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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number: 000-25423
EAGLE SUPPLY GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3889248
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 East 42nd Street, Suite 1116, New York, New York 10168
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 986-6190
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
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Common Stock Boston Stock Exchange
- ----------------------------------------- --------------------------
Redeemable Common Stock Purchase Warrants Boston Stock Exchange
- ----------------------------------------- --------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
The aggregate market value of the common equity held by non-
affiliates of the registrant at September 20, 2000, was approximately
$10,423,750 based upon the closing price ($3.875 per share) as reported
by NASDAQ on that date. The number of shares outstanding of the
Registrant's common stock, as of September 20, 2000, was 8,510,000
shares.
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:)
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court.
Yes [_] No [_]
2
TABLE OF CONTENTS
-----------------
ITEM PAGE
PART I ........................................................... 4
ITEM 1. BUSINESS.............................................. 4
ITEM 2. PROPERTIES............................................ 9
ITEM 3. LEGAL PROCEEDINGS..................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.................................... 12
PART II........................................................... 13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED MATTERS..................................... 13
ITEM 6. SELECTED FINANCIAL DATA............................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK................................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 24
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................. 24
PART III.......................................................... 25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........ 25
ITEM 11. EXECUTIVE COMPENSATION................................ 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................... 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 35
PART IV........................................................... 39
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES............ 39
SIGNATURES ....................................................... 40
EAGLE SUPPLY GROUP, INC. CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDED JUNE 30, 2000, 1999,
AND 1998, AND INDEPENDENT AUDITORS' REPORT
3
PART I
------
This document includes statements that may constitute forward-
looking statements made pursuant to the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company would
like to caution readers regarding certain forward-looking statements in
this document and in all of its communications to shareholders and
others, press releases, securities filings, and all other
communications. Statements that are based on management's projections,
estimates and assumptions are forward-looking statements. The words
"believe," "expect," "anticipate," "intend," and similar expressions
generally identify forward-looking statements. While the Company
believes in the veracity of all statements made herein, forward-looking
statements are necessarily based upon a number of estimates and
assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies and known and unknown risks. Many of
the uncertainties and contingencies can affect events and the Company's
actual results and could cause its actual results to differ materially
from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Some of the factors that could cause actual
results or future events to differ materially include the Company's
inability to find suitable acquisition candidates or financing on terms
commercially reasonable to the Company, inability to find suitable
facilities or personnel to open or maintain new branch locations,
interruptions or cancellation of existing sources of supply, the
pricing of and demand for distributed products, the presence of
competitors with greater financial resources, economic and market
factors, and other factors. Please see the "Risk Factors" in the
Company's other filings with the Securities and Exchange Commission for
a description of some, but not all, risks, uncertainties and
contingencies.
ITEM 1. BUSINESS
Eagle Supply Group, Inc. ("us," "our," "we" or the "Company"),
with corporate offices in New York City and operations headquarters in
Mansfield, Texas, believes that it is the fourth largest wholesale
distributor of residential roofing and masonry supplies and related
products in the United States. We sell primarily to contractors and
subcontractors engaged in roofing repair and construction of new
residences and commercial property through our own distribution
facilities and direct sales force. We currently operate a network of 35
distribution centers in 12 states, including locations in Florida (11),
Texas (8), Colorado (5), Alabama (3), and one each in Indiana,
Virginia, Kansas, Minnesota, Mississippi, Louisiana, Illinois and
Wisconsin.
We are majority-owned by TDA Industries, Inc. ("TDA" or our
"Parent"), and we were organized to acquire, integrate and operate
seasoned, privately-held companies which distribute products to or
manufacture products for the building supplies/construction industry.
On March 17, 1999, we completed the sale of 2,500,000 shares of
Common Stock at $5.00 per share and 2,875,000 Redeemable Common Stock
Purchase Warrants (the "Warrants") at $.125 per Warrant in connection
with our initial public offering (the "Offering"). We received net
proceeds aggregating approximately $10,206,000 from the Offering.
Upon consummation of the Offering, the Company acquired all of the
issued and outstanding common shares of Eagle Supply, Inc. ("Eagle"),
JEH/Eagle Supply, Inc. ("JEH Eagle") and MSI/Eagle Supply, Inc. ("MSI
4
Eagle") (the "Acquisitions") from TDA for consideration consisting of
3,000,000 of the Company's common shares.
Upon the consummation of the Acquisitions, Eagle, JEH Eagle and
MSI Eagle became wholly-owned subsidiaries of the Company.
Effective May 31, 2000, MSI Eagle was merged with and into JEH
Eagle. As of July 1, 2000, the Texas operations of JEH Eagle were
transferred to a newly formed limited partnership entirely owned
directly and indirectly by JEH Eagle. Accordingly, the Company's
business operations are presently conducted through two wholly-owned
subsidiaries and a limited partnership.
We are wholesale distributors of a complete line of roofing
supplies and related products through our own sales force to roofing
supply and related products contractors and subcontractors in the
geographic areas where we have distribution centers. Such contractors
and subcontractors are engaged in commercial and residential roofing
repair and the construction of new residential and commercial
properties.
We also distribute sheet metal products used in the roofing repair
and construction industries. Furthermore, we distribute drywall,
plywood and related products and, solely in Colorado, vinyl siding to
the construction industry. Products distributed by us generally include
equipment, tools and accessory products for the removal of old roofing,
re-roofing and roof construction, and related materials such as
shingles, tiles, insulation, liquid roofing materials, fasteners,
ventilation materials, sheet metal of the type used in the roofing
industry, drywall and plywood.
In Texas, we are a wholesale distributor of a complete line of
cements and masonry supplies and related products through our own
direct sales force to building and masonry contractors and
sub-contractors in the Dallas/Fort Worth metropolitan area. In general,
products distributed by us in Texas include cement, cement mixtures and
similar "bag" products (lime, sand, etc.), angle iron, cinder blocks,
cultured stones and bricks, fireplace and pool construction materials,
and equipment, tools and accessory products for use in residential and
commercial construction.
The following chart indicates the approximate percentage of the
indicated product categories sold by us for the periods indicated:
Drywall Bagged/
Residential Commercial And Bulk All Other
Roofing Roofing Sheet Metal Plywood Products Products
- ------------------------------------------------------------------------------------------------
Fiscal Year
Ended June 30,
1998 68 14 5 5 6 2
1999 67 13 6 9 4 1
2000 63 14 5 11 5 2
5
Potential Expansion By Acquisition
We are seeking acquisition candidates primarily in the roofing
supplies and related products industry throughout the United States,
with greater emphasis on the Southeastern, Midwestern and Western
regions and less emphasis on the Northeastern region of the United
States. However, we may consider acquisition candidates in any of the
foregoing regions of the United States if an exceptional opportunity
arises.
We intend to seek out prospective acquisition candidates in
businesses that complement or are otherwise related to our current
businesses. We anticipate that we will finance future acquisitions, if
any, through a combination of cash, issuances of shares of our capital
stock, and additional equity or debt financing.
Expansion By Internal Growth
Management intends to continue to pursue expansion of our
operations by adding new distribution centers. During the fiscal year
ended June 30, 2000, we opened 6 new distribution centers, closed 3
distribution centers and relocated or consolidated 3 others.
Occasionally, we establish temporary distribution centers in
response to storms which have created temporary markets. After opening
a new distribution center, our initial focus is to develop a customer
base, to develop and improve the distribution center's market position
and operational efficiency and then to expand its customer base.
Operating Strategy
Purchasing Economics
We negotiate with suppliers to obtain volume discounts and other
favorable terms.
Principal Products
We distribute a variety of roofing supplies and related products
and accessories for use in the commercial and residential roofing
repair and construction industries.
Residential Roofing Products. Shingles (asphalt, ceramic, slate,
concrete, fiberglass and fiberglass combined with asphalt), tiles,
felt, insulation, waterproof underlaying, ventilation systems and
skylights.
Commercial Roofing Products. Asphalt, cements, tar, other
coatings, modified bitumen and roll roofings.
Sheet Metal Products. Aluminum, copper, galvanized and stainless
sheet metal.
Drywall/Plywood Products. Sheetrock and plywood.
6
We also sell accessory products related to each of the foregoing,
including, but not limited to, roofing equipment, power and hand tools
and fasteners.
Principally in the Dallas/Fort Worth metropolitan areas, we
distribute a variety of cement and masonry supplies and related
products and accessories for use in the residential and commercial
building and masonry industries. Such product lines include the
following:
Concrete and Masonry Products. Portland cement is for use in
housing foundations, laying pavements, walkways and other similar uses.
Masonry cement is for use in brick and stone masonry. Cement is
principally sold by bags of varying weight (approximately 10 pounds to
95 pounds) and is sold in a variety of mixtures such as concrete mixes
(portland cement, sand and gravel), sand mixes (portland cement and
sand), mortar mixes (masonry mortar cement and masonry sand) and grout
(cement and sand). Also sold are sand, gravel, underwater cement,
concrete and asphalt "patching" compounds.
Angle Iron. Iron forged at a ninety-degree angle which is cut to
customer's specification for use as support above windows and doorways.
Bricks and Stones. Bricks, used bricks, firewall bricks,
"cultured" (man-made) stones in a variety of colors and shapes, cinder
blocks and glass blocks.
Fireplace Products. Fireboxes, dampers, flues, facings,
insulations, fireplace tools and accessories.
Swimming Pool Products. Cements and molds used in pool
construction.
We also sell in that same metropolitan area, a variety of products
related to the foregoing, including cement mixers, rulers, levels,
trowels, and other tools, cleaning solvents, patching compounds,
supports and fasteners.
Vendors
We distribute products manufactured by a number of major vendors.
During the fiscal years ended June 30, 1998, 1999 and 2000,
approximately 20%, 17% and 18%, respectively, of our product lines were
purchased from one supplier, GAF Corporation. No other supplier
accounted for more than ten percent (10%) of our product lines in each
of our last three fiscal years.
We have no written long-term supply agreements with any vendors.
