assurance that appropriate regulatory approvals will continue to be obtained, or
that approvals required with respect to products being developed for the
personal communications services market will be obtained. The enactment by
federal, state, local or international governments of new laws or regulations or
a change in the interpretation of existing regulations could affect the market
for Eagle's products. Although recent deregulation of international
telecommunications industries along with recent radio frequency spectrum
allocations made by the FCC have increased the demand for Eagle's products by
providing users of those products with opportunities to establish new messaging
and other wireless personal communications services, there can be no assurance
that the trend toward deregulation and current regulatory developments favorable
to the promotion of new and expanded personal communications services will
continue or that future regulatory changes will have a positive impact on Eagle.
Employees
As of November 14, 2003, Eagle employed approximately 73 persons and
retained 4 independent contractors. Eagle believes its employee relations to be
good. Eagle enters into independent contractual relationships with various
individuals, from time to time, as needed.
Risk factors that may affect Eagle's results of operations and financial
condition.
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing the company. Additional risks and uncertainties not presently
known to or that are currently deem immaterial also may impair Eagle's business
operations. If any of the following risks actually occur, Eagle's business could
be harmed.
We have a history of operating losses and reliance on external sources for
working capital.
From inception through August 31, 2003, we have incurred an accumulated
deficit in the amount of $75,188,000. For the fiscal year ended August 31, 2003,
we incurred losses in the amount of $33,764,000. We will continue to rely on
external sources for working capital for the foreseeable future.
We may need additional working capital.
At August 31, 2003, we had $2,538,000 in cash and cash equivalents.
Subsequent to the fiscal year ended August 31, 2003, we received net proceeds of
$7,687,000 from private placement offerings of stock and bonds and through the
sale of marketable securities held as short-term investments. We believe our
current working capital and expected cash flow from operations will be
sufficient to fund operations for the next twelve months. See Item 7 -
Management's Discussion and Analysis - Liquidity and Capital Resources.
Historically, we have financed operations through the sale of debt and
equity securities. We do not have any significant credit facilities available
with financial institutions or other third parties and historically, we have
relied upon best efforts third-party funding from individual accredited
investors. Though we have been successful at raising additional capital on a
best efforts basis in the past, we can provide no assurance that we will be
successful in any future best efforts financing efforts. If we are unable to
either obtain financing from external sources or generate internal liquidity
from operations before September 2004 or thereafter, we may need to curtail
operations or sell assets.
Our ability to raise capital through equity offerings is limited because
nearly all shares of common stock have either been issued or reserved for
issuance.
11
We have been named a defendant in several lawsuits, which if determined
adversely, could have a material adverse effect on our business.
Eagle Broadband and its subsidiaries have been named defendants in several
lawsuits in which plaintiffs are seeking damages ranging from several thousand
dollars to several million dollars. These lawsuits are discussed in detail in
Item 3 herein under the heading of Legal Proceedings. We intend to vigorously
defend these and other lawsuits and claims against us. However, we cannot
predict the outcome of these lawsuits, as well as other legal proceedings and
claims with certainty. An adverse resolution of pending litigation could have a
material adverse effect on our business, financial condition and results of
operations.
Our revenues may be adversely affected by downward price pressure on fiber optic
cables and computer hardware and software.
For the twelve months ended August 31, 2003, approximately 34% of our
revenue was generated by our subsidiary Atlantic Pacific Communications and 21%
from United Computing Group. Because Atlantic Pacific and United Computing Group
are engaged in a commodity-related business, their ability to generate revenue
and operate at a profit is susceptible to downward price pressure in their
respective markets. If Atlantic Pacific and/or United Computing Group are
required to reduce prices on their products, our ability to compete with
competitors and to operate at a profit may be adversely effected.
Cancellations of recurring-revenue contracts could have a material adverse
effect on our business.
For the twelve months ended August 31, 2003, approximately 24% of our
revenue was generated by recurring-revenue contracts with Eagle Broadband
Services and DSS Security. Any defects or errors in our services or any failure
to meet customers' expectations could result in the cancellation of services or
require us to provide additional services to a client at no charge, which could
reduce revenue or the margins associated with this revenue segment.
Our products are subject to rapid technological change. If we are unable to
adapt or adjust our technology to our business may have a material adverse
effect on our business.
The design, development, and manufacturing of personal communication
systems, specialized mobile radio products, and multimedia entertainment
products are highly competitive and characterized by rapid technology changes.
We compete with other existing products and will compete against other
technologies. Development by others of new or improved products or technologies
may make our products obsolete or less competitive. While we believe that our
products are based on established state-of-the-art technology, there can be no
assurance that they will not become obsolete in the near future or that we will
be able to develop a commercial market for our products in response to future
technology advances and developments.
We will be required to record a significant charge to earnings if we determine
our goodwill is impaired.
We are required under generally accepted accounting principles to review
our intangible assets for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. Goodwill is required to be
tested for impairment at least annually. If the result indicates that impairment
exists, we will be required to record a significant charge to earnings in our
financial statements during the period in which any impairment of our goodwill
is determined. At August 31, 2003, our goodwill was $76.3 million
Our success depends upon our ability to protect proprietary technologies.
We rely on non-disclosure agreements with employees and consultants, and
common law remedies with respect to our proprietary technology. We also file
patent applications on our key technologies. We can provide no assurance that
others will not misappropriate our proprietary technologies or will develop
competitive technologies or products that could adversely affect our business.
In addition, although we are not aware of any infringement claims against us or
any circumstances that could lead to such claims, there can be no assurances
that such claims will not be made.
Our efforts to protect our intellectual property may require that we become
involved in costly and lengthy litigation, which could seriously harm our
business. In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Although we
have not been involved in any intellectual property litigation, we may be
required to file lawsuits to in the future to protect our intellectual property
rights or to defend allegations of infringement asserted by others. We could be
subject to significant liability for damages or the value of our proprietary
rights could be diminished if we are unsuccessful in prosecuting or defending
lawsuits. Any litigation, regardless of its outcome, would likely be time
consuming and expensive to resolve and would divert management's time and
attention. Any potential intellectual property litigation also could force us to
take specific actions, including:
12
o Cease selling products that use the challenged intellectual property;
o Obtain from the owner of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o Redesign those products that use infringing intellectual property.
We face substantial competition from competitors with significantly greater
resources.
We face competition from many entities with significantly greater financial
resources, well-established brand names, and larger customer bases. We may
become subject to severe price competition for our products and services as
companies seek to enter our industry or current competitors attempt to gain
market share. We expect competition to intensify in the future and expect
significant competition from traditional and new telecommunications companies
including, local, long distance, cable modem, Internet, digital subscriber line,
microwave, mobile and satellite data providers.
A system failure could delay or interrupt our ability to provide products
or services and have a materially adverse effect on our business.
Our operations are dependant upon our ability to support a highly complex
network infrastructure. Many of our customers are particularly dependent on an
uninterrupted supply of services. Any damage or failure that causes
interruptions in our operations could result in loss of these customers. Because
of the nature of the services we supply and the complexity of our network, it is
not feasible in all cases to maintain backup systems, and the occurrence of a
natural disaster, operational disruption or other unanticipated problem could
cause interruptions in the services we provide.
Stockholders face possible volatility of stock price for our common stock.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. As the market price of our common stock
has been quite volatile in the last 12 months, we can provide no assurance that
the current price will be maintained.
New government regulation could hurt our business.
Eagle's telecommunication and cable products are regulated by federal,
state, and local governments. We are generally required to obtain regulatory
approvals in connection with providing telephone and television services. For
example, the cable and satellite television industry is regulated by Congress
and the Federal Communications Commission, and various legislative and
regulatory proposals under consideration from time to time may substantially
affect our business. There is no guarantee that new laws or regulations will not
affect our operations or that appropriate regulatory approvals will continue to
be obtained.
Item 2. Description of Property
Eagle's headquarters are located in League City, Texas and include
approximately 34,375 square feet of leased office, production, and storage
space. The lease expires in May 2004. Eagle also maintains subsidiary offices in
one other Houston area location, with the lease expiring in December 2005 and in
San Antonio, Texas, with a lease expiring in July 2006. Facilities leases are
described herein in further detail in the Note 17 to the Company's Consolidated
Financial Statements included herein.
Eagle believes that all rental rents are at market prices. Eagle has
insured its facilities in an amount that it believes is adequate and customary
in the industry. Eagle believes that it has access to available facilities that
are adequate to meet its current requirements but anticipates the need to
acquire additional space within the next two years. Eagle believes that suitable
additional space in close proximity to its existing headquarters will be
available as needed to accommodate the growth of its operations through the
foreseeable future.
Item 3. Legal Proceedings
On February 23, 2001, ClearWorks and Eagle became defendants in Kaufman
Bros., LLP v. Clearworks.Net, Inc. and Eagle Wireless, Inc., Index No.
600939/01, 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. The Company settled this
lawsuit on November 4, 2003 by issuing cash and stock totaling a fair market
value of $1,320,000 as of the settlement date.
13
On December 17, 2001, Kevan Casey and Tommy Allen sued ClearWorks.net,
Inc., ClearWorks Integration, Inc., and Eagle Wireless International, Inc. for
breach of contract and other related matters in Cause No. 2001-64056; In the
281st Judicial District Court of Harris County, Texas. The Company settled this
lawsuit on November 26, 2003 for cash and stock to be paid and issued totaling a
fair market value of $3,000,000 as of the settlement date.
On July 10, 2003, Eagle became a defendant in Cornell Capital Partners,
L.P. vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), In the
United States District Court for the District of New Jersey. The suit presents
claims for breach of contract, fraud and negligent misrepresentation. Plaintiff
has also alleged that Eagle has defaulted on a convertible debenture for failing
to timely register the shares of common stock underlying the convertible
debenture and is seeking to accelerate the maturity date of the debenture. As of
August 31, 2003, the principal balance of the debenture was approximately $1.2
million. The Company denies the claims and intends to vigorously defend this
lawsuit and the claims against it.
On December 14, 2000, ClearWorks became a defendant in State Of Florida
Department Of Environmental Protection vs. Reco Tricote, Inc. And Southeast Tire
Recycling, Inc. A/K/A Clearwork.net, Inc.; In The Circuit Court Of The Tenth
Judicial Circuit In And For Polk County, Florida. The Florida EPA sued
ClearWorks.net presenting claims for recovery costs and penalties for a waste
tire processing facility. The suit seeks recovery of costs and penalties in a
sum in excess of $1,000,000, attorneys' fees and cost of court. ClearWorks
denies the claims and intends to vigorously contest all claims in this case and
to enforce its indemnification rights against the principals of Southeast Tire
Recycling.
On September 26, 2003 Intratech served a lawsuit on ClearWorks.net in
Intratech Capital Partners, Ltd. vs. ClearWorks.net, Inc.; Case No. CF3 20136 in
the High Court of Justice, Queen's Bench Division, Cardiff District Registry.
This lawsuit presents claims for breach of contract for failing to pay the
plaintiff for financial advice and services allegedly rendered. The complaint
seeks damages of $6,796,245.50, plus attorneys' fees and costs. ClearWorks
denies the claims and intends to vigorously defend this lawsuit and claims
against it.
On or about September 2003, Enron sued United Computing Group, Inc. in
Enron Corp. (Debtors/Plaintiff) vs. United Computing Group, Inc.; Case No.
01-16034 in the United States Bankruptcy Court for the Southern District of New
York. The suit presents claims pursuant to sections 547 and 550 of the
Bankruptcy Code to avoid and recover a transfer in the amount of approximately
$1,500,000.00. Defendant has filed an answer, denies the claims and intends to
vigorously defend this lawsuit and claims against it.
We intend to vigorously defend these and other lawsuits and claims against
us. However, we cannot predict the outcome of these lawsuits, as well as other
legal proceedings and claims with certainty. An adverse resolution of pending
litigation could have a material adverse effect on our business, financial
condition and results of operations. The Company is subject to legal proceedings
and claims that arise in the ordinary course of business. The Company's
management does not expect that the results in any of these legal proceedings
will have adverse affect on the Company's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
14
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Shares of Eagle common stock are listed on the American Stock Exchange
under the symbol "EAG." On November 14, 2003, Eagle's common stock closed at
$1.53 per share. Eagle is authorized to issue 200,000,000 shares of common
stock, 186,964,041 of which were issued and outstanding at November 14, 2003. At
November 14, 2003 there were approximately 1,069 holders of record of Eagle
common stock.
