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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________
FORM 10-Q
___________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 001-15649
EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0494995
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)
101 Courageous Drive
League City Texas 77573-3925
(Address of principal executive offices, including zip code)
(281) 538-6000
(Registrant's telephone number, including area code)
_____________
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (ii) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of July 7, 2004, there were 201,964,815 shares of common stock outstanding.
EAGLE BROADBAND, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended May 31, 2004
Table of Contents
Part 1 - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at May 31, 2004, and August 31, 2003 3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended May 31, 2004, and May 31, 2003 4
Consolidated Statements of Changes In Shareholders' Equity for the
Nine Months Ended May 31, 2004, and Twelve Months Ended
August 31, 2003 5
Consolidated Statements of Cash Flows for the Nine Months Ended
May 31, 2004, and May 31, 2003 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 37
Part 2 - Other Information
Item 1. Legal Proceedings 38
Item 2. Recent Sales of Unregistered Securities or Changes
in Securities and Use of Proceeds. 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 40
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
ASSETS
May 31, August 31,
2004 2003
---- ----
(Unaudited) (Audited)
Restated
Current Assets:
Cash and Cash Equivalents $ 1,627 $ 824
Securities Available for Sale 1,563 1,714
Accounts Receivable, net 4,622 1,704
Inventories 2,859 3,199
Net Investment in Direct Financing Leases 129 ---
Prepaid Expenses 420 668
-------------- ----------
Total Current Assets 11,220 8,109
Property and Equipment:
Operating Equipment 36,372 36,422
Less: Accumulated Depreciation (7,277) (5,689)
-------------- ----------
Total Property and Equipment 29,095 30,733
Other Assets:
Deferred Costs --- 334
Net Investment in Direct Financing Leases 409 ---
Goodwill, net 41,660 41,660
Contract rights, net 22,156 23,590
Customer relations, net 5,551 5,912
Other Intangible Assets, net 4,132 4,366
Other Assets 784 227
-------------- ----------
Total Other Assets 74,692 76,089
-------------- ----------
Total Assets $ 115,007 $ 114,931
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 8,928 $ 5,461
Accrued Expenses 3,616 7,560
Notes Payable 5,581 5,779
Deferred Revenue 492 230
-------------- ----------
Total Current Liabilities 18,617 19,030
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred Stock - $.001 par value
Authorized 5,000,000 shares
Issued -0- shares --- ---
Common Stock - $.001 par value
Authorized Shares at May 31, 2004, and
August 31, 2003 -- 350,000,000 and
200,000,000, respectively
Issued and Outstanding Shares at May 31,
2004, and August 31, 2003 -- 188,479,000
and 147,447,000, respectively 188 147
Paid in Capital 201,026 177,017
Retained Earnings (104,141) (80,536)
Accumulated Comprehensive Income (Loss) (683) (727)
-------------- ----------
Total Shareholders' Equity 96,390 95,901
-------------- ----------
Total Liabilities and Shareholders' Equity $ 115,007 $ 114,931
============== ==========
See accompanying notes to consolidated financial statements.
3
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
For the Three Months ended May 31 For the Nine Months ended May 31
2004 2003 2004 2003
--------------- -------------- --------------- ---------------
Net Sales:
Structured Wiring $ $ $ $
Broadband Services 156 598 673 3,198
Products 709 657 4,805 2,219
Other 4,226 527 5,673 2,722
--- 65 81 1,389
--------------- -------------- --------------- ---------------
Total Sales 5,091 1,847 11,232 9,528
--------------- -------------- --------------- ---------------
Costs of Goods Sold:
Direct Labor and Related Costs 226 245 1,078 993
Products and Integration Service 3,937 605 4,375 2,256
Structured Wiring Labor and Materials 115 326 376 984
Broadband Services Costs 304 152 2,550 682
Depreciation and Amortization 285 114 856 342
Other Manufacturing Costs --- --- 26 155
--------------- -------------- --------------- ---------------
Total Costs of Goods Sold 4,867 1,442 9,261 5,412
--------------- -------------- --------------- ---------------
Gross Profit 224 405 1,971 4,116
--------------- -------------- --------------- ---------------
Operating Expenses:
Selling, General and Administrative:
Salaries and Related Costs 884 413 7,686 3,276
Advertising and Promotion --- 21 20 77
Depreciation and Amortization 960 915 2,945 2,709
Other Support Costs 2,494 2,524 6,586 4,766
Research and Development 129 125 395 184
--------------- -------------- --------------- ---------------
Total Operating Expenses 4,467 3,998 17,632 11,012
--------------- -------------- --------------- ---------------
Loss from Operations (4,243) (3,593) (15,661) (6,896)
Other Income / (Expenses):
Interest Income - Net 10 52 21 69
Interest (Expense) (140) (292) (7,789) (551)
Loss on Sale of Assets --- --- (642) ---
Gain on Sale of Marketable Securities --- --- 466 ---
--------------- -------------- --------------- ---------------
Total Other Income (Expense) (130) (240) (7,944) (482)
Net Loss (4,373) (3,833) (23,605) (7,378)
--------------- -------------- --------------- ---------------
Other Comprehensive Loss
Unrealized Holding Gain/(Loss) (11) 346 44 (595)
--------------- -------------- --------------- ---------------
Other Comprehensive Loss $ (4,384) $ (3,487) $ (23,561) $ (7,973)
=============== ============== =============== ===============
Net Loss per Common Share:
Basic $ (0.02) $ (0.05) $ (0.13) $ (0.09)
Diluted $ (0.02) $ (0.05) $ (0.13) $ (0.09)
Comprehensive Loss $ (0.02) $ (0.05) $ (0.13) $ (0.09)
See accompanying notes to consolidated financial statements.
4
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
Additional Accumulated Total
Preferred Paid in Retained Comprehensive Shareholders
Shares Value Stock Capital Earnings Income Equity
------ ----- --------- ---------- -------- ------------- ------------
Total Shareholders' 73,051 $ 73 --- $ 158,731 $(44,035) $ (656) $114,113
Equity As of August 31,
2002
======== =========== ====== =========== ============ =========== ===========
Net Loss --- --- --- --- (36,501) (36,501)
New Stock Issued to
Shareholders
Services and
Compensation 7,437 7 --- 1,813 --- 1,820
Property and Other
Assets 14,938 15 --- 3,032 --- 3,047
Retirement of Debt and
Liabilities 50,816 51 --- 13,827 --- 13,878
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
As of August 31, 2003 147,447 147 --- 177,017 (80,536) (727) 95,901
======== =========== ====== =========== ============ =========== ==========
Net Loss for the Nine
Months Ended May 31, 2004 --- --- --- --- (23,605) (23,605)
New Stock Issued to
Shareholders
Services and
Compensation 5,090 5 --- 4,448 --- 4,453
Property and Other
Assets --- ---
Retirement of Debt and
Liabilities 35,942 36 --- 8,156 --- 8,192
Interest for
Beneficial Conversion
Value --- 6,912 --- 6,912
Retirements /
Issuance of Warrants 4,493 4,493
Unrealized Holding Gain --- 44 44
Total Shareholders'
Equity as of
May 31, 2004 188,479 $188 --- $201,026 $(104,141) $ (683) $96,390
======== =========== ====== =========== ============ =========== ===========
See accompanying notes to consolidated financial statements.
5
- --------------------------------------------------------------------------------
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
For the Nine Months Ended May 31,
------------------------------------------------
2004 2003
------------- -------------
Restated
Cash Flows from Operating Activities:
Net Loss $ (23,605) $ (7,378)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Gain (Loss) on Sale of Assets 611 ---
Interest for Beneficial Conversion Value 6,912 91
Depreciation and Amortization 3,801 3,051
Stock Issued for Interest Expense 108 266
Stock Issued for Services Rendered 8,947 1,060
Allowance for Doubtful Accounts 372 643
(Increase)/Decrease in Accounts Receivable (3,246) 837
(Increase)/Decrease in Inventories 340 (1,124)
(Increase)/Decrease in Direct Finance Leasing (538) ---
(Increase)/Decrease in Prepaid Expenses 248 (777)
Increase/(Decrease) in Accounts Payable 3,467 1,284
Increase/(Decrease) in Accrued Expenses (1,453) 1,456
------------- -------------
Total Adjustment 19,569 6,787
------------- -------------
Net Cash Used by Operating Activities (4,036) (591)
Cash Flows from Investing Activities:
(Purchase)/Disposal of Property and Equipment (686) (3,486)
(Increase)/Decrease in Deferred Costs 334 (52)
(Increase)/Decrease in Intangible Costs --- (368)
(Increase)/Decrease in Marketable Securities 151 951
(Increase)/Decrease in Other Assets (557) ---
------------- -------------
Net Cash Used by Investing Activities (758) (2,955)
------------- -------------
Cash Flows from Financing Activities:
Increase/(Decrease) in Notes Payable & Long-Term Debt 5,597 3,360
------------- -------------
Net Cash Provided by Financing Activities 5,597 3,360
------------- -------------
Net Increase/(Decrease) in Cash 803 (186)
------------- -------------
Cash at the Beginning of Period 824 1,273
Cash at the End of Period $1,627 $1,087
============= =============
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for
Interest $312 $ 286
Income Taxes --- ---
Supplemental non-cash investing activities (See Note 21) and changes in
shareholder's equity.
See accompanying notes to consolidated financial statements.
6
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Eagle Broadband, Inc., (the Company or Eagle) incorporated as a Texas
corporation on May 24, 1993, and commenced business in April of 1996.
The Company is a 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 are last-mile cable and fiber
installation services, as well as comprehensive IT products and
services.
A) Consolidation
At May 31, 2004, 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 $1,627,000 and $824,000 of cash invested in interest
bearing accounts and cash equivalents at May 31, 2004, and August 31,
2003, respectively.
The Company also has securities available for sale that include
967,500 shares of common stock of Burst.com, 146,085,264 shares of
Celerity Systems common stock and $350,000 Celerity Systems Bonds.
These common stock and bond investments have an aggregate cost basis
of $867,650 and an aggregate fair market value of $1,563,149 and are
included in the Balance Sheet category of Securities Available for
Sale as of May 31, 2004. See (Note 8)
Subsequent to the quarter ended May 31, 2004, Celerity Systems, Inc.
repurchased the Celerity Systems common stock and bonds from the
Company for $662,308 in cash.
C) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated by using the straight-line
method for financial reporting and accelerated methods for income tax
purposes. The recovery classifications for these assets are listed as
follows:
Years
-----
Head-End Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of Lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized. Eagle has
acquired all of its property and equipment with either cash or stock
and has not capitalized any interest expenses in its capital assets.
7
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
D) Inventories
Inventories are valued at the lower of cost or market. The cost is
determined by using the FIFO method. Inventories consist of the
following items, in thousands:
May 31, August 31,
2004 2003
--------- -----------
Raw Materials $ 1,437 $ 1,826
Work in Process 915 1,237
Finished Goods 507 136
--------- -----------
$ 2,859 $ 3,199
========= ===========
E) Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the Eagle Broadband, Inc.; BroadbandMagic;
ClearWorks Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle
Wireless International, Inc., Atlantic Pacific Communications, Inc.;
Link Two Communications, Inc.; United Computing Group, Inc.; Contact
Wireless, Inc.; and DSS Security, Inc., names.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of
adopting EITF 00-21 did not have a material effect to Eagle's results
of operations. Eagle's contracts that contain multiple elements as of
May 31, 2004, or prior were immaterial. When elements such as
hardware, software and consulting services are contained in a single
arrangement, or in related arrangements with the same customer, Eagle
allocates revenue to each element based on its relative fair value,
provided that such element meets the criteria for treatment as a
separate unit of accounting. The price charged when the element is
sold separately generally determines fair value. In the absence of
fair value for a delivered element, Eagle allocates revenue first to
the fair value of the undelivered elements and allocates the residual
revenue to the delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a single unit
of accounting, resulting in a delay of revenue recognition for the
delivered elements until the undelivered elements are fulfilled. Eagle
limits the amount of revenue recognition for delivered elements to the
amount that is not contingent on the future delivery of products or
services or subject to customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed are
deferred until the conclusion of the period of the service for which
the advance billing relates. Deferred revenues are included on the
balance sheet as a current liability until the service is performed
and then recognized in the period in which the service is completed.
