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 FEBRUARY 28, 2005
[ ] 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)
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Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
As of April 5, 2005, there were 249,022,536 shares of common stock outstanding.
EAGLE BROADBAND, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended February 28, 2005
Table of Contents
Part 1 -- Financial Information Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at February 28, 2005, and August 31, 2004 1
Consolidated Statements of Operations for the Three Months and Six Months Ended
February 28, 2005, and February 29, 2004 2
Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended
February 28, 2005, and Twelve Months Ended August 31, 2004 3
Consolidated Statements of Cash Flows for the Six Months Ended
February 38, 2005, and February 29, 2004 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
Part 2 -- Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
Signatures 24
Part 1 -- Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
February 28, August 31,
2005 2004
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 5,441 $ 2,051
Securities available for sale - 551
Accounts receivable, net 2,236 1,470
Inventories 1,771 403
Net investment in direct financing leases 446 291
Prepaid expenses 486 327
------------ ------------
Total current assets 10,380 5,093
------------ ------------
Property and equipment
Operating equipment 35,274 36,415
Less accumulated depreciation (8,125) (7,837)
------------ ------------
Total property and equipment 27,149 28,578
------------ ------------
Other assets:
Deferred costs - -
Net investment in direct financing leases 844 623
Goodwill, net 4,095 4,095
Contract rights, net 20,721 21,678
Customer relationships, net 5,192 5,431
Other intangible assets, net 3,920 4,034
Other assets 680 679
------------ ------------
Total other assets 35,452 36,540
------------ ------------
Total assets $ 72,981 $ 70,211
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,529 $ 4,445
Accrued expenses 6,282 9,647
Notes payable 1,856 5,920
Deferred revenue 248 96
------------ ------------
Total current liabilities 13,915 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 February 28, 2005, and
August 31, 2004, 245,953,000 and
205,509,000, respectively 246 206
Additional paid in capital 230,748 208,051
Accumulated deficit (171,928) (157,106)
Accumulated comprehensive income (loss) - (1,048)
------------ ------------
Total shareholders' equity 59,066 50,103
------------ ------------
Total liabilities and shareholders' equity $ 72,981 $ 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 For the six months
ended February 28, ended February 28,
(or February 29, (or February 29,
as appropriate) as appropriate)
---------------------- ----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales:
Structured wiring $ 369 $ 125 $ 632 $ 517
Broadband services 524 2,533 1,740 4,096
Products 1,754 1,086 1,779 1,447
Other 36 - 60 81
---------- ---------- ---------- ----------
Total sales 2,683 3,744 4,211 6,141
---------- ---------- ---------- ----------
Costs of goods sold:
Direct labor and related
costs 522 391 784 852
Products and integration
service 2,164 301 2,203 438
Impairment, slow moving
and obsolete inventory - - - -
Structured wiring labor
and materials 332 56 506 261
Broadband services costs 339 2,057 1,258 2,246
Depreciation and
amortization 286 285 576 571
Other manufacturing costs - 9 - 26
---------- ---------- ---------- ----------
Total costs of goods sold 3,643 3,099 5,327 4,394
---------- ---------- ---------- ----------
Gross profit (960) 645 (1,116) 1,747
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative:
Salaries and related
costs 3,144 5,844 3,544 6,802
Advertising and
promotion 40 2 50 21
Depreciation and
amortization 804 293 1,645 612
Other support costs 2,658 2,666 5,606 4,091
Research and
development 232 147 375 266
Impairment,
write-downs and
restructuring
costs 1,050 - 1,050 -
---------- ---------- ---------- ----------
Total operating expenses 7,928 8,952 12,270 11,792
---------- ---------- ---------- ----------
Loss from operations (8,888) (8,307) (13,386) (10,045)
---------- ---------- ---------- ----------
Other income/(expenses):
Interest income 5 6 9 11
Interest expense (443) (569) (545) (7,649)
Gain (loss) on sale of
assets - (642) - (642)
Gain (loss) on sale of
marketable securities 114 (900) 466
---------- ---------- ---------- ----------
Total other income
(expense) (438) (1,091) (1,436) (7,814)
---------- ---------- ---------- ----------
Net loss (9,326) (9,398) (14,822) (17,859)
---------- ---------- ---------- ----------
Other comprehensive loss:
Unrealized holding gain
(loss) - (255) 54
---------- ---------- ---------- ----------
Total other comprehensive
loss $ - $ (255) $ $ 54
========== ========== ========== ==========
Comprehensive losses $ (9,326) $ (9,653) $ (14,822) $ (17,805)
========== ========== ========== ==========
Net loss per common
share:
Basic $ (0.04) $ (0.05) $ (0.07) $ (0.10)
Diluted $ (0.04) $ (0.05) $ (0.07) $ (0.10)
Comprehensive loss $ (0.04) $ (0.05) $ (0.07) $ (0.10)
See accompanying notes to consolidated financial statements.
2
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Common Stock Additional Accumulated Total
--------------------- Preferred Paid in Retained Comprehensive Shareholders'
Shares Value Stock Capital Earnings Income Equity
---------- ---------- ---------- ----------- ----------- -------------- --------------
Total shareholders' equity
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 six months
ended
February 28, 2005
Net loss - - - - (14,822) - (14,822)
New stock issued to
shareholders: -
For services and
compensation 6,811 7 - 5,687 - - 5,694
For retirement of debt and
liabilities 13,633 13 - 9,526 - - 9,539
Proceeds from sale of
common stock, net 20,000 20 - 7,484 - - 7,504
Beneficial conversion
features on convertible
debentures - - - - - - -
Unrealized holding loss - - - - 1,048 1,048
---------- ---------- ---------- ----------- ----------- -------------- --------------
Total shareholders' equity
as of February 28, 2005 245,953 $ 246 - $ 230,748 $ (171,928) - $ 59,066
========== ========== ========== =========== =========== ============== ==============
See accompanying notes to consolidated financial statements.