We believe that, in the event of any interruption of product deliveries
from any suppliers, we will be able to secure suitable replacement
suppliers on acceptable terms.
7
Customers, Sales and Marketing
Practically all customers purchase products pursuant to short-term
credit arrangements. Sales efforts are directed primarily through our
salespersons including "inside" counter persons who serve walk-in and
call-in customers and "outside" salespersons calling upon past, current
and potential customers.
We have no written long-term sales agreements with any customers.
None of our customers accounted for 5% or greater of sales during our
fiscal year ended June 30, 2000.
Competition
We face substantial competition in the wholesale distribution of
roofing, cement and masonry supplies and related products from
relatively smaller distributors, retail distribution centers and from a
number of multi-regional and national wholesale distributors of
building products, including suppliers of roofing products which have
greater financial resources and are larger than us, including:
* American Builders & Contractors Supply Co., Inc.,
* Cameron Ashley Building Products, Inc. (owned by
Guardian Industries, Inc. since June 2000 and now part
of Guardian Building Products),
* Allied Building Products (a division of a subsidiary of
CRH, plc since 1997), and
* Bradco Supply Corporation.
We currently compete on the basis of:
* pricing,
* breadth of product line,
* prompt delivery,
* customer service,
* providing discounts for prompt payment,
* credit extension, and
* the abilities of personnel.
To a substantially lesser degree, we also compete with larger high
volume discount general building supply stores selling standardized
products, sometimes at lower prices than ours, but not carrying the
breadth of product lines or offering the same service as provided by
full service wholesale distributors such as we are.
We anticipate that we may experience competition from entities and
individuals (including venture capital partnerships and corporations,
equity funds, blind pool companies, operations of competing wholesale
roofing supply distribution centers, large industrial and financial
institutions, small business investment companies and wealthy
individuals) which are well-established and have greater financial
resources and more extensive experience than we have in connection with
8
identifying and effecting acquisitions of the type sought by us. Our
financial resources are limited in comparison to those of many of such
competitors.
Backlog
Our business is conducted on the basis of short-term orders and
prompt delivery schedules precluding any substantial backlog.
Employees
At June 30, 2000, we employed approximately 506 full-time
employees, including 7 executives, 49 managerial employees, 119
salespersons (including 55 "inside" salespersons), 250 warehouse
persons, drivers and helpers, and 81 clerical and administrative
persons. Difficulties have been experienced in retaining drivers and
helpers because of the tight job market in our market areas and the
need for drivers to be certified by the departments of motor vehicles
and to pass other testing standards, but suitable replacements have
been readily available without material adverse economic impact. We are
not subject to any collective bargaining agreement, and we believe that
our relationship with our employees is good.
ITEM 2. PROPERTIES
We lease approximately 15,000 square feet of executive office
space located at 1451 Channelside Drive, Tampa, Florida 33605 from 39
Acre Corp., a wholly-owned subsidiary of TDA, at an approximate annual
rental of $120,000. Approximately 8,500 square feet of such space is
subleased by us to an unrelated third party tenant. See Item 13
"Certain Relationships and Related Transactions."
TDA provides office space and administrative services to us at its
offices in New York City pursuant to a month-to-month, $3,000 per
month, administrative services agreement. See Item 13. "Certain
Relationships and Related Transactions."
Locations Owned By And Leased From A Wholly-Owned TDA Subsidiary(1)
-------------------------------------------------------------------
Approximate Approximate
Square Base
City and State Footage Annual Rental
- -------------- ----------- -------------
Birmingham, Alabama...................... 39,000 $117,000
Mobile, Alabama.......................... 24,000 $ 77,000
Littleton, Colorado, .................... 7,500 $ 46,000
Fort Myers, Florida...................... 16,000 $ 47,000
Holiday, Florida......................... 16,000 $ 47,000
Lakeland, Florida........................ 20,000 $ 80,000
Pensacola, Florida....................... 26,000 $ 80,000
Tampa, Florida........................... 69,000 $149,000
St. Petersburg, Florida.................. 25,000 $ 73,000
- -------------------------------
(1) See Item 13. "Certain Relationships and Related Transactions."
9
As part of the foregoing leasing arrangements with 39 Acre Corp.,
additional undeveloped land is leased to us from the TDA subsidiary.
That undeveloped land is used for storage or reserved for future use.
The locations and approximate acreage of the undeveloped land are as
follows: Birmingham (one), Littleton (three), Ft. Myers (one and a
third), Holiday (three), Pensacola (two and a half), St. Petersburg
(two), and Tampa (one).
In March 1999, we entered into written ten-year leases with 39
Acre Corp. providing for base annual rentals as set forth above for the
first five years of such leases with provisions for increases in rent
based upon the consumer price index at the beginning of the sixth year
of such ten-year leases and with provisions for five-year renewal
options, increases in rent based upon the consumer price index, and
lease terms, additional rental and other charges customarily included
in such leases, including provisions requiring us to insure and
maintain and pay real estate taxes on the premises. We believe that the
rent and other terms of our lease agreements with 39 Acre Corp. are on
at least as favorable terms as we would expect to negotiate with
unaffiliated third parties. Neither party is permitted to terminate the
leases before the end of their term without a breach or default by the
other party. See Item 13. "Certain Relationships and Related
Transactions."
Locations Owned By and Leased From James E. Helzer (1)
------------------------------------------------------
We also lease approximately 8,000 and 10,000 square feet of
executive office and showroom space located at 2500 U.S. Highway 287,
Mansfield, Texas 76063 and 8221 E. 96th Avenue, Henderson, Colorado
80640, respectively, from James E. Helzer, our President. The annual
aggregate rental for the foregoing premises is combined with the
rentals of relevant distribution centers discussed below. See Item 13.
"Certain Relationships and Related Transactions."
Approximate Approximate
Square Base
City and State Footage Annual Rental
- -------------- ----------- -------------
Colorado Springs, Colorado................. 4,000 $ 19,000
Henderson, Colorado........................ 110,000 $108,000
Littleton, Colorado ....................... 7,500 $ 46,000
Colleyville, Texas......................... 7,000 $ 42,000
Fort Worth, Texas ......................... 41,500 $143,000
Frisco, Texas.............................. 17,000 $ 60,000
Mansfield, Texas........................... 57,700 $231,000
Mesquite, Texas............................ 17,500 $ 72,000
The foregoing premises are leased to us from James E. Helzer
pursuant to five-year leases expiring in June 2002 providing the
indicated base annual rentals with provisions for five percent
- ----------------------------
(1) See Item 13. "Certain Relationships and Related Transactions"
10
increases effective July 2000. Except for the Frisco, Texas, premises,
said leases grant us two five-year renewal options providing for five
percent increases in the base annual rent during certain renewal years.
Additional rental and other charges for the foregoing leases include
provision for us to insure and maintain and pay all taxes on the
premises. We also have a right of first refusal to purchase the
foregoing premises. We believe that such leases are on terms no less
favorable than we could have obtained from independent third parties.
As part of the foregoing leases, additional undeveloped land is
leased to us from James E. Helzer. That undeveloped land is used for
storage or reserved for future use. The locations and approximate
acreage of the undeveloped land is as follows: Colorado Springs
(three), Henderson (six), Colleyville (one and a half), Frisco (two and
a half), Mansfield (twelve and a half), Mesquite (two) and Littleton
(three).
We lease approximately 30,000 square feet of office, showroom and
warehouse space, and approximately four acres of outdoor storage space
in Mansfield, Texas, from Gary L. Howard, one of our Senior Vice
Presidents, and his spouse at an annual base rental of approximately
$107,000 pursuant to a lease expiring in October 2001. We have the
right to two, three-year renewals at a base annual rental five percent
over the prior term. Additional rental and other charges for the
foregoing lease include provisions for us to insure and maintain and
pay taxes on the premises. We have a right of first refusal to purchase
the foregoing premises. We believe that the foregoing lease is on terms
no less favorable than we could have obtained from an independent third
party. See Item 13. "Certain Relationships and Related Transactions."
Locations Leased From Third Parties
-----------------------------------
Approximate Approximate
Square Base
City and State Footage Annual Rental
- -------------- ----------- -------------
Decatur, Alabama............................ 12,300 $ 43,000
Montgomery, Alabama......................... 13,000 $ 48,000
Eagle, Colorado............................. 10,000 $ 72,000
Fort Collins, Colorado...................... 10,000 $ 42,000
Brooksville, Florida ....................... 5,400 $ 26,000
Clearwater, Florida......................... 6,000 $ 47,000
Fort Walton Beach, Florida.................. 12,600 $ 38,000
Panama City, Florida........................ 21,600 $ 68,000
Tallahassee, Florida........................ 15,000 $ 50,000
Lake Zurich, Illinois ...................... 43,000 $132,000
Indianapolis, Indiana....................... 15,000 $ 67,000
Great Bend, Kansas.......................... 7,000 $ 48,000
Kenner, Louisianna ......................... 39,500 $ 90,000
Eagan, Minnesota ........................... 31,200 $173,000
Gulfport, Mississippi....................... 13,000 $ 32,000
Addison, Texas ............................. 30,000 $143,000
Austin, Texas............................... 56,000 $ 96,000
Fort Worth, Texas (land).................... 50,000 $ 8,000
11
Approximate Approximate
Square Base
City and State Footage Annual Rental
- -------------- ----------- -------------
Mesquite, Texas ............................ 10,000 $ 30,000
Southlake, Texas ........................... 9,000 $ 42,000
Lorton, Virginia............................ 30,000 $195,000
Oshkosh, Wisconsin ......................... 12,000 $122,000
Other than the Austin, Texas lease, which is on a month-to-month
basis, the above leases expire at varying times from August 31, 2000
through June 2003. These leases generally contain provisions, believed
customary to their locale, requiring us, among other things, to:
* Maintain liability, fire, casualty and/or other insurance
coverage on the premises.
* Maintain the premises.
* Pay utilities.
* Pay municipal, county, state, real estate, sales and/or use
taxes.
Several leases contain renewal options which if fully exercised
would enable Eagle to extend the leases as follows:
* Eagle, Colorado - through June 2003.