Eagle's deferred revenues primarily consist of billings in advance for
cable, internet, security and telephone services, which generally are
between one and three months of services. Eagle had deferred revenues
of $491,953 and $230,397 as of May 31, 2004, and August 31, 2003,
respectively.
EAGLE WIRELESS INTERNATIONAL, INC.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in
commercial and personal communication systems, radio and telephone
systems. Revenues from these products are recognized when the product
is shipped. Eagle's Wireless International Product revenues are
reported under the category of Products on Eagle's Consolidated
Statements of Operations included as page 4 of this report and also
under the category Eagle within Note 20 - Industry Segments.
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 Eagle recognizes the revenue.
Eagle's Broadband Multimedia and Internet Products revenues are
reported under the category of Products on Eagle's Consolidated
Statements of Operations included as page 4 of this report and also
under the category Eagle within Note 20 - Industry Segments. Revenue
from software consists of software licensing. There is no
post-contract customer support. Software revenue is allocated to the
license using vendor specific objective evidence of fair value
("VSOE") or, in the absence of VSOE, the residual method. The price
charged when the element is sold separately generally determines VSOE.
In the absence of VSOE of a delivered element, Eagle allocates revenue
to the fair value of the undelivered elements and the residual revenue
to the delivered elements. Eagle recognizes revenue allocated to
software licenses at the inception of the license.
8
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
EAGLE BROADBAND, INC.
Eagle Broadband, Inc., engages independent agents for sales
principally in foreign countries and certain geographic regions in the
United States. Under the terms of these one-year agreements the
distributor or sales agents provide the companies with manufacturing
business sales leads. The transactions from these distributors and
agents are subject to Eagle's approval prior to sale. The
distributorship or sales agent receives commissions based on the
amount of the sales invoice from the companies to the customer. The
sale is recognized at the time of shipment to the customer. These
sales agents and distributors are not a significant portion of total
sales in any of the periods presented. Eagle's Broadband, Inc.,
revenues are reported under the category of Products on Eagle's
Consolidated Statements of Operations included as page 4 of this
report and also under the category Eagle within Note 20 - Industry
Segments.
EAGLE BDS SERVICES - DBA CLEARWORKS COMMUNICATIONS, INC.
ClearWorks Communications, Inc., provides Bundled Digital Services to
business and residential customers, primarily in the Texas market.
Revenue is derived from fees charged for the delivery of Bundled
Digital Services, which includes telephone, long distance, internet,
security monitoring and cable services. This subsidiary recognizes
revenue and the related costs at the time the services are rendered.
Installation fees are recognized upon completion and acceptance. Eagle
BDS Services' revenues are reported under the category of Broadband
Services on Eagle's Consolidated Statements of Operations included as
page 4 of this report and also under the category EBS/DSS within
Note 20 - Industry Segments.
EAGLE RESIDENTIAL STRUCTURED WIRING-DBA CLEARWORKS HOME SYSTEMS, INC.
ClearWorks Home Systems, Inc., sells and installs structured wiring
and audio and visual components to homes. This subsidiary recognizes
revenue and the related costs at the time the services are performed.
Revenue is derived from the billing of structured wiring to homes and
the sale of audio and visual components to the homebuyers. Eagle's
Residential Structured Wiring revenues are reported under the category
of Structured Wiring on Eagle's Consolidated Statements of Operations
included as page 4 of this report and also under the category
APC/HSI within Note 20 - Industry Segments.
EAGLE COMMUNICATION SERVICES-DBA ATLANTIC PACIFIC COMMUNICATIONS, INC.
Atlantic Pacific Communications, Inc., provides project planning,
installation, project management, testing and documentation of fiber
and cable to commercial and industrial clients throughout the United
States. The revenue from the fiber and cable installation and services
is recognized upon percentage of completion of the project. Most
projects are completed in less than one month, therefore, matching
revenue and expense in the period incurred. Service, training and
extended warranty contract revenues are recognized as services are
completed. Eagle's Communications Services revenues are reported under
the category of Structured Wiring on Eagle's Consolidated Statements
of Operations included as page 4 of this report and also under the
category APC/HSI within Note 20 - Industry Segments.
ETOOLZ, INC.
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to
independent third parties.
EAGLE MESSAGING SERVICES - DBA LINK TWO COMMUNICATIONS, INC.
Link Two Communications, Inc., provides customers with one- and
two-way messaging systems. The revenue from the sale of these products
is recognized at the time the services are provided. Eagle's Messaging
Services revenues are reported under the category of Other on Eagle's
Consolidated Statements of Operations included as page 4 of this
report and also under the category Eagle within Note 20 - Industry
Segments.
EAGLE PAGING SERVICES - DBA CONTACT WIRELESS, INC.
Contact Wireless, Inc., provides customers with paging and mobile
telephone products and related monthly services. Revenue from product
sales is recorded at the time of shipment. Revenue for the mobile
phone and paging service is billed monthly as the service is provided.
Eagle's Paging Services revenues are reported under the category of
Other on Eagle's Consolidated Statements of Operations included as
page 4 of this report and also under the category Other within Note
20 - Industry Segments.
EAGLE SECURITY SERVICES - DBA DSS SECURITY, INC.
DSS Security, Inc., provides security monitoring services to
residential and commercial customers, purchases and resells and
bundles and sells contracts from its own portfolio to independent
third party companies. Security monitoring customers are billed three
months in advance of service usage. The revenues are deferred at the
time of billing and ratably recognized over the prepayment period as
service is provided. Installation fees are recognized upon completion
and acceptance. Revenues from the sale of security monitoring
contracts, both purchased and owned, are recognized upon contract
execution except for reserves, hold backs or retentions, which are
deferred until the contract provisions are fulfilled. Eagle's Security
Services revenues are reported under the category of Broadband
Services on Eagle's Consolidated Statements of Operations included as
page 4 of this report and also under the category EBS/DSS within
Note 20 - Industry Segments.
EAGLE TECHNOLOGY SERVICES - DBA UNITED COMPUTING GROUP, INC.
United Computing Group, Inc., provides business-to-business hardware
and software network solutions and network monitoring services. The
revenue from the hardware and software sales is recognized at the time
of shipment. The monitoring services recognition policy is to record
revenue on completion. Eagle's Technology Services product revenues
are reported under the category of "Products" while the services
components are reported under the category "Other" on Eagle's
Consolidated Statements of Operations included as page 4 of this
report and also under the category UCG within Note 20 - Industry
Segments.
9
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
F) Research and Development Costs
For the three months ended May 31, 2004, and May 31, 2003, 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 $129,000 and $125,000 were expensed for the three months ended May
31, 2004, and May 31, 2003, respectively. Research and development
costs of $395,000 and $184,000 were expensed for the nine months ended
May 31, 2004, and May 31, 2003, respectively.
No research and development services were performed for outside
parties for the three months ended May 31, 2004 and May 31, 2003.
G) Income Taxes
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires a change from the deferral method to assets and
liability method of accounting for income taxes. Timing differences
exist between book income and tax income, which relate primarily to
depreciation methods.
H) Net Earnings Per Common Share
Net earnings per common share are shown as both basic and diluted.
Basic earnings per common share are computed by dividing net income
less any preferred stock dividends (if applicable) by the weighted
average number of shares of common stock outstanding. Diluted earnings
per common share are computed by dividing net income less any
preferred stock dividends (if applicable) by the weighted average
number of shares of common stock outstanding plus any dilutive common
stock equivalents. The components used for the computations are shown
as follows, in thousands:
May 29, August 31,
2004 2003
-------- -----------
Weighted Average Number of Common
Shares Outstanding Including
Primary Common Stock Equivalents 179,228 95,465
Fully Dilutive Common Stock Equivalents 179,228 95,465
I) Impairment of Long-Lived Assets and Goodwill
Our long-lived assets primarily include goodwill, contract rights and
customer relationships Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires that
goodwill and intangible assets be tested for impairment at the
reporting unit level (operating segment or one level below an
operating segment) on an annual basis and between annual tests in
certain circumstances. Application of the goodwill impairment test
requires judgment, including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning
goodwill and intangible assets to reporting units, and determining the
fair value of each reporting unit. Significant judgments required to
estimate the fair value of reporting units include estimating future
cash flows, determining appropriate discount rates and other
assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value for each reporting
unit.
The intangible assets primarily are the Company rights to deliver
bundled digital services such as, Internet, telephone, cable
television and security monitoring services to residential and
business users. The Company assessed the fair value of the intangible
assets. There were a number of significant and complex assumptions
used in the calculation of the fair value of the intangible assets. If
any of these assumptions prove to be incorrect, the Company could be
required to record a material impairment to its intangible assets. The
assumptions include significant market penetration in its current
markets under contract and significant market penetration in markets
where they are currently negotiating contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. An impairment loss would be deemed necessary when the estimated
non-discounted future cash flows are less than the carrying net amount
of the asset. If an asset were deemed to be impaired, the asset's
recorded value would be reduced to fair market value. In determining
the amount of the charge to be recorded, the following methods would
be utilized to determine fair market value:
10
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets
3) Estimate based on valuation techniques
As of May 31, 2004, no impairment existed.
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.
Contract rights and customer relationships relate to the Company
rights to deliver bundled digital services such as, Internet,
telephone, cable television and security monitoring services to
certain residential and business users that were acquired in the
Clearworks.net, Inc. merger, and are being amortized over the lives of
the contracts which is fifteen (15) years..
Other intangible assets consist of licenses and permits and other
acquired contracts, which are being amortized using the straight-line
method over their estimated useful lives of 1 to twenty (20) years.
Eagle's licenses include FCC licenses for designated narrowband
personal communications services, radio frequencies or spectrum to
service providers. Eagle does not maintain that these licenses have an
indefinite life, but rather has ceased amortizing the remaining
balance of $1,562,000, as management believes that this balance
represents the salvage value of such assets. Eagle, to date, has
maintained all operational requirements to keep its licenses current,
and periodically assesses both future operating requirements as well
as the salvage of such assets.
Eagle 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. 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 $75,528,000 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 Chief Executive Officer
with an extensive sales and marketing background and proven senior
management and operational skills leading high-growth technology
companies to implement its modified strategy.
Eagle assessed the fair value of the intangible assets as of August
31, 2003, and May 31, 2004, and concluded 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
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 three and nine months ended May 31, 2004,
the Company has expensed $0, and $21,000. For the three and nine
months ended May 31, 2003, the Company has expensed $20,000 and
$77,000.
11
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
L) Deferred Syndication Costs
Deferred syndication costs consist of those expenditures incurred that
are directly attributable to fundraising and the collection thereto.
Upon successful collection of the funds, all expenses incurred will be
reclassified to additional paid in capital and treated as syndication
costs; netted against the funds raised.
M) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent asset and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
N) Marketable Securities
Eagle holds minority equity investments in companies having operations
or technology in areas within Eagle's strategic focus. Eagle applies
the equity method of accounting for minority investments when Eagle
has the ability to exert significant influence over the operating and
financial policies of an investee. In the absence of such ability,
Eagle accounts for these minority investments under the cost method.
Certain investments carry restrictions on immediate disposition.
Investments in public companies (excluding those accounted for under
the equity method) with restrictions of less than one year are
classified as available-for-sale and are adjusted to their fair market
value with unrealized gains and losses, net of tax, recorded as a
component of accumulated other comprehensive income. Upon disposition
of these investments, the specific identification method is used to
determine the cost basis in computing realized gains or losses, which
are reported in other income and expense. Declines in value that are
judged to be other than temporary are reported in other income and
expense.
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 three months ended May
31, 2004, and May 31, 2003, the Company recorded a comprehensive loss
of $11,000 and comprehensive gain of $346,000, respectively. For the
nine months ended May 31, 2004, and May 31, 2003, the Company recorded
a comprehensive gain of $44,000 and a comprehensive loss of $595,000,
respectively.
P) Beneficial Conversion Values
Beneficial conversion values are calculated at the difference between
the conversion price and the fair value of the common stock into which
the debt is convertible, multiplied by the number of shares into which
the debt is convertible. The beneficial conversion value is charged to
interest expense because the debt is convertible at the date of
issuance. The value is limited to the total proceeds received.
Q) Reclassification
The Company has reclassified certain assets, costs and expenses for
the three and nine months ended May 31, 2004, and May 31, 2003, to
facilitate comparisons.
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.
12
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
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.
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 Statement of Financial Accounting
Standards No. 149 (SFAS 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.