3
EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended
-----------------------------
February 28, February 29,
2005 2004
------------ ------------
Cash flows from operating activities
Net loss $ (14,822) $ (17,859)
------------ ------------
Adjustments to reconcile net loss to net
cash
Used by operating activities:
Impairment, write-downs and
restructuring costs 1,050 -
(Gain)/loss on sale of assets 1,048 611
Interest for beneficial conversion
value - 6,912
Depreciation and amortization 2,221 1,183
Stock issued for interest expense 474 108
Stock issued for services rendered 5,220 8,423
Provision for bad debt 20 196
(Increase)/decrease in accounts
receivable (786) (2,412)
(Increase)/decrease in inventories (1,368) (873)
(Increase)/decrease in prepaid
expenses (159) 265
Increase/(decrease) in accounts
payable 1,084 1,723
Increase/(decrease) in accrued
expenses 2,671 (1,442)
------------ ------------
Total Adjustment 11,475 14,694
------------ ------------
Net cash provided/(used) by operating
activities (3,347) (3,165)
------------ ------------
Cash flows from investing activities
(Purchase)/disposal of property and
equipment (530) (214)
Increase/(decrease) deferred costs - 334
Increase/(decrease) in intangible
costs (2) -
Increase/(decrease) in marketable
securities 551 140
(Increase)/decrease in other assets (1) 133
Gross equipment purchase for direct
financing leases (641) -
Principal collections on direct
financing leases 76 -
------------ ------------
Net cash provided/(used) by investing
activities (547) 393
------------ ------------
Cash flows from financing activities
Increase/(decrease) in notes payable
and long-term debt (220) 5,563
Proceeds from sale of common stock,
net 7,504 -
Treasury stock - -
------------ ------------
Net cash provided/(used) by financing
activities 7,284 5,563
------------ ------------
Net increase/(decrease) in cash 3,390 2,791
Cash at the beginning of the period 2,051 824
------------ ------------
Cash at the end of the period $ 5,441 $ 3,615
============ ============
Supplemental disclosure of cash flow
information:
Net cash paid during the year for:
Interest $ 43 $ 312
Income taxes $ - $ -
Supplemental non-cash investing activities (See Note 18) and changes in
shareholders equity.
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 communications technology and services that aim to
create new revenue opportunities for broadband providers and enhance
communications for government, military and enterprise customers.
Eagle leverages years of proven experience delivering advanced
IP-based broadband bundled services to provide service provider
partners with a way to deliver next-generation entertainment,
communications and security services to their subscribers. Our
product offerings include IPTVComplete(TM), the fastest, lowest cost
way for broadband providers to deliver the most competitive IP video
services; the Media Pro line of HDTV-ready IP set-top boxes that
enable broadband providers and hotel operators to maximize revenues
by delivering state-of-the-art, interactive entertainment services;
and the SatMAX(TM) satellite communications system that provides
government, military, homeland security and enterprise customers with
reliable non-line-of-sight voice and data communications from any
location on Earth.
The condensed balance sheet of the Company as of February 28, 2005,
the related condensed statements of operations for the three months
ended February 28, 2005, and February 29, 2004, and the statements of
cash flows for the three months ended February 28, 2005, and February
29, 2004, included in the condensed financial statements have been
prepared by the Company without audit. In the opinion of management,
the accompanying condensed financial statements include all
adjustments (consisting of normal, recurring adjustments) necessary
to summarize fairly the Company's financial position and results of
operations. The results of operations for the six months ended
February 28, 2005, are not necessarily indicative of the results of
operations for the full year or any other interim period. The
information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and Financial Statements
and notes thereto included in the Company's August 31, 2004, Form
10-K.
NOTE 2 -- Related Party Transactions:
In February 2004, compensation for certain officers and key employees
under incentive clauses of their employment contracts (i) includes a
non-cash expense of $4,493,000 incurred upon the modification of
outstanding options for 4,200,000 common shares and (ii) reflects a
guaranteed compensation of the modified options equivalent to $1.75
less the option strike price, which was an additional $4,074,000
accrued in August 2004. The amount of the accrual varies at each
quarter end depending on the stock market value fluctuation or upon
exercise of options subject to employment agreements. At quarter end
February 28, 2005, the company accrued net $766,000 in compensation.
An additional 400,000 shares were earned under the option agreements
for the second quarter that will be guaranteed at $1.75, resulting in
an additional accrual of $549,000. The total amount of the guarantee
liability at February 28, 2005, is $5,389,000. The monthly principal
amount of payments for exercise options is $266,000 to be paid out
over the current calendar year.
NOTE 3 -- Accounts Receivable:
Accounts receivable consist of the following (in thousands):
Februry 28, August 31,
2005 2004
------------ ------------
Accounts receivable $ 3,452 $ 3,866
Completed contracts 835 -
Contract in progress 273 -
Allowance for doubtful accounts (2,324) (2,396)
------------ ------------
Accounts receivable, net $ 2,236 $ 1,470
============ ============
Allowance for doubtful accounts
percentage of accounts receivable 51% 62%
5
NOTE 4 -- Property, Plant and Equipment and Intangible Assets:
Components of property, plant and equipment are as follows (in thousands):
February 28, August 31,
2005 2004
------------ ------------
Automobile $ 143 $ 143
Headend facility and fiber
infrastructure 27,596 27,146
Furniture and fixtures 520 516
Leasehold improvements 183 133
Office equipment 1,027 1,023
Property, manufacturing and equipment 5,805 7,454
------------ ------------
Total property, plant and equipment $ 35,274 $ 36,415
Less accumulated depreciation (8,125) (7,837)
------------ ------------
Net property, plant and equipment $ 27,149 $ 28,578
============ ============
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. Eagle determined that
twenty-year straight-line depreciation method is appropriate for its
headend facility and fiber infrastructure based on industry standards for
these asset types.
Eagle expensed repairs and maintenance of $12,000 and $11,000 for the three
months ended February 28, 2005, and February 29, 2004, respectively;
whereas, it did not have any capitalized major improvements for the same
time periods. Eagle expensed repairs and maintenance of $24,000 and $20,000
for the six months ended February 28, 2005, and February 29, 2004,
respectively; whereas it did not have any capitalized major improvements
for the same time periods.
Components of intangible assets are as follows (in thousands):
February 28, August 31,
2005 2004
------------ ------------
Goodwill $ 5,596 $ 5,596
Accumulated amortization (1,501) (1,501)
------------ ------------
$ 4,095 $ 4,095
============ ============
Contract rights $ 28,691 $ 28,691
Accumulated amortization (7,970) (7,013)
------------ ------------
$ 20,721 $ 21,678
============ ============
Customer relationships $ 7,189 $ 7,189
Accumulated amortization (1,997) (1,758)
------------ ------------
$ 5,192 $ 5,431
============ ============
Other intangible assets $ 6,882 $ 6,839
Accumulated amortization (2,962) (2,805)
------------ ------------
$ 3,920 $ 4,034
============ ============
Total intangibles $ 48,358 $ 48,315
Total accumulated amortization $ (14,430) $ (13,077)
------------ ------------
Net of amortization $ 33,928 $ 35,238
============ ============
6
NOTE 5 -- Notes Payable:
The following table lists the Company's note obligations as of February 28,
2005, and August 31, 2004 (in thousands):
Amount
Annual -------------------------
Interest February 28, August 31,
Rate Due Date 2005 2004
---------- ---------- ------------ ------------
Notes payable:
Investor group 8.0% Demand $ 1,788 $ 4,888
Q-series bonds 12.0% Various - 744
Other Various Various 68 288
------------ ------------
Total notes payable $ 1,856 $ 5,920
------------ ------------
Less current portion 1,856 5,920
------------ ------------
Total long-term debt $ - $ -
============ ============
Eagle entered into an agreement in June 2004 with four accredited
investors, pursuant to which Eagle issued debentures in the principal
amount of $4,888,400, bearing interest at 8% per annum and maturing June
2007, convertible into shares of Eagle common stock together with 5-year
warrants to purchase an aggregate of 1,340,022 shares of common stock at an
exercise price of $1.265 per share. At February 28, 205, $1,788,000 of
convertible debt remains outstanding.