The table set forth below, for the periods indicated, lists the reported
high and low sale prices per share of Eagle common stock on the American Stock
Exchange.
Eagle Common Stock
------------------
High Low
FISCAL 2003
Quarter ended November 30, 2002 $0.54 $0.27
Quarter ended February 28, 2003 $0.53 $0.16
Quarter ended May 31, 2003 $0.37 $0.12
Quarter ended August 31, 2003 $0.63 $0.33
FISCAL 2002
Quarter ended November 30, 2001 $0.95 $0.52
Quarter ended February 28, 2002 $1.00 $0.40
Quarter ended May 31, 2002 $0.47 $0.33
Quarter ended August 31, 2002 $0.72 $0.32
Eagle has never paid any cash dividends on its common stock and does not
anticipate paying cash dividends within the next two years. Eagle anticipates
that all earnings, if any, will be retained for development of its business. Any
future dividends will be subject to the discretion of the board of directors and
will depend on, among other things, future earnings, Eagle's operating and
financial condition, Eagle's capital requirements and general business
conditions.
Recent Sales of Unregistered Securities
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 pursuant to Rule 506 of the Securities Act. 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 and no commissions have been paid. During the
fourth quarter ended August 31, 2003, the Company received proceeds of
$2,866,000 from the sale of such bonds.
15
Item 6. Selected Financial Data
The data that follows should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in Item 8 and
"Management's Discussion and Analysis."
Year Ended August 31,
------------------------------
($ in thousands) 2003 2002 2001 2000 1999
---------------- ----------------- --------------- ---------------- ------------------
Operating Data:
Net sales $11,593 $29,817 $28,110 $5,240 $2,217
Operating expenses $29,076 $43,635 $15,924 $3,985 $1,319
Operating income (loss) $(28,267) $(36,522) $(8,222) $(1,227) $(438)
Other income (expense), net $(5,426) $(265) $2,348 $1,516 $789
Income tax provision $0 $0 $0 $96 $91
---------------- ----------------- --------------- ---------------- ------------------
Net income (loss) $(33,693) $(36,787) $(5,874) $175 $168
================ ================= =============== ================ ==================
Earnings per share (basic) $(0.35) $(0.57) $(0.12) $0.01 $0.01
Statement of Cash Flows Data:
Cash provided by operating
activities $(6,085) $ (797) $(1,609) $(5,299) $(1,902)
Cash used by investing $(1,710) $(13,755) $(6,512) $(2,224) $(33)
activities
Cash provided (used) by financing $6,912 $ (2,406) $(3,846) $39,681 $1,025
activities
As of August 31,
----------------
2003 2002 2001 2000 1999
---------------- ----------------- --------------- ---------------- ------------------
Balance Sheet Data:
Total assets $121,006 $129,983 $170,667 $57,641 $10,320
Long-term debt --- $1,272 $2,136 $73 $12
Total stockholders' equity $101,976 $117,380 $149,128 $54,061 $8,894
Item 7. Management's Discussion and Analysis
Overview
For the year ended August 31, 2003, Eagle's business operations reflected
further investment and expansion into the broadband products and services
sector; paving the way for future growth of the BDS business in conjunction with
one of the Company's objectives of producing profitable recurring revenues while
moving away from commodity product and service sales with low gross margins. In
addition, during fiscal 2003 and 2002, the Company conducted extensive cost
reduction and containment activities associated with such restructuring. We
believe that the effects of these cost reduction measures will significantly
reduce our fiscal 2004 ongoing expenses. The Company's consolidated operations
generated revenues of $11,593,000 with a corresponding gross profit of $809,000
for the fiscal year ended August 31, 2003. The significant decline in revenues
in fiscal 2003 is primarily attributable to the discontinuance of direct sales
of low-margin commodity 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 technology service provider
versus its historical emphasis on direct product fulfillment. Additionally, a
decline in the sale of commercial and residential home cabling occurred as a
result of a deferral of implementation of national contracts and a
discontinuance of home cabling projects in Arizona, Houston, San Antonio and
Austin, Texas markets, partially offset by increased sales of broadband products
and services.
The Company incurred a net loss of $33,693,000 for the fiscal year ended
August 31, 2003. The loss was primarily attributable to the Company's loss from
operations that included non-cash impairment, write-downs and restructuring
charges of $7,611,000 associated with restructured and discontinued operations
of low margin commodity and unprofitable business operations, litigation
settlement costs of $3,650,000, bad debt expense of $2,177,000 and various
charges included in accrued expenses related to
16
restructuring costs and settlement of various supplier payment obligations. The
Company consolidated management positions and centralized financial and
administrative functions, research and development activities and marketing of
all products and services in an effort to minimize unnecessary expenditures,
increase profitability, and provide management with timely information to react
to changing market conditions in the broadband industry.
During the fiscal year ended August 31, 2003, we implemented 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. Also, the company is
continuing the development and expansion of the Company's BDS model for
distribution on a nationwide basis of voice, video and data content; increased
sales efforts in the telephone, cable, internet, security services and wireless
segments; 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
entering into business relationships with financial and technology companies to
provide bundled digital services (digital content) to cities and municipalities
that currently have or are in the process of completing construction of 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.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following policies as critical to its
business and the understanding of its results of operations. The Company
believes it is improbable that materially different amounts would be reported
relating to the accounting policies described below if other acceptable
approaches were adopted. However, the application of these accounting policies,
as described below, involve the exercise of judgment and use of assumptions as
to future uncertainties; therefore, actual results could differ from estimates
generated from their use.
Impairment of Long-Lived Assets and Goodwill
Our long-lived assets predominantly include goodwill.. Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142") requires that goodwill and intangible assets be tested for
impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis and between annual tests in certain
circumstances. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill and intangible assets to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.
Goodwill is primarily the Company rights to deliver bundled digital
services such as Internet, telephone, cable television and security monitoring
services to residential and business users. The Company obtained an independent
appraisal to assess the fair value of the intangible assets. There were a number
of significant and complex assumptions used in the calculation of the fair value
of the intangible assets. If any of these assumptions prove to be incorrect, the
Company could be required to record a material impairment to its intangible
assets. The assumptions included significant market penetration in its current
markets under contract and significant market penetration in markets where they
are currently negotiating contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing basis. An
impairment loss would be deemed necessary when the estimated non-discounted
future cash flows are less than the carrying net amount of the asset. If an
asset were deemed to be impaired, the asset's recorded value would be reduced to
fair market value. In determining the amount of the charge to be recorded, the
following methods would be utilized to determine fair market value (i) quoted
market prices in active markets, (ii) estimate based on prices of similar assets
and (iii) estimate based on valuation techniques. The Company obtained an
independent valuation to assist it in testing the fair value of its goodwill and
intangibles as of August 31, 2003 and determined that these assets totaling
$81.6 million were not impaired.
Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under its principal subsidiaries and operating business units
including; Eagle Wireless International, Inc.; BroadbandMagic; ClearWorks
Communications, Inc.; ClearWorks Home Systems, Inc.; Atlantic Pacific
Communications, Inc.; Contact Wireless, Inc.; DSS Security, Inc.; Link Two
Communications, Inc.; and United Computing Group, Inc., names.
17
Eagle Wireless International
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.
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 90-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 Wireless International and BroadbandMagic engage 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 companies'
approval prior to sale. The distributorship or sales agent receives commissions
based on the amount of the sales invoice from the companies to the customer. The
sale is recognized at the time of shipment to the customer. These sales agents
and distributors are not a significant portion of total sales in any of the
periods presented.
Eagle Broadband Services
Eagle Broadband Services provides Bundled Digital Services to business and
residential customers, primarily in the Texas market to date. 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 Residential Structured Wiring
Eagle Broadband Residential Structured Wiring sells and installs structured
wiring, audio and visual components to homes. This subsidiary recognizes revenue
and the related costs at the time the services are performed. Revenue is derived
from the billing of structured wiring to homes and the sale of audio and visual
components to the homebuyers.
Eagle Broadband Communications Services
Eagle Broadband Communication Services 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
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to independent third
parties.
Eagle Messaging Services
Eagle Messaging Services provides customers with one and two way messaging
systems. The revenue from these services is recognized as it is earned from the
customer.
Eagle Paging Services
Eagle Paging Services 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.
18
Eagle Security Services
Eagle Security Services 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.
Eagle Technology Services
Eagle Technology Services provides business-to-business hardware and
software network solutions and a 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.
Receivables
For the year ended August 31, 2003, Eagle accounts receivables decreased to
$1,704,000 from $5,028,000 at August 31, 2002. The majority of this decrease was
due to the decline in lower margin commodity computer product and structured
cabling revenues compared to the prior year combined with the write down of
$2,177,000 in accounts receivable for allowance for doubtful accounts associated
with discontinued operations and the sale of a net of $243,650 in accounts
receivable to Southwest Bank of Texas in conjunction with a purchase and sale
agreement entered into by the Company's subsidiaries, United Computing Group,
Inc. and Atlantic Pacific Communications, Inc.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivables deemed uncollectible are charged against the
allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At August 31, 2003, Eagle's
inventory totaled $3,199,000 as compared to $6,059,000 at August 31, 2002. The
majority of this decrease was due to a decrease in raw materials inventory
resulting from reserves, write-downs and allowances for restructured and
discontinued commodity related product lines.
Recent Accounting Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that
costs associated with an exit or disposal activity be recognized only when the
liability is incurred (that is, when it meets the definition of a liability in
the FASB's conceptual framework). SFAS 146 also establishes fair value as the
objective for initial measurement of liabilities related to exit or disposal
activities. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted SFAS in the first quarter
of fiscal 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." For certain guarantees issued
after December 31, 2002, FIN 45 requires a guarantor to recognize, upon issuance
of a guarantee, a liability for the fair value of the obligations it assumes
under the guarantee. Guarantees issued prior to January 1, 2003, are not subject
to liability recognition, but are subject to expanded disclosure requirements.
The Company does not believe that the adoption of this Interpretation has had a
material effect on its consolidated financial position or statement of
operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which requires the
Company to consolidate variable interest entities for which it is deemed to be
the primary beneficiary and disclose information about variable interest
entities in which it has a significant variable interest. FIN 46 became
effective immediately for variable interest entities formed after January 31,
2003 and effective for periods ending after December 15, 2003, for any variable
interest entities formed prior to February 1, 2003. The Company does not believe
that this Interpretation will have a material impact on its consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," which requires that the
extinguishment of debt not be considered an extraordinary item under APB Opinion
No. 30 ("APB 30"), "Reporting the Results of
19
Operations-Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
unless the debt extinguishment meets the "unusual in nature and infrequent of
occurrence" criteria in APB 30. SFAS 145 is effective for fiscal years beginning
after May 15, 2002, and, upon adoption, companies must reclassify prior period
items that do not meet the extraordinary item classification criteria in APB 30.
The Company adopted SFAS 145 and related rules as of August 31, 2002. The
adoption of SFAS 145 had no effect on the Company's financial position or
results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). The provisions of this Statement
are effective for financial instruments entered into or modified after May 31,
2003, and otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this Statement did not have an
impact on the Company's financial results of operations and financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
and for hedging relationships designated after June 30, 2003. The adoption of
this statement did not have an impact on the Company's operating results or
financial position.
Results of Operations
Year Ended August 31, 2003 Compared to Year Ended August 31, 2002
Net Sales. For the year ended August 31, 2003, net sales declined to
$11,593,000 from $29,817,000 during the year ended August 31, 2002. The overall
decrease of 61% was primarily attributable to the discontinuance of direct sales
of low-margin commodity 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 technology service provider
versus its historical emphasis on direct product fulfillment. Additionally, a
decline in the sale of commercial and residential home cabling occurred as a
result of a deferral of implementation of national contracts and a
discontinuance of home cabling projects in Arizona, Houston, San Antonio and
Austin, Texas markets, partially offset by increased sales of broadband products
and services.