* Panama City, Florida - through January 2008.
* Lorton, Virginia - through July 2003.
The foregoing leases for Panama City and Tallahassee, Florida,
also grant us purchase options or a right of first refusal for the
premises.
As part of the foregoing leases, additional undeveloped land is
leased from third parties. That undeveloped land is used for storage or
reserved for future use. The location and approximate acreage of the
undeveloped land is as follows: Eagle (two), Fort Collins (one and a
half), Indianapolis (two) and Austin (six).
ITEM 3. LEGAL PROCEEDINGS
Group is not subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this
Report, no matters were submitted to a vote of security holders.
12
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
(a) Market Information
We have two classes of securities presently registered: Common
Stock and Warrants. These securities are presently traded on the NASDAQ
SmallCap Market under the trading symbols "EEGL" and "EEGLW,"
respectively, and, on the Boston Stock Exchange under the trading
symbols "EGL" and "EGLW," respectively, and have been since the
Offering in March 1999.
The high and low bid price quotations for our Common Stock, as reported
by NASDAQ, are as follows for the periods indicated:
High Low
-------- -------
From March 12 through March 31, 1999 ............. $5.03125 $4.40625
From April 1 through June 30, 1999 ............... $5.28125 $4.125
From July 1 through September 30, 1999 ........... $4.75 $3.50
From October 1 through December 31, 1999 ......... $4.438 $3.75
From January 1 through March 31, 2000 ............ $4.625 $3.875
From April 1 through June 30, 2000 ............... $4.438 $2.25
The Common Stock was held by approximately 12 holders of record as
of September 14, 2000. Based upon information received from our
transfer agent, following a past "broker" search, we believe that we
have approximately 900 beneficial holders of our Common Stock.
The high and low bid price quotations for the Warrants, as
reported by NASDAQ, are as follows for the periods indicated:
High Low
------- ------
From March 12 through March 31, 1999 ............ $1.25 $0.75
From April 1 through June 30, 1999............... $1.875 $0.875
From July 1 through September 30, 1999........... $1.625 $0.875
From October 1 through December 31, 1999 ........ $1.125 $0.781
From January 1 through March 31, 2000 ........... $1.25 $0.906
From April 1 through June 30, 2000 .............. $1.094 $0.625
The Warrants were held by approximately 5 holders of record, as of
September 14, 2000. Based upon information received from our transfer
agent, following a past "broker" search, we believe that we have
approximately 700 beneficial holders of our Warrants.
Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
13
We believe that NASDAQ SmallCap is the principal market for our
Common Stock and Warrants.
We have not paid dividends to date. The payment of dividends, if
any, in the future is within the discretion of the Board of Directors
and subject to restrictions under the terms and provisions of our
credit facility. The payment of dividends, if any, in the future will
depend upon our earnings, capital requirements and financial conditions
and other relevant factors. Our Board of Directors does not presently
intend to declare any dividends in the foreseeable future but instead
intends to retain all earnings, if any, for use in our business
operations.
(b) Use of Proceeds
On March 12, 1999, our Registration Statement filed with the SEC
became effective under the Securities Act of 1933 for an offering of
2,500,000 shares of Common Stock and 2,500,000 Warrants exclusive of an
additional 375,000 shares of Common Stock and 375,000 Warrants
registered to cover an overallotment option granted to Barron Chase
Securities, Inc. ("Barron"). The Offering was commenced by Barron on
the date of the effectiveness and a closing of the Offering of
2,500,000 shares of Common Stock and 2,875,000 Warrants was held on
March 17, 1999. The initial offering price was $5.00 per share of
Common Stock and $.125 per Warrant, resulting in gross proceeds of
approximately $12,859,000. Barron received a 9% commission and a 3%
non-accountable expense allowance of the gross proceeds, or an
aggregate of approximately $1,543,000. Additional offering expenses
were approximately $1,110,000 resulting in net proceeds of $10,206,000.
The following expenditures have been made from the net proceeds.
* $534,907 to repay principal and interest on borrowings of
$500,000 we made pursuant to promissory notes issued to
certain stockholders, including $369,755 to TDA.
* $1,474,478 in principal and interest to Gary L. Howard,
designee and owner of Masonry Supply, Inc. ("MSI Co.") and
one of our Senior Vice Presidents, pursuant to a five-year
promissory note issued in connection with the acquisition of
the business and substantially all of the assets of MSI Co.
* $2,624,000 to reduce outstanding balances of our credit
facilities.
* The balance has been invested in high grade, short-term
interest bearing investments.
Except for the foregoing payments to TDA and Gary L. Howard, no
part of the offering expenses or net proceeds was directly paid to (a)
our directors or officers, or their associates; (b) persons owning 10%
or more of our shares; or (c) any of our affiliates.
14
ITEM 6. SELECTED FINANCIAL DATA
Prior to the initial public offering and the acquisitions
described in Note 2 of the consolidated financial statements, the
Company had limited operations. The historical selected financial
information included in the statement of operations has been prepared
on a basis which combines the Company (organized on May 1, 1996),
Eagle, JEH Eagle (acquired on July 1, 1997) and MSI Eagle (acquired on
October 22, 1998) as four entities controlled by TDA. Information with
respect to the Company is included from May 1, 1996 (inception),
information for Eagle is included for all periods presented,
information with respect to JEH Eagle is included from July 1, 1997
(including the operations of MSI Eagle from June 1, 2000), and
information with respect to MSI Eagle is included from October 22, 1998
through May 31, 2000, the effective date of its merger with and into
JEH Eagle.
The selected financial information presented below should be read
in conjunction with the consolidated financial statements and the notes
thereto.
Selected Financial Information
------------------------------
Year Ended June 30, Combined (1)
--------------------------------
Statement of
Operations Data: 1996 1997 1998 1999 2000
- ---------------- ---- ---- ---- ---- ----
Revenue $59,262,226 $57,575,712 $129,502,812 $159,844,520 $187,714,736
Gross Profit 12,576,870 11,471,124 27,975,391 37,706,722 45,292,922
Income From Operations 2,689,290 907,970 3,016,155 6,743,995 5,760,988
Net Income (Loss) 1,315,035 (179,252) 756,884 2,703,352 2,010,746
Other Financial Data:
- ---------------------
EBITDA (2) $3,151,388 $1,133,554 $ 4,171,186 $ 8,195,013 8,248,961
Net Cash Provided by
(Used In) Operating
Activities 2,538,838 (766,978) (258,827) 938,846 (3,019,242)
Net Cash Used In
Investing Activities (863,448) (215,640) (3,704,624) (3,431,929) (2,248,030)
Net Cash (Used In)
Provided By Financing
Activities (1,931,121) 1,575,357 4,614,314 9,326,486 3,913,744
15
June 30, Combined (1)
---------------------
Balance Sheet Data: 1996 1997 1998 1999 2000
- ------------------- ---- ---- ---- ---- ----
Working Capital $ 4,527,568 $ 6,232,891 $17,081,190 $26,593,105 $31,886,555
Total Assets 15,778,742 15,853,837 49,471,412 75,692,955 84,509,141
Long Term Debt 5,678,243 7,195,163 25,294,523 30,139,072 33,089,454
Total Liabilities 15,586,657 15,832,712 49,611,968 60,305,160 66,323,395
Shareholders' Equity
(Deficiency) 192,085 21,125 (140,556) 15,387,795 18,185,746
______________________
(1) The historical financial data included in the statement of
operations data has been prepared on a basis which combines the Company
(organized May 1, 1996), Eagle, JEH Eagle (acquired on July 1, 1997),
and MSI Eagle (acquired on October 22, 1998) as four entities
controlled by TDA, because the separate financial data of the Company
would not be meaningful. Information with respect to the Company is
included from May 1, 1996 (inception), information for Eagle in
included for all periods presented, information with respect to JEH
Eagle is included from July 1, 1997 (including the operations of MSI
Eagle from June 1, 2000), and information for MSI Eagle is included
from October 22, 1998 through May 31, 2000, the effective date of its
merger with and into JEH Eagle.
(2) As used herein, EBITDA reflects net income (loss) increased by the
effects of interest expense, federal income tax provisions,
depreciation and amortization expense. EBITDA is used by management,
along with other measures of performance, to assess the Company's
financial performance. EBITDA should not be considered in isolation or
as an alternative to measures of operating performance or cash flows
pursuant to generally accepted accounting principles. In addition, the
measure of EBITDA may not be comparable to similar measures reported by
other companies.
(3) The loss for the year ended June 30, 1997 includes a write-off of
registration costs of $370,353 for an offering which was not
consummated.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This document includes statements that may constitute
forward-looking statements made pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company
would like to caution readers regarding certain forward-looking
statements in this document and in all of its communications to
shareholders and others, press releases, securities filings, and all
other communications. Statements that are based on management's
projections, estimates and assumptions are forward-looking statements.
The words "believe," "expect," "anticipate," "intend," and similar
expressions generally identify forward-looking statements. While the
Company believes in the veracity of all statements made herein,
forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the
Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown
risks. Many of the uncertainties and contingencies can affect events
and the Company's actual results and could cause its actual results to
differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. Some of the factors
that could cause actual results or future events to differ materially
include the Company's inability to find suitable acquisition candidates
or financing on terms commercially reasonable to the Company, inability
to find suitable facilities or personnel to open or maintain new branch
locations, interruptions or cancellation of existing sources of supply,
the pricing of and demand for distributed products, the presence of
competitors with greater financial resources, economic and market
factors, and other factors. Please see the "Risk Factors" in the
Company's other filings with the Securities and Exchange Commission for
a description of some, but not all, risks, uncertainties and
contingencies.
The following discussion and analysis should be read in
conjunction with the financial statements and related notes thereto
which are included elsewhere herein.