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:
February 28, August 31,
2005 2004
(%) (%)
------------ ------------
U. S. Federal statutory tax rate 34 34
U.S. valuation difference (34) (34)
Effective U. S. tax rate 0 0
Foreign tax valuation 0 0
Effective tax rate 0 0
Income tax expense (benefit) attributable to income from continuing
operations differed from the amounts computed by applying the U.S. Federal
income tax rate of 34% to pretax income from continuing operations as a
result of the following (in thousands):
February 28, August 31,
2005 2004
------------ ------------
Computed expected tax benefit $ (5,039) $ (13,262)
Increase in valuation allowance 5,039 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
February 28, 2005, and August 31, 2004, are presented below (in thousands)
and include the balances of the merged company ClearWorks.net.
Februaray 28, August 31,
2005 2004
------------- ------------
Deferred tax assets:
Net operating loss carry forwards $ 68,645 $ 63,606
Less valuation allowance (68,645) (63,606)
------------- ------------
Net deferred tax assets $ - $ -
============= ============
7
The valuation allowance for deferred tax assets of February 28, 2005, and
August 31, 2004, was $68,645,000 and $63,606,000, respectively. At February
28, 2005, the Company has a net operating loss carry-forward of
$120,890,000, which is available to offset future federal taxable income,
if any, with expirations from 2021 to 2023.
NOTE 7 -- Uncompleted Contracts:
Costs, estimated earnings and billings on uncompleted contracts for the six
months ended February 28, 2005, and February 29, 2004, are summarized as
follows (in thousands):
February 28, February 29,
2005 2004
------------ ------------
Costs incurred on uncompleted
contracts $ 260 $ -
Estimated revenue 14 -
------------ ------------
Gross revenue 274 -
Less: Billings to date (274) -
------------ ------------
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 Options/Warrants
Issued & Outstanding Exercisable
------------------------------ ---------------------------
Class of Expiration February 28, August 31, February 28, August 31,
Warrants Date 2005 2004 2005 2004
- ----------- ------------ ------------ -------------- ------------ ------------
0.41 Sep-08 4,024,994 3,800,000 4,024,994 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 Oct-09 416,660 - 83,332 -
0.62 Oct-09 444,448 - 55,556 -
0.73 Oct-07 25,000 - - -
0.75 Sep-08 500,000 500,000 - -
0.78 Sep-08 200,000 - 200,000 -
0.78 Sep-09 33,332 - 33,332 -
0.78 Jun-09 150,000 - 75,000 -
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
1.13 Sep-08 99,999 - 99,999 -
1.23 Apr-07 25,000 25,000 25,000 -
1.31 Jan-07 25,000 25,000 25,000 25,000
7.50 Apr-08 800,000 800,000 800,000 800,000
ESOP Various 516,120 * 346,002 * 346,002 346,002
------------ -------------- ------------ ------------
8,073,053 ** 5,996,002 ** 6,155,715 2,796,002
============ ============== ============ ============
*Denotes warrants which would have an anti-dilutive effect if currently
used to calculate earnings per share for the three months ended February
28, 2005, 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.
8
NOTE 9 -- Risk Factors:
For the six months ended February 28, 2005, substantially all of the
Company's business activities have remained within the United States and
have been extended to the wireless infrastructure, fiber, cabling, computer
services and broadband industries. Approximately 45% of the Company's
revenues and receivables have been created solely in the state of Texas, 1%
in the international market, and the approximate 54% remainder relatively
evenly over the rest of the nation during the six months ended February 28,
2005; whereas approximately 80% of the Company's revenues and receivables
were created solely in the state of Texas, 0% in the international market,
and the approximate 20% remainder relatively evenly over the rest of the
nation during the six months ended February 29, 2004. Through the normal
course of business, the Company generally does not require its customers to
post any collateral.
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 1% and 0% for the six months ended February 28, 2005, and
February 29, 2004, respectively.
NOTE 11 -- Commitments and Contingent Liabilities:
Leases
For the six months ended February 28, 2005, and February 29, 2004, rental
expenses of approximately $177,000 and $314,000, 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 $ 149,901
2006 299,801
2007 306,180
2008 325,316
2009 243,987
---------------
Total $ 1,325,185
===============
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
9
the Act, and shall have the duty and authority to do all things appropriate
to the accomplishment of the purposes of LLV. The Manager shall be
reimbursed for the direct costs and expenses of its employees and agents
who provide services to LLV.
Allocations of net income and distributions are generally made to each
member in proportion to their respective ownership and will vary from
quarter to quarter depending on capital balance from both parties. Since,
as of February 28, 2005, Eagle has yet to fund the $3 million initial
capitalization contribution, both parties are discussing responsibilities
going forward and are currently operating under an oral agreement.
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.
In November 2004, Palisades Master Fund L.P. sued Eagle Broadband, Inc.,
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.
10
NOTE 12 -- Earnings Per Share:
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per-share amount):
For the six months ended February 28, 2005
------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Net loss $ (14,822) - $ -
Basic EPS:
Income available to common stockholders (14,822) 218,613 (0.07)
Effect of dilutive securities warrants - - -
------------- ------------- -------------
Diluted EPS:
Income available to common stockholders and assumed
conversions $ (14,822) 218,613 $ (0.07)
============= ============= =============
For the six months ended February 29, 2004
------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Net loss $ (17,859) $ - $ -
Basic EPS:
Income available to common stockholders (17,859) 174,614 (0.10)
Effect of dilutive securities warrants - - -
------------- ------------- -------------
Diluted EPS:
Income available to common stockholders and assumed
conversions $ (17,859) $ 174,614 $ (0.10)
============= ============= =============
For the six months ended February 28, 2005, and February 29, 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 February 28, 2005, a total of 516,120 options have been
issued to various employees.