Cost Of Goods Sold. For the year ended August 31, 2003, cost of goods sold
declined to $10,784,000 from $22,704,000 during the year ended August 31, 2002.
The decrease was primarily attributable to the discontinuance of direct sales of
low-margin commodity computer products and commercial structured wiring in the
markets referenced above. The Company's overall gross profit percentage was 7%
and 24% for the years ended August 31, 2003 and August 31, 2002. This decrease
is primarily attributable to write-downs and reserves of inventory in connection
with the discontinuance of commodity based products combined with the baseline
operating infrastructure costs being spread over fewer revenue dollars.
Operating Expenses. For the year ended August 31, 2003, operating expenses
decreased to $29,076,000 from $43,635,000 for the year ended August 31, 2002.
The primary portions of the decrease are discussed below:
A $19,489,000 decrease in non-cash impairment charges resulting from: a
$7,611,000 non-cash impairment charge was expensed at August 31, 2003
associated with restructured and discontinued operations of low margin
commodity business units discussed above as compared to a $27,100,000
non-cash impairment charge being expensed at August 31, 2002, for
impairment of licenses and equipment in the Company's Link Two subsidiary.
A $1,693,000 decrease in salaries and related costs, as a result of overall
staffing reductions across all business units; the majority of which
occurred in discontinued and restructured operations.
A $716,000 decrease in advertising and promotion, due primarily to
extensive cost reductions measures implemented in fiscal 2003 as the
Company placed more emphasis on directly marketing its products and
services to its customers as well as entering into business relationships
with financial and technology companies to provide BDS services to cities
and municipalities and decreased attendance at conventions and tradeshows.
A $1,431,000 decrease in depreciation and amortization, due principally to
the disposal of certain assets from restructured and discontinued
operations.
An $8,763,000 increase in other support costs, due to an increase in
litigation settlement costs of $3,650,000, bad debt expense of $2,177,000
and various charges included in accrued expenses related to restructuring
costs and settlement of various
20
supplier payment obligations.
Net Loss. For the year ended August 31, 2003, Eagle's net loss was
$33,693,000, compared to a net loss of $36,787,000 during the year ended August
31, 2002.
Changes in Cash Flow. Eagle's operating activities used net cash of
$6,085,000 in the year ended August 31, 2003, compared to use of net cash of
$797,000 in the year ended August 31, 2002. The increase in net cash used by
operating activities was primarily attributable to an increase in the Company's
net operating loss, net of non-cash charges. Eagle's investing activities used
net cash of $1,710,000 in the year ended August 31, 2003, compared to
$13,755,000 in the year ended August 31, 2002. The decrease was due primarily to
a significant decline in investment activities and purchase of equipment
associated with the prior years build out of Eagle's network and infrastructure
for the delivery of broadband services. Eagle's financing activities provided
cash of $6,912,000, in the year ended August 31, 2003, compared to $2,406,000 of
cash used in the year ended August 31, 2002. The increase is attributable to an
increase in notes payable aggregating $7,297,000 in conjunction with the
Company's financing activities in fiscal 2003 as compared to a net repayment
against lines of credit in the amount of $1,846,000 and purchase of treasury
stock of $918,000 in fiscal 2002.
Liquidity and Capital Resources. Current assets for the year ended August
31, 2003 totaled $8,109,000 (includes cash and cash equivalents of $2,538,000)
as compared to $14,866,000 reported for the year ended August 31, 2002. During
the first fiscal quarter of 2004, Eagle has received net proceeds of $7,687,000
from private placement offerings of stock and bonds and through the sale of
marketable securities held as short term investments and has retired or reduced
certain of its notes payable, accounts payable and other obligations including
numerous lawsuits; thereby significantly reducing the Company's current and
contingent liabilities. Additionally, the Company has $1,259,000 of Burst.com
stock held in short term investments; valued as of November 21, 2003.
The Company anticipates that it will incur significantly less capital
expenditures for broadband fiber infrastructure on a going forward basis as a
result of an emphasis of the sale of its BDS services to municipalities, real
estate developers, hotels, multi-tenant units and service providers that own or
will build out their own fiber networks versus the Company's history of building
out and owning these networks. Additionally, the Company anticipates that it
will generate annualized cost savings aggregating $7,822,000 from staffing
reductions and related operating expense reductions discussed in the Company's
overall restructuring plan in Note 24 to the Company's financial statements,
(Subsequent Events). The Company's current cash and cash equivalents, including
net proceeds received during the first fiscal quarter, will be sufficient to
fund operations for the next twelve months.
Historically, we have financed operations through the sale of debt and
equity securities. We do not have any significant credit facilities available
with financial institutions or other third parties and historically, we have
relied upon best efforts third-party funding from individual accredited
investors. Though we have been successful at raising additional capital on a
best efforts basis in the past, we can provide no assurance that we will be
successful in any future best efforts financing efforts. If we are unable to
either obtain financing from external sources or generate internal liquidity
from operations before September 2004 or thereafter, we may need to curtail
operations or sell assets. Our ability to raise capital through further equity
offerings is limited because nearly all shares of common stock have either been
issued or reserved for issuance.
Contractual Obligations
Contractual obligations Payments due by period
-----------------------------------------------
Total Less than 1-3 3-5 More than 5
1 year years years years
-----------------------------------------------
Long-Term Debt 5,779 5,779 --- --- ---
Obligations
-----------------------------------------------
Operating Lease 695 521 174 --- ---
Obligations
-----------------------------------------------
Total 6,474 6,300 174 --- ---
-----------------------------------------------
The Company's contractual obligations consist of long-term debt as set
forth in Note 6, (Notes Payable), to the Company's financial statements and
certain off-balance sheet obligations for office space operating leases
requiring future minimal commitments under non-cancelable leases. - See Item 7 -
Management's Discussion and Analysis under the heading (Off-Balance Sheet
Arrangements) and Note 17 to the Company's financial statements under the
heading (Commitments and Contingent Liabilities).
21
Year Ended August 31, 2002 Compared to Year Ended August 31, 2001
Net Sales. For the year ended August 31, 2002, net sales increased to
$29,817,000 from $28,110,000 during the year ended August 31, 2001. The overall
increase of 6% was primarily attributable to added sales from the Company's
broadband service offerings through its subsidiaries ClearWorks Communications
and ClearWorks Home Systems, along with revenues from its Contact Wireless and
DSS Security subsidiaries that were acquired in January 2002. These increases
were partially offset by a decline in product revenues from the Company's United
Computing Group subsidiary due to the loss of a major customer in the energy
sector and an overall decline in the IT procurement market in 2002 and a minor
decrease in revenues from the Company's Atlantic Pacific Communications
subsidiary. Atlantic Pacific provides project planning, installation, project
management, testing and documentation of fiber and cable to commercial and
industrial clients throughout the United States while United Computing Group
provides business-to-business hardware and software network solutions and
network monitoring services.
Cost Of Goods Sold. For the year ended August 31, 2002, cost of goods sold
increased to $22,704,000 from $20,408,000 during the year ended August 31, 2001.
The increase was primarily attributable to added cost of sales comprised of
direct labor, materials and related costs for both broadband services and the
Company's Atlantic Pacific Communications subsidiary. Atlantic Pacific provides
project planning, installation, project management, testing and documentation of
fiber and cable to commercial and industrial clients throughout the United
States. The Company's overall gross profit percentage was 24% and 27% for the
years ended August 31, 2002 and August 31, 2001. This decrease is primarily
attributable to lower profit margins on volume sales of computers and related
equipment and increases in other manufacturing costs associated with the
production of the convergent set-top box.
Operating Expenses. For the year ended August 31, 2002, operating expenses
increased to $43,635,000 from $15,924,000 for the year ended August 31, 2001.
The primary portions of the increase are discussed below:
A $27,100,000 non-cash impairment charge was expensed at August 31, 2002,
for impairment of licenses and equipment in the Company's Link Two
subsidiary.
A $1,626,000 increase in salaries and related costs, as a result of its
acquisitions and expanded business.
A $363,000 increase in advertising and promotion, due primarily to
introductions and expansion of the Company's broadband services and
convergent set-top box offerings.
A $335,000 net increase in other support costs, due to an increase in
salary and related costs, rents, interest, contract labor, professional
fees and communication costs. This net increase included an offset of
$729,000 associated with a decrease in advertising and promotion, due
primarily to decreased attendance at conventions and trade shows on a
worldwide basis
Net Earnings. For the year ended August 31, 2002, Eagle's net loss was
$36,787,000, compared to a net loss of $5,874,000 during the year ended August
31, 2001.
Off-Balance Sheet Arrangements. The Company has no off-balance sheet
structured financing arrangements. The Company has operating leases primarily
for office space. The Company incurred office space rental expense of
$1,183,000, $436,219 and $232,195 in fiscal years ended August 31, 2003, 2002,
and 2001, respectively. Future minimum rental commitments under non-cancelable
leases are $521,000, $116,000 and $58,000 for fiscal years ended August 31,
2004, 2005 and 2006, respectively. .
Item 7A. 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. The Company fully retired its revolving
credit facility in September 2003 and thus no longer has such exposure related
to interest rate risk. Borrowings under the credit facility bear interest at
variable rates based on the bank prime rate. The extent of this risk with
respect to interest rates on funded debt is not quantifiable or predictable due
to the variability of future interest rates; however, the Company does not
believe a change in these rates would have a material adverse effect on the
Company's operating results, financial condition, and cash flows.
The Company's cash and cash equivalents are invested in mortgage and asset
backed securities, mutual funds, money market accounts and common stock.
Accordingly, the Company is subject to both changes in market interest rates and
the equity market fluctuations and risk. There is an inherent roll over risk on
these funds as they accrue interest at current market rates. The extent of this
risk is not quantifiable or predictable due to the variability of future
interest rates. The Company does not believe a change in these rates would have
a material adverse effect on the Company's operating results, financial
condition, and cash flows with respect to
22
invested funds in mortgage and asset backed securities, mutual funds and money
market accounts, however; the company does have both cash and liquidity risks
associated with its common stock investments aggregating $1,714,006 in market
value as of August 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 which represented greater than
10% of its revenues during fiscal 2002 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.
International Business Risk
Eagle generated net sales in markets outside the United States, which
amount to less than 5% of total Eagle net sales in the last three years. Sales
are subject to the customary risks associated with international transactions,
including political risks, local laws and taxes, the potential imposition of
trade or currency exchange restrictions, tariff increases, transportation
delays, difficulties or delays in collecting accounts receivable, and exchange
rate fluctuations. Pre-payments and letters of credit drawn on American or
limited foreign corresponding banks are required from international customers to
reduce the risk of non-payment.
Item 8. Consolidated Financial Statements
The financial statements commencing on page F-1 have been audited by Malone
& Bailey, PLLC as of August 31, 2003, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended and McManus & Co.,
P.C., independent certified public accountants, to the extent and for the
periods set forth in their reports appearing elsewhere herein and are included
in reliance upon such reports given upon the authority of said firm as experts
in auditing and accounting.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This disclosure has been previously reported in the Company's Form 8-K
filed September 15, 2003.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) as of the end of the period covered by this annual
report. Based on such evaluation, such officers have concluded that the
Company's disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act. Changes In Internal Controls
There has been no change in the Company's internal control over financial
reporting that occurred during the year ended August 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference
from the information provided in the Company's Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
from the information provided in the Company's Proxy Statement.
23
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
The following table sets forth information, as of August 31, 2003, with
respect to the Company's compensation plans under which common stock is
authorized for issuance
Number of Securities
Remaining Available for
Number of Securities Weighted Average Future Issuance Under
To be Issued Upon Exercise Price of Equity Compensation
Exercise of Outstanding Outstanding Plans (Excluding
Options, Warrants and Options, Securities
Rights Warrants and Rights Reflected in Column A)
Plan Category (A) (B) (C)
-----------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans 406,131 $1.27 551,370
Approved by Security Holders
Equity Compensation Plans Not
Approved by Security Holders
(1) 5,991,667 $1.47 0
----------------------------- -------------------- ---------------------------
6,397,798 $1.45 551,370
Total
(1) A description of the equity compensation not approved by the security
holders is set forth in note 13 to the financial statements contained in
this Form 10-K.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
from the information provided in the Company's Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference
from the information provided in the Company's Proxy Statement.