Results of Operations
Fiscal Year Ended June 30, 2000 Compared to the Fiscal Year Ended June
30, 1999
Revenues of the Company during the fiscal year ended June 30, 2000
increased by approximately $27,870,000 (17.4%) compared to the 1999
fiscal year. Approximately $4,194,000 of this increase is as a result
of the acquisition in fiscal 1999 (on October 22, 1998) of MSI Co. by
MSI Eagle, which operations are included in fiscal 2000 for the full
year. The remaining increase may be attributed to revenues generated
from new distribution centers opened in fiscal 2000 or during the last
quarter of fiscal 1999 and a general improvement in market conditions,
offset by revenues that had been generated from distribution centers
closed or consolidated.
Cost of sales increased between the 2000 and 1999 fiscal years at
a lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of sales as a percentage of revenues decreased to
75.9% in the fiscal year ended June 30, 2000 from 76.4% in the fiscal
year ended June 30, 1999, and gross profit as a percentage of revenues
increased to 24.1% in the fiscal year ended June 30, 2000 from 23.6% in
the fiscal year ended June 30, 1999. This increase may be attributed
primarily to the increased revenues generated from sales of masonry
supplies and related products many of which generally carry higher
gross profit margins than sales of roofing products. Included in cost
of sales for the fiscal year ended June 30, 2000 is a charge of
17
approximately $190,000 ($10,000 in fiscal 1999) resulting from valuing
a portion of the year-end inventories using the last-in, first-out
("LIFO") method. See Notes to the Consolidated Financial Statements.
Operating expenses of the Company increased by approximately
$8,569,000 (27.7%) between the 2000 and 1999 fiscal years.
Approximately $677,000 of this increase is as a result of the
acquisition of MSI Co. by MSI Eagle, which operations are included in
fiscal 2000 for the full year. Approximately $3,677,000 of this
increase may be attributed to the operating expenses of new
distribution centers opened in fiscal 2000 or during the last quarter
of fiscal 1999, approximately $1,181,000 consists of corporate
operating expenses incurred subsequent to the Offering, approximately
$3,103,000 is attributable to an increase in payroll costs and delivery
expenses due primarily to the need to service the increased sales
revenues, an increase in advertising costs of $330,000 and smaller
increases in other expense areas, offset by a decrease in bad debt
expense of approximately $616,000. Depreciation and amortization, and
amortization of excess cost of investments over net assets acquired
(goodwill) and deferred financing costs increased by an aggregate of
approximately $467,000 (25.2%) between the 2000 and 1999 fiscal years.
Approximately $176,000 of this increase is additional depreciation and
approximately $284,000 is additional amortization of goodwill. The
increase in amortization of goodwill may be attributed primarily to the
increase in goodwill arising from the additional consideration in the
amount of approximately $1,908,000 paid for the purchase of the
business and substantially all of the assets of JEH Co. by JEH Eagle,
which is being amortized over the remaining life of the goodwill.
Operating expenses as a percentage of revenues were 21.1% in the 2000
fiscal year compared to 19.4% in the 1999 fiscal year.
Interest expense increased by approximately $569,000 (22.7%)
between the 2000 and 1999 fiscal years. This increase is due primarily
to the interest expense incurred on borrowings under revolving credit
loans ($427,000) and the interest expense for a full fiscal year on the
debt incurred to finance the acquisition of MSI Co. by MSI Eagle
($115,000).
Net income and EBITDA (earnings before interest, federal income
taxes, depreciation and amortization) for the fiscal year ended June
30, 2000 were approximately $2,011,000 and $8,249,000, respectively,
compared to net income and EBITDA of approximately $2,703,000 and
$8,195,000, respectively, for fiscal 1999.
Earnings per share for the fiscal year ended June 30, 2000 were
$.24 compared to $.43 for fiscal 1999. EBITDA per share for the fiscal
year ended June 30, 2000 was $.97 compared to $1.30 for fiscal 1999.
Fiscal Year Ended June 30, 1999 Compared to the Fiscal Year Ended June
30, 1998
Revenues of the Company during the fiscal year ended June 30, 1999
increased by approximately $30,342,000 (23.4%) compared to the 1998
fiscal year. Approximately $9,018,000 of this increase is due to the
acquisition on October 22, 1998 of MSI Co. by MSI Eagle. The remaining
increase may be attributed to additional revenues generated from 4 new
distribution centers ($16,077,000) and a general improvement in market
conditions.
18
Cost of sales increased between the 1999 and 1998 fiscal years at
a lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of sales as a percentage of revenues decreased to
77.6% in the fiscal year ended June 30, 1999 from 78.4% in the fiscal
year ended June 30, 1998, and gross profit as a percentage of revenues
increased to 22.4% in the fiscal year ended June 30, 1999 from 21.6% in
the fiscal year ended June 30, 1998. The cost of sales and gross profit
of MSI Eagle have not been included in calculating the percentages for
the 1999 fiscal year. If MSI Eagle's cost of sales and gross profit
were included, cost of sales as a percentage of revenues would have
been 76.4% and gross profit as a percentage of revenues would have been
23.6%.
Operating expenses of the Company increased by approximately
$6,004,000 (24.1%) between the 1999 and 1998 fiscal years.
Approximately $2,506,000 of this increase may be attributed to the
acquisition of MSI Co. by MSI Eagle and includes approximately $113,000
of amortization of excess cost of investments over net assets acquired
(goodwill) and approximately $15,000 of amortization of deferred
financing costs attributable to the acquisition. Excluding the
operating expenses of MSI Eagle, operating expenses of the Company
would have increased by approximately $3,498,000 (14%) between the 1999
and 1998 fiscal years. This increase may be attributed to new
distribution center operating expenses of approximately $2,040,000, an
increase in the allowance for doubtful accounts of approximately
$135,000, an increase in payroll costs of approximately $829,000, an
increase in depreciation of $170,000, an increase in warehouse and
delivery expenses of approximately $125,000, an increase in office
expenses of approximately $146,000 primarily related to the
implementation and relocation of the administrative functions of the
Company to Texas and an increase in amortization of goodwill of
approximately $53,000, offset by reductions in other expense areas.
Operating expenses as a percentage of revenues were 18.9% in the 1999
fiscal year compared to 19.3% in the 1998 fiscal year. If MSI Eagle's
operating expenses were included, operating expenses as a percentage of
revenues would have changed only minimally in the 1999 fiscal year.
Interest expense increased by approximately $639,000 (34.3%)
between the 1999 and 1998 fiscal years. This increase is due to the
interest expense incurred by MSI Eagle (approximately $322,000) on its
credit facility and other indebtedness used primarily to fund its
acquisition of MSI Co., the increase in interest expense on borrowings
under revolving credit loans (approximately $300,000), and short-term
borrowings by the Company (approximately $17,000).
Net income and EBITDA for the fiscal year ended June 30, 1999 were
approximately $2,703,000 and $8,195,000, respectively, compared to net
income and EBITDA of approximately $757,000 and $4,171,000,
respectively, for fiscal 1998.
Earnings per share for the fiscal year ended June 30, 1999 were
$.43 compared to $.14 for fiscal 1998, an increase of 207.1%. EBITDA
per share for the fiscal year ended June 30, 1999 was $1.30 compared to
$.77 for fiscal 1998.
Fiscal Year Ended June 30, 1998 Compared to the Fiscal Year Ended June
30, 1997
Revenues of the Company during the fiscal year ended June 30, 1998
increased by approximately $71,927,000 (124.9%) compared to the 1997
fiscal year. This increase was due almost entirely to the acquisition
19
of JEH Co. in July 1997 by JEH Eagle. Sales of JEH Eagle during the
fiscal year ended June 30, 1998 were approximately $71,006,000.
Excluding the sales of JEH Eagle, revenues of the Company would have
been approximately $58,497,000 in the fiscal year ended June 30, 1998,
an increase of approximately $921,000 (1.6%) from the comparable 1997
fiscal year. This increase was comprised of an increase of
approximately $3,195,000 in sales to customers out of warehouse
inventory offset by a decrease in direct sales shipments to customers
from vendors of approximately $2,274,000. Sales of both Eagle and JEH
Eagle during the fiscal year ended June 30, 1998 were adversely
effected by the "El Nino" weather patterns. Unusually heavy and record
rainfall in the southeast and the paucity of hail storms in the
southwest negatively impacted sales of Eagle and JEH Eagle,
respectively, whereas hurricanes and intense rainstorms accompanied by
strong winds, which can cause significant roof damage, did not occur in
any significant amount in the Company's market areas.
Cost of sales increased between the fiscal years 1998 and 1997 at
a lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of sales as a percentage of revenues decreased to
78.4% in the fiscal year 1998 from 80.1% in the fiscal year 1997, and
gross profit as a percentage of revenues increased to 21.6% in the
fiscal year 1998 from 19.9% in the fiscal year 1997. This increase in
gross profit margin may be attributed primarily to the relative
increase in fiscal year 1998 sales to customers out of warehouse
inventory which carry a higher gross profit margin than direct sales
shipments to customers from vendors. Whereas a significant amount of
the sales to Eagle's customers are direct shipments from vendors,
almost all of the sales to customers of JEH Eagle are out of warehouse
inventory.
Operating expenses of the Company increased by approximately
$14,396,000 (136.3%) between the fiscal years 1998 and 1997. This
increase was due almost entirely to the acquisition of JEH Co. by JEH
Eagle. Operating expenses of JEH Eagle during the fiscal year 1998 were
approximately $13,720,000, including approximately $172,000 of
amortization of excess cost of investments over net assets acquired
(goodwill) and approximately $58,000 of amortization of deferred
financing costs attributable to the acquisition. During the fiscal year
1998, management of JEH Eagle evaluated its accounts receivable and
determined that no further deterioration of the customer accounts
specifically reserved in 1997 had occurred, and, accordingly, no
specific increase in the provision for doubtful accounts was required
beyond the normal level which has ranged between .8% and 1.4% of sales.
During fiscal 1998, collections of customer accounts receivable
specifically reserved in fiscal 1997 were not material. Excluding the
operating expenses of JEH Eagle, operating expenses of the Company
would have been approximately $11,239,000 in the fiscal year 1998, an
increase of approximately $676,000 (6.4%) from the fiscal year 1997.