The Company has elected to follow APB 25, "Accounting for Stock Issued to
Employees." Accordingly, since employee stock options are granted at market
price on the date of grant, no compensation expense is recognized. However,
SFAS 123 requires presentation of pro forma net income and earnings per
share as if the Company had accounted for its employee stock options
granted under the fair value method of that statement. The weighted average
fair value of the individual options issued and granted during the six
months ended February 2005, and 2004, is estimated as $1.08 on the date of
grant. Management estimates the average fair value for options granted
during fiscal 2005 to be comparable to those granted in fiscal 2004. The
impact on net loss is minimal; therefore, the pro forma disclosure
requirements prescribed by SFAS 123 are not significant to the Company. The
fair values were determined using a Black-Scholes option-pricing model with
the following assumptions:
February 28, February 29,
2005 2004
------------ ------------
Dividend yield 0.00% 0.00%
Volatility 0.91% 0.91%
Risk-free interest rate 4.00% 4.00%
Expected life 5 5
The pro forma effect on net loss as if the fair value of stock-based
compensation had been recognized as compensation expense on a straight-line
basis over the vesting period of the stock option or purchase right was as
follows for the three months ended February 28, 2005, and February 29,
2004:
11
February 28, February 29,
(in thousands, except share amounts) 2005 2004
------------ ------------
Net loss, as reported $ (14,822) $ (17,859)
Add: Stock-based employee
compensation included in
reported net earnings/(loss),
net of related tax effects -
Less: Stock-based employee
compensation expense determined
under fair-value based method
for all awards, net of related
tax effects (61) -
------------ ------------
Pro forma net earnings/(loss) $ (14,883) $ (17,859)
============ ============
Net loss per share:
As reported $ (0.07) $ (0.10)
Pro forna $ (0.07) $ (0.10)
Diluted net loss per share:
As reported $ (0.07) $ (0.10)
Pro forna $ (0.07) $ (0.10)
Option activity was as follows for the six months ended February 28, 2005:
2005
Weighted-Average
Shares Exercise Price
------------ ----------------
Outstanding at beginning of year 346,002 $ 1.27
Granted 170,118 0.50
Assumed through acquisitions - -
Exercised - -
Forfeited/cancelled - -
------------ ----------------
Outstanding throughout the period 516,120 $ 1.08
============ ================
Exercisable at year end 516,120 $ 1.08
============ ================
Information about options outstanding was as follows at February 28, 2005:
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- -------------- ------------- ------------- ------------ ------------ ------------
$0 - $1.00 379,278 4.50 0.53 379,278 0.53
$1.01 - $2.00 111,342 4.00 1.73 111,342 1.73
$2.01 - $7.50 25,500 4.50 6.55 25,500 6.55
------------- ------------
516,120 1.08 516,120 1.08
============= ============
NOTE 14 -- Retirement Plans:
During October 1997, the Company initiated a 401(k) plan for its employees,
funded through the contributions of its participants. Prior to March 2003,
the Company matched the participant's contribution up to 3% of their
salary. Subsequent to March 2003, the plan was amended and the Company
match became elective. For the six months ended February 28, 2005, and
February 29, 2004, employee contributions were approximately $63,458 and
$30,891, respectively. The Company matched $0 and $0, respectively, for
those same periods.
NOTE 15 -- Major Customer:
The Company had gross revenues of $2,683,000 and $3,744,000 for the three
months ended February 29, 2005, and February 29, 2004, respectively. The
three-month period ended February 28, 2005, included $1,729,000 or 64% of
the quarter's total product sales from General Dynamics. There were no
other customers individually that represented greater than 10% of the
revenues in the three months ended February 28, 2005.
12
The Company had gross sales of $4,211,000 and $6,141,000 for the six months
ended February 28, 2005, and February 29, 2004, respectively. The six-month
period ended February 28, 2005, included $880,000 or 21% of the period's
total sales from Sweetwater Security Capital, LLC, that were executed with
the Company's security-monitoring service subsidiary, DSS Security, Inc.
Additionally, the six months ended February 28, 2005, included $1,729,000
or 41% of the six months total product sales from General Dynamics.
NOTE 16 - Industry Segments:
This summary reflects the Company's current and past operating
segments, as described below. All have discontinued operations except
Eagle Broadband, Inc., Eagle Broadband Services, Inc., and DSS
Security, Inc.:
Eagle:
------
Eagle Broadband, Inc., (Eagle) is a provider of broadband, Internet
Protocol (IP) and communications technology and equipment with
related software and broadband products (including Eagle Wireless
International, Inc.; BroadbandMagic; and Etoolz, Inc., for this
summary).
EBS/DSS:
--------
Eagle Broadband Services, Inc., (EBS) currently provides
broadband services to residential and business customers in
select communities.
DSS Security, Inc., (DSS) is a wholesale security monitoring
company.
ClearWorks Communications, Inc., provided solutions to
consumers by implementing technology both within the
residential community and home, through the installation of
fiber optic backbones to deliver voice, video and data
solutions directly to consumers. (Has discontinued
operations.)
APC/HSI:
-------
Atlantic Pacific Communications, Inc., (APC) specialized in
providing professional data and voice cable and fiber optic
installations through project management services on a
nationwide basis for multiple site-cabling installations for
end users and re-sellers. (Has discontinued operations.)
ClearWorks Home Systems, Inc., (HSI) specialized in providing
fiber optic and copper based structured wiring solutions and
audio and visual equipment to single-family and multi-family
dwelling units. (Has discontinued operations.)
UCG:
----
United Computing Group, Inc., (UCG) was an accelerator company
and computer hardware and software reseller. UCG/INT
maintain a national market presence. (Has discontinued
operations.)
Other:
------
Link Two Communications, Inc., (Link II) was in the development
and delivery of one- and two-way messaging systems. (Has
discontinued operations.)
ClearWorks.net, Inc., (.NET) is inactive with exception of debt
related expenses. (Has discontinued operations.)
Contact Wireless, Inc., is a paging, cellular, and mobile
services provider and reseller. Contact Wireless, Inc.,
assets were sold October 10, 2003. (Has discontinued
operations.)
For the six months ended February 28, 2005
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
--------------------------------------------------------------------
Revenue $ 21 $ 1,740 $ - $ 2,450 $ - $ - $ 4,211
Segment Loss (45) (2,069) (1) (10,200) (1,071) - (13,386)
Total Assets 18 29,025 31 132,039 55,885 (143,683) 72,981
Capital
Expenditures - 439 - 91 - - 530
Depreciation 20 790 1 1,389 21 - 2,221
For the six months ended February 29,2004
(in thousands) APC/HSI EBS/DSS UCG Eagle Other Elim. Consol.