Item 15--Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules:
The financial statements are set forth under Item 8 of this Annual Report
on Form 10-K. Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise included.
(b) Reports on Form 8-K
The following reports were furnished on Form 8-K during the three months
ended August 31, 2003:
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on June 30, 2003 with the Securities and Exchange Commission.
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on August 27, 2003 with the Securities and Exchange Commission.
24
(c) Exhibit Listing
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Eagle Wireless International, Inc. Articles of
Incorporation, as Amended (incorporated by reference to
Exhibit 3.1 of Form SB-2 file no. 333-20011)
Exhibit 3.2 Amended and Restated Eagle Wireless International, Inc.
Bylaws (Incorporated by reference to Exhibit 3.2 of Form
10-KSB for the fiscal year ended August 31, 2001, filed
November 16, 2001)
Exhibit 4.1 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of Form SB-2 file no. 333-20011)
Exhibit 10.1 Asset Purchase Agreement between Eagle Telecom
International, Inc., a Delaware corporation and Eagle
Telecom International, Inc., a Texas corporation
(incorporated by reference to Exhibit 10.1 of Form SB-2
file no. 333-20011)
Exhibit 10.2 Stock Option Plan (incorporated by reference to Exhibit
10.2 of Form SB-2 file no. 333-20011)
Exhibit 10.3 Agreement and Plan of Reorganization dated September 15,
2000 (incorporated by reference to Exhibit 10.1 of Form
S-4 file no. 333-49688)
Exhibit 10.4 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Comtel
Communications, Inc. (incorporated by reference to
Exhibit 10.4 of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000)
Exhibit 10.5 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Atlantic
Pacific Communications, Inc. (incorporated by reference
to Exhibit 10.5 of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000)
Exhibit 10.6 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Etoolz, Inc.
(incorporated by reference to Exhibit 10.6 of Form 10-KSB
for the fiscal year ended August 31, 2000, filed December
13, 2000)
Exhibit 21.1 List of Subsidiaries (incorporated by reference to
Exhibit 21.1 of Form S-4 file no. 333-49688)
Exhibit 23.1 Consent of McManus & Co., P.C
Exhibit 23.2 Consent of Malone & Bailey, PLLC
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
25
SIGNATURES
----------
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eagle Broadband, Inc.
By: /S/David Weisman
-----------------------
David Weisman,
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/S/David Weisman Chief Executive Officer, Director December 8, 2003
- -----------------------
David Weisman
/S/Richard R. Royall Chief Financial Officer December 8, 2003
- -----------------------
Richard R. Royall
/S/H. Dean Cubley Director, Chairman of the Board December 8, 2003
- -----------------------
H. Dean Cubley
/S/Christopher W. Futer Director December 8, 2003
- -----------------------
Christopher W. Futer
/S/A. L. Clifford Director December 8, 2003
- -----------------------
A. L. Clifford
/S/Glenn A. Goerke Director December 8, 2003
- -----------------------
Glenn A. Goerke
/S/Lorne E. Persons Director December 8, 2003
- -----------------------
Lorne E. Persons
/S/Jim Reinhartsen Director December 8, 2003
- -----------------------
Jim Reinhartsen
26
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Eagle Broadband, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of Eagle Broadband,
Inc. as of August 31, 2003, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of Eagle Broadband, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eagle Broadband,
Inc. as of August 31, 2003, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2, the Company restated its prior period financial
statements.
/S/ Malone & Bailey, PLLC
- -------------------------
Malone & Bailey, PLLC
Houston, Texas
www.malone-bailey.com
December 5, 2003
F-1
INDEPENDENT ACCOUNTANT'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF EAGLE BROADBAND, INC.:
We have audited the accompanying consolidated balance sheets of Eagle Broadband,
Inc. and subsidiaries as of August 31, 2002, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the two
years ended August 31, 2002 and 2001. These financial statements are the
responsibility of Eagle Broadband, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Eagle Broadband, Inc. and subsidiaries as of August 31, 2002, and
the results of their earnings, shareholders' equity, and their cash flows for
each of the two years then ended are in conformity with generally accepted
accounting principles.
/S/McManus & Co., P.C.
- ----------------------------
McMANUS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
ROCKAWAY, NEW JERSEY
December 13, 2002
F-2
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
ASSETS
August 31,
2003 2002
---- ----
(Restated)
Current Assets
Cash and Cash Equivalents $ 2,538 $ 3,421
Accounts Receivable, net 1,704 5,028
Inventories 3,199 6,059
Prepaid Expenses 668 358
------------- ---------------
Total Current Assets 8,109 14,866
Property and Equipment
Operating Equipment 36,422 34,509
Less: Accumulated Depreciation (5,689) (3,661)
------------- --------------
Total Property and Equipment 30,733 30,848
Other Assets:
Deferred Costs 334 334
Goodwill 76,273 78,151
Other Intangible assets 5,330 5,387
Other Assets 227 397
------------- --------------
Total Other Assets 82,164 84,269
------------- --------------
Total Assets $ 121,006 $ 129,983
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 5,461 $ 4,757
Accrued Expenses 7,790 2,873
Notes Payable 5,779 3,653
Capital Lease Obligation -- 48
------------- --------------
Total Current Liabilities 19,030 11,331
Long-Term Liabilities:
Capital Lease Obligations
(net of current maturities) -- 70
Long-Term Debt -- 1,202
------------- --------------
Total Long-Term Liabilities --- 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 August 31, 2003
and 2002, 147,447,000 and 73,051,000, respectively 147 73
Paid in Capital 177,017 158,731
Accumulated Deficit (75,188) (41,424)
------------- --------------
Total Shareholders' Equity 101,976 117,380
------------- --------------
Total Liabilities and Shareholders' Equity $ 121,006 $ 129,983
============= ==============
See accompanying notes to consolidated financial statements.
F-3
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
- --------------------------------------------------------------------------------
For the years ended August 31,
---------------------------------------------------------
2003 2002 2001
---------------- ---------------- -----------------
Net Sales:
Structured wiring $ 3,692 $ 8,036 $ 7,643
Broadband services 2,809 2,657 523
Products 3,342 16,108 19,342
Other 1,750 3,016 602
---------------- ---------------- -----------------
Total Sales 11,593 29,817 28,110
---------------- ---------------- -----------------
Costs of Goods Sold:
Direct Labor and Related Costs 2,195 3,160 1,638
Products and Integration Service 5,400 15,250 14,931
Structured Wiring Labor and Materials 1,774 2,121 2,345
Broadband Services Costs 903 763 260
Depreciation and Amortization 456 377 1,053
Other Manufacturing Costs 56 1,033 181
---------------- ---------------- -----------------
Total Costs of Goods Sold 10,784 22,704 20,408
---------------- ---------------- -----------------
Gross Profit 809 7,113 7,702
---------------- ---------------- -----------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 6,102 7,795 6,169
Advertising and Promotion 247 963 600
Depreciation and Amortization 1,968 3,399 3,615
Other Support Costs 12,737 3,974 4,264
Research and Development 411 404 1,276
Impairment, write-downs & restructuring costs 7,611 27,100 ---
---------------- ---------------- -----------------
Total Operating Expenses 29,076 43,635 15,924
---------------- ---------------- -----------------
Loss from Operations (28,267) (36,522) (8,222)
Other Income/(Expenses)
Interest income, 68 360 2,348
Interest expense (5,494) (625) ---
---------------- ---------------- -----------------
Total Other Income (Expense) (5,426) (265) 2,348
---------------- ---------------- -----------------
Net Loss (33,693) (36,787) (5,874)
Other Comprehensive Loss:
Unrealized Holding Loss (71) (279) (359)
---------------- ---------------- -----------------
Other Comprehensive Loss $ (33,764) $ (37,066) $ (6,233)
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Net Loss per Common Share:
Basic $ (0.35) $ (0.57) $ (0.12)
Diluted $ (0.35) $ (0.57) $ (0.12)
Comprehensive Loss $ (0.35) $ (0.58) $ (0.13)
See accompanying notes to consolidated financial statements.
F-4
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
- --------------------------------------------------------------------------------
Additional Total
Common Stock Preferred Paid in Retained Shareholders'
Shares Value Stock Capital Earnings Equity
Total Shareholders' Equity 25,609 $ 26 $ --- $ 52,160 $ 1,875 $ 54,061
As of August 31, 2000
Net Earnings --- --- --- --- (5,874) (5,874)
New Stock Issued to Shareholders
For Services and Compensation 1,370 1 --- 973 --- 974
For Property and Other Assets 127 --- --- 2,837 --- 2,837
For Retirement of Debt and Liabilities 3,004 3 --- 5,693 --- 5,696
For Warrants Conversion 645 1 --- 1,078 --- 1,079
For Employee Stock Option Plan 96 --- --- 192 --- 192
For Acquisition of ClearWorks, Inc. 35,287 35 --- 99,762 --- 99,797
For Licenses and Investments 1,204 1 --- 2,965 --- 2,966
Syndication Costs --- --- --- (876) --- (876)
Treasury Stock (7,078) (7) --- (11,358) --- (11,365)
Unrealized Holding Loss --- --- --- --- (359) (359)
-------------------------------------------------------------------------------------------
Total Shareholders' Equity 60,264 60 --- 153,426 (4,358) 149,128
As of August 31, 2001
Net Loss --- --- --- --- (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 Warrants Conversion --- --- --- --- --- ---
For Employee Stock Option Plan --- --- --- --- --- ---
For Acquisitions 2,002 2 --- 1,079 --- 1,081
For Licenses and Investments --- --- --- 100 --- 100
Syndication Costs --- --- --- --- --- ---
Treasury Stock (1,576) (2) --- (922) --- (924)
Unrealized Holding Loss --- --- --- --- (279) (279)
-------------------------------------------------------------------------------------------
Total Shareholders' Equity 73,051 73 --- 158,731 (41,424) 117,380
As of August 31, 2002
Net Loss --- --- --- --- (33,693) (33,693)
New Stock Issued to Shareholders
For Services and Compensation 7,437 7 --- 1,813 --- 1,820
For Property and Other Assets 14,938 15 --- 3,032 --- 3,047
For Retirement of Debt and Liabilities 50,816 51 --- 13,827 --- 13,878
For Warrants Conversion --- --- --- --- --- ---
For Employee Stock Option Plan 1,647 2 --- 180 --- 182
Syndication Costs --- --- --- (368) --- (368)
Treasury Stock (442) (1) --- (198) --- (199)
Unrealized Holding Loss --- --- --- --- (71) (71)
-------------------------------------------------------------------------------------------
Total Shareholders' Equity 147,447 $ 147 --- $ 177,017 $ (75,188) $101,976
======= ===== ========= ========= ========
As of August 31, 2003
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
F-5
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
- --------------------------------------------------------------------------------
For the years ended August 31,
---------------------------------------------------------
2003 2002 2001
----------------- ----------------- ----------------
Cash Flows from Operating Activities
Net Loss $ (33,693) $ (36,787) $ (5,874)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Impairment, write-downs & restructuring costs 7,611 27,100 ---
Interest for conversion value 91 --- ---
Depreciation and Amortization 2,424 3,776 4,667
Stock Issed for Services Rendered 1,820 882 974
Stock Issued for Interest Expense 2,477 100 ---
Changes in Assets and Liabilities
(Increase)/Decrease in Marketable Securities --- --- (910)
(Increase)/Decrease in Accounts Receivable 124 2,479 (462)
(Increase)/Decrease in Inventories 1,717 4,578 515
(Increase)/Decrease in Prepaid Expenses (311) 386 516
Increase/(Decrease) in Accounts Payable 921 232 (1,793)
Increase/(Decrease) in Accrued Expenses 8,557 (3,180) 1,494
Increase/(Decrease) in Expense Allowable for
Doubtful Acccounts 2,177 (363) ---
Increase/(Decrease) in Federal Income Taxes
Payables --- --- (736)
----------------- ----------------- -- ----------------
Total Adjustment 27,008 35,990 4,265
----------------- ----------------- ----------------
Net Cash Used by Operating Activities (6,085) (797) (1,609)
----------------- ----------------- ----------------
Cash Flows from Investing Activities
(Purchase)/Disposal of Property and Equipment (2,121) (12,886) (16,394)
(Purchase)/Disposal of Contact Wireless & DSS
Security, Net of Cash Acquired --- (869) ---
(Increase)/Decrease in Security Deposits --- --- (102)
(Increase)/Decrease in Investments --- --- 20
(Increase)/Decrease in Notes Receivable --- --- 8,655
(Increase)/Decrease in Deferred Advertising Costs --- --- 21
(Increase)/Decrease in Deferred Syndication Costs --- --- 270
(Increase)/Decrease in Other Intangible Assets --- --- 1,009
(Increase)/Decrease in Other Assets 411 --- 9
----------------- ----------------- ----------------
Net Cash Used by Investing Activities (1,710) (13,755) (6,512)
Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable 7,297 387 6,148
Increase/(Decrease) in Capital Leases -- 3 63
Increase/(Decrease) in Line of Credit --- (1,846) 230
Increase/(Decrease) in Deferred Taxes --- (32) ---
Proceeds from Sale of Common Stock, Net 182 --- 1,078
Retirement of ESOP Shares --- --- (2,740)
Syndication costs (368) --- ---
Treasury Stock (199) (918) (8,625)
----------------- ----------------- ----------------
Net Cash Provided by Financing Activities 6,912 (2,406) (3,846)
----------------- ----------------- ----------------
Net Increase/(Decrease) in Cash (883) (16,958) (11,967)
Cash at the Beginning of the Year 3,421 20,379 32,346
----------------- ----------------- ----------------
Cash at the End of the Year $ 2,538 $ 3,421 $ 20,379
================= ================= ===============
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for:
Interest $ 3,288 $ 165 $ 112
Income Taxes --- --- ---
Supplemental non-cash investing activities (See Notes 5 & Note 12) See
accompanying notes to consolidated financial statements.
