U. S. SECURITIES AND EXCHANGE
COMMISSION Washington, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 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: 001-154649
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 January 6, 2005, there were 225,491,457 shares of common stock
outstanding.
EAGLE BROADBAND, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended November 30, 2004
Table of Contents
Part 1 - Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at November 30, 2004, and August 31, 2004 1
Consolidated Statements of Operations for the Three Months
Ended November 30, 2004 and 2003 2
Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended
November 30, 2004, and Twelve Months Ended August 31, 2004 3
Consolidated Statements of Cash Flows for the Three Months
Ended November 30, 2004 and 2003 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 25
Part 2 - Other Information
Item 1. Legal Proceedings 25
Item 2. Recent Sales of Unregistered Securities or Changes in Securities and Use of Proceeds. 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
Part 1 - Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
November 30, August 31,
2004 2004
---------- --------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 474 $ 2,051
Securities Available for Sale -- 551
Accounts Receivable, net 1,363 1,470
Inventories 1,641 403
Net investment in direct financing leases 427 291
Prepaid Expenses 406 327
--------- ---------
Total Current Assets 4,311 5,093
--------- ---------
PROPERTY AND EQUIPMENT
Operating Equipment 36,559 36,415
Less: Accumulated Depreciation (8,312) (7,837)
--------- ---------
Total Property and Equipment 28,247 28,578
--------- ---------
OTHER ASSETS:
Deferred Costs -- --
Net investment in direct financing leases 938 623
Goodwill, net 4,095 4,095
Contract rights, net 21,200 21,678
Customer relationships, net 5,312 5,431
Other Intangible assets, net 3,978 4,034
Other Assets 679 679
--------- ---------
TOTAL OTHER ASSETS 36,202 36,540
--------- ---------
TOTAL ASSETS $ 68,760 $ 70,211
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 4,926 $ 4,445
Accrued Expenses 7,403 9,647
Notes Payable 5,401 5,920
Deferred revenue 71 96
--------- ---------
TOTAL CURRENT LIABILITIES 17,801 20,108
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Preferred Stock -- $.001 par value
Authorized 5,000,000 shares
Issued -0- shares -- --
Common Stock -- $.001 par value
Authorized 350,000,000 shares
Issued and Outstanding at November 30, 2004 and August 31,
2004, 212,598,000 and 205,509,000, respectively 213 206
Additional Paid in Capital 213,348 208,051
Accumulated Deficit (162,602) (157,106)
Accumulated Comprehensive Income (Loss) -- (1,048)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 50,959 50,103
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 68,760 $ 70,211
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the three months
ended November 30,
----------------------
2004 2003
------- ---------
NET SALES:
Structured wiring $ 262 $ 392
Broadband services 1,216 1,564
Products 26 361
Other 24 80
------- -------
TOTAL SALES 1,528 2,397
------- -------
COSTS OF GOODS SOLD:
Direct Labor and Related Costs 262 462
Products and Integration Service 38 137
Impairment Slow Moving & Obsolete Inventory -- --
Structured Wiring Labor and Materials 175 205
Broadband Services Costs 920 190
Depreciation and Amortization 290 285
Other Manufacturing Costs 16
------- -------
TOTAL COSTS OF GOODS SOLD 1,685 1,295
------- -------
GROSS PROFIT (157) 1,102
------- -------
OPERATING EXPENSES:
Selling, General and Administrative:
Salaries and Related Costs 399 959
Advertising and Promotion 10 18
Depreciation and Amortization 841 319
Other Support Costs 2,949 1,424
Research and Development 143 119
Impairment, Write-Downs &
Restructuring Costs -- --
------- -------
TOTAL OPERATING EXPENSES 4,342 2,839
------- -------
LOSS FROM OPERATIONS (4,499) (1,737)
------- -------
OTHER INCOME/(EXPENSES):
Interest Income, 4 4
Interest Expense (102) (7,080)
Gain (Loss) on Sale of Assets 149 352
------- -------
TOTAL OTHER INCOME (EXPENSE) 51 (6,724)
------- -------
NET LOSS (4,448) (8,461)
------- -------
OTHER COMPREHENSIVE LOSS:
Unrealized Holding Gain (Loss) 1,048 309
------- -------
TOTAL OTHER COMPREHENSIVE LOSS $ 1,048 $ 309
======= =======
COMPREHENSIVE LOSSES $(3,400) $(8,152)
======= =======
NET LOSS PER COMMON SHARE:
Basic (0.02) (0.05)
Diluted (0.02) (0.05)
Comprehensive Loss (0.02) (0.05)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Additional Accumulated Total
Common Stock Preferred Paid in Retained Comprehensive Shareholders'
---------------------- --------- --------- --------- ---------- ---------
Shares Value Stock Capital Earnings Income Equity
--------- --------- --------- --------- --------- ---------- ---------
TOTAL SHAREHOLDERS' EQUITY
AS OF AUGUST 31, 2003 147,447 $ 147 $ 177,017 $(118,101) $ (727) $ 58,336
--------- --------- --------- --------- ---------- --------- ---------
Net Loss -- -- -- -- (39,005) -- (39,005)
New Stock Issued to Shareholders: --
For Services and Compensation 11,016 12 -- 6,335 -- -- 6,347
For Retirement of Debt and Liabilities 47,046 47 -- 13,294 -- -- 13,341
Stock-Based Compensation -- -- -- 4,493 -- -- 4,493
Beneficial Conversion Features on
Convertible Debentures -- -- -- 6,912 -- -- 6,912
Unrealized Holding Loss -- -- -- -- (321) (321)
--------- --------- --------- --------- ---------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY
AS OF AUGUST 31, 2004 205,509 $ 206 $ -- $ 208,051 $ (157,106) $ (1,048) $ 50,103
========= ========= ========= ========= ========== ========= =========
NET LOSS FOR THE THREE MONTHS ENDED
NOVEMBER 30, 2004 (4,448) (4,448)
New Stock Issued to Shareholders:
For Services and Compensation 732 1 1,518 1,519
For Retirement of Debt and Liabilities 6,357 6 3,779 3,785
Stock-Based Compensation --
Beneficial Conversion Features on
Convertible Debentures --
Unrealized Holding Loss (1,048) 1,048 --
--------- --------- --------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY
AS OF NOVEMBER 30, 2004 212,598 $ 213 -- $ 213,348 $ (162,602) -- $ 50,959
========= ========= ========= ========= ========== ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months
Ended November 30,
------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(4,448) $(8,461)
------- -------
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Impairment, write-downs & restructuring costs -- --
Gain (Loss) on sale of Assets -- --
Interest for beneficial conversion value -- 6,912
Depreciation and Amortization 1,131 614
Stock Issued for Interest Expense 96 --
Stock Issued for Services Rendered 1,423 2,304
Provision for bad debt 19 103
(Increase)/Decrease in Accounts Receivable 88 (493)
(Increase)/Decrease in Inventories (1,238) (656)
(Increase)/Decrease in Prepaid Expenses (79) 17
Increase/(Decrease) in Accounts Payable 481 279
Increase/(Decrease) in Accrued Expenses 1,657 (1,109)
------- -------
Total Adjustment 3,578 7,971
------- -------
NET CASH USED BY OPERATING ACTIVITIES (870) (490)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase)/Disposal of Property and Equipment (144) (94)
Increase/(Decrease) Deferred Costs -- --
Increase/(Decrease) in Intangible Costs (3) --
Increase/(Decrease) in Marketable Securities 551 (163)
(Increase)/Decrease in Other Assets -- (12)
(Purchase)/Disposal of Contact Wireless & DSS Security,
Net of Cash Acquired --
Gross Equipment Purchase for Direct Financing Leases (641) --
Principal Collections on Direct Financing Leases 49 --
------- -------
NET CASH USED BY INVESTING ACTIVITIES (188) (269)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(Decrease) in Notes Payable & Long-Term Debt (519) 5,608
Increase/(Decrease) in Capital Leases --
Increase/(Decrease) in Line of Credit --
Increase/(Decrease) in Deferred Taxes --
Proceeds from Sale of Common Stock, Net --
Syndication costs --
Treasury Stock
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (519) 5,608
------- -------
NET INCREASE/(DECREASE) IN CASH (1,577) 4,849
CASH AT THE BEGINNING OF THE YEAR 2,051 824
------- -------
CASH AT THE END OF THE YEAR $ 474 $ 5,673
======= =======
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Year for:
Interest $ 6 $ 168
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
NOTE 1 - Basis of Presentation and Significant Accounting Policies:
Eagle Broadband, Inc. (the "Company" or "Eagle"), incorporated as a
Texas corporation on May 24, 1993, and commenced business in April
of 1996. The Company is a leading provider of broadband, Internet
protocol (IP) and satellite communications technology and services.
The Company is focused on three core businesses: broadband bundled
services, IP set-top boxes and satellite communications technology.