--------------------------------------------------------------------
Revenue $ 517 $ 4,097 $ 428 $ 1,019 $ 80 $ - $ 6,141
Segment Loss (499) (706) (21) (8,785) (34) - (10,045)
Total Assets 461 23,283 182 174,592 57,026 (176,010) 79,534
Capital
Expenditures 228 12 33 - - - 273
Depreciation 88 199 30 811 55 - 1,183
13
Reconciliation of Segment Loss from February 28, February 29,
Operations to Net Loss 2005 2004
- -------------------------------------- ----------- ------------
Total segment loss from operations $ (13,386) $ (10,045)
Total other income (expense) (1,436) (7,814)
------------ ------------
Net loss $ (14,822) $ (17,859)
============ ============
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 $ 2,683
Net earnings (loss) (4,448) (9,326)
Basic loss per share (0.02) (0.04)
Diluted loss per share (0.02) (0.04)
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:
See Note 2 "Related Parity Transactions."
NOTE 19 -- Equity Financing
On February 14, 2005, Eagle completed the sale of 20 million shares of its
common stock to certain investors at a price of $0.41 per share. The net
proceeds to Eagle from this offering, after placement agent fees and
offering expenses, were $7,504,000.
NOTE 20 -- Subsequent Events:
Eagle entered into a note agreement with H. Dean Cubley in December 2003 in
the principal amount of $2,332,000 (the "Note"), of which the Company has
paid $407,000 to date. On March 23, 2005, the Company received a notice of
default from Dr. Cubley stating that the Company failed to make a payment
of $110,713 on March 11, 2005, which payment was subsequently made to Dr.
Cubley on March 24, 2005. Pursuant to the terms of the Note, all
indebtedness under the Note becomes immediately due and payable, with
interest accruing at the highest rate permitted by applicable law from and
after an event of default. The Company does not believe that the notice
presents a valid claim of default and intends to respond appropriately.
The Company responded to Dr. Cubley's default notice dated March 23, 2005,
and subsequently received a letter from Dr. Cubley which stated his
position relative to the matter. The reason the company made the payment on
March 24, 2005, is because that is the date the company believed the
payment was due. With respect to his notice of default, Dr. Cubley has
acknowledged the following:
1) Eagle paid Dr. Cubley $110,712.72 on March 24, 2005, which constituted
payment of the entire principal amount referenced in the notice of default
for the payment that was due on March 11, 2005.
2) There is currently no dispute between Dr. Cubley and the company and he
is 100% supportive of the company.
3) Dr. Cubley sent the initial notice of default on advice of counsel
simply to protect his legal rights.
4) Dr. Cubley has no intention of demanding an acceleration of the note
obligation at this time as long as the company makes the monthly note
payments in a timely fashion.
14
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.
The Company is a leading provider of broadband, Internet Protocol (IP) and
communications technology and services that aim to create new revenue
opportunities for broadband providers and enhance communications for government,
military and enterprise customers. Eagle leverages years of proven experience
delivering advanced IP-based broadband bundled services to provide service
provider partners with a way to deliver next-generation entertainment,
communications and security services to their subscribers. Our product offerings
include IPTVComplete(TM), the fastest, lowest cost way for broadband providers
to deliver the most competitive IP video services; the Media Pro line of
HDTV-ready IP set-top boxes that enable broadband providers and hotel operators
to maximize revenues by delivering state-of-the-art, interactive entertainment
services; and the SatMAX(TM) satellite communications system that provides
government, military, homeland security and enterprise customers with reliable
non-line-of-sight voice and data communications from any location on Earth.
Results of Operations
Three and Six Months Ended February 28, 2005, Compared to Three and Six Months
Ended February 29, 2004
The following table sets forth summarized consolidated financial
information for the three months and six months ended February 28, 2005 and
February 29, 2004:
Condensed Financial Information
Three Months Ended February 28, Six Months Ended February 28,
(or February 29, as appropriate) (or February 29, as appropriate)
--------------------------------------- ---------------------------------------
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
--------- --------- --------- --------- --------- --------- --------- ---------
Total sales $ 2,683 $ 3,744 $ (1,061) -28% $ 4,211 $ 6,141 $ (1,930) -31%
Cost of goods sold 3,643 3,099 544 18% 5,327 4,394 933 21%
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit (960) 645 (1,605) -249% (1,116) 1,747 (2,863) -164%
--------- --------- --------- --------- --------- --------- --------- ---------
Percent of total sales -36% 17% -53% -308% -27% 28% -55% -193%
Operating expenses 7,928 8,952 (1,024) -11% 12,270 11,792 478 4%
--------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations (8,888) (8,307) (581) 7% (13,386) (10,045) (3,341) 33%
--------- --------- --------- --------- --------- --------- --------- ---------
Other income/(expense) (438) (1,091) 653 -60% (1,436) (7,814) 6,378 -82%
--------- --------- --------- --------- --------- --------- --------- ---------
Net gain/(loss) (9,326) (9,398) 72 -1% (14,822) (17,859) 3,037 -17%
Unrealized holding gain/(loss) (255) 255 -100% 54 (54) -100%
--------- --------- --------- --------- --------- --------- --------- ---------
Comprehensive loss $ (9,326) $ (9,653) $ 327 -3% $(14,822) $(17,805) $ 2,983 -17%
========= ========= ========= ========= ========= ========= ========= =========
Overview
For the three months ended February 28, 2005, Eagle's business operations
reflected emphasis and further expansion of its bundled digital services
(Internet, video, voice and security) for residential and business customers.
The Company's consolidated operations generated revenues of $2,683,000 with a
corresponding negative gross margin of $960,000 for the three months ended
February 28, 2005. The overall decrease of 28% in revenues for the three months
ended February 28, 2005, as compared to the three months ended February 29,
2004, was primarily attributable to a $2,009,000 decrease in the Company's sales
of bundled digital services, offset by an increase in structured wiring of
$244,000 and an increase in product sales of $668,000.
The Company incurred a net loss of $9,326,000 for the three months ended
February 28, 2005. The loss was attributable primarily to $10,033 of non-cash
charges, increased operating expenses, and negative gross margin.
The Company's net loss for the three months ended February 28, 2005,
included approximately $1,090,000 in depreciation and amortization expenses and
$1,664,000 in expenses associated with a net increase in professional services
fees, $3,144,000 in salary expense, and a loss on the Impairment of Link-Two
Communications' assets of $1,050,000. Management determined that the value of
assets were nominal after a diligent review of the assets in the marketplace.