F-6
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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.
A) Consolidation
At August 31, 2003, 2002 and 2001, the Company's subsidiaries were:
Atlantic Pacific Communications, Inc. (APC) - operated as Eagle
Communication Services; Etoolz, Inc. (ETI); Eagle Wireless
International, Inc. (EWI); ClearWorks.net, Inc. (.NET); ClearWorks
Communications, Inc. (COMM) - operated as Eagle BDS Services;
ClearWorks Home Systems, Inc. (HSI) - operated as Eagle Residential
Structured Wiring; Contact Wireless, Inc. (CWI) - operating as Eagle
Paging Services; DSS Security, Inc., (DSS) - operated as Eagle Security
Services; United Computing Group, Inc. (UCG) - operated as Eagle
Technology Services; and Link Two Communications, Inc. (LINK II) -
operated as Eagle Messaging Services. The consolidated financial
statements include the accounts of the Company and its subsidiaries.
All significant inter-company transactions and balances have been
eliminated in consolidation.
B) Cash and Cash Equivalents
The Company has $2,538,000 and $3,421,000 invested in interest bearing
accounts and marketable securities (Note 10) at August 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
-----
Headend Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized.
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the
following items, in thousands:
August 31,
2003 2002,
Raw Materials $ 1,826 $ 4,515
Work in Process 1,237 1,262
Finished Goods 136 282
--------- -------
$3,199 $ 6,059
========= =======
E) Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; BroadbandMagic;
ClearWorks Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle
Wireless International, Inc., Atlantic Pacific Communications, Inc.;
Link Two Communications, Inc.; United Computing Group, Inc.; Contact
Wireless, Inc.; and DSS Security, Inc., names.
Eagle 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.
F-7
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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.
Eagle BDS Services - dba ClearWorks Communications, Inc.
ClearWorks Communications, Inc., provides Bundled Digital Services to
business and residential customers, primarily in the Texas market.
Revenue is derived from fees charged for the delivery of Bundled
Digital Services, which includes telephone, long distance, internet,
security monitoring and cable services. This subsidiary recognizes
revenue and the related costs at the time the services are rendered.
Eagle Residential Structured Wiring - dba ClearWorks Home Systems, Inc.
ClearWorks Home Systems, Inc., sells and installs structured wiring,
audio and visual components to homes. This subsidiary recognizes
revenue and the related costs at the time the services are performed.
Revenue is derived from the billing of structured wiring to homes and
the sale of audio and visual components to the homebuyers.
Eagle Communication Services - dba Atlantic Pacific Communications,
Inc. Atlantic Pacific Communications, Inc., provides project planning,
installation, project management, testing and documentation of fiber
and cable to commercial and industrial clients throughout the United
States. The revenue from the fiber and cable installation and services
is recognized upon percentage of completion of the project. Most
projects are completed in less than one month, therefore, matching
revenue and expense in the period incurred. Service, training and
extended warranty contract revenues are recognized as 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.
Eagle Messaging Services - dba 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.
Eagle Paging Services - dba Contact Wireless, Inc.
Contact Wireless, Inc., provides customers with paging and mobile
telephone products and related monthly services. Revenue from product
sales is recorded at the time of shipment. Revenue for the mobile
phone and paging service is billed monthly as the service is provided.
Eagle Security Services - dba DSS Security, Inc.
DSS Security, Inc., provides monthly security monitoring services to
residential customers. The customers are billed three months in advance
of service usage. The revenues are deferred at the time of billing and
ratably recognized over the prepayment period as service is provided.
Eagle Technology Services - dba United Computing Group, Inc.
United Computing Group, Inc., provides business-to-business hardware
and software network solutions and network monitoring services. The
revenue from the hardware and software sales is recognized at the time
of shipment. The monitoring services recognition policy is to record
revenue as earned.
F) Research and Development Costs
For the years ended August 31, 2003, 2002 and 2001, the Company
performed research and development activities for internal projects
related to its Orb'Phone Exchange, convergent set-top boxes as well as
its multi-media entertainment centers. Research and development costs
of $ 411,000, $404,000, and $1,276,000 were expensed for the years
ended August 31, 2003, 2002, and 2001, respectively.
No research and development services were performed for outside
parties for the year ended August 31, 2003, 2002 and 2001.
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.
F-8
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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:
August 31,
------------------------------------------
2003 2002 2001
---------- ----------- -----------
Weighted Average Number of Common
Shares Outstanding Including
Basic Common Stock Equivalents 95,465 64,004 49,726
Fully Diluted Common Stock Equivalents 95,465 64,158 49,880
I) Impairment of Long-Lived Assets and Goodwill
Our long-lived assets include predominantly goodwill. Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142") requires that goodwill and intangible assets be
tested for impairment at the reporting unit level (operating segment or
one level below an operating segment) on an annual basis and between
annual tests in certain circumstances. Application of the goodwill
impairment test requires judgment, including the identification of
reporting units, assigning assets and liabilities to reporting units,
assigning goodwill and intangible assets to reporting units, and
determining the fair value of each reporting unit. Significant
judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount
rates and other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value for each
reporting unit.
The intangible assets primarily are the Company rights to deliver
bundled digital services such as, Internet, telephone, cable television
and security monitoring services to residential and business users. The
Company obtained an independent appraisal to assess the fair value of
the intangible assets. There were a number of significant and complex
assumptions used in the calculation of the fair value of the intangible
assets. If any of these assumptions prove to be incorrect, the Company
could be required to record a material impairment to its intangible
assets. The assumptions include significant market penetration in its
current markets under contract and significant market penetration in
markets where they are currently negotiating contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. An impairment loss would be deemed necessary when the estimated
non-discounted future cash flows are less than the carrying net amount
of the asset. If an asset were deemed to be impaired, the asset's
recorded value would be reduced to fair market value. In determining
the amount of the charge to be recorded, the following methods would be
utilized to determine fair market value:
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
At August 31, 2002, the Company determined that an impairment of Link
Two paging network equipment and nationwide licenses existed. Link Two
Communications competes with many established companies in the
nationwide one- and two-way messaging services area. The paging
industry has declined over the past year and the major paging companies
have undergone significant beneficial financial restructurings. These
companies are able to offer products and related services at more
favorable rates than Link Two. Because the paging industry and related
financial credit availability from banks for financing emerging
nationwide networks has been declining over the last year, Link Two has
been unable to obtain significant funding to expand and provide cost
effective service to its customers. Accordingly, Link Two has had to
curtail its development on a nationwide basis and restricted its
operations to serve the Houston and Dallas, Texas, markets. The
equipment servicing the nationwide network has been inactive and is
being dismantled. The equipment servicing the nationwide network is
inactive and has been impaired as well as the value of the related FCC
licenses. At August 31, 2002, management estimated through recent sales
of equipment and industry pricing of FCC licenses that an impairment
charge of $27,100,000 was necessary to reflect the ongoing value of its
assets and licenses. At August 31, 2003, management determined that a
$7,611,000 non-cash impairment charge was necessary against
restructured and discontinued operations of low margin commodity
product fulfillment operations, residential and commercial structured
wiring operations and the withdrawal from its Austin area BDS
development based on the lack of demand for BDS services resulting from
a slower build out of the development than originally projected in
conjunction with local market competition. Included in the impairment
was the write down of goodwill associated with the Comtel acquisition
of $1,878,000.
J) Intangible Assets
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at the dates of acquisition and were
being amortized using the straight-line method over twenty (20) years
for Atlantic Pacific Communications, Inc., and twenty-five (25) years
for Bundled Digital Services through June 30, 2001. Other intangible
assets consist of patents and licenses, which are being amortized using
the straight-line method over their estimated useful life of ten (10)
years and twenty (20) years, respectively.
F-9
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Goodwill and other intangible assets are carried at cost less
accumulated amortization. Intangible assets were amortized on a
straight-line basis over the economic lives of the respective assets,
generally ten to twenty-five years. Prior to July 1, 2001, goodwill and
certain purchased intangible assets (i.e., licenses) were amortized
over 10 to 25 years. The Company's adoption of SFAS 142 eliminated the
requirement to amortize goodwill and licenses subsequent to the fiscal
year ending August 31, 2001. Under the provisions of SFAS 142, the
Company is required to periodically assess the carrying value of
goodwill and licenses associated with each of its distinct business
units that comprise its business segments of the Company to determine
if impairment in value has occurred. Impairment tests completed as of
August 31, 2002 and August 31, 2001 concluded that the carrying amount
of goodwill and licenses for each acquired business unit did not exceed
its net realizable value based on the Company's estimate of expected
future cash flows to be generated by its business units, except as
described above in Note 1, I. The Company updated its assessment as of
August 31, 2003 and concluded that based on a valuation model
incorporating expected future cash flows in consideration of historical
cash flows and results to date, no impairment charge was necessary.
Goodwill and other intangibles of $82,164,000 net of prior impairments
and amortization were recorded under the purchase method for the
purchases of ClearWorks.net, Inc., Atlantic Pacific, Inc., DSS
Security, Inc., Contact Wireless, Inc., and Comtel, Inc. The majority
of the intangibles were from the ClearWorks acquisition. ClearWorks was
in the business of selling telecommunications services to residential
neighborhoods. In fiscal 2003, Eagle realized it had failed to
successfully achieve profits using the ClearWorks model of installing
fiber optic cable to neighborhoods under the speculative attempt to
capture enough individual homeowners in each neighborhood via
individual selling methods to pay for the cable infrastructure. In
early 2003, Eagle modified its strategy to deliver the ClearWorks
developed bundled digital services approach including Internet,
telephone, cable television and security monitoring services to
residential and business users by targeting municipalities,
homebuilders and residential real estate developers that finance and
install the fiber optic cable backbone in every lot and offer Eagle
exclusive rights to deliver digital bundled services to homeowners,
using pre-selling promotions and other low cost mass marketing
techniques. In October 2003, Eagle hired a new CEO with an extensive
sales and marketing background and proven senior management and
operational skills leading high-growth technology companies to
implement its modified strategy. As of December 5, 2003, the date of
the auditor's report, Eagle had realized several initial successes in
projects where the municipalities, public utility districts and
developers assume the predominate capital cost responsibility and
contract with Eagle to provide the services and content; thereby
significantly limiting the Company's capital outlays on such projects..