S) Product Warranties
The Company warrants its products against defects in design, materials
and workmanship generally for nine months to a year. Other warranties
from our vendors which are incorporated in our products are passed on
to the customer at the completion of the sale. Provision for estimated
warranty costs is made in the period in which such costs become
probable. Historically, Eagle has not incurred any material warranty
costs and, accordingly, Eagle has not accrued for these costs at May
31, 2004, and May 31, 2003. Eagle provides for the estimated cost of
product warranties at the time it recognizes revenue. Eagle engages in
product quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers; however,
ongoing product failure rates, material usage and service delivery
costs incurred in correcting a product failure, as well as specific
product class failures outside of Eagle's baseline experience, affect
the estimated warranty obligation. If actual product failure rates,
material usage or service delivery costs differ from estimates,
revisions to the estimated warranty liability would be required.
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS
During the quarter ended May 31, 2004, and subsequent to the issuance
of the Company's financial statements as of August 31, 2003, it
was determined that the allocation of the purchase price to net
assets acquired in connection with its merger with
Clearworks.net, Inc. and certain other classifications of
intangible assets had not been appropriately accounted for. The
principal change to previously issued financial statements
related to the reclassification of a portion of the Company's
goodwill acquired in the Clearwork.net, Inc. merger to contract
rights, customer relationships and other intangible assets that
are amortizable versus goodwill not being amortizable following
the Company's adoption of FAS 142. Accordingly, the Company has
restated its consolidated financial statements for the years
ended August 31, 2003, 2002 and 2001 to correctly present
goodwill, intangible assets, amortization expense and net loss.
13
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
The accompanying consolidated financial statements for the three and
nine months ended May 31, 2003 have been restated to correctly present
amortization expense and net loss.
The following table summarizes the impact of these adjustments on the
results of operations for the three and nine months ended May 31,
2003.
Three Months Ended Nine Months Ended
May 31, 2003 May 31, 2003
As As As As
Reported Restated Reported Restated
--------- ----------- --------- --------
Depreciation and
amortization $ 213 $ 915 $ 603 $ 2,709
Total Operating Expenses
3,086 3,998 8,365 11,012
Loss from Operations (2,681) (3,593) (4,249) (6,896)
Net Loss (2,921) (3,833) (4,731) (7,378)
Other Comprehensive Loss
(2,575) (3,487) (5,326) (7,973)
Basic $ (0.04) $ (0.05) $ (0.06) $ (0.09)
Diluted $ (0.04) $ (0.05) $ (0.06) $ (0.09)
Comprehensive Loss $ (0.04) $ (0.05) $ (0.06) $ (0.09)
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following, in thousands:
May 31, August 31,
2004 2003
------- ---------
Accounts Receivable $ 4,958 $ 2,116
Allowance for Doubtful Accounts (336) (412)
-------- --------
Net Accounts Receivable $ 4,622 $ 1,704
======== ========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS:
Components of property, plant and equipment are as follows, in thousands:
May 31, August 31,
2004 2003
-------- ----------
Automobile $ 143 $ 143
Headend Facility & Fiber Infrastructure 27,361 26,688
Furniture, Fixtures & Equipment 1,539 1,544
Leasehold Improvements 124 122
Property, Manufacturing & Equipment 7,205 7,925
----------- ---------
----------- ---------
Total Property, Plant & Equipment 36,372 36,422
Less: Accumulated Depreciation (7,277) (5,689)
----------- -----------
Net Property, Plant & Equipment $ 29,095 $ 30,733
=========== ===========
Eagle expenses repairs and maintenance against income as incurred
whereas major improvements are capitalized. Eagle defines major
improvements as those assets acquired that extend the life of the
underlying base asset while defining other improvements that do not
extend the life as repairs and maintenance. Eagle expensed repairs and
maintenance of $16,125 and $18,000 for the three months ended May 31,
2004, and May 31, 2003, respectively, whereas it did not have any
capitalized major improvements for the same time periods. Eagle
expensed repairs and maintenance of $35,698 and $26,000 for the nine
months ended May 31, 2004, and May 31, 2003, respectively, whereas it
did not have any capitalized major improvements for the same time
periods.
Eagle's headend facility and fiber infrastructure consist primarily of
digital computing and telecommunications equipment that comprise
Eagle's main headend facility at it headquarters, wireless headend
equipment, a digital headend facility and a fiber backbone in the
master planned communities in which it operates and a fiber ring
connecting the various master planned communities in the Houston area.
These fiber and headend infrastructures are similar to those that
would exist in a major telecommunications or cable television provider
that offers digital services for Internet, cable TV, telephone and
security monitoring services. Eagle determined that a 20-year
straight-line depreciation method is appropriate for its headend
facility and fiber infrastructure based on industry standards for
these asset types.
14
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
The Company has also reclassified the accumulated amortization
relating to goodwill and intangible assets.
NOTE 5 - NOTES PAYABLE:
The following table lists the Company's note obligations as of May 31,
2004, and August 31, 2003, in thousands:
Annual
Interest May 31, August 31,
Rate Due Date 2004 2003
---------------- --------------- ------------- -----------
Vehicles Various Various $ --- $ 4
5% Convertible Debenture (Note 9) 5 .0% Demand --- 1,200
Tail Wind Convertible Debenture 2.0% Demand --- 1,595
Notes Payable - Investor Group 10.0% October 2003 --- 900
Notes Payable - Q Series Bonds 12.0% Various 5,275 1,363
Other Various Various 306 717
---------- -------
Total notes Payable $ 5,581 $ 5,779
---------- -------
Less Current Portion 5,581 5,779
---------- -------
Total Long-Term Debt $ ---$ ---
========== =======
NOTE 6 - LINE OF CREDIT:
APC entered into a credit facility with Southwest Bank of Texas (SWBT)
to provide working capital and fund ongoing operations. This credit
facility is a purchase and sale agreement against accounts receivable
and 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. During the first quarter of fiscal
2004, APC repaid and canceled the line of credit.
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. During the first
quarter of fiscal 2004, UCG repaid and canceled the line of credit,
NOTE 7 - CONVERTIBLE DEBENTURES:
During October 2002, the Company entered into a $3,000,000 convertible
debenture agreement with Cornell Capital Partners, LP (CCP). During
the three month period ended November 30, 2003, the principal balance
of the debenture was repaid, although a lawsuit remains outstanding -
see Legal Proceedings. On July 16, 2002, the Company entered into a
$20,000,000 line of credit with Cornell Capital Partners, LP (CCP).
The Company has not drawn on the line of credit and currently has no
plans to do so. One of the issues in the litigation between CCP and
the Company (see Legal Proceedings below) is whether the Company owes
CCP a commitment fee for this line of credit. Cornell contends that
the Company owes $395,000 of stock; the Company denies the liability.
The Company is currently negotiating to settle this contested
liability and the cancellation of the line of credit.
15
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
During 2001, the Company acquired ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. Link Two
Communications, Inc., is a subsidiary of ClearWorks. Link Two entered
an agreement with The Tail Wind Fund Ltd., under which Tail Wind
purchased from Link Two a 2% convertible note in the initial amount of
$5,000,000. As a result of the acquisition, Eagle the parent of Link
Two, has guaranteed the Link Two notes issued to Tail Wind and allowed
Tail Wind to convert the above mentioned debt into Eagle common stock
and warrants at various rates. During the three-month period ended
February 29, 2004, the note was repaid.
Between November 25, 2002, and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45
accredited investors. The securities consisted of $25,000, 12%
five-year bonds. The bonds are due and payable upon maturity at the
end of the five-year period. Interest on the bonds is payable at the
rate of 12% per annum, and is payable semiannually. The bondholder may
require the Company to convert the bond (including any unpaid
interest) into shares of the Company's common stock at any time during
the first year but not thereafter. The conversion rates vary from
$0.16 to $0.34 per share. The Company may redeem the bonds at any time
after the first year.
Between October 30, 2003, and November 5, 2003, the Company sold
approximately $4.1 million of convertible debt securities to 36
accredited investors. The securities consisted of $25,000, 12%
five-year bonds. The bonds are due and payable upon maturity at the
end of the five-year period. Interest on the bonds is payable at the
rate of 12% per annum, and is payable semiannually. The bondholder may
require the Company to convert the bond (including any unpaid
interest) into shares of the Company's common stock at any time during
the first year but not thereafter. The conversion rates vary from
$0.50 to $0.75 per share. The Company may redeem the bonds at any time
after the first year.
NOTE 8 - SECURITIES AVAILABLE FOR SALE:
At May 31, 2004 and August 31, 2003, all of the Company's marketable
equity securities are classified as available-for-sale.
Securities available for sale include 967,500 shares of common stock
of Burst.com, 146,085,264 shares of Celerity Systems common stock and
$350,000 Celerity Systems Bonds as of May 31, 2004. These common stock
and bond investments have an aggregate cost basis of $867,650 and an
aggregate fair market value of $1,563,149.
Subsequent to the quarter ended May 31, 2004, Celerity Systems, Inc.
repurchased the Celerity Systems common stock and bonds from the
Company for $662,308 in cash.
NOTE 9 - INCOME TAXES:
The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
May 31, August 31,
2004 2003
(%) (%)
----------------- ----------------
U.S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference (34) (34)
----------------- ----------------
Effective U.S. Tax Rate 0 0
Foreign Tax Valuation 0 0
----------------- ----------------
Effective Tax Rate 0 0
================= ================
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S.
Federal income tax rate of 34% to pretax income from continuing
operations as a result of the following: (in thousands).
May 31, August 31,
2004 2003
-------------- -----------
Computed Expected Tax Benefit $ (8,026) $ (11,456)
Increase in Valuation Allowance 8,026 11,456
-------------- -----------
$ 0 $ 0
============== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
May 31, 2004, and August 31, 2003, are presented below, in thousands,
and include the balances of the acquired company ClearWorks.Net.
16
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
May 31, August 31,
2004 2003
----------------- -----------
Deferred tax assets:
Accounts Receivable, Principally Due to
Allowance for Doubtful Accounts $ --- $ ---
Net Operating Loss Carry-Forwards 43,529 35,503
Less Valuation Allowance (43,529) (35,503)
----------------- -----------
Net Deferred Tax Assets --- ---
Deferred Tax Liabilities:
Differences in Depreciation --- ---
----------------- ------------
Net Deferred Tax Liabilities $ --- $ ---
================= ============
The valuation allowance for deferred tax assets of May 31, 2004, and
August 31, 2003, was $43,529,000 and $35,503,000, respectively. At May
31, 2004, the Company has net operating loss carry-forwards of
$128,026,000, which are available to offset future federal taxable
income, if any, with expirations from 2020 to 2021.
NOTE 10 - ISSUANCE OF COMMON STOCK:
For the nine months ended May 31, 2004, the Company issued shares of
common stock. The following table summarizes the shares of common
stock issued, in thousands.
Shares Outstanding August 31, 2003 147,447
---------
Shares Issued for Retirement of Debt and Liabilities 35,942
Shares Issued for Services, Compensation, Property and 5,090
Other Assets
---------
Shares Outstanding May 31, 2004 188,479
=========
NOTE 11 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:
In July 1996, the Board of Directors and majority shareholders adopted
an employee stock option plan under which 400,000 shares of Common
Stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for
issuance. As of May 31, 2004, options to purchase 351,233 are
outstanding and 648,767 are available to be issued.
The Company has issued (or has acquired through its acquisitions) and
has outstanding the following warrants which have not yet been
exercised at May 31, 2004:
50,000 stock purchase options issued to L. A. Delmonico Consulting,
Inc., expiring April 4, 2005. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $1.04 per share. The shares of common
stock underlying these warrants were registered for resale on August
9, 2002, under the Securities Act of 1933. As of May 31, 2004, 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 May 31, 2004, these
warrants have expired unexercised.
41,667 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.00 per share. The shares of common stock underlying these
have not been registered as of November 30, 2002, under the Securities
Act of 1933. As of May 31, 2004, none of these warrants have been
exercised.
41,667 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.25 per share. The shares of common stock underlying these
warrants have not been registered or issued, under the Securities Act
of 1933. As of May 31, 2004, none of these warrants have been
exercised.
58,333 stock purchase warrants issued to Peter Miles expiring July 20,
2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $3.00 per share. The shares of common stock underlying these
warrants have not been registered or issued, under the Securities Act
of 1933. As of May 31, 2004, none of these warrants have been
exercised.