This increase was due primarily to the increase in data processing
expenses of approximately $251,000 due to an upgrading, in March 1997,
of Eagle's data processing hardware and software, and an increase in
payroll costs of approximately $441,000 due primarily to the additional
manpower needed to service the increased sales out of warehouse
inventory. Operating expenses as a percentage of revenues were 19.3% in
the fiscal year 1998 compared to 18.3% in the fiscal year 1997.
Interest expense increased by approximately $1,262,000 (210.7%)
between the fiscal years 1998 and 1997. This increase was due
principally to the interest expense incurred by JEH Eagle
(approximately $1,250,000) on its credit facility used primarily to
fund its acquisition of JEH Co. Excluding the interest expense of JEH
20
Eagle, interest expense of the Company would have been approximately
$612,000 in fiscal 1998, an increase of approximately $13,000 (2.2%)
from fiscal 1997. This increase was due to the increase in interest
expense on short-term borrowings by the Company (approximately
$18,000), offset by the reduction in interest expense on borrowings
under Eagle's credit facility (approximately $5,000).
Net income for the fiscal year ended June 30, 1998 was
approximately $757,000 compared to a net loss of approximately
$(179,000) for fiscal 1997. EBITDA for the fiscal year ended June 30,
1998 was approximately $4,171,000 compared to approximately $1,134,000
for fiscal 1997.
Earnings per share for the fiscal year ended June 30, 1998 were
$.14 compared to a loss of $(.03) for fiscal 1997. EBITDA per share for
the fiscal year ended June 30, 1998 was $.77 compared to $.21 for
fiscal 1997.
Liquidity and Capital Resources
The Company's working capital was approximately $31,887,000 at
June 30, 2000 compared to approximately $26,593,000 at June 30, 1999.
At June 30, 2000, the Company's current ratio was 1.97 to 1 compared to
1.88 to 1 at June 30, 1999.
Cash used in operating activities for the fiscal year ended June
30, 2000 was approximately $3,019,000. Such amount consisted primarily
of increased levels of accounts and notes receivable of $2,168,000,
inventories of $7,349,000, allowance for doubtful accounts of $104,000
and decreased levels of accrued expenses and other current liabilities
of $197,000 and federal and state income taxes of $183,000, offset by
net income of $2,011,000, depreciation and amortization of $2,089,000
and increased levels of accounts payable of $2,367,000 and deferred
income taxes of $420,000.
Cash used in investing activities for the fiscal year ended June
30, 2000 was approximately $2,248,000. Such amount consisted primarily
of payments of additional consideration for the purchase of the
business and substantially all of the net assets of JEH Co. by JEH
Eagle of $1,908,000 and capital expenditures of $967,000, offset by
proceeds from the sale of fixed assests of $627,000.
Capital expenditures were approximately $967,000 for the fiscal
year ended June 30, 2000. Management of the Company presently
anticipates such expenditures in the next twelve months of not less
than $710,000, of which approximately $300,000 will be financed and
used primarily for the purchase of trucks and forklifts for the
Company's currently existing operations in anticipation of increased
business and to upgrade its vehicles to compete better in its market
areas.
Cash provided by financing activities for the fiscal year ended
June 30, 2000 was approximately $3,914,000. Such amount consisted
primarily of principal borrowings on long-term debt of $199,351,000 and
a decrease of $487,000 in the amount due from TDA and affiliated
companies, offset by principal reductions on long-term debt of
$195,924,000.
21
Acquisitions
In July 1997, JEH Eagle acquired the business and substantially
all of the assets of JEH Co., a Texas corporation, wholly-owned by
James E. Helzer, now the President of the Company. The purchase price,
as adjusted, including transaction expenses, was approximately
$14,774,000, consisting of $13,909,000 in cash, net of $250,000 due
from JEH Co., and a five-year note bearing interest at the rate of 6%
per annum in the principal amount of $864,652. The purchase price and
the note are subject to further adjustments under certain conditions.
Certain, potentially substantial, contingent payments, as additional
future consideration to JEH Co., or its designee, are to be paid by JEH
Eagle. Upon consummation of the Offering, the Company issued 300,000 of
its common shares to James E. Helzer, the designee of JEH Co., in
fulfillment of certain of such future consideration. For the fiscal
year ended June 30, 1999, approximately $1,773,000 of additional
consideration was paid to JEH Co., and approximately $1,947,000 of
additional consideration is payable to JEH Co. for the fiscal year
ended June 30, 2000. All of such additional consideration increased
goodwill and is being amortized over the remaining life of the
goodwill.
In October 1998, MSI Eagle acquired the business and substantially
all of the assets of MSI Co., a Texas corporation, wholly-owned by Gary
L. Howard, now a Senior Vice President of the Company. The purchase
price, as adjusted, including transaction expenses, was approximately
$8,538,000, consisting of $6,492,000 in cash and a five-year note
bearing interest at the rate of 8% per annum in the principal amount of
$2,045,972. The purchase price is subject to further adjustment under
certain conditions. Upon consummation of the Offering, the Company
issued 50,000 of its common shares to Gary L. Howard, the designee of
MSI Co., in payment of $250,000 principal amount of the note. The
balance of the note was paid in full in March 1999 out of the proceeds
of the Offering. Certain, potentially substantial, contingent payments,
as additional future consideration to MSI Co., or its designee, are to
be paid by JEH Eagle. (Effective May 31, 2000, MSI Eagle was merged
with and into JEH Eagle.) Upon consummation of the Offering, the
Company issued 200,000 of its common shares, and, as of July 1, 1999,
the Company issued 60,000 of its common shares, to Gary L. Howard in
fulfillment of certain of such future consideration. For the fiscal
year ended June 30, 2000, approximately $216,000 of additional
consideration is payable to MSI Co. All of such additional
consideration increased goodwill and is being amortized over the
remaining life of the goodwill.
Credit Facilities
Eagle was a party to a loan agreement which provided for a credit
facility in the aggregate amount of $10,900,000.
In order to finance the purchase of substantially all of the
assets and business of JEH Co. and to provide for working capital
needs, JEH Eagle had entered into a loan agreement for a credit
facility in the aggregate amount of $20 million.
In order to finance the purchase of substantially all of the
assets and business of MSI Co. and to provide for working capital
needs, MSI Eagle had entered into a loan agreement for a credit
facility in the aggregate amount of $9,075,000.
22
In June 2000, the Company's credit facilities were consolidated
into an amended, restated and consolidated loan agreement with JEH
Eagle and Eagle as borrowers. The amended loan agreement increased our
credit facility by $5 million, to $44,975,000, and lowered the average
interest rate by approximately one-half of one (1/2%) percent.
Furthermore, up to $8 million in borrowing was made available for
acquisitions. This credit facility bears interest as follows (with the
alternatives at our election):
* Equipment Term Note -Libor (as defined), plus two and one-
half (2.5%) percent, or the lender's Prime Rate (as
defined), plus one-half of one (1/2%) percent.
* Acquisition Term Note - Libor, plus two and three-fourths
(2.75%) percent, or the lender's Prime Rate, plus three-
fourths of one (3/4%) percent.
* Revolving Credit Loans - Libor, plus two (2%) percent or the
lender's Prime Rate.
The credit facility is collateralized by substantially all of our
tangible and intangible assets and is guaranteed by the Company.
In October 1998, in connection with the purchase of substantially
all of the assets and business of MSI Co. by MSI Eagle, TDA lent MSI
Eagle $1,000,000 pursuant to a 6% two-year note. The note is payable in
full in October 2000, and TDA has agreed to defer the interest payable
on the note until its maturity.
Impact of Inflation
General inflation in the economy has driven the operating expenses
of many businesses higher, and, accordingly, we have experienced
increased salaries and higher prices for supplies, goods and services.
We continuously seek methods of reducing costs and streamlining
operations while maximizing efficiency through improved internal
operating procedures and controls. While we are subject to inflation as
described above, our management believes that inflation currently does
not have a material effect on our operating results, but there can be
no assurance that this will continue to be so in the future.
Impact of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement
establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires the recognition of all
derivatives as either assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
The accounting for changes in the fair value of a derivative is
dependent upon the intended use of the derivative. SFAS No. 133 will be
effective in the Company's first quarter of the fiscal year ending June
30, 2001 and retroactive application is not permitted. Management does
not believe that this Statement will have a significant impact on the
Company.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The estimated fair value of financial instruments have been
determined by the Company using available market information and
appropriate valuation and methodologies. However, considerable
judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented here are
not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
The following methods and assumptions were used to estimate the
fair value of the financial instruments:
Cash and Cash Equivalents, Accounts and Notes Receivable,
Accounts Payable and Accrued Expenses - The carrying amounts
of these items are a reasonable estimate of their fair
value.
Long-Term Debt - Interest rates that are currently available
to the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value for
bank debt. The carrying amount comprising this item are
reasonable estimates of fair value, except for a 6% note due
in October 2000 and a 6% note due in June 2002. Such notes
have carrying values of $1,000,000 and $864,852,
respectively, and estimated fair market values of $975,000
and $790,000, respectively.
The fair value estimates are based on pertinent information
available to management as of June 30, 2000. Although management is not
aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date and current
estimates of fair value may differ significantly from the amounts
presented. The Company has not entered into, and does not expect to
enter into, financial instruments for trading or hedging purposes.
The Company is currently exposed to material future earnings or
cash flow exposures from changes in interest rates on long-term debt
obligations since the majority of the Company's long-term debt
obligations are at variable rates. The Company does not currently
anticipate entering into interest rate swaps and/or similar
instruments. Based on the amount outstanding as of June 30, 2000, a 100
basis point change in interest rates would result in an approximate
$333,000 charge to the Company's annual interest expense. For fixed
rate interest rate obligations, changes in market interest rates affect
the fair market value of such debt, but do not impact the Company's
earnings or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements annexed to this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
24
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of Group are as follows:
Name Age Position
- ---- --- --------
Douglas P. Fields(1) 58 Chairman of the Board and Chief
Executive Officer
James E. Helzer(1) 60 President, Vice Chairman of the Board
of Directors
Frederick M. Friedman(1) 60 Executive Vice President, Treasurer,
Secretary and a Director
E.G. Helzer 49 Senior Vice President-Operations
Gary L. Howard 45 Senior Vice President-Operations
Steven R. Andrews(2) 45 Vice President-Legal and a Director
Paul D. Finkelstein(2)(3) 58 Director
George Skakel III(2)(3) 49 Director
John E. Smircina(1)(3) 67 Director
Management believes that Messrs. Andrews, Finkelstein, Smircina
and Skakel are independent directors.