The Company's product offerings include an exclusive "four-play"
suite of IP-based broadband bundled services with high-speed
Internet, cable TV, telephone and security monitoring, and a turnkey
suite of financing, network design, operational and support services
that enables municipalities, utilities, real estate developers,
hotels, multi-tenant owners and service providers to deliver
exceptional value, state-of-the-art entertainment and communications
choices and single-bill convenience to their residential and
business customers. Eagle offers the HDTV-ready Media Pro IP set-top
box product line that enables hotel operators and service providers
to maximize revenues by offering state-of-the-art in-room
entertainment and video services. The Company also develops and
markets the SatMAX satellite communications system that allows
government, military, homeland security, aviation, maritime and
enterprise customers to deliver reliable, non-line-of-sight, voice
and data communications services via the Iridium satellite network
from any location on Earth.
The condensed balance sheet of the Company as of November 30,
2004, the related condensed statements of operations for the
three months ended November 30, 2004 and 2003, and the
statements of cash flows for the three months ended November
30, 2004 and 2003, included in the condensed financial
statements have been prepared by the Company without audit.
In the opinion of management, the accompanying condensed
financial statements include all adjustments (consisting of
normal, recurring adjustments) necessary to summarize fairly
the Company's financial position and results of operations.
The results of operations for the three months ended
November 30, 2004, are not necessarily indicative of the
results of operations for the full year or any other interim
period. The information included in this Form 10-Q should be
read in conjunction with Management's Discussion and
Analysis and Financial Statements and notes thereto included
in the Company's August 31, 2004, Form 10-K.
5
NOTE 2 - Related Party Transactions:
Sale of Assets:
During the fiscal year ended August 31, 2004, the Company completed
a transaction with an effective date of October 1, 2003, with Eagle
RF International, Inc. (dba ERF), to sell certain assets of its
subsidiary Contact Wireless, Inc. Eagle RF International, Inc., is a
private company engaged in providing products and services to the
wireless industry. ERF has a board member who is also a member of
the Company's board of directors, namely H. Dean Cubley. The assets
sold related to the Contract Wireless paging network business and
included a switch center lease and tower lease, network equipment,
network contracts, paging licenses, accounts receivable, inventory,
furniture and fixtures. The Company had downsized this subsidiary
during the course of fiscal 2003 and during the three months ended
February 29, 2004, elected to exit this business segment. The
Company has recorded approximately $329,000 in revenues with a
corresponding segment loss of approximately $387,000 from this
business segment in fiscal 2003 and recorded approximately $80,000
in revenues with a corresponding loss of $25,000 in the first
quarter of fiscal 2004. The Company had no competing offers with
respect to the sale of assets and/or sale of the business and the
Company's board of directors determined that the offer from ERF
represented fair value. The Company terminated its remaining
employees associated with this subsidiary and ERF entered into new
employment arrangements with certain of these employees.
Additionally, ERF assumed certain liabilities and subleased certain
property from the Company in Houston and San Antonio. In conjunction
with this transaction, the Company recorded a loss of $642,000 on
the sale of assets and certain other costs incurred in the exit from
this line of business.
Compensation
Eagle renewed a professional service agreement effective April 1,
2004, with the son of a director. The agreement states that
consulting services provided will include support in the areas of
management information systems, investor relations, and corporate
finance and accounting. Compensation includes monthly salary of
$10,000 and quarterly issuance of stock options to purchase common
stock of Eagle Broadband.
In addition, in February 2004, compensation for certain officers and
key employees under incentive clauses of their employment contracts
(i) includes a non-cash expense of $4,493,000 incurred upon the
modification of warrants for 4,200,000 common shares and (ii)
reflects a guaranteed compensation of the modified options
equivalent to $1.75 less the option strike price, which was an
additional $4,074,000 accrued in August 2004. The amount of the
accrual varies each quarter end depending on the stock market value
fluctuation or upon exercise of options subject to employment
agreement.
6
NOTE 3 - Accounts Receivable:
Accounts receivable consist of the following (in thousands):
November 30, August 31,
2004 2004
--------------- ---------------
Accounts Receivable $ 2,705 $ 3,866
Completed Contracts 463 -
Unbilled Completed Contracts 335 -
Unbilled Contracts in Progress 87 -
Contract in Progress 97 -
Allowance for Doubtful Accounts (2,324) (2,396)
--------------- ---------------
Accounts Receivable, Net $ 1,363 $ 1,470
=============== ===============
Allowance for Doubtful Accounts
Percentage of Accounts Receivable 63% 62%
NOTE 4 - Property, Plant & Equipment and Intangible Assets:
Components of property, plant and equipment are as follows (in
thousands):
November 30, August 31,
2004 2004
-------------- --------------
Automobile $ 143 $ 143
Headend facility and fiber infrastructure 27,214 27,146
Furniture and fixtures 522 516
Leasehold improvements 185 133
Office equipment 7,454 7,454
Property, manufacturing and equipment 1,041 1,023
-------------- --------------
Total Property, Plant and Equipment $ 36,559 $ 36,415
Less accumulated depreciation (8,312) (7,837)
-------------- --------------
Net property, plant and equipment $ 28,247 $ 28,578
============== ==============
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 $12,000 and $9,000 for the three months ended
November 30, 2004 and 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 its headquarters, wireless headend
equipment, a digital headend facility and a fiber backbone in the
master planned communities in which it operates and a fiber ring
connecting the various master planned communities in the Houston
area. These fiber and headend infrastructures are similar to those
that would exist in a major telecommunications or cable television
provider that offers digital services for Internet, cable TV,
telephone and security monitoring services. Eagle determined that a
twenty-year straight line depreciation method is appropriate for its
Headend Facility and Fiber Infrastructure based on industry standards
for these asset types.
7
Components of intangible assets are as follows (in thousands):
November 30, August 31,
2004 2004
--------- --------
Goodwill $ 5,596 $ 5,596
Accumulated Amortization (1,501) (1,501)
-------- --------
$ 4,095 $ 4,095
======== ========
Contract Rights $ 28,691 $ 28,691
Accumulated Amortization (7,491) (7,013)
-------- --------
$ 21,200 $ 21,678
======== ========
Customer Relationships $ 7,189 $ 7,189
Accumulated Amortization (1,877) (1,758)
-------- --------
$ 5,312 $ 5,431
======== ========
Other Intangible Assets $ 6,882 $ 6,839
Accumulated Amortization (2,904) (2,805)
-------- --------
$ 3,978 $ 4,034
======== ========
NOTE 5 - Notes Payable:
The following table lists the Company's note obligations as of
November 30 and August 31, 2004 (in thousands):
Amount
----------------------------
Annual November 30, August 31,
Interest Rate Due Date 2004 2004
------------- ------------ ------------- -----------
Notes Payable: Investor Group 8.0% Demand $ 3,704 $ 4,888
Notes Payable: Q Series Bonds 12.0% Various 744 744
Other Various Various 953 288
-------------- ------------
Total Notes Payable $ 5,401 $ 5,920
-------------- ------------
Less Current Portion 5,401 5,920
-------------- ------------
Total Long-Term Debt $ -- $ --
============== ============
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. At November 30, 2004, $744,000 is
outstanding.
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"). At November 30,
2004, $3,704,000 is outstanding.
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.
8
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.
NOTE 6 - Income Taxes:
As discussed in Note 1, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Implementation of SFAS 109 did not
have a material cumulative effect on prior periods nor did it result
in a change to the current year's provision.
The effective tax rate for the Company is reconcilable to statutory
tax rates as follows:
November 30, 2004 August 31, 2004
(%) (%)
------------------- ----------------
U. S. Federal Statutory Tax Rate 34 34
U.S. Valuation Difference (34) (34)
Effective U. S. Tax Rate 0 0
Foreign Tax Valuation 0 0
Effective Tax Rate 0 0
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by apply the U.S.
Federal income tax rate of 34% to pretax income from continuing
operations as a result of the following (in thousands):
November 30, 2004 August 31, 2004
----------------- --------------
Computed Expected Tax Benefit $ (1,512) $ (13,262)
Increase in Valuation Allowance 1,512 13,262
--------------- --------------
Income Tax Expense $ - $ -
=============== ==============
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at November 30, 2004 and August 31, 2004, are presented
below (in thousands) and include the balances of the merged company
ClearWorks.net.
November 30, 2004 August 31, 2004
----------------- ---------------
Deferred Tax Assets:
Net Operating Loss Carry Forwards $ 65,118 $ 63,606
Less Valuation Allowance (65,118) (63,606)
---------------- ---------------
Net Deferred Tax Assets $ -- $ --
================ ===============
The valuation allowance for deferred tax assets of November 30,
2004, and August 31, 2004, was $65,118,000 and $63,606,000,
respectively. At November 30, 2003, the Company has a net operating
loss carry-forward of $112,079,000, which is available to offset
future federal taxable income, if any, with expirations from 2021 to
2023.