17
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
25,000 stock purchase warrants issued to Synchton, Inc., expiring July
1, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $1.35 per share. The shares of common stock underlying these
warrants were registered for resale on August 9, 2002, under the
Securities Act of 1933. As of May 31, 2004, 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 November 30, 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 May 31, 2004, 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 May 31, 2004, none of these warrants
have been exercised.
192,000 stock purchase warrants issued to Tech Technologies Services,
LLC, expiring April 24, 2008. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $7.50 per share. The shares of common
stock underlying these warrants have not been registered or issued,
under the Securities Act of 1933. As of May 31, 2004, none of these
warrants have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring July
1, 2005. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $0.39 per share. The shares of common stock underlying these
warrants were not registered for resale under the Securities Act of
1933. As of May 31, 2004, 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 of May 31, 2004, 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 of May 31, 2004, none of these warrants
have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
October 1, 2005. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.35 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of May 31, 2004, none of these warrants
have been exercised.
40,000 stock purchase warrants issued to Rachel McClere 1998 Trust
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of May 31, 2004, 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 of May 31, 2004, none of these warrants
have been registered, issued or exercised.
25,000 stock purchase warrants issued to Synchton, Inc., expiring
January 1, 2006. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $0.28 per share. The shares of common stock
underlying these warrants were not registered for resale under the
Securities Act of 1933. As of May 31, 2004, 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 May 31, 2004, 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 May 31, 2004, none of these warrants have been exercised.
18
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
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 May 31, 2004, none of these warrants
have been exercised.
3,650,000 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 common stock underlying these warrants
were not registered for resale under the Securities Act of 1933. As of
May 31, 2004, 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
May 31, 2004, 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
May 31, 2004, none of these warrants have been exercised.
The warrants outstanding are segregated into two categories (issued
and outstanding and exercisable):
Warrants Issued & Warrants
Outstanding Exercisable
----------------------------------- ---------------------------------
Class of
Warrants May 31,2004 August 31, 2003 May 31,2004 August 31, 2003
- --------------------------------------------------------------------------------
0.26 25,000 25,000 25,000 25,000
0.28 25,000 25,000 25,000 25,000
0.35 25,000 25,000 25,000 25,000
0.38 50,000 50,000 50,000 50,000
0.39 25,000 25,000 25,000 25,000
0.41 3,650,000 3,800,000 3,650,000 1,550,000
0.45 25,000 25,000 25,000 25,000
0.60 400,000 400,000 400,000 -
0.61 25,000 25,000 25,000 25,000
0.69 25,000 25,000 25,000 25,000
0.75 500,000 500,000 500,000 -
1.04 50,000 50,000 50,000 50,000
1.35 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 58,333 58,333 58,333 58,333
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
ESOP 351,233 * 406,131 * 351,233 * 406,131
----------------- ---------------- -------------- -----------------
6,142,900 ** 6,347,798 ** 6,142,900 ** 3,197,798
================= ================ ============== =================
*Denotes warrants which would have an anti-dilutive effect if
currently used to calculate earnings per share for the period ended
May 31, 2004, and August 31, 2003.
**Denotes 12,650,000 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 five 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 $10.00 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 May 31, 2004, none of these warrants have been either
earned or exercised.
19
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
NOTE 12 - CAPITALIZATION ACTIVITIES:
Between November 25, 2002, and June 9, 2003, the Company sold
approximately $6.5 million of convertible debt securities to 45
accredited investors. The securities consisted of $25,000, 12%
five-year bonds. The bonds are due and payable upon maturity at the
end of the five-year period. Interest on the bonds is payable at the
rate of 12% per annum, and is payable semiannually. The bondholder may
require the Company to convert the bond (including any unpaid
interest) into shares of the Company's common stock at any time during
the first year but not thereafter. The conversion rates vary from
$0.16 to $0.34 per share. The Company may redeem the bonds at any time
after the first year.
Between October 30, 2003, and November 5, 2003, the Company sold
approximately $4.1 million of convertible debt securities to 36
accredited investors. The securities consisted of $25,000, 12%
five-year bonds. The bonds are due and payable upon maturity at the
end of the five-year period. Interest on the bonds is payable at the
rate of 12% per annum, and is payable semiannually. The bondholder may
require the Company to convert the bond (including any unpaid
interest) into shares of the Company's common stock at any time during
the first year but not thereafter. The conversion rates vary from
$0.50 to $0.75 per share. The Company may redeem the bonds at any time
after the first year.
NOTE 13 - RISK FACTORS:
For the nine months ended May 31, 2004, and May 31, 2003,
substantially all of the Company's business activities have remained
within the United States and have been extended to the wireless
infrastructure, fiber, cabling computer services and broadband
industry. Approximately eighty-five 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 fifteen percent remainder have been created relatively
evenly over the rest of the nation during the nine months ended May
31, 2004. Whereas approximately seventy-six percent of the Company's
revenues and receivables have been created solely in the state of
Texas, zero percent have been created in the international market, and
the approximate twenty-four percent remainder has been created
relatively evenly over the rest of the nation for the nine months
ended May 31, 2003. Through the normal course of business, the Company
generally does not require its customers to post any collateral.
NOTE 14 - FOREIGN OPERATIONS:
Although the Company is based in the United States, its product is
sold on the international market. Presently, international sales total
approximately 0% and 0% for the nine months ended May 31, 2004, and
May 31, 2003, respectively.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES:
Leases
For the nine months ending May 31, 2004, and May 31, 2003, rental
expenses of approximately $464,000 and $709,000 respectively, were
incurred.
The Company renewed its primary office lease space in League City,
Texas, for $24,983 per month with South Shore Harbor Development, Ltd.
The renewal lease commenced on June 1, 2004, and expires on May 31,
2009. The Lessor agreed to grant the Company a one-time option to
terminate the lease at 36 months by paying an unamortized leasing
commission of $35,000 and a penalty of 1.5 months rent of $37,000 for
a combined total of $72,000.
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.
The Company's wholly owned subsidiary, Contact Wireless, Inc., leases
office space in San Antonio, Texas with Wade Holdings. This
non-cancelable lease expires June 2007. The monthly payments are
$3,300.
The Company's wholly owned subsidiary, Contact Wireless, Inc., leases
office space in San Antonio, Texas with Cotter & Sons. This
non-cancelable lease expires August 2004. The monthly payments are
$2,698.
20
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
Future obligations under the non-cancelable lease terms areas follows:
Period Ending August 31, Amount
-------------
2004 $ 189,574
2005 447,761
2006 375,521
2007 339,180
2008 325,316
2009 243,988
-------------
Total $1,921,340
=============
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 and consequently,
$1,320,000 was charged to operations in the Company's fiscal 2003
financial statements.
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 and consequently, $3,000,000 was
charged to operations in the Company's fiscal 2003 financial
statements.
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), and In the United States District Court for the
District of New Jersey. The suit presents claims for breach of
contract, fraud, federal and state securities fraud and negligent
misrepresentation. Plaintiff has also alleged that Eagle has defaulted
on a convertible debenture for failing to timely register the shares
of common stock underlying the convertible debenture and is seeking to
accelerate the maturity date of the debenture. During the three month
period ended November 30, 2003, the principal balance of the debenture
was approximately $1.2 million and was repaid, although the suit
remains outstanding. The Company denies the claims and intends to
vigorously defend this lawsuit and the claims against it. Eagle has
asserted counterclaims against Cornell for fraud and breach of
contract. The Company has not accrued any expenses against this
lawsuit, as the outcome cannot be predicted at this time.
On December 14, EPA sued ClearWorks.net presenting claims for recovery
costs and penalties for a waste tire processing facility. The suit
seeks recovery of costs and penalties in a sum in excess of
$1,000,000, attorneys' fees and cost of court. ClearWorks denies the
claims and intends to vigorously contest all claims in this case and
to enforce its indemnification rights against the principals of
Southeast Tire Recycling. The Company has not accrued any expenses
against this lawsuit, as the outcome cannot be predicted at this time.
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, plus attorneys' fees and costs. ClearWorks denies the
claims and intends to vigorously defend this lawsuit and claims
against it. The Company has accrued $100,000 in its fiscal 2003
financial statements for litigation expenses but has not accrued any
settlement costs against this lawsuit as the outcome cannot be
predicted at this time.
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. Defendant has
filed an answer, denies the claims, and intends to vigorously defend
this lawsuit and claims against it. The Company has not accrued any
expenses against this lawsuit as the outcome cannot be predicted at
this time.
On January 31, 2004, Eagle became a defendant in Avnet, Inc. d/b/a
Cilicon vs. Eagle Broadband, Inc. f/k/a Eagle Wireless International,
Inc.; Cause No. 04CV0046; in the 56th Judicial Court, Galveston
County, Texas. This suit presents claims for breach of contract,
anticipatory breach, failure to pay money due on sworn account and
quantum meruit. The suit seeks recovery of damages in the sum of
$780,056, plus interest, attorney fees and court costs. The Company
settled this lawsuit on April 6, 2004, for cash to be paid totaling
$612,500 between April 30, 2004, and June 30, 2004, and consequently
$612,500 was charged to operations in the Company's fiscal 2003 and
2004 financial statements.
21
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
Eagle is involved in lawsuits, claims, and proceedings, including
those identified above, consisting of, commercial, securities,
employment and environmental matters, which arise in the ordinary
course of business. In accordance with SFAS No. 5, "Accounting for
Contingencies," Eagle makes a provision for a liability when it is
both probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. Eagle believes it has adequate
provisions for any such matters. Eagle reviews these provisions at
least quarterly and adjusts these provisions to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel, and other
information and events pertaining to a particular case. Litigation is
inherently unpredictable. However, Eagle believes that it has valid
defenses with respect to legal matters pending against it.
Nevertheless, it is possible that cash flows or results of operations
could be materially affected in any particular period by the
unfavorable resolution of one or more of these contingencies.
We intend to vigorously defend these and other lawsuits and claims
against us. However, we cannot predict the outcome of these lawsuits,
as well as other legal proceedings and claims with certainty. An
adverse resolution of pending litigation could have a material adverse
effect on our business, financial condition and results of operations.
The Company is subject to legal proceedings and claims that arise in
the ordinary course of business. The Company's management does not
expect that the results in any of these legal proceedings will have
adverse affect on the Company's financial condition or results of
operations.
NOTE 16 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share, in thousands (except Per-Share Amount):
For the nine months ended May 31, 2004
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Loss $(23,605)
Basic EPS:
Income Available to
Common Stockholders $(23,605) 179,228 $(0.13)
Effect of Dilutive Securities
Warrants --- --- ---
--------- -------- ---------
Diluted EPS:
Income Available to
Common Stockholders
and Assumed Conversions. $(23,605) 179,228 $(0.13)
========= ========= =========
For the nine months ended May 31, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Loss $(7,378)
Basic EPS:
Income Available to
Common Stockholders $(7,378) 83,117 $(0.09)
Effect of Dilutive Securities
Warrants 154
--------- -------- ---------
Diluted EPS:
Income Available to
Common Stockholders
and Assumed Conversions. $(7,378) 83,271 $(0.09)
--------- -------- ---------
For the nine months ended May 31, 2004, and May 31, 2003,
anti-dilutive securities existed (see Note 11).