15
The Company is continuing the development and expansion of the its bundled
digital services model of assisting broadband and service provider partners with
the delivery of voice, video and data on a nationwide basis; increased sales
efforts for telephone, cable, Internet and security services; securing of
long-term relationships for content for the bundled broadband services
activities; and marketing/sales agreements with other companies for the sale of
broadband products and services. On a nationwide basis, we are entering into
business relationships with technology companies and service providers to
provide bundled broadband services to real estate developers and/or
municipalities that currently have or are in the process of completing
construction of their own broadband networks.
Sales Information
The following table sets forth summarized sales information for the three
months ended February 28, 2005, and February 29, 2004:
Three Months Ended February 28
(or 29 as appropriate),
------------------------------------------
% of % of
($ in thousands) 2005 Total 2004 Total $Change % Change
--------- --------- --------- --------- --------- ---------
Structured wiring $ 369 14% $ 125 3% $ 244 195.2%
Broadband services 524 20% 2,533 68% (2,009) -79.3%
Products 1,754 65% 1,086 29% 668 61.5%
Other 36 1% - 0% 36 -100.0%
--------- --------- --------- --------- --------- ---------
Total sales $ 2,683 100% $ 3,744 100% $ (1,061) -28.3%
========= ========= ========= ========= ========= =========
Six Months Ended February 28
(or 29 as approriate),
------------------------------------------
% of % of
($ in thousands) 2005 Total 2004 Total $Change % Change
--------- --------- --------- --------- --------- ---------
Structured wiring $ 632 15% $ 517 8% $ 115 22.2%
Broadband services 1,740 41% 4,096 67% (2,356) -57.5%
Products 1,779 42% 1,447 24% 332 22.9%
Other 60 1% 81 1% (21) -25.9%
--------- --------- --------- --------- --------- ---------
Total sales $ 4,211 100% $ 6,141 100% $ (1,930) -31.4%
========= ========= ========= ========= ========= =========
Net Sales. For the three months ended February 28, 2005, net sales
decreased to $2,683,000 from $3,744,000, compared to the three-months ended
February 29, 2004. The overall decrease of 28% was attributable to a $2,009,000
decrease in bundled digital services, offset with an increase of $668,000
primarily attributable to $1,729,000 in the Company's product sales and an
increase of $244,000 in structured wiring services. The $2,009,000 decrease in
sales of the Company's broadband services during the three months ended February
28, 2005, was primarily attributable to a prior year sale of security contracts
of $2,007,000 by the Company's security-monitoring subsidiary, DSS Security,
Inc. The $244,000 increase in structured wiring sales is attributable to the
Company's decision to pursue commercial structured wiring and cabling
opportunities on a direct basis outside of the BDS model.
For the six months ended February 29, 2005, net sales decreased to
$4,211,000 from $6,141,000 during the six months ended February 29, 2004. The
overall decrease of 31% was attributable to a decrease of $2,356,000 in the
Company's BDS services, offset with an increase of $332,000 in the Company's
product sales and an increase of $115,000 in structured wiring. The $2,356,000
decrease in sales of the Company's broadband services during the six months
ended February 28, 2004, was primarily attributable to a prior year sale of
security contracts of $2,844,000 by the Company's security-monitoring
subsidiary, DSS Security, Inc., and is offset by security systems sales to
Sweetwater Capital LLC of $880,000. Also, the Company's broadband services sales
decreased by approximately $447,000 in the six months ended February 28, 2005.
The 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 increase of $115,000 in structured wiring sales is attributable to the
Company's decision to pursue commercial structured wiring and cabling
opportunities on a direct basis outside of the its BDS model.
16
Cost of Goods Sold
The following table sets forth summarized cost of goods sold information
for the three and six months ended February 28, 2005, and February 29, 2004:
Three Months Ended February 28, Six Months Ended February 28,
(or February 29, as appropriate) (or February 29, as appropriate)
------------------------------------------ ------------------------------------------
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
--------- --------- --------- --------- --------- --------- --------- ---------
Direct labor and related
costs $ 522 $ 391 $ 131 33.5% $ 784 $ 852 $ (68) -8.0%
Products and integration
service 2,164 301 $1,863 618.9% 2,203 438 $1,765 403.0%
Impairment slow moving and
obsolete inventory - - $- 0.0% - - $- 0.0%
Structured wiring labor and
material 332 56 $276 13.4% 506 261 $245 10.9%
Broadband services costs 339 2,057 $(1,718) -602.8% 1,258 2,246 $(988) -173.0%
Depreciation and
amortization 286 285 $1 11.1% 576 571 $5 19.2%
Other manufacturing costs - 9 $(9) -0.3% - 26 $(26) -0.6%
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses $ 3,643 $ 3,099 $ 544 17.6% $ 5,327 $ 4,394 $ 933 21.2%
========= ========= ========= ========= ========= ========= ========= =========
For the three months ended February 28, 2005, cost of goods sold increased
by 18% to $3,643,000 from $3,099,000 as compared to the three months ended
February 29, 2004. The overall increase of $544,000 was primarily attributable
to the Company's cost associated with product sales to General Dynamics. The
Company's overall negative gross profit percentage was 36% for the three months
ended February 28, 2005, compared to an overall gross profit percentage of 17%
for the three months ended February 29, 2004. This significant decrease in gross
profit percentage is primarily attributable to (i) additional costs of $759,000
for design changes and expedite charges incurred due to a change in product
requirements from a key customer and (ii) depreciation expenses in our BDS model
associated with the buildout of the Company's BDS infrastructure.
For the six months ended February 28, 2005, cost of goods sold increased by
21% to $5,327,000 from $4,394,000 as compared to the six months ended February
29, 2004. The overall increase of $933,000 was primarily attributable to the
Company's costs associated with the product sales to Sweetwater Capital LLC and
General Dynamics. The Company's overall negative gross profit percentage of 27%
for the six months ended February 28, 2005, compared to an overall gross profit
percentage of 28% for the six months ended February 29, 2004. This significant
decrease in gross profit percentage is primarily attributable to (i) additional
costs of $759,000 for design changes and expedite charges incurred due to a
change in product requirements from a key customer and (ii) depreciation
expenses in our BDS model associated with the buildout of the Company's BDS
infrastructure.