9
NOTE 7 - Uncompleted Contracts:
Costs, estimated earnings and billings on uncompleted contracts for
the three months ended November 30, 2004 and 2003, are summarized as
follows (in thousands):
November 30, 2004 November 30, 2003
----------------- -----------------
Costs Incurred on Uncompleted Contracts $ 175 $ -
Estimated Revenue 9 -
--------------- --------------
Gross Revenue 184 -
--------------- --------------
Less: Billings to Date 184 -
Costs and Estimated Revenue in Excess of
--------------- --------------
Billings on Uncompleted Contracts $ - $ -
=============== ==============
NOTE 8 - Preferred Stock, Stock Options and Warrants:
The options and warrants outstanding are segregated into two
categories (issued and outstanding, and exercisable):
Options/Warrants
Issued & Outstanding Options/Warrants Exercisable
----------------------------- ------------------------------
Class of Expiration November 30, August 31, November 30, August 31,
Warrants Date 2004 2004 2004 2004
- ----------------------------------------------------------------------------------------------------
0.41 Sep-08 3,875,000 3,800,000 3,875,000 1,550,000
0.48 Oct-06 25,000 25,000 25,000 25,000
0.60 Sep-06 400,000 400,000 - -
0.61 Jan-05 25,000 25,000 25,000 25,000
0.73 Oct-07 25,000 - - -
0.75 Sep-08 500,000 500,000 - -
0.78 Sep-09 33,332 - 33,332 -
0.97 Jul-07 25,000 25,000 - -
1.00 May-09 312,500 - 312,500 -
1.04 Apr-05 50,000 50,000 50,000 50,000
1.23 Apr-07 25,000 25,000 25,000 -
1.31 Jan-07 25,000 25,000 25,000 25,000
7.50 Apr-08 800,000 800,000 800,000 800,000
ESOP Various 516,120 * 346,002 * 346,002 346,002
------------- ------------- -------------- ------------
6,636,952 ** 6,021,002 ** 5,516,834 2,821,002
============== ============= ============== ============
*Denotes warrants which would have an anti-dilutive effect if
currently used to calculate earnings per share for the three
months ended November 30, 2004, and fiscal year ended August 31,
2004.
**Denotes 12,700,000 warrants for shares that have been excluded
from this table that are subject to issuance to certain
employees under incentive clauses of employment contracts
expiring 5 years from the date of issuance. The warrants vest
based on accumulated revenue targets ranging from $50 million to
$500 million and on market performance of Eagle's common stock
at market capitalization between $450 million and $1 billion.
The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $0.001 per share at
purchase prices ranging from $0.41 to $1.50 per share. The
Company has determined that the probability of the achievement
of such targets is remote as of the date of the issuance of the
Company's financial statements and thus has not included them in
the outstanding warrant table above. The shares of common stock
underlying these warrants were not registered for resale under
the Securities Act of 1933. As of August 31, 2004, none of these
warrants have been exercised.
NOTE 9 - Risk Factors:
For the three months ended November 30, 2004, substantially all of
the Company's business activities have remained within the United
States and have been extended to the wireless infrastructure, fiber,
cabling, computer services and broadband industries. Approximately,
71% of the Company's revenues and receivables have been created
solely in the state of Texas, 0% in the international market, and the
approximate 29% remainder relatively evenly over the rest of the
nation during the three months ended November 30, 2004; whereas
approximately, 94% of the Company's revenues and receivables were
created solely in the state of Texas, 0% in the international market,
and the approximate 6% remainder relatively evenly over the rest of
the nation during the three months ended November 30, 2003. Through
the normal course of business, the Company generally does not require
its customers to post any collateral.
10
NOTE 10 - 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% at November 30, 2004 and 2003,
respectively.
NOTE 11 - Commitments and Contingent Liabilities:
Leases
For the three months ended November 30, 2004 and 2003, rental
expenses of approximately $94,000 and $137,000, respectively, were
incurred.
The Company renewed its primary office lease space in League City,
Texas, for $24,983 per month with South Shore Harbor Development,
Ltd. The renewal lease commenced on June 1, 2004, and expires on May
31, 2009. The Lessor agreed to grant the Company a one-time option to
terminate the lease at 36 months by paying an unamortized leasing
commission of $35,000 and a penalty of 1.5 months rent of $37,000 for
a combined total of $72,000.
Period Ending
August 31 Amount
----------------- -------------
2005 $ 224,851
2006 299,801
2007 306,180
2008 325,316
2009 243,987
-------------
Total $ 1,400,135
=============
Legal Proceedings
In July 2003, Eagle became a defendant in Cornell Capital Partners,
L.P. vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860
(KSH), In the United States District Court for the District of New
Jersey. The suit presents claims for breach of contract, state and
federal securities fraud and negligent misrepresentation. Plaintiff
has also alleged that Eagle has defaulted on a convertible debenture
for failing to timely register the shares of common stock underlying
the convertible debenture and is seeking to accelerate the maturity
date of the debenture. In November 2003, the principal balance of the
debenture was repaid, although the suit remains outstanding. Cornell
claims damages in excess of $1,000,000. The Company denies the claims
and intends to vigorously defend this lawsuit and the claims against
it. Eagle has asserted counterclaims against Cornell for fraud and
breach of contract in the amount of $2,000,000. The Company has not
accrued any expenses against this lawsuit, as the outcome cannot be
predicted at this time.
In December 2000, ClearWorks became a defendant in State Of Florida
Department Of Environmental Protection vs. Reco Tricote, Inc. And
Southeast Tire Recycling, Inc., A/K/A Clearwork.net, Inc.; In the
Circuit Court of The Tenth Judicial Circuit In And For Polk County,
Florida. The Florida EPA sued ClearWorks.net presenting claims for
recovery costs and penalties for a waste tire processing facility.
The suit seeks recovery of costs and penalties in a sum in excess of
$1,000,000, attorneys' fees and cost of court. ClearWorks denies the
claims and intends to vigorously contest all claims in this case and
to enforce its indemnification rights against the principals of
Southeast Tire Recycling. The Company has not accrued any expenses
against this lawsuit, as the outcome cannot be predicted at this
time.
In September 2003, Enron sued United Computing Group, Inc. in Enron
Corp. (Debtors/Plaintiff) vs. United Computing Group, Inc.; Case No.
01-16034 in the United States Bankruptcy Court for the Southern
District of New York. The suit presents claims pursuant to sections
547 and 550 of the Bankruptcy Code to avoid and recover a transfer
in the amount of approximately $1,500,000. Defendant has filed an
answer, denies the claims and intends to vigorously defend this
lawsuit and claims against it. The Company has not accrued any
expenses against this lawsuit, as the outcome cannot be predicted at
this time.
In fiscal 2004, The Tail Wind Fund Ltd. sued Link Two Communications
and Eagle, Civil Action 04-CV-05776, in the United States District
Court for the Southern District of New York. Tail Wind claims breach
of contract seeking $25 million. The Company intends to vigorously
defend this claim. The Company has accrued $500,000 in expenses
against this lawsuit, although the outcome cannot be predicted at
this time.
11
In November 2004, Palisades Master Fund L.P. sued Eagle Broadband,
Ind., and David Weisman, Civil Action 04603626, in New York County,
New York Supreme Court. Palisades seeks an injunction setting a
conversion price on certain convertible debt and warrants at $0.4456
per share of Eagle common stock and seeks damages in excess of $3.1
million. The Company intends to vigorously defend this claim. The
Company has not accrued any expenses against the lawsuit, as the
outcome cannot be predicted at this time.
Eagle is involved in lawsuits, claims, and proceedings, including
those identified above, which arise in the ordinary course of
business. In accordance with SFAS No. 5, "Accounting for
Contingencies," Eagle makes a provision for a liability when it is
both probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. Eagle believes it has adequate
provisions for any such matters. Eagle reviews these provisions at
least quarterly and adjusts these provisions to reflect the impacts
of negotiations, settlements, rulings, advice of legal counsel, and
other information and events pertaining to a particular case.
Litigation is inherently unpredictable. However, Eagle believes that
it has valid defenses with respect to legal matters pending against
it. Nevertheless, it is possible that cash flows or results of
operations could be materially affected in any particular period by
the unfavorable resolution of one or more of these contingencies.
We intend to vigorously defend these and other lawsuits and claims
against us. However, we cannot predict the outcome of these lawsuits,
as well as other legal proceedings and claims with certainty. An
adverse resolution of pending litigation could have a material
adverse effect on our business, financial condition and results of
operations. The Company is subject to legal proceedings and claims
that arise in the ordinary course of business. The Company's
management does not expect that the results in any of these legal
proceedings will have adverse affect on the Company's financial
condition or results of operations.