22
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
NOTE 17 - EMPLOYEE STOCK OPTION PLAN:
In July 1996, the Board of Directors and majority stockholders adopted
a stock option plan under which 400,000 shares of the Company's common
stock have been reserved for issuance. Since that time, the Board of
Directors have amended the July 1996, employee stock option plan under
which 1,000,000 shares of Common Stock have been reserved for
issuance. Under this plan, as of May 31, 2004, 351,233 options have
been issued and are outstanding 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. For the nine months ended May 2004 and 2003, the impact on
net income is minimal; therefore, the pro forma disclosure
requirements prescribed by SFAS 123 are not significant to the
Company. The fair values were determined using a Black-Scholes
option-pricing model with the following assumptions:
May 31, May 31,
2004 2003
----------------- ---------------
Dividend Yield 0.00% 0.00%
Volatility 0.91 0.91
Risk-Free Interest Rate 4.00% 7.00%
Expected Life 5 5
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a
straight-line basis over the vesting period of the stock option or
purchase right was as follows for the three-month period ended May 31,
2004, and May 31, 2003:
2004 2003
------------- -------------
Net loss, as reported $ (4,373) $ (3,833)
Add: Stock-Based Employee Compensation Included in Reported Net Earnings
(Loss), Net of Related Tax Effects - -
Less: Stock-Based Employee Compensation Expense Determined under Fair-Value
Based Method for All Awards, Net of Related Tax Effects (-) (-)
------------- -------------
PRO FORMA NET EARNINGS (LOSS) $ (4,373) $ (3,833)
============= =============
Net Loss Per Share:
As Reported $ (0.02) $ (0.05)
Pro Forma $ (0.02) $ (0.05)
Diluted Net Loss Per Share
As Reported $ (0.02) $ (0.05)
Pro Forma $ (0.02) $ (0.05)
Option activity was as follows for the nine months ended May 31, 2004:
Weighted-Average
Shares Exercise Price
------------- ----------------
Outstanding at beginning of year 406,131 $ 1.27
Granted -
Assumed through acquisitions -
Exercised (54,898) 0.66
Forfeited/Cancelled - -
Outstanding at end of year 351,233 1.36
Exercisable at year-end 351,233 $ 1.36
23
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
Information about options outstanding was as follows at May 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------------------------- ---------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Remaining ------------ ------------
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life in Years Price Exercisable Price
------------------ ---------------- ------------ ------------ ------------
$0-$1.00 213,141 5.0 $0.55 213,141 $0.55
$1.01-$2.00 112,532 5.0 $1.73 112,532 $1.73
$2.01-$7.50 25,550 5.5 $6.55 25,550 $6.55
---------------------------------------------------------------------------------------------
351,233 5.2 $2.32 351,233 $2.32
================== ================ ============== ================ ==============
NOTE 18 - 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 three months ended May 31,
2004, and May 31, 2003, employee contributions were approximately
$28,091 and $0 respectively. The Company matched approximately $0 and
$0 respectively for those same periods.
NOTE 19 - MAJOR CUSTOMERS:
The Company had gross sales of $5,091,000 and $1,847,000 for the three
months ended May 31, 2004, and May 31, 2003, respectively. The three
month period ended May 31, 2004, reflects $3,788,175 or 74% of the
quarter's total sales from a major customer in conjunction with
shipments of products that included multimedia set-top boxes and other
related equipment.
The Company had gross sales of $11,232,000 and $9,528,000 for the nine
months ended May 31, 2004, and May 31, 2003, respectively. The nine
month period ended May 31, 2004, included $2,873,548 or 26% of the
nine month period total sales from Sweetwater Security Capital, LLC,
in conjunction with contracts valued at $3,115,354 that were executed
with the Company's security-monitoring service subsidiary, DSS
Security, Inc. The remaining $241,806 associated with these contracts
has been deferred in conjunction with nine-month holdback provisions
of these contracts. Additionally, the nine-month ended May 31, 2004,
included $934,592 or 8% of the nine months total sales from General
Dynamics in conjunction with shipments of convergent set-top-boxes.
Also during the third quarter May 31, 2004, Eagle Broadband Inc, had
sales of $3,788,175 or 34% sales to major customers for shipment of
multimedia set-top boxes and related equipment.
There were no parties individually that represented greater than ten
percent of the revenues in the three and nine months ended May 31,
2003.
NOTE 20 - INDUSTRY SEGMENTS:
The Company has seven business units have separate management teams
and infrastructures that offer different products and services. The
business units have been aggregated into five reportable segments (as
described below) since the long-term financial performance of these
reportable segments is affected by similar economic conditions.
Eagle Broadband, Inc., (Eagle) is a supplier of broadband and
telecommunications equipment with related software and broadband
products. (Including Eagle Wireless International, Inc.;
BroadbandMagic; and Etoolz, Inc., for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in providing
professional data and voice cable and fiber optic installations
through project management services on a nationwide basis for multiple
site-cabling installations for end users and re-sellers.
ClearWorks Communications, Inc., (EBS) provides solutions to consumers
by implementing technology both within the residential community and
home. This is accomplished through the installation of fiber optic
backbones to deliver voice, video and data solutions directly to
consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber
optic and copper based structured wiring solutions and audio and
visual equipment to single-family and multi-family dwelling units.
24
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT maintain a national
market presence.
Link Two Communications, Inc., (Link II) is in the development and
delivery of one- and two-way messaging systems.
DSS Security, Inc., (DSS) is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt
related expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services
provider and reseller.
For the nine months ending May 31, 2004
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
--------------------------------------------------------------------------
Revenue 673 4,805 445 5,228 81 --- 11,232
Segment Loss (688) (1,475) (19) (13,449) (30) --- (15,661)
Total Assets 361 28,830 72 168,354 57,006 (139,615) 115,007
Capital Expenditures 0 692 16 41 0 749
Depreciation 132 1,156 46 2,391 76 --- 3,801
For the nine months ending May 31, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
--------------------------------------------------------------------------
Revenue 3,456 2,219 1,938 1,612 303 --- 9,528
Segment Loss (882) (3,168) (821) (1,745) (280) --- (6,896)
Total Assets 11,950 36,330 310 156,622 73,054 (149,326) 128,940
Capital Expenditures 11 6,126 1 --- 158 --- 6,296
Dep. and Amort. 169 462 62 2,272 86 --- 3,051
May 31, 2004 May 31, 2003
-------------------- -------------------
Reconciliation of Segment Loss from Operations to Net Loss:
Total Segment Loss from Operations $ (15,661) $ (6,896)
Total Other Income (Expense) (7,944) (482)
Net Loss $ (23,605) $ (7,378)
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of
its operating segments based on income before net interest expense,
income taxes, depreciation and amortization expense, accounting
changes and non-recurring items.
NOTE 21 SUPPLEMENTAL NON-CASH DISCLOSURES:
During the quarter ended November 30, 2003, the Company issued
$3,000,000 of convertible debt which was retired through the issuance
of 2,000,000 shares of Series A Preferred Stock which was concurrently
converted into 29,500,000 shares of the Company's Common Stock.
Additionally, the Company received proceeds of $3,912,000 from the
sale of convertible Q-Series Bonds. See Note 12 - Capitalization
Activities.
The beneficial conversion values associated with these financings
aggregating $6,912,000 are calculated at the difference between the
conversion price and the fair value of the common stock into which the
debt is convertible, multiplied by the number of shares into which the
debt is convertible. Since the beneficial conversion value exceeded
the $6,912,000 raised on these convertible instruments, the value
charged to interest expense during the quarter was limited to
$6,912,000. This non-cash charge comprises $6,912,000 of the
$7,080,000 interest expense on the Company's Statement of Operations
and is shown as an adjustment to reconcile net loss to net cash on the
Company's Statement of Cash Flows.
During the nine month period ended May 31, 2004, the Company recorded
a non-cash expense of $4,493,000 in Salaries and Related Costs
associated with the cancellation and re-issuance of warrants for
4,200,000 common shares issued to certain officers and key employees
under incentive clauses of employment contracts.
25
Eagle Broadband, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
May 31, 2004
NOTE 22 - EXIT ACTIVITIES
An analysis of accrued costs and amounts charged against the provision are
as follows:
Beginning Ending
Balance Period Balance
11/30/2003 Costs (Additions) Payments 5/31/2004
Accrued Exit Expenses:
Severance $- $-
Terminated Lease costs 171,000 - $171,000
Total $171,000 $171,000
NOTE 23 SUBSEQUENT EVENTS
Eagle Broadband, Inc. ("Eagle" or "Company") entered into a Securities Purchase
Agreement dated June 2, 2004, (the "Agreement") with four accredited investors
(collectively, the "Investors"), pursuant to which Eagle agreed to sell, and the
Investors agreed to purchase, debentures in the principle amount of $4,888,400
bearing interest at the rate of 8% per annum, maturing in June 2007
("Debentures"), convertible into an aggregate of 5,360,088 shares of Eagle
common stock, par value $.001 per share (the "Common Stock"), together with
five-year warrants to purchase an aggregate of 1,340,022 shares of Common Stock
at an exercise price of $1.265 per share (the " Warrants") ( the funding of the
Debentures and issuance of the Warrants referred to as the "Financing").
The Debentures are convertible immediately. Subject to certain exceptions, in
the event that on or before the date on which the Debentures are converted,
Eagle issues or sells, or is deemed to have issued or sold in accordance with
the terms of the Debentures, any shares of Common Stock for consideration per
share less than the conversion price of the Debentures as then in effect (a
"Dilutive Issuance"), then the conversion price of the Debentures will be
adjusted to equal the consideration per share of Common Stock issued or sold or
deemed to have been issued and sold in such Dilutive Issuance.
All of the Warrants are exercisable immediately. Subject to certain exceptions,
in the event that on or before the date on which the Warrants are exercised,
Eagle issues or sells, or is deemed to have issued or sold in accordance with
the terms of the Warrants, a Dilutive Issuance, then the exercise price of the
Warrants will be adjusted to equal the consideration per share of Common Stock
issued or sold or deemed to have been issued and sold in such Dilutive Issuance.
Eagle also granted the Investors a right to participate in subsequent private
offerings of its equity or equity equivalent securities undertaken by Eagle for
the purpose of raising capital (each, a "Subsequent Placement"). The Investors'
right of participation is subject to certain additional limitations and expires
6 months from the effective date of the registration statement filed to register
the resale of the shares of Common Stock underlying the Debentures and Warrants
("Shares").
Eagle has agreed to file a registration statement with the Securities and
Exchange Commission within 40 days after the closing of the Financing in order
to register the resale of the Shares. If Eagle fails to meet this deadline, if
the registration statement is not declared effective prior to the 90th day after
the closing date, if Eagle fails to respond to comments made by the SEC within
10 days, if the registration statement ceases to remain effective, or certain
other events occur, Eagle has agreed to pay the Investors 2.0% of the aggregate
purchase price for each month of such event.
This summary description of the Financing described by the Agreements does not
purport to be complete and is qualified in its entirety by reference to the form
of the Agreements and the other documents and instruments that are filed as
Exhibits hereto.
The Company issued a press release issued on June 7, 2004, relating to the
Financing and filed a Form 8-K on June 17, 2004.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q. Information included herein relating to projected growth and future
results and events constitute forward-looking statements. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's competitive pricing; the Company's relationship with its
suppliers; relations with the Company's employees; the Company's ability to
manage its operating costs; the continued availability of financing;
governmental regulations; risks associated with regional, national, and world
economies. Any forward-looking statements should be considered in light of these
factors.
Results of Operations
Three and Nine Months Ended May 31, 2004, Compared to the Three and Nine
Months Ended May 31, 2003
The following table sets forth summarized consolidated financial
information for the three and nine months ended May 31, 2004, and May 31, 2003
Condensed Financial Information
- -------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
-------------------------- -------------------------------------
($ in thousands) 2004 2003 $Change % Change 2004 2003 $Change % Change
---------------------------------- -------------------------------------
Total Sales $5,091 $1,847 $3,244 176% $ 11,232 $9,528 $1,704 18%
Cost of Goods Sold 4,867 1,442 3,425 238% 9,261 5,412 3,849 71%
-----------------------------------------------------------------------
Gross Profit 224 405 (181) -45% 1,971 4,116 (2,145) -52%
-----------------------------------------------------------------------
% of Total Sales 4% 22% -6% 18% 43% -126%
Operating Expenses 4,467 3,998 469 12% 17,632 11,012 6,620 60%
-----------------------------------------------------------------------
Loss from Operations (4,243) (3,593) (650) 18% (15,661) (6,896) (8,765) 127%
-----------------------------------------------------------------------
Other Income (Expense) (130) (240) 110 -46% (7,944) (482) (7,462) 1548%
-----------------------------------------------------------------------
Net Loss (4,373) (3,833) (540) 14% (23,605) (7,378) (16,227) 220%
=======================================================================
Unrealized Holding Loss (11) 346 (357) -103% 44 (595) 639 -107%
-----------------------------------------------------------------------
Other Comprehensive Loss $(4,384)$(3,487) $(897) 26% $(23,561)$(7,973)$(15,588) 196%
=======================================================================
Overview
For the three-month period ended May 31, 2004, Eagle's business operations
reflected emphasis and further expansion of its convergent set-top box and BDS
business segments including Eagle's broadband Bundled Digital Services
(Internet, video, voice and security) for residential and business customers.
The Company's consolidated operations generated revenues of $5,091,000 with a
corresponding gross profit of $224,000 for the three-month period ended May 31,
2004. The overall increase of 176% in revenues for the three-month period ended
May 31, 2004, as compared to the corresponding period of 2003, was primarily
attributable to a $3,699,000 increase in the Company's convergent set-top box
and ancillary equipment product shipments; offset by decreases of $442,000 in
structured wiring operations.