Operating Expenses
The following table sets forth summarized operating expense information for
the three months and six months ended February 28, 2005, and February 29, 2004:
Three Months Ended February 28, Six Months Ended February 28,
(or February 29, as appropriate) (or February 29, as appropriate)
------------------------------------------ ------------------------------------------
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
--------- --------- --------- --------- --------- --------- --------- ---------
Salaries and related costs $ 3,144 $ 5,844 $ (2,700) -46% $ 3,544 $ 6,802 $ (3,258) -48%
Advertising and promotion 40 2 38 1900% 50 21 29 138%
Depreciation and
amortization 804 293 511 174% 1,645 612 1,033 169%
Research and development 232 147 85 58% 375 266 109 41%
Other support costs 2,658 2,666 (8) 0% 5,606 4,091 1,515 37%
Impairment, write-downs and
restructuring costs 1,050 - 1,050 - 1,050 - 1,050 -
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses $ 7,928 $ 8,952 $ (1,024) -11% $ 12,270 $ 11,792 $ 478 4%
========= ========= ========= ========= ========= ========= ========= =========
17
The following table breaks out "Other Support Costs" information for the
three and six months ended February 28, 2005, and February 29, 2004:
Three Months Ended February 28, Six Months Ended February 28,
(or February 29, as appropriate) (or February 29, as appropriate)
------------------------------------------ ------------------------------------------
($ in thousands) 2005 2004 $Change % Change 2005 2004 $Change % Change
--------- --------- --------- --------- --------- --------- --------- ---------
Auto related $ 10 $ 2 $ 8 400% $ 14 $ 12 $ 2 17%
Bad debt 1 92 (91.00) -99% 20 196 (176.00) -90%
Contract labor * - 266 (266.00) -100% - 592 (592.00) -100%
Delivery/postage 15 9 6.00 67% 28 25 3.00 12%
Fees 64 284 (220.00) -77% 101 346 (245.00) -71%
Insurance and office 263 246 17.00 7% 415 436 (21.00) -5%
Professional fees 1,664 874 790.00 90% 3,954 1,281 2,673.00 209%
Rent 136 177 (41.00) -23% 229 314 (85.00) -27%
Repairs and maintenance 12 11 1.00 9% 24 20 4.00 20%
Travel 112 46 66.00 143% 200 102 98.00 96%
Taxes 193 555 (362.00) -65% 324 558 (234.00) -42%
Telephone and utilities 130 89 41.00 46% 216 191 25.00 13%
Other 58 15 43.00 287% 81 18 63.00 350%
--------- --------- --------- --------- --------- ---------
Total operating expenses $ 2,658 $ 2,666 $ (8) 0% $ 5,606 $ 4,091 $ 1,515 37%
========= ========= ========= ========= ========= =========
*Current fiscal year contract labor expense is $18,000 and is reported under
salary and expense
Operating Expenses. For the three months ended February 28, 2005, operating
expenses decreased by 11% to $7,928,000 as compared to $8,952,000 for the three
months ended February 29, 2004. The primary fluctuations that occurred as
evidenced by the two preceding tables immediately above are discussed below:
o A $2,700,000 decrease in salaries and related costs. The decrease was
primarily attributable to a prior year non-cash expense of $4,493,000
incurred upon the modification of certain outstanding options to
purchase 4,200,000 common shares, offset with a net market-to-market
adjustment of $766,000. An additional 400,000 shares were earned under
outstanding option agreements during the second quarter to be
guaranteed at $1.75, resulting in an additional accrual of $549,000
and increasing the original guarantee liability to $5,389,000 at
February 28, 2005, 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 $511,000 increase in depreciation and amortization, due principally
to amortization of intangible assets of $656,000 not reflected in the
prior-year quarter ended February 29, 2004.
o An $8,000 decrease in other support costs, the components of which are
set forth on the table included immediately above. Included in this
increase was a $790,000 increase in professional fees that included
costs associated with corporate compliance, consulting and litigation;
offset by a $91,000 decrease in bad debt, a $41,000 decrease in rent
expense, a $266,000 decrease in contract labor (incorporated in salary
expenses in current year), and $362,000 one-time adjustment to capture
the appropriate property tax accrued in prior years.
o An $85,000 increase in research and development expenses, primarily
consisting of the Company's continued investment in IP set-top boxes
for hospitality and broadband customers and the SatMAX satellite voice
and data communications products for military, government and
commercial customers.
o A $1,050,000 increase in impairment primarily consists of Link 2
Communications assets. Management determined that the value of the
assets was nominal after a review of the marketplace.
For the six months ended February 28, 2005, operating expenses increased by
4% to $12,270,000 as compared to $11,792,000 for the six months ended February
29, 2004. The primary fluctuations that occurred as evidenced by the two
preceding tables immediately above are discussed below:
o A $3,258,000 decrease in salaries and related costs. The decrease was
primarily attributable to a prior year non-cash expense of $4,493,000
incurred upon the modification of certain outstanding options to
purchase 4,200,000 common shares, offset with a net market-to-market
adjustment of $766,000. An additional 400,000 shares were earned under
the option agreements for second quarter to be guaranteed at $1.75,
resulting in an additional accrual of $549,000 and increasing the
original guarantee liability to $5,389,000 at February 28, 2005, 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 $1,033,000 increase in depreciation and amortization, due
principally to amortization of intangible assets of $1,312,000 not
reflected in the prior-year quarter ended February 29, 2004.
o A $1,515,000 increase in other support costs. Included in the increase
was a $2,673,000 increase in professional fees that included costs
associated with corporate compliance, audits, review fees, consulting
and litigation, offset by a $176,000 decrease in bad debt, a $592,000
18
decrease in contract labor, which is incorporated in salary expenses
in current year, a $245,000 decrease in fees, $85,000 decrease in
rent, and a $234,000 one-time adjustment to capture the appropriate
property tax accrued in prior years.
o A $109,000 increase in research and development expenses, primarily
consisting of the Company's continued investment in IP set-top boxes
for hospitality and broadband customers and the SatMAX satellite voice
and data communications products for military, government and
commercial customers.
o A $1,050,000 increase in impairment primarily consists of Link 2
Communications assets. Management determined that the value of the
assets was nominal after a review of the marketplace.
Net Loss. For the three months ended February 28, 2005, Eagle's net loss
was $9,326,000, compared to a net loss of $9,398,000 during the three months
ended February 29, 2004. For the six months ended February 28, 2005, Eagle's net
loss was $13,774,000 compared to a net loss of $17,859,000 during the six months
ended February 29, 2004.
Changes in Cash Flow. Eagle's operating activities increased net cash used
to $3,347,000 in the six months ended February 28, 2005, compared to use of net
cash of $3,165,000 in the six months ended February 29, 2004. The increase in
net cash used by operating activities was primarily attributable to fund an
increase in the Company's net operating loss, net of non-cash charges, totaling
$10,033,000 combined with $1,442,000 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 $547,000 in the six months ended February
28, 2005, compared to $393,000 gained in the six months ended February 29, 2004.
The decrease was due primarily to a decline in investment activities and
purchase of equipment associated with the prior years build out of Eagle's
network and infrastructure for the delivery of broadband services. Eagle's
financing activities provided net cash of $7,284,000 in the six months ended
February 28, 2005, compared to $5,563,000 of cash provided in the six months
ended February 29, 2004. The increase resulted from net proceeds of $7,504,000
from the sale of 20 million shares of common stock to certain investors.