NOTE 12 - Earnings Per Share:
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per-share amount):
For the three months ended November 30, 2004
--------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- -------------- ------------
Net Loss $ (4,448) $ - $ -
Basic EPS:
Income Available to Common Stockholders (4,448) 209,418 (0.02)
Effect of Dilutive Securities Warrants - - -
Diluted EPS:
------------- -------------- -----------
Income Available to Common Stockholders
and Assumed Conversions (4,448) 209,418 (0.02)
============= ============== ===========
For the three months ended November 30, 2003
--------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- -------------- ------------
Net Loss $ (8,461) $ - $ -
Basic EPS:
Income Available to Common Stockholders (8,461) 159,696 (0.05)
Effect of Dilutive Securities Warrants - - -
Diluted EPS:
------------- -------------- ------------
Income Available to Common Stockholders
and Assumed Conversions $ (8,461) $ 159,696 $ (0.05)
============= ============== ============
For the three months ended November 30, 2004, anti-dilutive
securities existed. (See Note 8.)
NOTE 13 - Employee Stock Option Plan:
In July 1996, the Board of Directors and majority stockholders
adopted a stock option plan under which 400,000 shares of the
Company's common stock have been reserved for issuance. Since that
time, the Board of Directors have amended the July 1996, employee
stock option plan under which 1,000,000 shares of Common Stock have
been reserved for issuance. Under this plan, as of November 30, 2004,
a total of 516,120 options have been issued to various employees.
The Company has elected to follow APB 25, "Accounting for Stock
Issued to Employees." Accordingly, since employee stock options are
granted at market price on the date of grant, no compensation
expense is recognized. However, SFAS 123 requires presentation of
pro forma net income and earnings per share as if the Company had
accounted for its employee stock options granted under the fair
value method of that statement. The weighted average fair value of
the individual options issued and granted during the three months
ended November 30, 2004, is estimated as $1.08 on the date of grant.
Management estimates the average fair value for options granted
during 2004, to be comparable to those granted in 2003. The impact
on net loss is minimal; therefore, the pro forma disclosure
requirements prescribed by SFAS 123 are not significant to the
Company. The fair values were determined using a Black-Scholes
option-pricing model with the following assumptions:
12
November 30,
------------------------------
2004 2003
------------ ------------
U. S. Federal Statutory Tax Rate 0.00% 0.00%
U.S. Valuation Difference 0.91% 0.91%
Effective U. S. Tax Rate 4.00% 4.00%
Foreign Tax Valuation 4.00% 7.00%
Effective Tax Rate 5 years 5 years
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a
straight-line basis over the vesting period of the stock option or
purchase right was as follows for the three months ended November
30, 2004 and 2003:
(in thousands, except share amounts) 2,004 2,003
------------ ------------
Net loss, as reported $ (4,448) $ (8,461)
Add: Stock-Based Employee
Compensation Included in Reported
Net Earnings (Loss, Net of Related
Tax Effects - -
Less: Stock-Based Employee
Compensation Expenses Determined
under Fair-Value Based Methods for All
Awards, Net of Related Tax Effects (61) -
------------ ------------
Pro Forma Net Earnings (Loss) $ (4,509) $ (8,461)
============ ============
Net loss per share:
As reported $ (0.02) $ (0.05)
Pro forna $ (0.02) $ (0.05)
Diluted net loss per share:
As reported $ (0.02) $ (0.05)
Pro forna $ (0.02) $ (0.05)
Option activity was as follows for the three months ended November 30, 2004:
Information about options outstanding was as follows at November 30,
2004:
2005
Weighted-Average
Shares Exercise Price
------- --------------
Outstanding at Beginning of Year 346,002 $ 1.27
Granted 170,118 $ 0.50
Assumed Through Acquisitions
Exercised 0 -
------- --------
Forfeited/Cancelled
Outstanding Throughout the Period 516,120 $ 1.08
======= ========
Exercisable at Year-End 516,120 $ 1.08
======= ========
Information about options outstanding was as follows at November 30, 2004:
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- ------------------- ------------ ------------- ------------ ------------ -------------
$0 - $1.00 379,278 4.50 0.53 379,278 0.53
$1.01 - $2.00 111,342 4.00 1.73 111,342 1.73
$2.01 - $7.50 25,500 4.50 6.55 25,500 6.55
------------ ------------
516,120 1.08 516,120 1.08
============ ============
NOTE 14 - Retirement Plans:
During October 1997, the Company initiated a 401(k) plan for its
employees which is funded through the contributions of its
participants. Prior to March 2003, the Company matched the
participant's contribution up to 3% of their salary. Subsequent to
March 2003, the plan was amended and the Company match became
elective. For the three months ended November 30, 2004 and 2003,
employee contributions were approximately $27,989 and $27,298,
respectively. The Company matched $0 and $0, respectively, for those
same periods.
13
NOTE 15 - Major Customer:
The Company had gross revenues of $1,528,000 and $2,397,000 for the
three months ended November 30, 2004 and 2003, respectively.
The three-month period ended November 30, 2004, included $753,000 or
49% of the quarter's total sales from Sweetwater Security Capital,
LLC, that were executed with the Company's security-monitoring
service subsidiary, DSS Security, Inc. There were no other customers
individually that represented greater than 10% of the revenues in
the three months ended November 30, 2004.
NOTE 16 - Industry Segments:
The Company has four operating segments as described in the tables
below:
Eagle Broadband, Inc., (Eagle) is a supplier of broadband and
telecommunications equipment with related software and broadband
products (including Eagle Wireless International, Inc.;
BroadbandMagic; and Etoolz, Inc., for this summary).
Atlantic Pacific Communications, Inc., (APC) specializes in
providing professional data and voice cable and fiber optic
installations through project management services on a nationwide
basis for multiple site-cabling installations for end users and
re-sellers.
ClearWorks Communications, Inc., (EBS) provides solutions to
consumers by implementing technology both within the residential
community and home. This is accomplished through the installation of
fiber optic backbones to deliver voice, video and data solutions
directly to consumers.
ClearWorks Home Systems, Inc., (HSI) specializes in providing fiber
optic and copper based structured wiring solutions and audio and
visual equipment to single-family and multi-family dwelling units.
United Computing Group, Inc., (UCG) is an accelerator company and
computer hardware and software reseller. UCG / INT maintain a
national market presence.
Link Two Communications, Inc., (Link II) is in the development and
delivery of one- and two-way messaging systems.
DSS Security, Inc., (DSS) is a security monitoring company.
ClearWorks.net, Inc., (.NET) is inactive with exception of debt
related expenses.
Contact Wireless, Inc., is a paging, cellular, and mobile services
provider and reseller. Contact Wireless, Inc., assets were sold
October 10, 2003. (See Note 2 - Related Party Transactions.)
For the three months ended November 30, 2004
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
---------------------------------------------------------------------------------------
Revenue $ 21 $ 1,216 $ - $ 291 $ - $ 1,528
Segment Loss (35) (839) - (3,604) (21) (4,499)
Total Assets 30 28,579 32 125,551 56,935 (142,367) 68,760
Capital Expenditures - 70 - 74 - 144
Depreciation 10 397 1 702 21 1,131
For the three months ended November 30, 2003
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
---------------------------------------------------------------------------------------
Revenue $ 392 $ 1,564 $ 274 $ 87 $ 81 $ - $ 2,397
Segment Loss (220) 331 (68) (1,758) (23) - (1,737)
Total Assets 1,126 30,156 123 175,253 57,704 (137,455) 126,907
Capital Expenditures - 128 - 25 - - 153
Depreciation 39 383 15 126 51 - 614
14
Reconciliation of Segment Loss Novmember 30, November 30,
from Operations to Net Loss 2004 2003
- ---------------------------------- -------------- --------------
Total segment loss from operations $ (4,499) $ (1,737)
Total Other Income (Expense) 51 (6,724)
--------------- --------------
Net Loss $ (4,448) $ (8,461)
=============== ==============
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 17 - Quarterly Financial Data:
Nov. 30 Feb. 28 May 31 Aug. 31
------- ------- ------- -------
Year Ended August 31,
2005
Revenues $ 1,528
Net Earnings (Loss) (4,448)
Basic Loss per Share (0.02)
Diluted Loss per Share (0.02)
2004
Revenues $ 2,397 $ 3,744 $ 5,091 $ 1,258
Net Earnings (Loss) (8,461) (9,398) (4,373) (16,773)
Basic Loss per Share (0.05) (0.05) (0.02) (0.08)
Diluted Loss per Share (0.05) (0.05) (0.02) (0.08)
2003
Revenues $ 4,618 $ 3,063 $ 1,947 $ 1,965
Net Earnings (Loss) (1,533) (2,012) (3,833) (29,123)
Basic Loss per Share (0.02) (0.03) (0.05) (0.28)
Diluted Loss per Share (0.02) (0.03) (0.05) (0.28)
NOTE 18 - Supplemental Non-Cash Disclosures:
During the fiscal year ended August 31, 2004, the Company issued
$3,000,000 of convertible debt which was retired through the
issuance of 2,000,000 shares of Series A Preferred Stock which was
concurrently converted to 29,500,000 shares of the Company's common
stock. Additionally, the Company received proceeds of $3,912,000
from the sale of convertible bonds.