The Company incurred a net loss of $4,373,000 for the three-month period
ended May 31, 2004. The loss was attributable to an overall decline in gross
margins to $224,000 for the three month period ended May 31, 2004 as compared to
$4,467,000 in operating expenses and $130,000 in net interest expenses for the
same three month period.
The Company's net loss for the three month period ended May 31, 2004
included approximately $1,245,000 in depreciation and amortization expenses and
$176,000 in expenses associated with an increase in the Company's accounts
receivable allowances. Additionally, the Company's expenses included $524,000 of
charges for which stock was issued to pay for interest expense and for services
rendered.
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; 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.
27
Restatement of Financial Statements
- -----------------------------------
During the quarter ended May 31, 2004, and subsequent to the issuance of
the Company's financial statements as of August 31, 2003, it was determined that
the allocation of the purchase price to net assets acquired in connection with
its merger with Clearworks.net, Inc. and certain other classifications of
intangible assets had not been appropriately accounted for. The principal change
to previously issued financial statements related to the reclassification of a
portion of the Company's goodwill acquired in the Clearwork.net, Inc. merger to
contract rights, customer relationships and other intangible assets that are
amortizable versus goodwill not being amortizable following the Company's
adoption of FAS 142. Accordingly, the Company has restated its consolidated
financial statements for the years ended August 31, 2003, 2002 and 2001 to
correctly present goodwill, intangible assets, amortization expense and net
loss. The Company has included tables in its amended Form 10-K and its Form 10-Q
for the quarter ended May 31, 2004 under the heading Note 2 - Restatement of
Financial Statements to summarize the impact of these adjustments on the
consolidated financial position and results of operations. As summarized in
these tables, all such changes were of a "non-cash" nature and did not impact
the Company's previously reported revenues, gross margins, liquidity, or cash
flows.
The follow table sets forth summarized sales information for the three and
nine months ended May 31, 2004, and May 31, 2003.
Sales Information
- -----------------
Three Months Ended May 31,
($ in % of % of
thousands) 2004 Total 2003 Total $Change % Change
-----------------------------------------------------
Structured
Wiring $156 3% $598 32% $(442) -74%
Broadband
Services 709 14% 657 36% 52 8%
Products 4,226 83% 527 29% 3,699 702%
Other 0 0% 65 3% (65) -100%
-----------------------------------------------------
Total Sales $5,091 100% $1,847 100% $3,244 176%
=====================================================
Nine Months Ended May 31,
($ in % of % of
thousands) 2004 Total 2003 Total $Change % Change
-----------------------------------------------------
Structured
Wiring $673 6% $3,198 34% $(2,525) -79%
Broadband
Services 4,805 43% 2,219 23% 2,586 117%
Products 5,673 50% 2,722 29% 2,951 108%
Other 81 1% 1,389 14% (1,308) -94%
-----------------------------------------------------
Total Sales $11,232 100% $9,528 100% $1,704 18%
=====================================================
Net Sales. For the three-month period ended May 31, 2004, net sales
increased to $5,091,000 from $1,847,000 during the three-month period ended May
31, 2003. The overall increase of 176% was attributable to a $3,699,000 increase
in the Company's product shipments of convergent set top boxes and a $52,000
increase in BDS revenues; offset by decreases of $442,000 in structured wiring
operations and a $65,000 decrease in other sales. The $3,699,000 increase in
sales of the Company's convergent set top boxes was primarily attributable to
shipment of products that included multimedia set-top boxes and other related
equipment to a major customer during the quater. The $442,000 decrease in
structured wiring sales corresponded to the Company's previously announced
strategy to no longer pursue structured wiring and commercial cabling
opportunities on a direct basis outside of the its BDS model
For the nine-month period ended May 31, 2004, net sales increased to
$11,232,000 from $9,528,000 during the nine-month period ended May 31, 2003. The
overall increase of 18% was attributable to a $2,951,000 increase in the
Company's product sales of convergent set top boxes and an increase of
$2,586,000 in the Company's BDS sales; offset by decreases of $2,525,000 in
structured wiring operations and a $1,308,000 decrease in other sales. The
$2,951,000 increase in the Company's product sales was primarily attributable to
shipment of multimedia set-top boxes and related equipment to a major customer
during the quarter. The $2,586,000 increase in sales of the Company's broadband
services was primarily attributable to contracts valued at $3,111,354 executed
by the Company's security-monitoring subsidiary, DSS Security, Inc., against
which the Company realized sales of $2,873,548 during the nine months ended May
31, 2004. Absent the security monitoring contract transactions of $2,873,548,
the Company's base broadband services sales decreased by approximately $288,000
in the nine-month period ended May 31, 2004, primarily attributable to the exit
from the unprofitable Austin area BDS market discussed in prior periods and the
decline in recurring security monitoring sales resulting from the sale of
certain security monitoring contracts in the Company's portfolio to Sweetwater
Capital, LLC, in the first and second quarters of fiscal 2004. The $2,525,000
decrease in structured wiring sales corresponded to the Company's previously
announced strategy to no longer pursue structured wiring and commercial cabling
opportunities on a direct basis outside of the its BDS model. The $1,308,000
decrease in other sales was primarily attributable to the other sales components
from various operating segments that were divested or phased out during fiscal
2003 including Contact Wireless, UCG, and Eagle Wireless.
29
The following table sets forth summarized cost of goods sold information
for the three and six months ended May 31, 2004, and May 31, 2003
Costs of Goods Sold:
- --------------------------
Three Months Ended May 31, Nine Months Ended May 31,
-------------------------------- -------------------------------
($ in thousands) 2004 2003 $Change % Change 2004 2003 $Change % Change
-------------------------------- -------------------------------
Direct Labor and Related
Costs $226 $245 (19) -8% $1,078 $993 $85 9%
Products and Integration
Service 3,937 605 3,332 551% 4,375 2,256 2,119 94%
Structured Wiring Labor
and Materials 115 326 (211) -65% 376 984 (608) -62%
Broadband Services Costs 304 152 152 100% 2,550 682 1,868 274%
Depreciation and
Amortization 285 114 171 150% 856 342 514 150%
Other Manufacturing Costs 0 0 0 0% 26 155 (129) -83%
-------------------------------- -------------------------------
Total Operating Expenses $4,867 $1,442 $3,425 238% $9,261 $5,412 $3,849 71%
================================ ===============================
Cost of Goods Sold. For the three-month period ended May 31, 2004, cost of
goods sold increased by 238% to $4,867,000 from $1,442,000 as compared to the
three-month period ended May 31, 2003. The overall increase of $3,425,000 was
primarily attributable to the shipment of multimedia set-top boxes and related
equipment to a major customer during the three month period ended May 31, 2004.
The Company's overall gross profit percentage was 4% and 22% for the three-month
periods ended May 31, 2004, and May 31, 2003. This substantial decrease in gross
profit percentage is primarily attributable to a heavy sales mix of product
shipments of multimedia set-top boxes and the dilutive effect of the purchase
and resale of certain related equipment versus the prior year period and an
increase in depreciation expenses associated with the build-out of the company's
BDS infrastructure.
For the nine-month period ended May 31, 2004, cost of goods sold increased
by 71% to $9,261,000 from $5,412,000 as compared to the nine-month period ended
May 31, 2003. The overall increase of $3,849,000 was primarily attributable to
the shipment of convergent set top boxes and the purchase and resale of certain
related equipment. The Company's overall gross profit percentage was 18% and 43%
for the nine-month periods ended May 31, 2004, and May 31, 2003. This
substantial decrease in gross profit percentage is primarily attributable to a
heavy sales mix of product shipments of convergent set-top boxes and the
dilutive effect of the purchase and resale of certain related equipment versus
the prior year period; the dilutive effect of the security monitoring
transactions recorded in the nine-months ended May 31, 2004, i.e., sales
recorded of $2,873,548 with corresponding cost of sales of $1,900,534, the
decision to no longer pursue structured wiring outside of its BDS model and an
increase in depreciation expenses associated with the build-out of the company's
BDS infrastructure.
The following table sets forth summarized operating expense information for
the three and nine months ended May 31, 2004, and May 31, 2003.
Operating Expenses:
- -----------------------
Three Months Ended May 31, Nine Months Ended May 31,
----------------------------------- -----------------------------------
($ in thousands) 2004 2003 $Change % Change 2004 2003 $Change % Change
----------------------------------- -----------------------------------
Salaries and Related
Costs $884 $413 $471 114% $7,686 $3,276 $4,410 135%
Advertising and
Promotion 0 21 (21) -100% 20 77 (57) -74%
Depreciation and
Amortization 960 915 45 5% 2,945 2,709 236 9%
Other Support Costs 2,494 2,524 (30) -1% 6,586 4,766 1,820 38%
Research and
Development 129 125 4 3% 395 184 211 115%
----------------------------------- -----------------------------------
Total Operating
Expenses $4,467 $3,998 $469 12% $17,632 $11,012 $6,620 60%
=================================== ===================================
29
The following table breaks out other support costs information for the
three and nine months ended May 31, 2004, and May 31, 2003.
Other Support Costs:
- ----------------------
Three Months Ended May 31, Nine Months Ended May 31,
----------------------------------- -----------------------------------
($ in thousands) 2004 2003 $Change % Change 2004 2003 $Change % Change
----------------------------------- -----------------------------------
Advertising and -NA- -NA-
Conventions $- $- $- $- $- $-
Auto Related 11 5 6 120% 17 43 (26) -60%
Bad Debt 176 311 (135) -NA- 372 642 (270) -42%
Delivery and Postage 12 14 (2) -14% 37 80 (43) -54%
Fees 91 88 3 3% 218 278 (60) -22%
Insurance & Office 167 13 154 -NA- 590 127 463 365%
Other 11 88 (77) -88% 49 158 (109) -69%
Professional &
Contract Labor 1,047 1,435 (388) -27% 3,139 1,737 1,402 81%
Rent 149 237 (88) -37% 464 709 (245) -35%
Repairs and
Maintenance 16 20 (4) -20% 36 46 (10) -22%
Travel 75 64 11 17% 176 217 (41) -19%
Taxes 640 7 633 9043% 1,199 72 1,127 1565%
Telephone and
Utilities 99 242 (143) -59% 289 657 (368) -56%
----------------------------------- -----------------------------------
Total Other Support
Costs $2,494 $2,524 $(30) -1% $6,586 $4,766 $1,820 38%
=================================== ===================================
Operating Expenses. For the three-month period ended May 31, 2004,
operating expenses increased by 12% to $4,467,000 as compared to $3,998,000 for
the three-month period ended May 31, 2003. The primary fluctuations that
occurred as evidenced by the two preceding tables immediately above are
discussed below:
o A $471,000 increase in salaries and related costs. The increase was
attributable to an expansion of executive and general management
compensation expenses, increased Board of Director compensation expense,
and compensation expense associated with stock option exercises and
severance.
o A $21,000 decrease in advertising and promotion 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.
o A $45,000 increase in depreciation and amortization, due principally to the
additional build-out of the Company's BDS infrastructure in fiscal 2003 and
amortization of intangibles.
o A $30,000 decrease in other support costs; the components of which are set
forth on the table included immediately above. Included in this increase
was a $633,000 increase in property taxes recorded against the Company's
BDS infrastructure, a $164,000 increase in insurance and office expenses,
offset by a $135,000 decrease in bad debt expense, a $388,000 decrease in
professional fees and contract labor and a $143,000 decrease in telephone
and utilities.
o A $4,000 increase in research and development expenses, primarily
consisting of the Company's continued investment in HDTV-ready multimedia
set-top boxes for hospitality and broadband customers and the Orb'Phone
Exchange satellite voice and data communications products for military,
government and commercial customers.
For the nine-month period ended May 31, 2004, operating expenses increased
by 60% to $17,632,000 as compared to $11,012,000 for the nine-month period ended
May 31, 2003. The primary fluctuations that occurred as evidenced by the two
preceding tables immediately above are discussed below:
o A $4,410,000 increase in salaries and related costs. The increase was
primarily attributable to non-cash compensation expense of $4,494,000
recorded against the cancellation and re-issuance of warrants for 4,200,000
common shares issued to certain officers and key employees under incentive
clauses of employment contracts partially offset by a decline in salaries
and related costs associated with the Company's reduction in personnel in
fiscal 2003. Excluding this non-cash compensation expensed recorded in the
second quarter of fiscal 2004, salaries and related costs declined by
$84,000 in the nine-month period ended May 31, 2004, as compared to the
nine-month period ended May 31, 2003.