Eagle utilized an independent third party appraiser to assess the fair
value of the intangible assets as of August 31, 2003. This is the same
appraiser who Eagle hired to issue a fairness opinion in the ClearWorks
purchase in 2001 and who has consulted for Eagle in presentations made
in various subsequent litigation proceedings to defend the ClearWorks
purchase transaction. This appraiser still maintains that the goodwill
valuation remains at an amount greater than the current carrying value.
There were a number of significant and complex assumptions used in the
calculation of the fair value of the goodwill. If any of these
assumptions prove to be incorrect, Eagle could be required to record a
material impairment to its goodwill. The assumptions include
significant market penetration in its current markets under contract
and significant market penetration in markets where they are currently
negotiating contracts.
K) Advertising Costs
In fiscal 2003, 2002, and 2001, 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 year
ended August 31, 2003, 2002, and 2001, the Company expensed $247,000,
$963,000 and $600,000 respectively.
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that
are directly attributable to fundraising and the collection thereto.
Upon successful collection of the funds, all expenses incurred will be
reclassified to additional paid in capital and treated as syndication
costs; netted against the funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent asset and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
N) Marketable Securities
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.
F-10
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
O) Other Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Other Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This
statement considers the presentation of unrealized holding gains and
losses attributable to debt and equity securities classified as
available-for-sale. As stated, any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income." For the fiscal year ended August
31, 2003, 2002, and 2001 comprehensive loss was ($71,000), ($279,000)
and ($359,000), respectively.
P) Reclassification
The Company has reclassified certain assets costs and expenses for the
year ended August 31, 2002, and 2001, to facilitate comparisons.
Q) Supporting Costs in Selling, General and Administrative Expenses
Other support cost for the twelve months ended August 31, 2003, 2002,
and 2001 are as follows, in thousands: -
2003 2002 2001
------------------------------------
Advertising/Conventions $ --- $ 8 $ 737
Auto Related 66 174
Bad debt 2,177 --- ---
Contract Labor 907 100 ---
Delivery/Postage 95 162 178
Fees 418 --- ---
Insurance 437 181 263
Office & telephone 675 880 482
Other 291 21 17
Professional 5,222 424 831
Rent 1,183 1,052 791
Travel 377 459 437
Taxes 170 53 90
Utilities 719 460 438
--------------------------------------
Total $ 12,737 $ 3,974 $ 4,264
======================================
R) Recent Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with
Exit or Disposal Activities," which nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that costs associated with an exit
or disposal activity be recognized only when the liability is incurred
(that is, when it meets the definition of a liability in the FASB's
conceptual framework). SFAS 146 also establishes fair value as the
objective for initial measurement of liabilities related to exit or
disposal activities. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company
adopted SFAS in the first quarter of fiscal 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." For certain
guarantees issued after December 31, 2002, FIN 45 requires a guarantor
to recognize, upon issuance of a guarantee, a liability for the fair
value of the obligations it assumes under the guarantee. Guarantees
issued prior to January 1, 2003, are not subject to liability
recognition, but are subject to expanded disclosure requirements. The
Company does not believe that the adoption of this Interpretation has
had a material effect on its consolidated financial position or
statement of operations.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, which requires
the Company to consolidate variable interest entities for which it is
deemed to be the primary beneficiary and disclose information about
variable interest entities in which it has a significant variable
interest. FIN 46 became effective immediately for variable interest
entities formed after January 31, 2003 and effective for periods ending
after December 15, 2003, for any variable interest entities formed
prior to February 1, 2003. The Company does not believe that this
Interpretation will have a material impact on its consolidated
financial statements.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which requires that the extinguishment of debt not be
considered an extraordinary item under APB Opinion No. 30 ("APB 30"),
"Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," unless the debt extinguishment
meets the "unusual in nature and infrequent of occurrence" criteria in
APB 30. SFAS 145 is effective for fiscal years beginning after May 15,
2002, and, upon adoption, companies must reclassify prior period items
that do not meet the extraordinary item classification criteria in APB
30. The Company adopted SFAS 145 and related rules as of August 31,
2002. The adoption of SFAS 145 had no effect on the Company's financial
position or results of operations.
F-11
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The provisions of this Statement are effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this Statement did not
have an impact on the Company's financial results of operations and
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement is
effective for contracts entered into or modified and for hedging
relationships designated after June 30, 2003. The adoption of this
statement did not have an impact on the Company's operating results or
financial position.
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS
-----------------------------------
In August 2003, the Company determined its reporting of its intangible
assets as "contract rights" was misleading and has reclassed contract
rights to goodwill. There was no effect on cash or cash flows or on the
net loss. The accompanying consolidated financial statements as of
August 31, 2002 have been restated for the correction.
A comparison of the Company's consolidated financial position as of
August 31, 2002 prior to and following the restatement follows:
As Restated As Reported
Goodwill $ 82,429 $ 7,916
Contract rights $ - $ 74,513
NOTE 3 - Accounts Receivable:
--------------------
Accounts receivable consist of the following, in thousands:
August 31,
2003 2002
----------- ------------
Accounts Receivable $ 2,116 $ 5,270
Allowance for Doubtful Accounts (412) (242)
----------- ------------
Net Accounts Receivable $ 1,704 $ 5,028
=========== ============
NOTE 4 - Property, Plant & Equipment and Intangible Assets:
--------------------------------------------------
Components of property, plant & equipment are as follows, in thousands:
August 31,
2003 2002
----------- ------------
Automobile $ 143 $ 392
Headend Facility and Fiber Infrastructure 26,688 20,090
Construction in progress --- 7,074
Furniture & Fixtures 565 634
Leasehold Improvements 122 216
Office Equipment 979 1,015
Property, Manufacturing & Equipment 7,925 5,088
----------- ------------
Total Property, Plant & Equipment $ 36,422 $ 34,509
Less: Accumulated Depreciation (5,689) (3,661)
----------- ------------
Net Property, Plant & Equipment $ 30,733 $ 30,848
=========== ============
Components of intangible assets are as follows, in thousands:
August 31,
2003 2002
----------- ------------
Goodwill $ 80,551 $ 82,429
Licenses & Permits 5,330 5,387
----------- ------------
Total Intangible Assets $ 85,881 $ 87,816
Less: Accumulated Amortization (4,278) (4,278)
----------- ------------
Net Intangible Assets $ 81,603 $ 83,538
=========== ============
F-12
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 5 - Business Combinations:
---------------------
On February 1, 2001, the Company completed the purchase of
ClearWorks.net, Inc., and its subsidiaries, ClearWorks Communication,
Inc., ClearWorks Structured Wiring Services, Inc., ClearWorks
Integration Services, Inc., United Computing Group, Link Two
Communications, Inc., and LD Connect, Inc., (collectively, ClearWorks)
by acquiring all the outstanding common stock for a total purchase
price of approximately $99.8 million. The acquisition was accounted for
using the purchase method of accounting. ClearWorks is a communications
carrier providing broadband data, video and voice communication
services to residential and commercial customers, currently within
Houston, Texas. These services are provided over fiber-optic networks
("Fiber-To-The-Home" or "FTTH"), which the Company designed,
constructed, owned and operated inside large residential master-planned
communities and office complexes. ClearWorks also provides information
technology staffing personnel, network engineering, vendor evaluation
of network hardware, implementation of network hardware and support of
private and enterprise networks, as well as, developing residential,
commercial and education accounts for deployment of structured wiring
solutions. The results of operation for ClearWorks are included in the
accompanying financial statements since the date of acquisition. The
Company acquired the net assets of ClearWorks for $99,797,000 through
the issuance of 29,410,000 shares of its common stock valued at
$91,172,000 and a cash total of $8,625,000. Prior to the merger, the
Company provided to ClearWorks, working capital and materials totaling
$8,625,000. During February 2001, ClearWorks repaid these advances
through the issuance of 7,346,000 shares of its common stock, which
converted into 5,877,000 Eagle Wireless International, Inc., common
stock shares. These shares were converted to Treasury shares at this
date. The Company allocated (in thousands) the acquisition costs to
current assets of $11,708, property, plant and equipment of $6,570,
intangible assets of $96,920 (which consist of $74,513 in goodwill and
$22,407 in licenses), other assets of $79 and assumed liabilities of
accounts payable and accrued expenses of $10,784, banks lines of credit
and notes of $4,696 for a total acquisition of $99,797. The allocation
of the purchase price is based on the fair value of assets and
liabilities assumed as determined either by independent third parties
or management's estimates, based on existing contracts, recent
purchases of assets and underlying loan documents.
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 in goodwill. The allocation of the
purchase price is based on the fair value of the assets acquired based
on management's estimates and existing contracts. At August 31, 2003
and 2002, the Company has accruals for $573,000 and $921,000;
respectively for the portion of the purchase that represents the
difference between purchase price and market value of the Company's
common stock on the date of purchase.
NOTE 6 - Notes Payable:
--------------
The following table lists the Company's note obligations as of August
31, 2003 and 2002, in thousands:
Annual
Interest Amount
Rate Due Date 2003 2002
------------------------------------------------------------
Vehicles Various Various $ 4 $ 27
6% Convertible Debenture (Note 9) 6.0% Demand 1,200 2,000
Tail Wind Convertible Debenture 2.0% Demand 1,595 2,000
Notes Payable - Investor Group 10.0% October 2003 900 ---
Notes Payable - Q Series Bonds 12.0% Various 1,363 ---
Other Various Various 717 828
--------- ----------
Total notes payable $ 5,779 $ 4,855
--------- ---------
Less current portion 5,779 3,653
--------- ----------
Total long-term debt $ --- $ 1,202
========= ==========
NOTE 7 - Capital Lease Obligations:
--------------------------
The Company historically has leased equipment from various companies
under capital leases. The assets and liabilities under the capital
lease are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are
depreciated over the estimated useful life with the value and
depreciation being included as a component of Property and Equipment
under operating equipment.
NOTE 8 - Lines of Credit:
----------------
On September 29, 2000, Atlantic Pacific Communications, Inc., "(APC", a
wholly owned subsidiary of the Company) entered into a one year
$900,000 line of credit agreement with Southwest Bank of Texas,
("SWBT"). This note bears interest at SWBT's prime rate plus .25%,
which was payable monthly with principal due September 28, 2001. APC's
accounts receivable are pledged as collateral with Eagle Wireless
International,
F-13
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Inc., the guarantor. This line of credit was repaid to
Southwest Bank of Texas in the six months ended February 28, 2002;
therefore, there was not a balance outstanding as of August 31, 2002.
Subsequent to the fiscal year ended August 31, 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
August 31, 2003, APC reduced its accounts receivable by $198,851 to
reflect the gross sale of $360,003 to SWBT less $161,851 of reserves
held by SWBT against such purchases. Subsequent to the fiscal year
ended August 31, 2003, APC repaid and canceled the line of credit in
full to SWBT in September 2003.
The Company, through its subsidiary United Computing Group, Inc. (UCG),
maintained $3,000,000 line of credit with IBM Credit Corporation (IBM)
bearing a variable rate of interest. At May 31, 2002, a balance of
$1,012,000 existed. During July 2002, UCG entered into a credit
facility with Southwest Bank of Texas (SWBT) to provide working
capital, repay the IBM 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 August 31, 2002, UCG reduced
its accounts receivable by $817,401 to reflect the gross sale of
$961,649 to SWBT less $144,247 of reserves held by SWBT against such
purchases. As of August 31, 2003, UCG reduced its accounts receivable
by $44,799 to reflect the gross sale of $52,210 to SWBT less $7,832 of
reserves held by SWBT against such purchases. Subsequent to the fiscal
year ended August 31, 2003, APC repaid and canceled the line of credit
in full to SWBT in September 2003.
NOTE 9 - 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. Subsequent to the fiscal year ended August 31, 2003, the
Company entered into discussions with CCP regarding the retirement of
the convertible debenture and settlement of CCP commitment fees in
connection to a $20,000,000 Equity Line of Credit.