The beneficial conversion values associated with these financings
aggregating $6,912,000 are calculated at the difference between the
conversion price and the fair value of the common stock into which
the debt is convertible, multiplied by the number of shares into
which the debt is convertible. Since the beneficial conversion value
exceeded the $6,912,000 raised on these convertible instruments, the
value charged to interest expense during the quarter was limited to
$6,912,000 raised on these convertible instruments, the value
charged to interest expense during the fiscal year ended August 31,
2004, was limited to $6,912,000. This non-cash charge comprises
$6,912,000 of the $8,325,000 interest expense on the Company's
Statement of Operations as is shown as an adjustment to reconcile
net loss to net cash on the Company's Statement of Cash Flows.
In addition, in February 2004, compensation for certain officers and
key employees under incentive clauses of their employment contracts
(i) includes a non-cash expense of $4,493,000 incurred upon the
modification of warrants for 4,200,000 common shares and (ii)
reflects a guaranteed compensation of the modified options
equivalent to $1.75 less the option strike price, which was an
additional $4,074,000 accrued in August 2004. The amount of the
accrual varies each quarter end depending on the stock market value
fluctuation or upon exercise of options subject to employment
agreement.
NOTE 19 - Exit Activities:
During the quarter ended November 30, 2004, we implemented cost
reductions in various operating segments. In the aggregate, the
Company reduced its overall personnel by 114 headcount or a 50%
reduction for the fiscal year ended August 31, 2003 as compared to
the fiscal year ended August 31, 2002. The predominate reduction in
headcount related to the Company's Atlantic Pacific / Homes Systems
structured wiring and commercial cabling segment with headcount
reductions of nine, six and 57 personnel in the first three quarters
of fiscal 2003; aggregating an overall headcount reduction of 72 or
71% of this segments workforce. Additionally, the Company reduced its
United Computing Group computer hardware sales segment by 18, nine,
15
and two personnel in the first three quarters of fiscal 2003;
aggregating an overall reduction of 29 or 59% of this segments
workforce. These two operating segments accounted for 101 of the 114
headcount reductions affected in fiscal 2003. Specifically, certain
components of these operating segments, i.e., home systems structured
wiring, commercial cabling and computer hardware sales, were not
expected to provide significant long-term revenues and profitability,
and therefore were reduced. Following the series of cost reduction
activities implemented during the first three quarters of fiscal
2003, Eagle's management assessed the viability of continued
financial investment in these unprofitable segments in the fourth
quarter of fiscal 2003 and into early first quarter of fiscal 2004
and made further reductions. In conjunction with the appointment of ,
Mr. Weisman as our new Chief Executive Officer, in early October
2003, the Company completed the final consolidation of the United
Computing Group segment into other Eagle operations while further
reducing the Atlantic Pacific / Home Systems operations to an
outsource commercial cabling and structured wiring operation that
project manages affiliate contractors.
Additionally, in conjunction with the appointment of Mr. Weisman as
Chief Executive Officer,, the Company made certain decisions during
the preparation of its Form 10-K in our first quarter of fiscal 2004
that affected the value of certain assets as of August 31, 2003.
These decisions included:
o A revised collection assessment of certain accounts
receivables from these and other down-sized Eagle business
segments.
o The decision to no longer pursue new commercial structured
cabling opportunities on a direct basis versus the outsource
model; thereby resulting in the impairment of goodwill from
its Atlantic Pacific operations.
o The decision to no longer pursue Home Systems structured
wiring opportunities on a direct standalone model basis
outside its BDS model; thereby resulting in the impairment
of its Home Systems inventory.
o The decision to withdraw from certain unprofitable BDS
projects, namely its Austin area BDS developments; thereby
impairing certain assets including property, plant and
equipment.
o The decision to settle numerous existing and threatened
legal proceedings versus continuing the timing consuming and
costly process of defending such proceedings; thereby
resulting in the accrual of numerous reserves for such
settlements.
o The decisions to consolidate its operating segments into its
corporate lease space; thereby resulting in reserves for
property lease settlements.
o The decision to negotiate the settlement of certain sales
tax liabilities that resulted from a sales tax audit of
United Computing Group operations for periods that preceded
the acquisition date of this subsidiary.
Accordingly, Eagle incurred certain asset impairments and operating
charges in the fourth quarter associated with these decisions. These
asset impairment charges, allowances, write-offs and reserves
included the following:
o Accounts receivable write-off's and reserves aggregating
$2,177,000; of which $1,348,000 was attributable to the
decisions affecting the Company's Atlantic Pacific / Home
Systems operations, $15,000 attributable to the decisions
affecting its United Computing Group operations and $814,000
attributable to the Company's Eagle, EBS and Other segment
operations.
o Inventory impairment charges of $2,627,000; of which
$501,000 was attributable to the decisions affecting the
Company's Atlantic Pacific / Home Systems operations and
$74,000 attributable to the decisions affecting its United
Computing Group operations. Additionally, the Company
recorded an impairment charge of $1,125,000 for slow-moving
and obsolete inventory in its Eagle operations. This charge
primarily resulted from a major client's decision to upgrade
from a 400 MHz chip to a 500 MHz chip for the Company's IP
set top box.
o Litigation settlement costs and reserves of $3,650,000
against certain of the legal proceedings previously
discussed in Item 3. Legal Proceedings. Additionally, the
Company recorded charges aggregating $2,274,000 to settle
threatened and existing legal proceeding associated with
prior financing transactions, including the Kaufman
litigation.
o Lease settlement costs and reserves of $171,000 were
attributable to the decision to consolidate various
operating segments into its corporate lease space; thereby
resulting in reserves for early exit of such leases.
o Impairment, write-down's and restructuring costs aggregating
$7,611,000; of which $1,878,000 was attributable to an
impairment of goodwill in the Company's Atlantic Pacific
operations following the Company's decision to no longer
pursue commercial cabling opportunities on a direct basis
versus an outsource model. These costs were also comprised
of $3,412,000 in impairment of property and equipment
following the Company's decision to withdraw from certain
unprofitable BDS projects, namely in the Austin area, and
$323,000 of impairment of property and equipment from the
Company's Atlantic Pacific / Home Systems operations
following the decision to no longer pursue structured wiring
opportunities on a direct standalone basis outside of its
BDS model. Additionally, the aggregate total included a
$553,000 charge for certain sales tax liabilities that
resulted from an audit of the Company's United Computing
Group operations for time periods that preceded the
acquisition date of this operation.
Eagle incurred approximately $0 for severance and accrued vacation
related to employees terminated in the three months ended November
30, 2004.
16
An analysis of accrued costs and amounts charged against the
provision are as follows:
Beginning Balance Period Costs Ending Balance
August 31, 2004 (Additional) Payments November 30, 2004
--------------------- ------------- ----------- ------------------
Accrued Exit Expenses:
Severance $ - $ - $ - $ -
Terminated Lease Costs 171,000 - - 171,000
--------------------- -------------- ------------ -------------------
$ 171,000 $ - $ - $ 171,000
===================== ============== ============ ===================
For the year ended August 31, 2003, the Company incurred exit costs
of $267,000 which are principally severance and lease termination
costs. The total expected exit costs for severance and terminated
leases are $96,000 and $171,000, respectively. These costs are
included in the consolidated statement of income under the
categories of salaries and related costs and other support costs.
These period and accumulated costs are included in the segment
reporting as follows:
Costs APC/HIS KBS/DSS UCG Eagle Other Total
- -------------------------- ------------- ------------ ------------- ------------ ------------- ------------
Severance $ 37,000 $ 24,000 $ 14,000 $ 21,000 $ - $ 96,000
Terminated Lease Costs 50,000 - 44,000 - 7,700 101,700
------------- ------------ ------------- ------------ ------------- ------------
Total $ 87,000 $ 24,000 $ 58,000 $ 21,000 $ 7,700 $ 197,700
============= ============ ============= ============ ============= ============
NOTE 20 Subsequent Events:
LLV Broadband, LLC, Agreement
In November, 2004, Eagle entered into a Limited Liability Company
Agreement with Neva Holdings, LLC ("Neva"), whereby both parties are
members of LLV Broadband, LLC ("LLV"), a Delaware limited liability
company). The purpose of LLV is to construct, develop, and operate a
system for the provision of television services, video-on-demand
services, audio services, broadband data and Internet services,
telephone services, and security monitoring services to the
commercial, recreational, and residential buildings located within
the Lake Las Vegas Resort in Clark County, Nevada, and the
surrounding geographic area.