30
o A $57,000 decrease in advertising and promotion 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.
o A $236,000 increase in depreciation and amortization, due principally to
the additional build-out of the Company's BDS infrastructure in fiscal
2003.
o A $1,820,000 increase in other support costs, the components of which are
set forth on the table included immediately above. Included in this
increase was $1,402,000 in professional fees associated with the Company's
ongoing legal matters, a $1,127,000 increase in property taxes recorded
against the Company's BDS infrastructure, a $486,000 increase in insurance
and office expenses, partially offset by a $270,000 decrease in bad debt
expenses, a $368,000 decrease in telephone and utility expenses, and a
$245,000 decrease in rent expenses.
o An $211,000 increase in research and development expenses, primarily
consisting of the Company's continued investment in HDTV-ready multimedia
set-top boxes for hospitality and broadband customers and the Orb'Phone
Exchange satellite voice and data communications products for military,
government and commercial customers.
Net Loss. For the three months ended May 31, 2004, Eagle's net loss was
$4,373,000, compared to a net loss of $3,833,000 during the three month period
ended May 31, 2003. For the nine months ended May 31, 2004, Eagle's net loss was
$23,605,000, compared to a net loss of $7,378,000 during the nine month period
ended May 31, 2003.
Changes in Cash Flow. Eagle's operating activities used net cash of
$4,036,000 in the nine-month period ended May 31, 2004, compared to use of net
cash of $591,000 in the nine-month period ended May 31, 2003. The increase in
net cash used by operating activities was primarily attributable to fund an
increase in the Company's net operating loss, net of non-cash charges, totaling
$2,854,000 combined with $1,182,000 of cash utilized for fluctuations in working
capital requirements consisting of the combination of accounts receivable,
inventory, prepaid expenses, accounts payable and accrued expenses Eagle's
investing activities used net cash of $758,000 in the nine-month period ended
May 31, 2004, compared to $2,955,000 in the nine-month period ended May 31,
2003. The decrease was due primarily to a significant decline in investment
activities and purchase of equipment associated with the prior years build out
of Eagle's network and infrastructure for the delivery of broadband services.
Eagle's financing activities provided cash of $5,597,000, in the nine-month
period ended May 31, 2003, compared to $3,360,000 of cash provided in the
nine-month ended May 31, 2003. The increase is attributable to an increase in
convertible notes aggregating a net of $5,608,000 in conjunction with the
Company's financing activities in the first fiscal quarter of 2004.
Liquidity and Capital Resources. Current assets for the period ended May
31, 2004, totaled $11,220,000 (includes cash and cash equivalents of $1,627,000
and securities available for sale of $1,563,000) as compared to $8,109,000
reported for the year ended August 31, 2003. During the first nine months ended
May 31, 2004, Eagle received net proceeds of $6,174,000 from the sale of
convertible bonds and notes and through the sale of marketable securities held
as short-term investments and has retired or reduced certain of its notes
payable and accrued expenses including numerous lawsuits, thereby reducing the
Company's current and contingent liabilities.
The Company anticipates that it will incur significantly less capital
expenditures for broadband fiber infrastructure for the balance of the current
fiscal year 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 a fiber network. Historically, the Company
built out these networks, thereby incurring significant capital expenditures.
The Company incurred approximately $686,000 in capital expenditures in the first
nine months of fiscal 2004 ended May 31, 2004. The Company expects to spend
$1,000,000 or less on capital expenditures in fiscal 2004; an anticipated
reduction of at least $1,121,000 as compared to $2,121,000 for fiscal 2003.
However, the Company could adjust its capital expenditure plan in the fourth
quarter of the current fiscal year if future business opportunities dictate.
The Company expects that certain of its liabilities listed on the balance
sheet under the headings Accounts Payable, Accrued Liabilities and Notes Payable
will be retired by issuing stock versus cash during the next 12 months. The
Company has historically used stock for retirement of certain liabilities on a
negotiated basis. The Company issued stock for retirement of certain liabilities
aggregating $5,696,000, $3,586,000 and $13,878,000 for fiscal years 2001, 2002,
and 2003, respectively. During the first nine months ended May 31, 2004, the
Company retired approximately $8,192,000 in liabilities with stock versus cash.
Eagle Broadband expects to continue its practice of retiring certain liabilities
as may be negotiated through a combination of cash and the issuance of shares of
Eagle common stock. The Company cannot quantify the amount of common stock
expected to be issued to retire such debts at this time and as such will report
these results on a quarterly basis. In the first nine months of fiscal 2004, the
Company completed $5,597,000 in net financing activities. The Company's
management believes it has sufficient capital to fund operations for the next
twelve months based on: (i) the Company's reduced capital expenditure
requirements for fiscal 2004, (ii) the Company's current cash, cash equivalents
and securities held for resale, including recent net financing proceeds and sale
of marketable securities received during the first nine months of fiscal 2004
and (iii) the Company's completion of $4.9 million in new financing from an
investor group in a private placement financing round subsequent to the quarter
ended May 31, 2004; as previously announced in the Company's press release dated
June 7, 2004 and as further disclosed in the Company's Form 8-K filing on June
17, 2004.
31
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 in the future, we may need to curtail operations or sell assets.
Contractual Obligations
Payments Due by Period
(in Thousands)
-------------------------------------------------------------
Contractual Obligations Total Less than 1-3 years 3-5 years More than 5
1 year years
- ------------------------------------------------------------------------------------------
Long-Term Debt Obligations 5,581 5,581 --- --- ---
Operating Lease Obligations 1,921 190 1,162 569 ---
-------------------------------------------------------------
-------------------------------------------------------------
Total 7,502 5,771 1,162 569 ---
=============================================================
The Company's contractual obligations consist of long-term debt as set
forth in Note 5 (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 2 -
Management's Discussion and Analysis under non-cancelable leases as described in
Note 15 to the Company's financial statements under the heading Commitments and
Contingent Liabilities.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following policies as critical to its
business and the understanding of its results of operations. The Company
believes it is improbable that materially different amounts would be reported
relating to the accounting policies described below if other acceptable
approaches were adopted. However, the application of these accounting policies,
as described below, involve the exercise of judgment and use of assumptions as
to future uncertainties; therefore, actual results could differ from estimates
generated from their use.
Impairment of Long-Lived Assets and Goodwill
Background:
Goodwill and other intangibles of $81,603,000 net of prior impairments and
amortization were recorded under the purchase method for the purchases of
ClearWorks.net, Inc.; Atlantic Pacific, Inc.; DSS Security, Inc.; Contact
Wireless, Inc.; and Comtel, Inc. The majority of the intangibles were from the
ClearWorks acquisition. ClearWorks was in the business of selling
telecommunications services to residential neighborhoods.
Impairment Assessment:
Our long-lived assets predominantly include goodwill. Statement of
Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets" ("SFAS 142") requires that goodwill and intangible assets be
tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis and between annual tests in
certain circumstances. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill and intangible assets to
reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units
include estimating future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.
Goodwill is primarily the Company 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 as of August 31, 2003, to assess the fair value of the intangible
assets. There were a number of significant and complex assumptions used in the
calculation of the fair value of the intangible assets. If any of these
assumptions prove to be incorrect, the Company could be required to record a
material impairment to its intangible assets. The assumptions included
significant market penetration in its current markets under contract and
significant market penetration in markets where they are currently negotiating
contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing basis. An
impairment loss would be deemed necessary when the estimated non-discounted
future cash flows are less than the carrying net amount of the asset. If an
asset were deemed to be impaired, the asset's recorded value would be reduced to
fair market value. In determining the amount of the charge to be recorded, the
following methods would be utilized to determine fair market value (i) quoted
market prices in active markets, (ii) estimate based on prices of similar assets
and (iii) estimate based on valuation techniques. The Company tested the fair
value of its goodwill and intangibles as of February 29, 2004, and August 31,
2003, and determined that these assets totaling $81.6 million were not impaired.
32
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.
Eagle adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables," in the fourth quarter of fiscal 2003. The impact of adopting EITF
00-21 did not have a material effect to Eagle's results of operations. Eagle's
contracts that contain multiple elements as of May 31, 2004, or prior were
immaterial. When elements such as hardware, software and consulting services are
contained in a single arrangement, or in related arrangements with the same
customer, Eagle allocates revenue to each element based on its relative fair
value, provided that such element meets the criteria for treatment as a separate
unit of accounting. The price charged when the element is sold separately
generally determines fair value. In the absence of fair value for a delivered
element, Eagle allocates revenue first to the fair value of the undelivered
elements and allocates the residual revenue to the delivered elements. In the
absence of fair value for an undelivered element, the arrangement is accounted
for as a single unit of accounting, resulting in a delay of revenue recognition
for the delivered elements until the undelivered elements are fulfilled. Eagle
limits the amount of revenue recognition for delivered elements to the amount
that is not contingent on the future delivery of products or services or subject
to customer-specified return or refund privileges.
Deferred Revenues
Revenues that are billed in advance of services being completed are
deferred until the conclusion of the period of the service for which the advance
billing relates. Deferred revenues are included on the balance sheet as a
current liability until the service is performed and then recognized in the
period in which the service is completed. Eagle's deferred revenues primarily
consist of billings in advance for cable, internet, security and telephone
services, which generally are between one and three months of services. Eagle
had deferred revenues of $492,000 and $230,000 as of May 31, 2004, and August
31, 2003, respectively.
EAGLE WIRELESS INTERNATIONAL, INC.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial and
personal communication systems, radio and telephone systems. Revenues from these
products are recognized when the product is shipped. Eagle's Wireless
International Product revenues are reported under the category of Products on
Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category Eagle within Note 20 - Industry Segments.
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 Eagle
recognizes the revenue. Eagle's Broadband Multimedia and Internet Products
revenues are reported under the category of Products on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category Eagle within Note 20 - Industry Segments. Revenue from software
consists of software licensing. There is no post-contract customer support.
Software revenue is allocated to the license using vendor specific objective
evidence of fair value ("VSOE") or, in the absence of VSOE, the residual method.
The price charged when the element is sold separately generally determines VSOE.
In the absence of VSOE of a delivered element, Eagle allocates revenue to the
fair value of the undelivered elements and the residual revenue to the delivered
elements. Eagle recognizes revenue allocated to software licenses at the
inception of the license.
EAGLE BROADBAND, INC.
Eagle Broadband, Inc., engages independent agents for sales principally in
foreign countries and certain geographic regions in the United States. Under the
terms of these one-year agreements the distributor or sales agents provide the
companies with manufacturing business sales leads. The transactions from these
distributors and agents are subject to Eagle's approval prior to sale. The
distributorship or sales agent receives commissions based on the amount of the
sales invoice from the companies to the customer. The sale is recognized at the
time of shipment to the customer. These sales agents and distributors are not a
significant portion of total sales in any of the periods presented. Eagle's
Broadband, Inc., revenues are reported under the category of Products on Eagle's
Consolidated Statements of Operations included as page F-4 of this report and
also under the category Eagle within Note 20 - Industry Segments.
33
EAGLE BDS SERVICES - DBA CLEARWORKS COMMUNICATIONS, INC.
ClearWorks Communications, Inc., provides Bundled Digital Services to
business and residential customers, primarily in the Texas market. Revenue is
derived from fees charged for the delivery of Bundled Digital Services, which
includes telephone, long distance, Internet, security monitoring and cable
services. This subsidiary recognizes revenue and the related costs at the time
the services are rendered. Installation fees are recognized upon completion and
acceptance. Eagle's BDS Services revenues are reported under the category of
Broadband Services on Eagle's Consolidated Statements of Operations included as
page F-4 of this report and also under the category EBS/DSS within Note 20 -
Industry Segments.
EAGLE RESIDENTIAL STRUCTURED WIRING - DBA CLEARWORKS HOME SYSTEMS, INC.
ClearWorks Home Systems, Inc., sells and installs structured wiring, audio
and visual components to homes. This subsidiary recognizes revenue and the
related costs at the time the services are performed. Revenue is derived from
the billing of structured wiring to homes and the sale of audio and visual
components to the homebuyers. Eagle's Residential Structured Wiring revenues are
reported under the category of Structured Wiring on Eagle's Consolidated
Statements of Operations included as page F-4 of this report and also under the
category APC/HSI within Note 20 - Industry Segments.