Liquidity and Capital Resources: At February 28, 2005, the Company's
current assets totaled $10,380,000 (includes cash and cash equivalents of
$5,441,000) and total current liabilities were $13,915,000, which gave the
Company a negative working capital of $3,535,000. The Company's strategy is to
utilize cash on hand and issue common stock to settle current liabilities and to
raise additional capital through the sale of its securities to fund operations.
The Company will likely need to raise additional capital to fund working capital
requirements commencing in the fourth quarter of fiscal 2005.
The Company has historically used stock for retirement of certain
liabilities on a negotiated basis. During the first six months ended February
28, 2005, the Company retired $9,359,000 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 there is no
assurance that this strategy will be successful.
Historically, we have financed operations through the sale of debt and
equity securities. During the six months ended February 28, 2005, we raised
$9,517,000 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. 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.
Contractual Obligations
Payments Due by Period
-------------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total Year 1-3 Years 3-5 Years Years
- -------------------------- ----------- ----------- ----------- ----------- -----------
Long-term debt obligations $ 1,856 $ 1,856 $ - $ - $ -
Operating lease
obligations 1,325 150 931 244 -
----------- ----------- ----------- ----------- -----------
Total $ 3,181 $ 2,006 $ 931 $ 244 $ -
=========== =========== =========== =========== ===========
Payments Due by Period
-------------------------------------------------------------------
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
- -------------------------- ----------- ----------- ----------- ----------- -----------
Off-balance sheet
obligations 3,000 3,000 - - -
----------- ----------- ----------- ----------- -----------
Total $ 3,000 $ 3,000 $ - $ - $ -
=========== =========== =========== =========== ===========
The Company's contractual obligations consist of long-term debt as set
forth in Note 5 (Notes Payable) to the Company's financial statements. See Note
11 (Commitments and Contingent Liabilities) for certain obligations for office
space operating leases requiring future minimal commitments under non-cancelable
leases and for off-balance sheet contractual obligations. The Company has no off
balance sheet arrangements other than with LLV Broadband, LLC.
19
CRITICAL ACCOUNTING POLICIES
The Company has identified the following policies as critical to its
business and the understanding of its results of operations. The Company
believes it is improbable that materially different amounts would be reported
relating to the accounting policies described below if other acceptable
approaches were adopted. However, the application of these accounting policies,
as described below, involve the exercise of judgment and use of assumptions as
to future uncertainties; therefore, actual results could differ from estimates
generated from their use.
Impairment of Long-Lived Assets and Goodwill
Background
Goodwill and other intangibles of $33,928,000 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.
Revenue Recognition
The Company designs, manufactures, markets and services its products and
services under the name of Eagle Broadband, Inc., and its subsidiaries.
The Company records revenues from its fixed-price, long-term contracts
using the percentage-of-completion method, whereby revenues are recorded based
on construction costs incurred to date as a percentage of estimated total cost
at completion. The percentage-of-completion, determined by using total costs
incurred to date as a percentage or estimated total costs at completion,
reflects the actual physical completion of the project. This method of revenue
recognition is used because management considers total cost to be the best
available measure of progress on the contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used will change within the near term.
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 February 28, 2005, or prior were
immaterial. When elements such as hardware, software and consulting services are
contained in a single arrangement, or in related arrangements with the same
customer, 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.
20
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 $248,000 and $96,000 as of February 28, 2005, and
August 31, 2004, respectively.
Receivables
For the six months ended February 28, 2005, Eagle accounts receivable
increased to $2,236,000 from $1,470,000 at August 31, 2004. The majority of this
increase was due to product sales to a major customer in the second quarter of
fiscal 2005 in the amount of $1,729,000,
The Company's accounts receivable aging as measured by days sales
outstanding (DSO) totaled 39 days at February 28, 2005, 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 39 days at February
28, 2005, was attributable to slow paying customers during the first six months.
The Company's allowance for doubtful accounts totaled $2,324,000 and
$2,396,000 for the six months ended February 28, 2005, and the year ended August
31, 2004, respectively. These allowance for doubtful accounts amounts
represented 51% and 62% of the gross accounts receivable balances for the six
months ended February 28, 2005, and the year ended August 31, 2004,
respectively; while they likewise represented 50% and 7% of the Company's
greater than 90-day accounts for these same respective time periods.
The Company reviews its accounts receivable balances by customer for
accounts greater than 90 days old and makes a determination regarding the
collectability of the accounts based on specific circumstances and the payment
history that exists with such customers. The Company also takes into account its
prior experience, the customer's ability to pay and an assessment of the current
economic conditions in determining the net realizable value of its receivables.
The Company also reviews its allowances for doubtful accounts in aggregate for
adequacy following this assessment. Accordingly, the Company believes that its
allowances for doubtful accounts fairly represent the underlying collectability
risks associated with its accounts receivable.
Earnings are charged with a provision for doubtful accounts based on
collection experience and current review of the collectability of accounts
receivable. Accounts receivables deemed uncollectible are charged against the
allowance for doubtful accounts.
Inventory
Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At February 28, 2005, Eagle's
inventory totaled $1,771,000 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.
21
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.
Credit Risks
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, but does not require collateral from these
parties. Two customers, Sweetwater Capital, LLC, and General Dynamics,
represented greater than 10% of the Company's revenues during the six months
ended February 28, 2005. The Company does not believe that the credit risk posed
by Sweetwater Capital, LLC, and General Dynamics 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 defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of
the end of our second fiscal quarter 2005. Based on such evaluation, such
officers have concluded that the Company's disclosure controls and procedures
are effective.
Changes in Internal Controls
There has been no change in the Company's internal control over financial
reporting identified in connection with our evaluation that occurred during our
last fiscal quarter ended February 28, 2005, that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
22
Part 2. - Other Information
Item 1 - 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.
In November 2004, Palisades Master Fund L.P. sued Eagle Broadband, Inc.,
and David Weisman, Civil Action 04603626, in New York County, New York Supreme
Court. Palisades seeks an injunction setting a conversion price on certain
convertible debt and warrants at $0.4456 per share of Eagle common stock and
seeks damages in excess of $3.1 million. The Company intends to vigorously
defend this claim. The Company has not accrued any expenses against the lawsuit,
as the outcome cannot be predicted at this time.
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 - Unregistered Sales of Equity 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
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)
23
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 31.3 Certification of Principal Accounting Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.3 Certification of Principal Accounting Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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: April 11, 2005
By:/S/David A. Weisman
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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
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Tom Matura
Principal Accounting Officer
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