LLV currently owns cable television assets including, without
limitation, cable real property easements, franchises and
governmental and third-party consents necessary for the operation of
the system (collectively the "Existing System Assets"). Neva's
capital account shall consist of the initial capital contribution of
the "Existing System Assets" and existing system documents having an
aggregate net fair value of $3,000,000 plus amounts funded by Neva or
its affiliates to or for the benefit of LLV between January 1, 2004,
and the effective date of this agreement.
Eagle's capital account shall be an initial cash contribution of
$3,000,000 plus amounts funded by Eagle or its affiliates to or for
the benefit of LLV between January 1, 2004, and the effective date of
this agreement.
If at any time LLV's Board determines that additional funds are
needed as set forth in the approved budget and plan for the
development, construction or marketing of the system for any direct
out-of-pocket costs and expenses incurred by LLV in connection with
the formation, financing and operation of LLV or normal day-to-day
business affairs of LLV, then Eagle shall be required to make
additional cash contributions in the amount of such deficit not to
exceed $2 million.
Eagle shall act as the initial Manager of LLV. The Manager shall be
responsible for the conduct of the business of LLV including without
limitation the design, construction and operation of the system. The
Manager shall have full power, authority and duty to manage the
operations and affairs of LLV and to act for and to bind LLV to the
extent provided by the Act, and shall have the duty and authority to
do all things appropriate to the accomplishment of the purposes of
LLV. The Manager shall be reimbursed for the direct costs and
expenses of its employees and agents who provide services to LLV.
As of November 30, 2004, Eagle had not funded the $3,000,000 initial
capital contribution. Allocations of net income and distributions are
generally made to each member in proportion to their respective
ownership. Final determination of percentage of ownership has yet to
be determined.
17
Item 2. Management's Discussion and Analysis
Overview
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q. Information included herein relating to projected growth and future
results and events constitutes forward-looking statements. Actual results in
future periods may differ materially from the forward-looking statements due to
a number of risks and uncertainties, including but not limited to fluctuations
in the construction, technology, communication and industrial sectors; the
success of the Company's restructuring and cost reduction plans; the success of
the Company's competitive pricing; the Company's relationship with its
suppliers; relations with the Company's employees; the Company's ability to
manage its operating costs; the continued availability of financing;
governmental regulations, and risks associated with regional, national, and
world economies. Any forward-looking statements should be considered in light of
these factors.
Eagle Broadband, Inc. (the "Company" or "Eagle"), is a leading provider
of broadband, Internet protocol (IP) and satellite communications technology and
services. The Company is focused on three core businesses: broadband bundled
services, IP set-top boxes and satellite communications technology. The
Company's product offerings include an exclusive "four-play" suite of IP-based
broadband bundled services with high-speed Internet, cable TV, telephone and
security monitoring, and a turnkey suite of financing, network design,
operational and support services that enables municipalities, utilities, real
estate developers, hotels, multi-tenant owners and service providers to deliver
exceptional value, state-of-the-art entertainment and communications choices and
single-bill convenience to their residential and business customers. Eagle
offers the HDTV-ready Media Pro IP set-top box product line that enables hotel
operators and service providers to maximize revenues by offering
state-of-the-art in-room entertainment and video services. The Company also
develops and markets the SatMAX satellite communications system that allows
government, military, homeland security, aviation, maritime and enterprise
customers to deliver reliable, non-line-of-sight, voice and data communications
services via the Iridium satellite network from any location on Earth.
During the three months ended November 30, 2004, Eagle's business
strategy has focused on the bundled digital services and related products
business. We expect this trend to continue in fiscal 2005 with our goal of
growing sales of the SatMAX satellite voice and data communications products for
military, government and commercial customers. Set forth below is a table
presenting the revenue derived from our business segments in the three months
ended November 30, 2004 and 2003:
($ in thousands) 2004 % of Total 2003 % of Total $ Change % Change
------------ ------------- ------------- ------------- ------------ ------------
Structured Wiring $ 262 17% $ 392 16% $ (130) 1%
Broadband Services 1,216 80% 1,564 65% (348) 14%
Products 26 2% 361 15% (335) -13%
Other 24 2% 80 3% (56) -2%
------------ ------------- ------------- ------------- ------------ ------------
Total $ 1,528 100% $ 2,397 100% $ (869) -36%
============ ============= ============= ============= ============ ============
During the three months ended November 30, 2004, Eagle recognized 30% of
its revenues from sales of bundle digital services and 2% product sale as
compared to 2003 sales of bundled digital services and product sales
representing 65% and 2% of revenues, respectively.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 2004, COMPARED TO THREE MONTHS
ENDED NOVEMBER 30, 2003
The following table sets forth summarized consolidated financial
information for the three months ended November 30, 2004 and 2003:
CONDENSED FINANCIAL INFORMATION
Three Months Ended November 30,
--------------------------------
($ in thousands) 2004 2003 $ Change % Change
-------------- -------------- ------------ ------------
Total Sales $ 1,528 $ 2,397 $ (869) -36%
Cost of Goods Sold 1,685 1,295 390 30%
-------------- -------------- ------------ ------------
Gross Profit (157) 1,102 (1,259) -114%
-------------- -------------- ------------ ------------
Percent of Total Sales -10% 46% -56% -122%
Operating Expenses 4,342 2,839 1,503 53%
-------------- -------------- ------------ ------------
Loss from Operations (4,499) (1,737) (2,762) 159%
-------------- -------------- ------------ ------------
Other Income (Expense) 51 (6,724) 6,775 -101%
-------------- -------------- ------------ ------------
Net Loss (4,448) (8,461) 4,013 -47%
Unrealized Holding Loss 1,048 309 739 239%
-------------- -------------- ------------ ------------
Comprehensive Loss $(3,400) $(8,152) $4,752 -58%
============== ============== ============ ============
For the three months ended November 30, 2004, Eagle's business
operations reflected emphasis and further expansion of its products
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 $1,528,000 with a
corresponding negative gross margin of $157,000 for the three months ended
November 30, 2004. The overall decrease of 36% in revenues for the three months
ended November 30, 2004, as compared to the three months ended November 30,
2003, was primarily attributable to a $869,000 decrease in the Company's sales
of bundled digital services, products, ancillary equipment, and
structured wiring.
The Company incurred a net loss of $4,448,000 for the three months
ended November 30, 2004. The loss was attributable primarily to $2,669,000 of
non-cash charges and increased operating expenses.
The Company's net loss for the three months ended November 30, 2004, included
approximately $841,000 in depreciation and amortization expenses and $2,290,000
in expenses associated with a net increase in professional services fees.
The Company is continuing the development and expansion of the
Company's bundled digital services model for distribution on a nationwide basis
of voice, video and data content; increased sales efforts in the telephone,
cable, Internet, and security services; securing of long-term relationships for
content for the bundled digital services activities; and marketing/sales
agreements with other companies for the sale of broadband products and
services. On a nationwide basis, we are entering into business relationships
with financial and technology companies to provide bundled digital services
(digital content) to real estate developments, cities and
municipalities that currently have or are in the process of completing
construction of their own fiber infrastructure to the home.
The following table sets forth summarized sales information for the
three months ended November 30, 2004 and 2003:
Three Months Ended November 30,
-----------------------------------------------------------
($ in thousands) 2004 % of Total 2003 % of Total $ Change % Change
------------ ------------ ------------ ------------- ------------ ------------
Structured Wiring $ 262 17% $ 392 16% $ (130) -33.2%
Broadband Services 1,216 80% 1,564 65% (348) -22.3%
Products 26 2% 361 15% (335) -92.8%
Other 24 2% 80 3% (56) -70.0%
------------ ------------ ------------ ------------- ------------ ------------
Total Sales $ 1,528 100% $ 2,397 100% $ (869) -36.3%
============ ============ ============ ============= ============ ============
19
SALES INFORMATION
Net Sales. For the three months ended November 30, 2004, net sales
decreased to $1,528,000 from $2,397,000, compared to the three-month period
ended November 30, 2003. The overall decrease of 36% was attributable to a
$335,000 decrease in the Company's product sales, a decrease of $348,000 in
the Company's BDS sales; decreases of $130,000 in structured wiring
operations and a $56,000 decrease in other sales. The $348,000 decrease in
sales of the Company's broadband services during the three month ended November
30, 2004, was primarily attributable to a prior year sale of security
contracts of $866,000 by the Company's security-monitoring subsidiary, DSS
Security, Inc., and is offset by sales to Sweetwater Capital, LLC, of $753,000
for installing surveillance systems. Also, the Company's base broadband
services sales decreased by approximately $145,000 in the three months ended
November 30, 2004. This decrease was primarily attributable to the decline in
recurring security monitoring sales resulting from the sale of certain
security monitoring in the Company's portfolio to Sweetwater Capital, LLC.