EAGLE COMMUNICATION SERVICES - DBA ATLANTIC PACIFIC COMMUNICATIONS, INC.
Atlantic Pacific Communications, Inc., provides project planning,
installation, project management, testing and documentation of fiber and cable
to commercial and industrial clients throughout the United States. The revenue
from the fiber and cable installation and services is recognized upon percentage
of completion of the project. Most projects are completed in less than one
month, therefore, matching revenue and expense in the period incurred. Service,
training and extended warranty contract revenues are recognized as services are
completed. Eagle's Communications Services revenues are reported under the
category of Structured Wiring on Eagle's Consolidated Statements of Operations
included as page F-4 of this report and also under the category APC/HSI within
Note 20 - Industry Segments.
ETOOLZ, INC.
Etoolz, Inc., provides research and development support for all Eagle
companies and does not currently provide billable services to independent third
parties.
EAGLE MESSAGING SERVICES - DBA LINK TWO COMMUNICATIONS, INC.
Link Two Communications, Inc., provides customers with one- and two-way
messaging systems. The revenue from the sale of these products is recognized at
the time the services are provided. Eagle's Messaging Services revenues are
reported under the category of Other on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Eagle
within Note 20 - Industry Segments.
EAGLE PAGING SERVICES - DBA CONTACT WIRELESS, INC.
Contact Wireless, Inc., provides customers with paging and mobile telephone
products and related monthly services. Revenue from product sales is recorded at
the time of shipment. Revenue for the mobile phone and paging service is billed
monthly as the service is provided. Eagle's Paging Services revenues are
reported under the category of Other on Eagle's Consolidated Statements of
Operations included as page F-4 of this report and also under the category Other
within Note 20 - Industry Segments.
EAGLE SECURITY SERVICES - DBA DSS SECURITY, INC.
DSS Security, Inc., provides security monitoring services to residential
and commercial customers, purchases and resells and bundles and sells contracts
from its own portfolio to independent third party companies. Security monitoring
customers are billed three months in advance of service usage. The revenues are
deferred at the time of billing and ratably recognized over the prepayment
period as service is provided. Installation fees are recognized upon completion
and acceptance. Revenues from the sale of security monitoring contracts, both
purchased and owned, are recognized upon contract execution except for reserves,
hold backs or retentions, which are deferred until the contract provisions are
fulfilled. Eagle's Security Services revenues are reported under the category of
Broadband Services on Eagle's Consolidated Statements of Operations included as
page F-4 of this report and also under the category EBS/DSS within Note 20 -
Industry Segments.
EAGLE TECHNOLOGY SERVICES - DBA UNITED COMPUTING GROUP, INC.
United Computing Group, Inc., provides business-to-business hardware and
software network solutions and network monitoring services. The revenue from the
hardware and software sales is recognized at the time of shipment. The
monitoring services recognition policy is to record revenue on completion.
Eagle's Technology Services product revenues are reported under the category of
"Products" while the services components are reported under the category "Other"
on Eagle's Consolidated Statements of Operations included as page F-4 of this
report and also under the category UCG within Note 20 - Industry Segments.
Receivables
For the nine-month period ended May 31, 2004, Eagle accounts receivable
increased to $4,622,000 from $1,704,000 at August 31, 2003. The majority of this
increase was due to the increased sales of convergent set top boxes and
ancillary equipment to a major customer in the third quarter ended May 31, 2004,
totaling $3,806,806, as discussed earlier herein.
The Company's accounts receivable aging as measured by day's sales
outstanding (DSO) totaled 88 days at May 31, 2004, as compared to 90 days at
November 30, 2003, and 75 days at August 31, 2003, on an adjusted basis after
recording the write-off's and reserves in the fourth quarter of fiscal 2003. The
primary increase in DSO from 75 days at August 31, 2003, to 88 days at May 31,
2004, was attributable to deferred revenue components of the transactions
entered into with Sweetwater Security, LLC, totaling $241,805 and the impact of
large dollar volume transactions associated with customers comprising greater
than ten percent of the Company's revenues during the period ended May 29, 2004.
34
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectibility of accounts
receivable. Accounts receivables deemed uncollectible are charged against the
allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At May 31, 2004, Eagle's
inventory totaled $2,859,000 as compared to $3,199,000 at August 31, 2003. The
majority of this decrease was due to a decrease in finished goods and raw
materials inventory associated with in recent set-top box shipments.
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 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 Statement of Financial Accounting Standards
No. 149 (SFAS 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.
35
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate and Equity Market Risks
The Company is exposed both to market risk from changes in interest rates
on funded debt and changes in equity values on common stock investments it holds
in publicly traded companies. The Company also previously had exposure that
related to the Company's revolving credit facility. The Company fully retired
its revolving credit facility in September 2003 and thus no longer has such
exposure related to interest rate risk. Borrowings under the credit facility
bear interest at variable rates based on the bank prime rate. The extent of this
risk with respect to interest rates on funded debt is not quantifiable or
predictable due to the variability of future interest rates; however, the
Company does not believe a change in these rates would have a material adverse
effect on the Company's operating results, financial condition, and cash flows.
The Company's cash and cash equivalents and securities available for sale
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 rollover risk on these funds as they accrue interest at current
market rates. The extent of this risk is not quantifiable or predictable due to
the variability of future interest rates. The Company does not believe a change
in these rates would have a material adverse effect on the Company's operating
results, financial condition, and cash flows with respect to invested funds in
mortgage and asset backed securities, mutual funds and money market accounts;
however, the company does have both cash and liquidity risks associated with its
common stock investments aggregating $1,563,000 in market value as of May 31,
2004.
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 had three customers that represented greater than 10% of
its revenues during the three- and six-month period ended May 31, 2004. See Note
19 - Major Customers. With respect to transactions entered into with Sweetwater
Capital, LLC, for the nine months ended May 31, 2004, the Company had collected
$2,873,549 of the aggregate contract value of $3,115,354 while $241,805 remained
in accounts receivable, of which $241,805 related to deferred revenue. With
respect to transactions entered into with General Dynamics for the nine months
ended May 31, 2004, the Company had collected $921,689 of the nine-month sales
totaling $934,592 while $12,903 remained in accounts receivable at May 31, 2004.
Subsequent to the period ended May 31, 2004, the Company collected in accounts
receivable associated with this client. With respect to another major customer
against which the Company entered into transactions for sale of convergent
set-top boxes and ancillary equipment in the quarter ended May 31, 2004
aggregating $3,788,175; such customers are within terms as of the date of this
filing. Given collections to date against these accounts and an assessment of
the collectibility of the accounts, the Company believes that it has mitigated
any significant credit risk posed by specific customers which could have had a
material adverse affect on its financial condition.
Item 4. 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
quarterly 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.
There were no changes in Eagle's internal control over financial reporting
that occurred during the quarter ended May 31, 2004, that have materially
affected, or reasonably likely to materially affect, Eagle's internal control
over financial reporting.
Eagle's disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching Eagle's desired disclosure control
objectives and are effective in reaching that level of reasonable assurance.
36
Part 2. - Other Information
Item 1 - Legal Proceedings
For a description of certain legal matters, refer to Note 15. "Commitments
and Contingent Liabilities" under the heading Legal Proceedings in Part 1, Item
1.,"Consolidated Financial Statements."
The Company is also subject to legal proceedings and claims that arise in
the ordinary course of business. The Company's management does not expect that
the results in any of these legal proceedings will have a material adverse
effect on the Company's financial condition or results of operations (Note 15).
Item 2 - Recent Sales of Unregistered Securities or Changes in Securities
and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits, Financial Statement Schedules and Reports on Form 8-K -
(Brewer & Pritchard to review and Advise)
(a) Financial Statements and Schedules:
The financial statements are set forth under Item 1 of this Quarterly
Report on Form 10-Q. 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 May 31, 2004:
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on April 28, 2004, with the Securities and Exchange Commission.
A report on Form 8-K, announcing information under Item 5 of the report,
was filed on June 17, 2004, with the Securities and Exchange Commission.
(c) Exhibit Listing
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Eagle Broadband, Inc. Articles of Incorporation, as Amended and
Restated, dated February 13, 2002 (incorporated by reference to
Exhibit 3.1 (a) of Form 1-KSB/A Amendment No. 2 for the fiscal
year ended August 31, 2003, filed March 30, 2004).
Exhibit 3.2 Eagle Broadband, Inc. Articles of Incorporation, as Amended,
dated February 17, 2004 (incorporated by reference to Exhibit
3.1 (b) of Form 1-KSB/A Amendment No. 2 for the fiscal year
ended August 31, 2003, filed March 30, 2004).
Exhibit 3.3 Amended and Restated Eagle Broadband, Inc. Bylaws (incorporated
by reference to Exhibit 3.2 of Form 10-KSB for the fiscal year
ended August 31, 2001, filed November 16, 2001).
Exhibit 4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4 of Form S-3/A, file no. 333-111160, filed March 26,
2004).
Exhibit 4.2 Purchase Agreement by and between Eagle Broadband and Investors
dated August 23, 2003, including registration rights and
security agreement attached as an exhibit thereto (incorporated
by reference to Exhibit 10.1 of Form S-3 file no. 333-109481).
37
Exhibit 4.3 Convertible Debt Agreement (incorporated by reference to Exhibit
10.3 of Form S-3, file no. 333-106074).
Exhibit 4.4 Addendum to Convertible Debt Agreement (incorporated by
reference to Exhibit 10.4 of Form S-3, file no. 333-106074).
Exhibit 4.5 Form of Subscription Agreement for Convertible Debt, between
Eagle Broadband and certain investors (incorporated by reference
to Exhibit 10.5 of Form S-3, file no. 333-106074).
Exhibit 4.6 Securities Purchase Agreement dated June 2, 2004 between Eagle
and certain investors (incorporated by reference to Form 8-K
filed June 17, 2004, file no. 001-15649).
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 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.1 of Form S-8 file no. 333-72645).
Exhibit 10.3 2002 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 of Form S-8 file no. 333-97901).
Exhibit 10.4 2002 Stock Incentive Plan, as Amended (incorporated by
reference to Exhibit 10.1 of Form S-8 file no. 333-102506).
Exhibit 10.5 2003 Stock Incentive and Compensation Plan (incorporated by
reference to Exhibit 10.1 of Form S-8 file no. 333-103829).
Exhibit 10.6 2003 Stock Incentive and Compensation Plan, as Amended
(incorporated by reference to Exhibit 10.1 of Form S-8 file no.
333-105074).
Exhibit 10.7 2003 Stock Incentive and Compensation Plan, as Amended
(incorporated by reference to Exhibit 10.1 of Form S-8 file no.
333-109339).
Exhibit 10.8 2004 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 of Form S-8 file no. 333-110309).
Exhibit 10.9 Agreement and Plan of Reorganization by and between Eagle
Wireless International, Inc. Clearworks.net, Inc., and Eagle
Acquisition Corporation dated September 15, 2000 (incorporated
by reference to Exhibit 10.1 of Form S-4 file no. 333-49688)
Exhibit 10.10 Stock Purchase Agreement between Eagle Wireless International,
Inc. and the shareholders of Comtel Communications, Inc.
(incorporated by reference to Exhibit 10.4 of Form 10-KSB for
the fiscal year ended August 31, 2000, filed December 13, 2000).
Exhibit 10.11 Stock Purchase Agreement between Eagle Wireless International,
Inc. and the shareholders of Atlantic Pacific Communications,
Inc. (incorporated by reference to Exhibit 10.5 of Form 10-KSB
for the fiscal year ended August 31, 2000, filed December 13,
2000).
Exhibit 10.12 Stock Purchase Agreement between Eagle Wireless International,
Inc. and the shareholders of Etoolz, Inc. (incorporated by
reference to Exhibit 10.6 of Form 10-KSB for the fiscal year
ended August 31, 2000, filed December 13, 2000).
Exhibit 10.13 Purchase Agreement between Eagle Broadband, Inc.'s subsidiary,
Contact Wireless, Inc.
Exhibit 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1
of Form S-4 file no. 333-49688).
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE BROADBAND, INC.
Date: July 15, 2004
By: /S/David A. Weisman
-------------------
David A Weisman
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/S/Richard R. Royall
---------------------
Chief Financial Officer
(Principal Financial & Accounting
Officer)
39