_______________________
(1) Members of the Executive Committee of our Board of Directors.
(2) Members of the Audit Committee of our Board of Directors. Mr.
Finkelstein is Chairman of the Audit Committee.
(3) Members of the Compensation Committee of our Board of Directors.
Set forth below is a brief background of the foregoing executive
officers and directors, based on information supplied by them.
Douglas P. Fields has been our Chairman of the Board of Directors,
Chief Executive Officer and a Director since our inception. From our
inception until July 1996, Mr. Fields also served as our President. For
more than the past five years, Mr. Fields has been the Chairman of the
Board of Directors, President and Chief Executive Officer of TDA and
Chief Executive Officer and a Director of each of its subsidiaries. TDA
is a holding company that is our majority stockholder and whose
operating subsidiaries are engaged in the operation of an indoor tennis
facility and the management of real estate. Mr. Fields devotes no less
time to our affairs than he deems reasonably necessary to discharge his
duties to us. Mr. Fields received a Masters degree in Business
Administration from the Harvard University Graduate School of Business
Administration in 1966 and a B.S. degree from Fordham University in
1964.
Frederick M. Friedman has been our Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a Director since inception.
For more than the past five years, Mr. Friedman has been Executive Vice
25
President, Chief Financial Officer, Treasurer, Secretary and a Director
of TDA and Vice President, Chief Financial Officer, Treasurer,
Secretary and a Director of each of its subsidiaries. Mr. Friedman
devotes no less time to our affairs than he deems reasonably necessary
to discharge his duties to us. Mr. Friedman received a B.S. degree in
Economics from The Wharton School of the University of Pennsylvania in
1962.
James E. Helzer has been our President since December 1997 and
Vice Chairman of our Board of Directors since March 1999. He has been
President of JEH Eagle since July 1997 and President of Eagle since
December 1997. From 1982 until July 1997, Mr. James E. Helzer was the
owner and Chief Executive Officer of JEH Co.
E.G. Helzer has been Senior Vice President-Operations since
December 1997.He has been Senior Vice President-Operations of JEH Eagle
since July 1997 and Senior Vice President-Operations of Eagle since
1997. From 1994 until July 1997, Mr. E.G. Helzer was the Vice
President-Operations and Colorado Manager of JEH Co. From 1982 until
1994, he was JEH Co.'s Manager-Production and Service. E.G. Helzer is
the brother of James E. Helzer.
Gary L. Howard has been Senior Vice President-Operations since
July 1999, had been our Vice President-Masonry Products from
December 1998 to July 1999 and had been President of MSI Eagle from
October 1998 through May 31, 2000. From at least 1994 until October
1998, Gary L. Howard was the owner and chief executive officer of MSI
Co.
Messrs. Fields, Friedman, Helzers and Howard have been and are
executive officers and directors of our operational subsidiaries.
Steven R. Andrews, Esq. has been our Vice President-Legal since
March 1999 and a Director since May 1996. For more than the past five
years, Mr. Andrews has been engaged in the private practice of law.
Mr. Andrews received a Juris Doctor degree and an L.L.M. degree in 1977
and 1978 from Stetson University and New York University, respectively.
In his capacity as our Vice President-Legal, Mr. Andrews has entered
into an agreement with us requiring him to review our and our officers'
and directors' compliance with their obligations under federal and
state securities laws. Mr. Andrews is required to report his findings
to the Audit Committee of our Board of Directors. Our agreement with
Mr. Andrews does not require him to devote any minimum amount of time
to the foregoing obligations and provides him with compensation of
$1,000 per month.
Paul D. Finkelstein has been the President and Director of the
Regis Corporation, an operator of beauty salons and a cosmetic sales
company, for more than the past five years and that corporation's Chief
Executive Officer since July 1996. Mr. Finkelstein became a member of
our Board of Directors in February 1999. Mr. Finkelstein received a
Masters degree in Business Administration from the Harvard University
Graduate School of Business Administration in 1966 and a B.S. degree in
Economics from The Wharton School of the University of Pennsylvania in
1964.
George Skakel has been a private investor for more than the past
five years. Mr. Skakel became a member of our Board of Directors in
February 1999. Mr. Skakel received a B.S. degree in Economics from the
26
University of Delaware in 1973 and a Masters degree in Business
Administration from the Harvard University Graduate School of Business
Administration in 1978.
John E. Smircina, Esq. had been a partner in the law firm of Wade,
Hughes and Smircina, P.C. from April 1993 until July 1996. Since July
1996, Mr. Smircina has been a sole practitioner. For more than the past
five years, Mr. Smircina has been a Director of TDA. Mr. Smircina
became a member of our Board of Directors in March 1999. Mr. Smircina
received a Masters degree in Industrial Management from Ohio University
in 1954 and a B.A. degree in Political Science from Ohio University in
1953.
Our Directors serve until the next annual meeting of stockholders
and until their successors are elected and duly qualified. Our officers
are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors. Our independent directors are
responsible for reviewing and approving all material related party
transactions including potential conflicts of interest and ensuring
stockholder approval is obtained when they believe it is necessary.
The Board of Directors has established an Executive Committee
which is composed of Douglas P. Fields, Frederick M. Friedman, James E.
Helzer and John E. Smircina, Esq. Our Board of Directors can delegate
to the Executive Committee all of the powers and authority (other than
those reserved by statute to the full Board of Directors) of the full
Board of Directors in the management of our business and affairs.
Section 16(a) Beneficial Ownership Reporting Compliance.
Steven R. Andrews, a Director and Vice-President-Legal, filed a
Form 4 on or about February 28, 2000 reporting his open market purchase
of 10,000 shares of the Company's common stock on or about November 17,
1999.
Messrs. Fields, Friedman, Helzers, Howard and Andrews hold the
positions set forth opposite their names for the Company and our
operating subsidiaries as indicated below:
Name The Company Eagle JEH Eagle
- ---- ----------- ----- ---------
Douglas P. Fields Company Chairman Chairman of the Chairman of the
of the Board and Board and Chief Board and Chief
Chief Executive Officer Executive Officer Executive Officer
James E. Helzer President and Vice President and President and
Chairman of the Director Director
Board of Directors
Frederick M. Friedman Executive Vice Executive Vice Executive Vice
President, Treasurer, President, Treasurer, President, Treasurer
Secretary and Secretary and Secretary and
Director Director Director
27
Name The Company Eagle JEH Eagle
- ---- ----------- ----- ---------
E.G. Helzer Senior Vice Senior Vice Senior Vice
President-Operations President-Operations President-Operations
Gary L. Howard Senior Vice Senior Vice
President-Operations President-Operations
Steven R. Andrews Vice-President-
Legal and Director
In connection with certain transactions which occurred in 1971 and
1973, Messrs. Fields and Friedman and TDA, then a public company,
without admitting or denying the allegations set forth in a civil
action commenced by the Commission in 1976, consented to a final
judgment of permanent injunction which, in summary, provided that
Messrs. Fields and Friedman and TDA were permanently enjoined from
violating the registration, reporting, proxy and the anti-fraud
provisions of the federal securities laws and rules. Additionally,
Messrs. Fields and Friedman agreed to certain ancillary relief which
included their agreements, for a period of two years, to resign as
directors of TDA and a publicly held subsidiary of TDA and not to vote
any securities of TDA and the subsidiary owned or controlled by them.
The Commission's complaint alleged, among other things, that in 1973
TDA and Messrs. Fields and Friedman, in connection with TDA's
acquisition of Eagle, caused an improper finder's fee to be paid to
Messrs. Fields' and Friedman's designee with a portion of such finder's
fee being paid back to Mr. Friedman. Based upon facts related to the
injunctive action, in 1979, Messrs. Fields and Friedman were found
guilty of conspiring to violate the federal securities laws and making
false statements in filings made with the Commission. Messrs. Fields
and Friedman were sentenced to six and three months incarceration,
respectively, and both were fined. Also, on facts related to the
injunctive action, Mr. Friedman was found guilty of mail and wire
frauds. Mr. Friedman was sentenced to one month incarceration on each
of three counts.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information with
respect to the compensation paid by us (including our subsidiaries) for
services rendered in all capacities during each of the last two fiscal
years by those persons indicated (the Company's four most highly
compensated executive officers, and its Chief Executive Officer).
Neither the Company nor any of the subsidiaries have had any other
executive officer whose total annual salary and bonus exceeded $100,000
for either of said fiscal years.
28
Summary Compensation Table
- --------------------------
Fiscal Year
Ended
Name and Principal Position June 30, Salary Bonus
- --------------------------- ----------- ------ -----
Douglas P. Fields 2000 $260,000 $100,000
Chief Executive Officer 1999 $75,833 $0
Frederick M. Friedman 2000 $260,000 $100,000
Executive Vice President 1999 $75,833 $0
and Treasurer
James E. Helzer 2000 $300,000 $100,000
President 1999 $300,000 $0
E.G. Helzer 2000 $162,500 $0
Senior Vice President 1999 $150,000 $0
-Operations
Gary L. Howard 2000 $260,000 $0
Senior Vice President 1999 $226,200 $0
-Operations
Employment Agreements and Arrangements
The Company and Eagle have entered into employment agreements with
Messrs. Fields and Friedman pursuant to which they act as Chairman of
the Board and Chief Executive Officer, and Executive Vice President,
Chief Financial Officer, Treasurer, Secretary and a Director of the
Company and Eagle, respectively, for a five-year period that commenced
in March 1999, at annual salaries of $200,000 each, subject to annual
increases or bonuses as may be determined by the Board of Directors.
JEH Eagle has entered into employment agreements with Messrs.