The $130,000 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 $56,000 decrease in other sales was primarily attributable to the
other sales components from various operating segments that were divested or
phased out during fiscal 2004 including Contact Wireless, UCG, and Eagle
Wireless.
The following table sets forth summarized cost of goods sold
information for the three months ended November 30, 2004 and 2003:
COST OF GOODS SOLD
Three Months Ended November 30,
------------------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- ------------ ------------ ------------
Direct Labor and Related Costs $ 262 $ 462 $ (200) -43.3%
Products and Integration Service 38 137 (99) -72.3%
Impairment Slow Moving & Obsolete Inventory - - -
Structured Wiring Labor and Material 175 205 (30) -14.6%
Broadband Services Costs 920 190 730 384.2%
Depreciation and Amortization 290 285 5 1.8%
Other Manufacturing Costs - 16 (16) -100.0%
------------- ------------ ------------ ------------
Total Operating Expenses $1,685 $ 1,295 $ 390 30.1%
============= ============ ============ ============
Cost of Goods Sold. For the three months ended November 30, 2004, cost
of goods sold increased by 30% to $1,685,000 from $1,295,000 as compared to the
three months ended November 30, 2003. The overall increase of $390,000 was
primarily attributable to the Company's cost associated with the sale to
Sweetwater Capital LLC on the installation of surveillance systems. The
Company's overall negative gross profit percentage was 10% for the three months
ended November 30, 2004, compared to an overall gross profit percentage of 46%
for the three months ended November 30, 2003. This substantial decrease in gross
profit percentage is primarily attributable to (i) liquidating inventory at a
cost less than book value; (ii) an increase in depreciation expense in our BDS
model associated with the buildout of the Company's BDS infrastructure, which is
being aggressively addressed with an increased sales force that has expanded the
Company's customer base in recent months; and (iii) the dilutive effect of the
security monitoring transactions recorded in the three months ended November 30,
2004 (sales recorded of $753,000 with corresponding cost of sales of $716,000).
The following table sets forth summarized operating expense information
for the three months ended November 30, 2004 and 2003:
OPERATING EXPENSES
Three Months Ended November 30,
-------------------------------------
($ in thousands) 2004 2003 $ Change % Change
------------- ------------ ------------- ------------
Salaries and Related Costs $ 399 $ 959 $ (560) -58%
Advertising and Promotion 10 18 (8) -44%
Depreciation and Amortization 841 319 522 164%
Research and Development 143 119 24 20%
Other Support Costs 2,949 1,424 1,525 107%
Impairment, Write-Downs & Restructuring Costs - - - -
------------- ------------ ------------- ------------
Total Operating Expenses $ 4,342 $ 2,839 $ 1,503 53%
============= ============ ============= ============
20
The following table breaks out other support costs information for the
three months ended November 30, 2004 and 2003:
Other Support Costs
Three Months Ended Novembeer 30,
------------------------------------
($ in thousands) 2004 2003 $ Change % Change
----------- ------------- ------------ ------------
Auto Related $ 3 $ 5 $ (2) -40%
Bad Debt 19 103 (84) -82%
Delivery and Postage 13 16 (3) -19%
Fees 36 62 (26) -42%
Insurance and Office 83 111 (28) -25%
Professional Fees 2,290 733 1,557 212%
Rent 94 137 (43) -31%
Repairs and Maintenance 12 4 8 200%
Travel 88 56 32 57%
Taxes 132 3 129 4300%
Telephone and Utilities 156 181 (25) -14%
Other 23 13 10 77%
------------ ------------ ----------- -----------
Total Operating Expenses $ 2,949 $ 1,424 $ 1,525 107%
============ ============ ============ ===========
Operating Expenses. For the three months ended November 30, 2004,
operating expenses increased by 53% to $4,342,000 as compared to $2,839,000 for
the three months ended November 30, 2003. The primary fluctuations that occurred
as evidenced by the two preceding tables immediately above are discussed below:
o A $560,000 decrease in salaries and related costs. The
decrease was attributable to a market-to-market adjustment
of $336,000, reducing the original guarantee liability from
$4,074,000 at August 31, 2004. The adjustment to
compensation is variable until the options are exercised by
key employees. This reflects a guaranteed compensation of
the modified options equivalent to $1.75 less the warrant
strike price.
o A $522,000 increase in depreciation and amortization, due
principally to amortization of intangible assets of $656,000
not reflected in the prior-year quarter ended November 30,
2003.
o A $525,000 increase in other support costs, the components
of which are set forth on the table included immediately
above. Included in this increase was a $129,000 increase in
property taxes recorded against the Company's BDS
infrastructure; a $1,557,000 increase in professional fees
that included costs associated with 404 compliance, year-end
audit, consulting and litigation; offset by an $84,000
decrease in bad debt, a $43,000 decrease in rent expense and
an $80,000 decrease in telephone, utilities, fees and
insurance.
o A $24,000 increase in research and development expenses,
primarily consisting of the Company's continued investment
in HDTV-ready IP set-top boxes for hospitality and broadband
customers and the SatMAX satellite voice and data
communications products for military, government and
commercial customers.
Net Loss For the three months ended November 30, 2004, Eagle's net loss
was $4,448,000, compared to a net loss of $8,461,000 during the three months
ended November 30, 2003.
Changes in Cash Flow. Eagle's operating activities used net cash of
$870,000 in the three months ended November 30, 2004, compared to use of net
cash of $490,000 in the three months ended November 30, 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
$2,669,000 combined with $909,000 of cash provided by fluctuations in working
capital requirements consisting of the combination of accounts receivable,
inventory, prepaid expenses, accounts payable and accrued expenses. Eagle's
investing activities used net cash of $188,000 in the three months ended
November 30, 2004, compared to $269,000 in the three months ended November 30,
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 used net cash of $519,000 in the three months ended
November 30, 2004, compared to $5,608,000 of cash provided in the three months
ended November 30, 2003. The decrease resulted from less borrowing activities
and the paying off of current debt during the three months ended November 30,
2004.
Liquidity and Capital Resources: Current assets for the three months
ended November 30, 2004, totaled $4,311,000 (includes cash and cash equivalents
of $474,000) as compared to $5,093,000 reported for the year ended August 31,
2004. During the three months ended November 30, 2004, Eagle received net
proceeds of $700,000 through the sale of marketable securities held as
short-term investments and has retired or reduced certain of its notes payable
and accrued expenses.
21
The Company anticipates that it will incur significantly less capital
expenditures for broadband fiber infrastructure 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 their own
fiber networks. Historically, the Company built out these networks, thereby
incurring significant capital expenditures. The Company incurred approximately
$144,000 in capital expenditures during the three months ended November 30,
2004. The Company currently intends to continue its nationwide expansion into
the delivery of bundled digital services using partnerships and joint marketing
agreements funded through cash in amounts equal to or exceeding expenditures in
fiscal 2005 as well as through equity securities.
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 $3,586,000, $13,878,000 and $13,341,000 for fiscal years
2002, 2003 and 2004, respectively. During the first three months of fiscal 2005
ended November 30, 2004, the Company retired $3,785,000 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.
Historically, we have financed operations through the sale of debt and
equity securities. In fiscal 2005 we raised $850,000 cash through the issuance
of common stock upon the exercise of derivative 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. Management believes that it will fund operations for the next twelve
months from current cash and cash equivalents and from future financing. Though
we have been successful at raising additional capital on a best efforts basis in
the past, we can provide no assurance that we will be successful in any future
best-efforts financing endeavors. 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.
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 $34,585,000 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, 2004, to assess the fair value of the intangible
assets. There were a number of significant and complex assumptions used in the
calculation of the fair value of the intangible assets. If any of these
assumptions prove to be incorrect, the Company could be required to record a
material impairment to its intangible assets. The assumptions included
significant market penetration in its current markets under contract and
significant market penetration in markets where they are currently negotiating
contracts.
The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing basis. An
impairment loss would be deemed necessary when the estimated non-discounted
future cash flows are less than the carrying net amount of the asset. If an
asset were deemed to be impaired, the asset's recorded value would be reduced to
fair market value. In determining the amount of the charge to be recorded, the
following methods would be utilized to determine fair market value (i) quoted
market prices in active markets, (ii) estimate based on prices of similar assets
and (iii) estimate based on valuation techniques. The Company tested the fair
value of its goodwill and intangibles as of August 31, 2004, and determined that
these net assets totaling $35,238,000 were not impaired.
22
Revenue Recognition
The Company designs, manufactures, markets and services its products
and services under the name of Eagle Broadband, Inc. and its subsidaries.
The Company records revenues from its fixed-price , long-term contracts
using the percentage-of-completion method, whereby revenues are recorded based
on construction costs incurred to date as a percentage of estimated total cost
at completion. The percentage-of-completion, determined by using total costs
incurred to date as a percentage or estimated total costs at completion,
reflects the actual physical completion of the project. This method of revenue
recognition is used because management considers total cost to be the best
available measure of progress on the contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used will change within the near term.