At August 31, 2002, $2,000,000 in principal plus $600,000 of accrued
interest and fees were outstanding to Candlelight Investors, LLC. In
November 2002, the Company issued 2,600,000 shares of stock to settle
this debt.
During 2001, the Company merged with 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 merger, 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 merger, 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.
F-14
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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, $1,595,000.
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, 2003, 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.
NOTE 10 - 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
August 31, 2003, all of the Company's marketable equity securities are
classified as available-for-sale; they were acquired with the intent to
dispose of them within the next year.
Other marketable securities include 1,480,000 shares of common stock of
Burst.com, 65,598,000 shares of Celerity Systems common stock and
$350,000 Celerity Systems Bonds. These common stock and bond
investments have an aggregate cost basis of $1,075,000 and an aggregate
fair market value of $1,714,006 and are included in the cash and cash
equivalents category and are held for resale as of August 31, 2003.
NOTE 11 - Income Taxes:
-------------
As discussed in note 1, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". Implementation of SFAS 109 did not have a material
cumulative effect on prior periods nor did it result in a change to the
current year's provision.
The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
August 31,
2003 2002 2001
---- ---- ----
% % %
U.S. Federal Statutory Tax Rate 34 34 34
U.S. Valuation Difference (34) (34) (34)
---- ----- ----
Effective U.S. Tax Rate 0 0 0
Foreign Tax Valuation 0 0 0
- - -
Effective Tax Rate 0 0 0
= = =
F-15
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S. Federal
income tax rate of 34% to pretax income from continuing operations as a
result of the following: (in thousands)
August 31,
2003 2002 2001
--------- -----------------------
Computed expected tax benefit $ (11,456) $ (12,508) $ (1,997)
Increase in valuation allowance 11,456 12,508 1997
--------- -----------------------
$ --- $ ----- $ ---
========= =======================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
August 31, 2003 and 2002, are presented below, in thousands and include
the balances of the merged company ClearWorks.net.
2003 2002
--------- -----------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 0 $ 0
Net operating loss carry-forwards 35,503 24,047
Less valuation allowance (35,503) (24,047)
--------- ----------
Net deferred tax assets --- ---
Deferred tax liabilities:
Differences in depreciation 0 0
--------- -----------
Net deferred tax liabilities $ 0 $ 0
========= ===========
The valuation allowance for deferred tax assets of August 31, 2003,
2002, and 2001, was $35,503,000, $24,047,000, and $10,956,000,
respectively. At August 31, 2003 and 2002, the Company has net
operating loss carry-forwards of $104,420,588 and $70,727,000,
respectively, which are available to offset future federal taxable
income, if any, with expirations from 2020 to 2021.
NOTE 12 - Issuance of Common Stock:
-------------------------
During the fiscal year ended August 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 Services and Compensation 7,437
Shares issued for Property and Other Assets 14,938
Shares issued for Retirement of Debt and Liabilities 50,816
Shares issued for Stock Option exercise 1,647
Treasury Stock (442)
----------------
Shares Outstanding August 31, 2003 147,447
================
NOTE 13 - 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 August 31, 2003, options to purchase 406,131 are outstanding and
551,370 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 August 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 August 31, 2003, none of
these options have been exercised
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. As of August 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 August 31, 2003, none of these warrants have been
exercised.
F-16
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
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 August 31, 2003, none of these warrants have been exercised. s
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 August 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 August 31, 2003, none of these warrants have been exercised.
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 August 31, 2003, none of these warrants
have been exercised.
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 August 31, 2003, none of these warrants
have been exercised.
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 August 31, 2003, none of these warrants
have been exercised.
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 August 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 August 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 August 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 August 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 August 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 August 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 August 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 August 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 August 31, 2003, none of these warrants
have been exercised.
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 August 31, 2003, none of these warrants
have been exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July
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 $0.38 per share. The shares of common stock underlying these
warrants were not registered for resale under the Securities Act of
1933. As of August 31, 2003, none of these warrants have been
exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
October 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 $0.45 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants
have been exercised.
3,800,000 stock purchase warrants issued to Eagle Broadband employees
under incentive clauses of employment contracts expiring September 1,
2008. The warrants vest based on market performance of Eagle's common
stock at market capitalization between $50 million and $200 million.
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
F-17
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
common stock underlying these warrants were not registered for resale
under the Securities Act of 1933. As of August 31, 2003, none of these
warrants have been exercised.
400,000 stock purchase warrants issued to Eagle Broadband employee
under incentive clauses of employment contracts expiring September 1,
2008 The warrants vest based on market performance of Eagle's common
stock at market capitalization between $50 million and $200 million.
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
$0.60 per share. The shares of common stock underlying these warrants
were not registered for resale under the Securities Act of 1933. As of
August 31, 2003, none of these warrants have been exercised.
500,000 stock purchase warrants issued to Eagle Broadband employee
under incentive clauses of employment contracts expiring September 1,
2008. The warrants vest based on market performance of Eagle's common
stock at market capitalization between $50 million and $200 million.
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
$0.75 per share. The shares of common stock underlying these warrants
were not registered for resale under the Securities Act of 1933. As of
August 31, 2003, none of these warrants have been exercised.
The warrants outstanding are segregated into two categories (issued and
outstanding and exercisable):
Warrants Issued & Outstanding Warrants Exercisable
Class of August 31, August 31,
Warrants 2003 2002 2003 2002
- -------------- ------------------------------------- -------------------------
0.26 25,000 - 25,000 -
0.28 25,000 - 25,000 -
0.35 25,000 - 25,000 -
0.38 50,000 - 50,000 -
0.39 25,000 - 25,000 -
0.41 3,800,000 - 1,550,000 -
0.45 25,000 - 25,000 -
0.60 400,000 - - -
0.61 25,000 - 25,000 -
0.69 25,000 - 25,000 -
0.75 500,000 - - -
1.04 50,000 50,000 50,000 50,000
1.10 25,000 - 25,000 -
1.35 25,000 - 25,000 -
1.55 - 25,000 - 25,000
1.75 - 13,766 - 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 - 50,000 - 50,000
3.00 58,333 58,333 58,333 58,333
3.75 - 40,000 - 40,000
3.75 - 160,000 - 160,000
3.75 - 232,000 - 232,000
3.75 - 176,000 - 176,000
3.95 - 328,000 - 328,000
4.50 - 25,000 - 25,000
7.00 - 100,000 - 100,000
7.49 - 250,000 - 250,000
7.50 - 25,000 - 25,000
7.50 192,000 192,000 192,000 192,000
7.50 240,000 240,000 240,000 240,000
7.50 168,000 168,000 168,000 168,000
7.50 200,000 200,000 200,000 200,000
9.68 - 50,000 - 50,000
10.00 - 275,000 - 275,000
12.00 - 250,000 - 250,000
14.00 - 350,000 - 350,000
18.00 - 250,000 - 250,000
25.00 - 150,000 - 150,000
ESOP 406,131 * 355,170 * 406,131 355,170
------------------------------------- -------------------------
6,397,798 ** 4,121,603 3,247,798 4,121,603
===================================== =========================
*Denotes warrants which would have an anti-dilutive effect if currently used to
calculate earnings per share for the years ended August 31, 2003 and 2002.
**Denotes 12,700,000 warrants for shares that have been excluded from this table
that are subject to issuance to certain employees under incentive clauses of
employment contracts expiring 5 years from the date of issuance. The warrants
vest based on accumulated revenue targets ranging from $50 million to $500
million and on market performance of Eagle's common stock at market
capitalization between $450 million and $1 billion. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value $0.001 per
share at purchase prices ranging from $0.41 to $1.50 per share. The Company has
determined that the probability of the achievement of such targets is remote as
of the date of the issuance of the Company's financial statements and thus has
not included them in the outstanding warrant table above. The shares of common
stock underlying these warrants were not registered for resale under the
Securities Act of 1933. As of August 31, 2003, none of these warrants have been
exercised.
F-18
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 14 - 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
NOTE 15 - Risk Factors:
-------------
For the years ended August 31, 2003, 2002, and 2001, substantially all
of the Company's business activities have remained within the United
States and have been extended to the wireless infrastructure, fiber,
cabling computer services and broadband industries. Approximately,
seventy four 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-six
percent remainder have been created relatively evenly over the rest of
the nation during the year ended August 31, 2003. Approximately, eighty
four 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 sixteen percent remainder
have been created relatively evenly over the rest of the nation during
the year ended August 31, 2002. Whereas approximately eighty seven
percent of the Company's revenues and receivables have been created
solely in the state of Texas, two percent have been created in the
international market, and the approximate eleven percent remainder has
been created relatively evenly over the rest of the nation for the year
ended August 31, 2001. Through the normal course of business, the
Company generally does not require its customers to post any
collateral.
NOTE 16 - Foreign Operations:
-------------------
Although the Company is based in the United States, its product is sold
on the international market. Presently, international sales total
approximately 0%, 0% and 2% at August 31, 2003, 2002, and 2001,
respectively.
NOTE 17 - 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 years ending August 31, 2003and 2002, rental expenses of
approximately $1,183,000 and $436,219 respectively, were incurred.
The Company also leased 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
$9,030 per month.
Atlantic Pacific also leased office space in Chicago, Illinois with
Lasalle Bank National Association. This twenty-nine month lease
commenced on October 1, 2000,and expired 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 WL and
Deborah Miller in the amount of $4,500 per month. This non-cancelable
lease expired September 2002 and maintains a five-year renewal option.
The renewal option was waived in September 2002.
The Company's subsidiary, ClearWorks.net, Inc., leased office space in
Houston, Texas with 2000 North Loop. This non-cancelable lease expired
on April 30, 2003. The monthly payments increased 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., leased office space in Phoenix, Arizona
with Airpark Holdings. This non-cancelable lease expired on July 31,
2003. The monthly payments are variable.
Also, ClearWorks.net, Inc., leased office space in San Antonio, Texas
with Wade Holdings. This is a month-to-month lease. The monthly
payments were $3,300.
F-19
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
The Company's subsidiary, United Computing Group, leased office space
in Houston, Texas with Eastgroup Properties, L.P. This non-cancelable
lease expired on August 31, 2003. The monthly payments were $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, leased 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 areas follows:
Period Ending
August 31, Amount
-------------- ------
2004 $ 521,000
2005 116,000
2006 58,000
-------------------
Total $ 695,000
===================
Legal Proceedings
On February 23, 2001, ClearWorks and Eagle became defendants in Kaufman
Bros., LLP v. Clearworks.Net, Inc. and Eagle Wireless, Inc., Index No.
600939/01, 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. The Company settled this lawsuit on November 4, 2003 by
issuing cash and stock totaling a fair market value of $1,320,000 as of
the settlement date.
On December 17, 2001, Kevan Casey and Tommy Allen sued ClearWorks.net,
Inc., ClearWorks Integration, Inc., and Eagle Wireless International,
Inc. for breach of contract and other related matters in Cause No.
2001-64056; In the 281st Judicial District Court of Harris County,
Texas. This lawsuit is scheduled for the two-week docket beginning
December 1, 2003. The Company denies the claims and intends to
vigorously defend this lawsuit and claims against it. The Company
settled this lawsuit on November 26, 2003 for cash and stock to be paid
and issued totaling a fair market value of $3,000,000 as of the
settlement date.
On July 10, 2003, Eagle became a defendant in Cornell Capital Partners,
L.P. vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH),
In the United States District Court for the District of New Jersey. The
suit presents claims for breach of contract, fraud and negligent
misrepresentation. Plaintiff has also alleged that Eagle has defaulted
on a convertible debenture for failing to timely register the shares of
common stock underlying the convertible debenture and is seeking to
accelerate the maturity date of the debenture. As of August 31, 2003,
the principal balance of the debenture was approximately $1.2 million.
The Company denies the claims and intends to vigorously defend this
lawsuit and the claims against it.