Fields and Friedman pursuant to which they act as Chairman of the Board
of Directors and Chief Executive Officer, and Executive Vice President,
Chief Financial Officer, Treasurer, Secretary and a Director of JEH
Eagle, respectively, for a five-year period which commenced in
July 1997, at annual salaries of $60,000 each, subject to annual
increases and bonuses as may be determined by JEH Eagle's Board of
Directors. The compensation payable to Messrs. Fields and Friedman
under these employment agreements commenced in March 1999.
Effective November 1, 1999, the Company, Eagle and JEH Eagle
amended their employment agreements with each of Douglas P. Fields and
Frederick M. Friedman by extending the term of said agreements to June
30, 2004. The Company's and Eagle's employment agreements with Messrs.
Fields and Friedman were scheduled to expire on March 17, 2004, while
JEH Eagle's employment agreements with Messrs. Fields and Friedman were
to expire on March 17, 2002. The employment agreements were amended to
have all of them expire contemporaneously and at the end of the fiscal
year ending June 30, 2004.
29
Pursuant to the foregoing employment agreements, Messrs. Fields'
and Friedman's written consent is required if they are to be employed
other than in proximity to their residences. Messrs. Fields and
Friedman reside in Connecticut and New York, respectively. The
agreements require the Company, Eagle and JEH Eagle to provide their
beneficiaries and each of them, respectively, with twelve months
salary in the event of death or disability and indemnify
Messrs. Fields and Friedman to the full extent permitted under the
Delaware General Corporation Law. Their agreements do not require
either Messrs. Fields or Friedman to commit a specific amount of their
time to the affairs of the Company, Eagle or JEH Eagle. Messrs. Fields
and Friedman will devote no less time than they deem reasonably
necessary to carry out their duties to the Company, Eagle and JEH
Eagle.
The Company's, Eagle's and JEH Eagle's agreements with
Messrs. Fields and Friedman contain provisions for payments of salary
and benefits following a change of control (as defined) of the Company,
Eagle or JEH Eagle, the failure to reappoint either of them to his
position, a salary reduction or the Company's, Eagle's or JEH Eagle's
failure to perform its obligations under their respective agreements.
In general, under such circumstances, each of Messrs. Fields and
Friedman would be entitled to a cash payment equivalent to his salary
for the remaining term of his agreement, and continued life, health and
disability insurance benefits for a period of two years.
JEH Eagle has also entered into employment agreements with Messrs.
James E. Helzer and E.G. Helzer pursuant to which they serve as
President and Senior Vice President-Operations, respectively, of JEH
Eagle for terms of five and three years, respectively, which commenced
in July 1997, at compensation rates of $250,000 and $125,000 per year,
respectively, subject to annual review by JEH Eagle's Board of
Directors. Additionally, in December 1997, James E. Helzer accepted the
positions of President of the Company and Eagle, and E.G. Helzer
accepted the positions of Senior Vice President-Operations of the
Company and Eagle. As a result, James E. Helzer's rate of compensation
was increased by $50,000 to $300,000 per year, and he is required to
devote approximately 80% of his working time to us, Eagle and JEH
Eagle; and E.G. Helzer's rate of compensation was increased by $25,000
to $150,000 per year, and, in 1999, his compensation was further
increased by $25,000 to $175,000 per year. Additionally, James E.
Helzer and E.G. Helzer are entitled to receive 20% and 6%,
respectively, of Eagle's earnings before taxes in excess of $600,000
per year. James E. Helzer and E.G. Helzer are employed as President and
Senior Vice President-Operations, respectively, of the Company and
Eagle pursuant to oral agreements that can be terminated by either
party without notice or penalty. The employment agreement with E. G.
Helzer expired on June 30, 2000, but he continues to perform all of his
duties under the same compensation arrangements, but without a written
agreement.
MSI Eagle had entered into an employment agreement with Gary L.
Howard for a term ending on June 30, 2003, at an annual salary of
$260,000, subject to annual review. Pursuant to the agreement, Gary L.
Howard served as the President of MSI Eagle until its merger into and
with JEH Eagle effective May 31, 2000. Additionally, as of November
1998, Gary L. Howard accepted the position of Vice President-Masonry
Products and, as of July 1999, as Senior Vice President-Operations of
the Company and JEH Eagle.
30
Steven R. Andrews, Esq. serves as our Vice President-Legal, and he
is compensated at the rate of $1,000 per month. Our agreement with Mr.
Andrews is oral and can be terminated by either party without notice or
penalty.
We have granted to each of Messrs. James E. Helzer, E.G. Helzer,
Steven R. Andrews and Gary L. Howard options exercisable to purchase
120,000, 60,000, 100,000, and 100,000 shares of Common Stock,
respectively. Such options have a term of ten years and are exercisable
at $5.00 per share. Such options vest as to 20% of the underlying
shares of Common Stock on each successive anniversary of the date of
grant commencing one year from March 17, 1999, provided that they are
our employees on such dates.
Compensation of Directors
Our Directors do not receive compensation for their services as
directors; however, the Board of Directors may authorize the payment
of compensation to directors for their attendance at regular and
special meetings of the Board and for attendance at meetings of
committees of the Board as is customary for similar companies.
Directors are reimbursed for their reasonable out-of-pocket expenses
incurred in connection with their duties.
Limitation on Liability of Directors
The Delaware General Corporation Law permits a corporation,
through its Certificate of Incorporation, to exonerate its directors
from personal liability to the corporation or to its stockholders for
monetary damages for breach of fiduciary duty of care as a director,
with certain exceptions. The exceptions include a breach of the
director's duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law,
improper declarations of dividends, and transactions from which the
directors derived an improper personal benefit. Our Certificate of
Incorporation exonerates its directors from monetary liability to the
extent permitted by this statutory provision. We have been advised that
it is the position of the Commission that, insofar as the foregoing
provision may be invoked to disclaim liability for damages arising
under the Securities Act, that provision is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Stock Option Plan
In December 1998, the Board of Directors and the stockholders
adopted and approved, as the case may be, our 1998 Stock Option Plan
(the "Stock Option Plan"). The Stock Option Plan provides for the grant
of (i) options that are intended to qualify as incentive stock options
("Incentive Stock Options") within the meaning of Section 422A of the
Internal Revenue Code, as amended (the "Code"), to certain employees,
directors and consultants, and (ii) options not intended to so qualify
("Non-Qualified Stock Options") to employees (including directors and
officers who are employees of the Company), directors and consultants.
The total number of shares of the Company's Common Stock for which
options may be granted under the Stock Option Plan is 1,200,000 shares.
Options exercisable into 842,540 shares of Common Stock to various of
our employees, including options to purchase an aggregate of 380,000
shares issued to Messrs. James E. Helzer, E.G. Helzer, Gary L. Howard
and Steven R. Andrews, Esq. have been granted at a $5.00 per share
exercise price.
31
Messrs. Finkelstein and Skakel have each been granted options to
purchase 10,000 shares of Common Stock pursuant to our Stock Option
Plan. Such options have a term of ten years, are exercisable at $5.00
per share and have vested.
The Stock Option Plan is administered by the Board of Directors
and can be administered by a committee appointed by the Board of
Directors which will determine the terms of options granted, including
the exercise price, the number of shares subject to the option and the
terms and conditions of exercise. No option granted under the Stock
Option Plan is transferable by the optionee other than by will or the
laws of descent and distribution, and each option is exercisable during
the lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the Stock
Option Plan must be at least equal to the fair market value of such
shares on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting rights of all classes of
our outstanding capital stock, the exercise price of any Incentive
Stock Option must be not less than 110% of the fair market value on the
date of grant. The term of each option granted pursuant to the Stock
Option Plan may be established by the Board of Directors or a committee
of the Board of Directors, in its sole discretion; provided, however,
that the maximum term of each Incentive Stock Option granted pursuant
to the Stock Option Plan is ten years. With respect to any Incentive
Stock Option granted to a participant who owns stock possessing more
than 10% of the voting rights of all classes of our outstanding capital
stock, the maximum term is five years. Options shall become exercisable
at such times and in such installments as the Board of Directors or a
committee of the Board of Directors shall provide in the terms of each
individual option.
Options Granted Pursuant to the Stock Option Plan to Our Executive
Officers and Directors
The table below shows, as to each of our executive officers and
directors and as to all of our executive officers and directors as a
group, the aggregate amounts of shares of Common Stock subject to
options granted. All such options have a per share exercise price of
$5.00. No options have been exercised to date.
Names of Executive Officers Shares Subject
Directors and Director Nominees To Options
- ------------------------------- --------------
James E. Helzer(1) 120,000
E.G. Helzer(1) 60,000
Gary L. Howard (1) 100,000
Steven R. Andrews(1) 100,000
Paul D. Finkelstein(2) 10,000
George Skakel III(2) 10,000
-------
Total 400,000
=======
__________________
Footnotes on following page.
32
(1) All of the options granted to Messrs. James E. Helzer, E.G.
Helzer, Gary L. Howard and Steven R. Andrews vest at a rate of 20% per
year from March 17, 1999 with the initial 20% having vested on March
17, 2000, limited, however, such that the total amount of all options
granted to each of them and vesting in any single year does not exceed
$100,000 at the exercise price.
(2) The options granted to Messrs. Finkelstein and Skakel vested on
March 17, 2000.
Other Compensation
We provide basic health, major medical and life insurance for our
employees, including executive officers. Eagle and JEH Eagle have also
adopted 401(k) Retirement Savings Plans for eligible employees, as
described below. No other retirement, pension or similar program has
been adopted. These and other benefits may be adopted by us for our
employees or the employees of our subsidiaries in the future.
In July 1992 and January 1998, Eagle and JEH Eagle adopted 401(k)
Retirement Savings Plans for employees of Eagle and JEH Eagle,
respectively (the "401(k) Plan"). Eligible employees include all
employees of Eagle and JEH Eagle (including those formerly employed by
MSI Eagle until its merger into and with JEH Eagle) who have completed
one year of employment and have attained the age of 21. The 401(k) Plan
permits employees to make voluntary contributions to the 401(k) Plan up
to a dollar limit set by law. Eagle and JEH Eagle may contribute
discretionary matching contributions equal to a determined percentage
of the employees' contributions. Benefits under the 401(k) Plan are
distributable upon retirement, disability, termination of employment or
certain financial hardship, subject to regulatory requirements. Each
participant's share of Eagle's and JEH Eagle's contributions vests at
the rate of 20% per year until after six years of service, at which
time the participant becomes fully vested.