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 November 30, 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 for between one and three months of services.
Eagle had deferred revenues of $71,000 and $96,000 as of November 30, 2004, and
August 31, 2004, respectively.
Receivables
For the fiscal year ended November 30, 2004, Eagle accounts receivable
decreased to $1,363,000 from $1,470,000 at August 31, 2004. The majority of this
decrease was due to collections of current receivables and lower than expected
sales on account in the first quarter.
The Company's accounts receivable aging as measured by days sales
outstanding (DSO) totaled 36 days at November 30, 2004 and 29 days at August 31,
2004, on an adjusted basis after recording the write-off's and reserves. The
primary increase in DSO from 29 days at August 31, 2004, to 36 days at November
30, 2004, was attributable to slow paying customers during the first quarter.
The Company's allowance for doubtful accounts totaled $2,324,000 and
$2,396,000 for the three months ended November 30, 2004 and the year ended
August 31, 2004, respectively. These allowance for doubtful accounts amounts
represented 63% and 62% of the gross accounts receivable balances for the three
months ended November 30, 2004 and the year ended August 31, 2004, respectively;
while they likewise represented 77% and 7% of the Company's greater than 90-day
accounts for these same respective time periods.
The Company reviews its accounts receivable balances by customer for
accounts greater than 90 days old and makes a determination regarding the
collectability of the accounts based on specific circumstances and the payment
history that exists with such customers. The Company also takes into account its
prior experience, the customer's ability to pay and an assessment of the current
economic conditions in determining the net realizable value of its receivables.
The Company also reviews its allowances for doubtful accounts in aggregate for
adequacy following this assessment. Accordingly, the Company believes that its
allowances for doubtful accounts fairly represent the underlying collectability
risks associated with its accounts receivable.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivables deemed uncollectible are charged against the
allowance for doubtful accounts.
23
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At November 30, 2004, Eagle's
inventory totaled $1,641,000 as compared to $403,000 at August 31, 2004. The
majority of this increase was due to an increase in raw materials inventory
associated with in-process set-top box manufacturing. Management has
incorporated "just in time" inventory practices to avoid future inventory
obsolesce. Eagle is outsourcing most, if not all, production based on contract
orders from customers.
Recent Accounting Pronouncements
In March 2004, the FASB issued a proposed Statement, "Share-Based
Payment, an amendment of FASB Statements Nos. 123 and 95," that addresses the
accounting for share-based payment transactions in which a Company receives
employee services in exchange for either equity instruments of the Company or
liabilities that are based on the fair value of the Company's equity instruments
or that may be settled by the issuance of such equity instruments. The proposed
statement would eliminate the ability to account for share-based compensation
transactions using the intrinsic method that the Company currently uses and
generally would require that such transactions be accounted for using a
fair-value-based method and recognized as expense in the consolidated statement
of operations. The effective date of the proposed standard is for periods
beginning after June 15, 2005. It is expected that the final standard will be
issued before December 31, 2004 and should it be finalized in its current form,
it will have a significant impact on the consolidated statement of operations as
the Company will be required to expense the fair value of stock option grants
and stock purchases under employee stock purchase plan.
In April 2004, the Emerging Issues Task Force ("EITF") issued Statement
No. 03-06 "Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a
number of questions regarding the computation of earnings per share by companies
that have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the Company when, and if,
it declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 became effective during the quarter ended June 30,
2004, the adoption of which did not have an impact on the calculation of
earnings per share of the Company.
In July 2004, the EITF issued a draft abstract for EITF Issue No.
04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per
Share" ("EITF 04-08"). EITF 04-08 reflects the Task Force's tentative conclusion
that contingently convertible debt should be included in diluted earnings per
share computations regardless of whether the market price trigger has been met.
If adopted, the consensus reached by the Task Force in this Issue will be
effective for reporting periods ending after December 15, 2004. Prior period
earnings per share amounts presented for comparative purposes would be required
to be restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding. Currently, there would be no effect of this proposed statement on
our financial position and results of operations
In September 2004, the EITF delayed the effective date for the
recognition and measurement guidance previously discussed under EITF Issue No.
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. Currently, there would be no
effect of this proposed statement on its financial position and results of
operations.
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 are invested in mortgage and
asset backed securities, mutual funds, money market accounts and common stock.
Accordingly, the Company is subject to both changes in market interest rates and
the equity market fluctuations and risk. There is an inherent roll over risk on
these funds as they accrue interest at current market rates. The extent of this
risk is not quantifiable or predictable due to the variability of future
interest rates. The Company does not believe a change in these rates would have
a material adverse effect on the Company's operating results, financial
condition, and cash flows with respect to invested funds in mortgage and asset
backed securities, mutual funds and money market accounts.
24
Credit Risks
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, but does not require collateral from these
parties. Only one customer, Sweetwater Capital, LLC, represented greater than
10% of the Company's revenues during the three months ended November 30, 2004.
The Company does not believe that the credit risk posed by Sweetwater Capital,
LLC, or any other specific customer would have a material adverse affect on its
financial condition.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Principal Accounting Officer
have evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(be) or Rule 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end our fourth fiscal quarter of 2003. 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. Our Chief Accounting
Officer, instead of our Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of November 30, 2004, and certifies to
such effect pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002.
Our prior Chief Financial Officer resigned in November 2004 and our current
Chief Financial Officer was hired in November 2004. From August 31, 2004 to the
date hereof, our Principal Accounting Officer has performed the function of our
Chief Financial Officer.
Changes in Internal Controls
There has been no change in the Company's internal control over
financial reporting identified in connection with our evaluation as of the end
our first fiscal quarter ended November 30, 2004, that has materially affected,
or is reasonably likely to materially affect, the Company's internal controls
over financial reporting.
Part 2. - Other Information
Item 1 - Legal Proceedings
For a description of certain legal matters, refer to Part 1, Item 1. -
"Consolidated Financial Statements," Note 11 - "Commitments and Contingent
Liabilities" under the heading Legal Proceedings.
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 (see Note
11).
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
(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.
25
(b) Reports on Form 8-K
The following reports were furnished on Form 8-K during the three
months ended November 30, 2003:
A report on Form 8-K, announcing information under Item 4 of the
report, was filed on September 11, 2003 with the Securities and Exchange
Commission.
A report on Form 8-K, announcing information under Item 5 of the
report, was filed on September 30, 2003 with the Securities and Exchange
Commission.
A report on Form 8-K, announcing information under Item 5 of the
report, was filed on October 3, 2003 with the Securities and Exchange
Commission.
A report on Form 8-K, announcing information under Item 5 of the
report, was filed on October 28, 2003 with the Securities and Exchange
Commission.
(c) Exhibit Listing
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Eagle Wireless International, Inc. Articles of
Incorporation, as Amended (incorporated by reference to
Exhibit 3.1 of Form SB-2 file no. 333-20011)
Exhibit 3.2 Amended and Restated Eagle Wireless International, Inc.
Bylaws (Incorporated by reference to Exhibit 3.2 of Form
10-KSB for the fiscal year ended August 31, 2001, filed
November 16, 2001)
Exhibit 4.1 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of Form SB-2 file no.
333-20011)
Exhibit 10.1 Asset Purchase Agreement between Eagle Telecom
International, Inc., a Delaware corporation and Eagle
Telecom International, Inc., a Texas corporation
(incorporated by reference to Exhibit 10.1 of Form SB-2
file no. 333-20011)
Exhibit 10.2 Stock Option Plan (incorporated by reference to Exhibit
10.2 of Form SB-2 file no. 333-20011) Exhibit 10.3
Agreement and Plan of Reorganization dated September 15,
2000 (incorporated by reference to Exhibit 10.1 of Form
S-4 file no. 333-49688)
Exhibit 10.4 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Comtel
Communications, Inc. (incorporated by reference to
Exhibit 10.4 of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000)
Exhibit 10.5 Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Atlantic
Pacific Communications, Inc. (incorporated by reference
to Exhibit 10.5 of Form 10-KSB for the fiscal year ended
August 31, 2000, filed December 13, 2000) Exhibit 10.6
Stock Purchase Agreement between Eagle Wireless
International, Inc. and the shareholders of Etoolz, Inc.
(incorporated by reference to Exhibit 10.6 of Form
10-KSB for the fiscal year ended August 31, 2000, filed
December 13, 2000)
Exhibit 21.1 List of Subsidiaries (incorporated by reference to
Exhibit 21.1 of Form S-4 file no. 333-49688)
Exhibit 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
Exhibit32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
26
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: January 18, 2005
By: /s/ David A. Weisman
--------------------------------------
David A Weisman
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ Eric Blachno
--------------------------------------
Eric Blachno
Chief Financial Officer
/s/ Tom Matura
--------------------------------------
Tom Matura
Corporate Controller
(Principal Financial &
Accounting Officer)
27