On December 14, 2000, ClearWorks became a defendant in State Of Florida
Department Of Environmental Protection vs. Reco Tricote, Inc. And
Southeast Tire Recycling, Inc. A/K/A Clearwork.net, Inc.; In The
Circuit Court Of The Tenth Judicial Circuit In And For Polk County,
Florida. The Florida EPA sued ClearWorks.net presenting claims for
recovery costs and penalties for a waste tire processing facility. The
suit seeks recovery of costs and penalties in a sum in excess of
$1,000,000, attorneys' fees and cost of court. ClearWorks denies the
claims and intends to vigorously contest all claims in this case and to
enforce its indemnification rights against the principals of Southeast
Tire Recycling.
On September 26, 2003 Intratech served a lawsuit on ClearWorks.net in
Intratech Capital Partners, Ltd. vs. ClearWorks.net, Inc.; Case No. CF3
20136 in the High Court of Justice, Queen's Bench Division, Cardiff
District Registry. This lawsuit presents claims for breach of contract
for failing to pay the plaintiff for financial advice and services
allegedly rendered. The complaint seeks damages of $6,796,245.50, plus
attorneys' fees and costs. ClearWorks denies the claims and intends to
vigorously defend this lawsuit and claims against it.
On or about September 2003, Enron sued United Computing Group, Inc. in
Enron Corp. (Debtors/Plaintiff) vs. United Computing Group, Inc.; Case
No. 01-16034 in the United States Bankruptcy Court for the Southern
District of New York. The suit presents claims pursuant to sections
547 and 550 of the Bankruptcy Code to avoid and recover a transfer in
the amount of approximately $1,500,000.00. Defendant has filed an
answer, denies the claims and intends to vigorously defend this lawsuit
and claims against it.
We intend to vigorously defend these and other lawsuits and claims
against us. However, we cannot predict the outcome of these lawsuits,
as well as other legal proceedings and claims with certainty. An
adverse resolution of pending litigation could have a material adverse
effect on our business, financial condition and results of operations.
The Company is subject to legal proceedings and claims that arise in
the ordinary course of business. The Company's management does not
expect that the results in any of these legal proceedings will have
adverse affect on the Company's financial condition or results of
operations.
F-20
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 18 - Earnings Per Share:
-------------------
The following table sets forth the computation of basic and diluted
earnings per share, in thousands except Per-Share Amount:
For the year ended August 31, 2003
----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- ------
Net Loss $(32,025)
Basic EPS:
Income available to
common stockholders (33,693) 95,465 $(0.35)
Effect of Dilutive Securities
Warrants
-------- ---------- -------
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $(33,693) 95,465 $(0.35)
========== ======== =======
For the year ended August 31, 2002
----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ ----------
Net Income $ (36,787)
Basic EPS:
Income available to
common stockholders (36,787) 64,004 $(0.57)
Effect of Dilutive Securities
Warrants --- 154 ---
-------- --- -----
Diluted EPS:
Income available to
common stockholders
and assumed conversions. $ (36,787) 64,158 $(0.57)
========== ====== ======
For the year ended August 31, 2002, and August 31, 2001, anti-dilutive
securities existed. (see Note 13)
NOTE 19 - Employee Stock Option Plan:
--------------------------
In July 1996, the Board of Directors and majority stockholders adopted
a stock option plan under which 400,000 shares of the Company's common
stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for issuance.
Under this plan, as of August 31, 2003, a total of 406,131 options have
been issued to various employees.
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees." Accordingly, since employee stock options are granted at
market price on the date of grant, no compensation expense is
recognized. However, SFAS 123 requires presentation of pro forma net
income and earnings per share as if the Company had accounted for its
employee stock options granted under the fair value method of that
statement. The weighted average fair value of the individual options
issued and granted during 2003 is estimated as $0.58 on the date of
grant. Management estimates the average fair value for options granted
during 2003, to be comparable to those granted in 2002. The impact on
net loss is minimal; therefore, the pro forma disclosure requirements
prescribed by SFAS 123 are not significant to the Company. The fair
values were determined using a Black-Scholes option-pricing model with
the following assumptions:
2003 2002
--------- --------
Dividend Yield 0.00% 0.00%
Volatility 0.91 0.91
Risk-free Interest Rate 4.00% 7.00%
Expected Life 5 5
NOTE 20 - Retirement Plans:
-----------------
During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its
participants. This plan maintains that the Company will match up to 3%
of each participant's contribution. For the year ended August 31, 2003
and 2002, employee contributions were approximately $279,000 and
$279,000, respectively. The Company matched approximately $67,850 and
$67,850, respectively for those same periods.
F-21
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
NOTE 21 - Major Customer:
---------------
The Company had gross revenues of $11,593,000 and $29,817,000 for the
year ended August 31, 2003 and 2002, respectively. There were no
parties individually that represented a greater than ten percent of
these revenues.
NOTE 22 - 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.
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.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber
optic and copper based structured wiring solutions and audio and visual
equipment to single family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT 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 year ending August 31, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------- ---------- --------- ---------- ---------- ---------- ----------
Revenue 4,220 2,809 2,433 1,803 328 --- 11,593
Segment Loss (4,500) (6,083) (2,279) (20,467) (364) --- (33,693)
Total Assets 8,929 31,316 114 141,588 83,852 (144,793) 121,006
Capital Expenditures 11 6,254 1 --- 158 --- 6,424
Depreciation 372 1,351 72 376 253 --- 2,424
For the year ending August 31, 2002
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
----------- ---------- --------- ---------- ---------- ---------- ----------
Revenue 8,767 2,657 16,143 1,699 551 --- 29,817
Segment Loss (279) (193) (1,304) (5,819) (29,192) --- (36,787)
Total Assets 5,114 30,980 853 162,290 68,528 (137,782) 129,983
Capital Expenditures 125 12,034 --- 562 156 (11) 12,886
Dep. and Amort. 208 715 166 1,418 1,269 --- 3,776
For the year ending August 31, 2001
(in thousands) APC/HSI EBS UCG Eagle Other Elim. Consol.
----------- ---------- --------- ---------- ---------- ---------- ----------
Revenue 8,173 571 18,137 1,205 24 28,110
Segment Loss (990) (299) (211) (2,211) (2,163) (5,874)
Total Assets 5,351 13,149 4,394 156,760 34,128 (43,114) 170,668
Capital Expenditures 151 9,350 24 198 6,671 16,394
Dep. and Amort. 149 1,053 19 2,591 857 4,669
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
segments based on income before net interest expense, income taxes, depreciation
and amortization expense, accounting changes and non-recurring items.
F-22
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
Note 23 - Quarterly Financial Data.
-------------------------
Nov. 30, Feb. 28, May 31, Aug. 31,
------------------ ------------------ ------------------- -------------------
Year Ended August 31, 2003
Revenues 4,618 3,063 1,847 2,065
Net Earnings (loss) (831) (979) (2,921) (28,962)
Basic Loss per Share (0.01) (0.01) (0.04) (0.29)
Diluted Loss per Share (0.01) (0.02) (0.04) (0.29)
Year Ended August 31, 2002
Revenues 8,761 7,380 6,485 7,191
Net Earnings (loss) (3,371) (2,013) (1,824) (29,579)
Basic Loss per Share (0.06) (0.03) (0.03) (0.45)
Diluted Loss per Share (0.06) (0.03) (0.03) (0.45)
For the year ended August 31, 2002, the quarterly financial information has been
adjusted to reflect the application of Financial Accounting Standards
Pronouncements No. 142 (Goodwill and other Intangible Assets) and No. 144
(Accounting for the Impairment or Disposal of Long-Lived Assets).
Note 24 - Subsequent Events.
------------------
Resignation/Appointment of Chief Executive Officer. In October 2003, H.
Dean Cubley resigned as chief executive officer to become the chief
technology officer, and David Weisman accepted the position of chief
executive officer.
Recent Financings. During the first fiscal quarter of 2004, Eagle has
received net proceeds of $7,687,000 from private placement offerings of
stock and bonds and through the sale of stock held as short term
investments and has retired or reduced certain of its notes payable,
accounts payable and other obligations including numerous lawsuits;
thereby significantly reducing the Company's current and contingent
liabilities.
Conversion of Outstanding Debt. During the four months ended September
30, 2003, holders of the Q-Series Bonds elected to convert bonds with
an aggregate principal balance of 6,483,158 into 31,620,049 shares of
common stock, of which 2,000,000 shares were registered in a Form S-3
Registration statement filed in October 2003.
Private Placement Offering. In October 2003, we received gross proceeds
of $3,000,000 from a private placement to accredited investors in which
we issued promissory notes in the aggregate principal amount of
$3,000,000 ("Notes") and 2,000,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred"). The Series A Preferred is
convertible into 29,500,000 shares of common stock, subject to
adjustment based on certain anti-dilution provisions. We received net
proceeds from this offering of $2,915,000, which we intend to use for
general corporate purposes. Terms of the Series A Preferred and Notes
are described below under the caption "Description of Securities." We
granted registration rights to the selling stockholders covering the
resale of shares of our common stock, which are issuable upon
conversion of the Series A Preferred. We registered the resale of
29,500,000 shares of common stock underlying 2,000,000 shares Series A
Preferred on a Form S-3 Registration Statement.
Restructuring Plan. On October 1, 2003 the Company announced the
implementation of a strategic, company-wide restructuring designed to
enable the company to better meet customer needs, increase revenue
growth and position the company to achieve cash flow positive
operations within 90 days.
Key components of the plan include:
----------------------------------
o The consolidation and integration of multiple Eagle businesses,
divisions and functional areas under a single brand name with a
structure organized by customers and markets versus the current
product-based structure. The re-branding process has begun and
will take place over the next several months and will include a
single, integrated Eagle Broadband web site, an updated corporate
identity, etc.
o New management additions, staff reassignments and reductions
where necessary in order to operate more efficiently and ensure
every Eagle team member have the right skills to best serve
customers.
o Establish centralized sales and marketing functions, increase our
direct sales coverage and signing and train and support key
channel partners to drive revenues across all target markets.
o Integration of Eagle's products and services to more effectively
and efficiently leverage its portfolio of assets in order to
create comprehensive communications solutions.
F-23
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
August 31, 2003
The goals of the new organization include:
-----------------------------------------
o Implementing a structure that will enable Eagle's sales,
marketing and support personnel to better understand
customer/partner needs, recommend the most appropriate mix of
Eagle products and services and provide a single contact point to
make it very easy for customers to do business with Eagle.
o Simplifying Eagle's portfolio of assets, pulling all of Eagle's
capabilities under a single Eagle Broadband name and clearly
communicating how prospective customers, partners and
shareholders can benefit from doing business with or investing in
Eagle.
o Streamlining the organization and eliminating redundancies to
simplify business processes and achieve significant cost
efficiencies.
o Maximizing sales productivity and effectiveness by ensuring sales
teams have the requisite tools, resources and support needed to
best serve Eagle customers and partners.
o Positioning the company to achieve aggressive customer
acquisition, revenue growth and profitability goals in order to
maximize shareholder value.
The plan calls for targeted investments in four key areas:
----------------------------------------------------------
o Aggressive expansion of Eagle's turnkey suite of broadband
infrastructure finance, design, implementation, operation and
maintenance services for municipalities, real estate developers,
hotels, multi-tenant units and service providers to drive
recurring revenues from Eagle's exclusive four-play of Bundled
Digital Services (i.e. high-speed Internet access, phone, cable
TV, security monitoring, etc.).
o Eagle's state-of-the-art, IP-services Set-Top Box (STB) product
portfolio (including a new generation of IP-based,
high-definition TV/MPEG4 set-top boxes with exclusive IP-TV
streaming capabilities) to capture revenues from such high value
customer applications as bundled digital services for hotel and
apartment owners, hospital or home-based patient monitoring,
video-conferencing-based distance learning for employees or
students, remote security monitoring, etc.
o Increased direct and partner sales/marketing programs for Eagle's
Orb' Phone Exchange satellite-based system that enables airline,
government/military and enterprise customers to deliver "total"
global communications services to users in non-line-of-sight
environments.
o Outsourced, managed services for residential and
commercial/enterprise customers including security/network
monitoring, help-desk, intrusion detection, managed firewall,
anti-virus protection, spam filtering, etc.
F-24