No contributions were made to the 401(k) Plan by Eagle or JEH
Eagle during the fiscal years ended June 30, 1999 and 2000. Amounts to
be contributed in the future are at the discretion of Eagle's and JEH
Eagle's Boards of Directors. Accordingly, it is not possible to
estimate the amount of benefits that will be payable to participants in
the 401(k) Plan upon their retirement. The trustees under the 401(k)
Plan are Robert L. Noojin and Steven R. Skrotsky.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2000, based upon
our records and information obtained from the persons named below,
certain information concerning beneficial ownership of our shares of
Common Stock with respect to (i) each person known to own 5% or more of
our outstanding shares of Common Stock, (ii) each of our executive
officers and directors, and (iii) all of our officers and directors as
a group:
33
Amount Approximate
and Nature Percentage
of Beneficial of Common
Identity Ownership Stock Owned
-------- ------------- -----------
TDA Industries, Inc.(1) 5,100,000(2) 59.9%
Douglas P. Fields(1) 5,100,000(2) 59.9%
Frederick M. Friedman(1) 5,100,000(2) 59.9%
James E. Helzer(1) 320,000(3) 3.8%
Gary L. Howard (1) 330,000(3) 3.9%
E.G. Helzer(1) 12,000(3) *
Steven R. Andrews(1) 130,000(3) 1.5%
Paul D. Finkelstein(1) 10,000(3) *
John E. Smircina(1) 5,100,000(2) 59.9%
George Skakel III(1) 10,000(3) *
All Executive Officers and Directors
as a group (9 persons) 5,812,000(2)(3) 68.6%
___________________
* Denotes less than 1%.
(1) The addresses for the foregoing entity and persons are:
- TDA Industries, Inc., 122 East 42nd Street, New York, New
York 10168.
- Messrs. Fields and Friedman, c/o Eagle Supply Group, Inc.,
122 East 42nd Street, New York, New York 10168.
- Mr. James E. Helzer, 2500 U.S. Highway 287, Mansfield, Texas
76063.
- Mr. Howard, 2090 Highway 157 N., Mansfield, Texas 76063.
- Mr. Andrews, 822 North Monroe Street, Tallahassee, Florida
32303.
- Mr. E.G. Helzer, 8221 East 96th Avenue, Henderson, Colorado
80640.
- Mr. Finkelstein, c/o Regis Corp., 7201 Metro Boulevard,
Minneapolis, Minnesota 55439-2130.
- Mr. Smircina, 221S Alfred Street, Alexandria, Virginia
22314.
- Mr. Skakel, 115 Maple Avenue, Greenwich, Connecticut 06830.
(2) Messrs. Fields and Friedman are officers and directors and
principal stockholders of TDA. Mr. Smircina is a director of TDA.
Each of Messrs. Fields, Friedman and Smircina may be deemed to
exercise voting control over our securities owned by TDA. See Item
10. "Directors and Executive Officers of Registrant" and Item 13.
"Certain Relationships and Related Transactions."
(3) Does not include options granted under Group's Stock Option Plan
which have not vested but includes such options which have vested.
See Item 10. "Directors and Executive Officers of Registrant."
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JEH Eagle
In July 1997, JEH Eagle acquired the business and substantially
all of the assets of JEH Co., which is wholly-owned by James E. Helzer,
now our President.
In order to pay a substantial portion of the purchase price for
the acquisition of JEH Co.'s business and to provide working capital to
JEH Eagle, JEH Eagle in July 1997 entered into a loan agreement for a
credit facility in the aggregate amount of $20,000,000 (the "JEH
Facility"). Of the $13,878,000 initial cash payment portion of the
$14,768,000 JEH Co. tentative purchase price, including transaction
expenses, approximately $12,500,000 was supplied pursuant to the JEH
Facility and approximately $1,350,000 was invested by TDA into JEH
Eagle as an equity investment. In connection with the acquisition of
JEH Co., JEH Eagle paid TDA a financing fee of $150,000. This credit
facility has been amended and consolidated. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
James E. Helzer had rented to JEH Co. and continues to rent to JEH
Eagle, pursuant to five-year written leases, the premises for several
of JEH Eagle's distribution centers and JEH Eagle's executive offices.
Rental payments to Mr. Helzer for the several distribution facilities
he leases to JEH Eagle aggregated $669,000 during fiscal 2000. See
"Item 2. "Properties."
JEH Co. had substantial indebtedness to James E. Helzer for funds
advanced by him to JEH Co. As part of JEH Eagle's purchase of the
business and substantially all of the assets of JEH Co., JEH Eagle did
not assume this liability to Mr. Helzer.
During its fiscal years ended June 30, 1999 and June 30, 2000, JEH
Eagle made sales aggregating approximately $546,000 and $740,000,
respectively, to entities owned by Jay James Helzer, the son of James
E. Helzer.
Pursuant to an agreement, TDA provides JEH Eagle with certain
services including: (i) managerial, (ii) strategic planning, (iii)
banking negotiation, (iv) investor relations, and (v) advisory services
relating to acquisitions for a five-year term which commenced in
July 1997. A $3,000 monthly fee commenced in March 1999.
Gary L. Howard and his spouse had rented to MSI Co. and continue
to rent to JEH Eagle (successor by merger to MSI Eagle), pursuant to a
three-year written lease, certain office, showroom, warehouse and
outdoor storage space for one of JEH Eagle's distribution centers.
Rental payments to Gary L. Howard and his spouse for the distribution
facility they lease to JEH Eagle aggregated $107,000 during fiscal
2000. See Item 2. "Properties."
As of July 1, 1999, JEH Eagle began renting a distribution center,
pursuant to a five-year written lease, from a limited liability company
fifty (50%) percent owned by James E. Helzer and his spouse and fifty
(50%) percent owned by a wholly-owned subsidiary of TDA. Rental
payments to this limited liability company for the distribution
facility it leases to JEH Eagle aggregated $45,600 during fiscal 2000.
See Item 2. "Properties.
35
The limited liability company acquired these premises from JEH
Eagle, as of July 1, 1999, at a cost of approximately $392,500. JEH
Eagle had acquired the premises from one of its customers at a cost of
approximately $392,500, including approximately $217,300 of mortgage
debt and other costs incurred by JEH Eagle, resulting in the
cancellation of approximately $175,200 of a receivable due from that
customer.
MSI Eagle
In October 1998, MSI Eagle acquired the business and substantially
all of the assets of MSI Co., which is wholly-owned by Gary L. Howard,
now one of our Senior Vice Presidents-Operations.
In order to pay a substantial portion of the purchase price for
the acquisition of MSI Co.'s business and assets and to provide working
capital to MSI Eagle, MSI Eagle in October 1998 entered into a loan
agreement for a credit facility in the aggregate amount of $9,075,000
(the "MSI Facility"). Of the $6,492,000 cash payment portion of the
approximate $8,538,000 tentative purchase price for the business and
substantially all of the assets of MSI Co., including transaction
expenses, approximately $4,250,000 was supplied pursuant to the MSI
Facility, $1,000,000 was invested by TDA into MSI Eagle as an equity
investment and $1,000,000 was lent to MSI Eagle by TDA pursuant to a
six percent two-year note in that principal amount payable in full in
October 2000. TDA has agreed with MSI Eagle's lender to defer the
interest payable on such note until its maturity. This credit facility
has been amended and consolidated. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
TDA-Eagle
TDA is a holding company which operated several business
enterprises that included Eagle, JEH Eagle and MSI Eagle until our
acquisition of them in March 1999. During its fiscal year ended
June 30, 1999, Eagle and JEH Eagle made cash dividend payments to TDA
of $450,000 and $750,000, respectively. Since the acquisition of these
entities, all dividends ceased. See the Financial Statements and the
Notes thereto.
Eagle had been a party to a loan agreement which provided for a
credit facility in the amount of $10,900,000 (the "Eagle Facility").
During Eagle's fiscal year ended June 30, 1995, Eagle had used its
borrowings under the Eagle Facility to repay $2,325,533 of its
indebtedness to TDA and to advance $3,308,681 to TDA. At June 30, 1999,
Eagle's borrowings under the Eagle Facility was $9,425,117. See Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
A wholly-owned subsidiary of TDA had rented to Eagle and continues
to rent to Eagle, pursuant to ten-year written leases, the premises for
several of Eagle's distribution centers. Rental payments to the TDA
subsidiary for the several distribution centers it leases to Eagle
aggregated $790,000 during fiscal 2000. See Item 2. "Properties."
36
In October 1998, TDA and one of its wholly-owned subsidiaries lent
Eagle an aggregate of $1,400,000 repayable on demand without interest.
The loans were made to enhance Eagle's working capital. These loans
were paid in full prior to the closing of the Offering.
From February of 1998 through January 1999, TDA lent an aggregate
of $350,000 to us pursuant to promissory notes that bore interest at
rates ranging from 6% to 15%. We paid these notes in full from the net
proceeds of the Offering in March 1999 by the payment of $369,755 in
principal and interest.
TDA provides office space and administrative services to the
Company in New York City pursuant to a month-to-month administrative
services agreement requiring a $3,000 monthly payment to TDA.
The foregoing transactions that Eagle, JEH Eagle and MSI Eagle
have engaged in with TDA have benefited or may be deemed to have
benefited TDA, directly or indirectly. Messrs. Fields and Friedman, our
Chief Executive Officer and Chairman of our Board of Directors and our
Executive Vice President, Chief Financial Officer, Treasurer,
Secretary, and Director, respectively, are also executive officers,
directors and principal stockholders of TDA and have benefited or may
be deemed to have benefited, directly or indirectly, from the foregoing
transactions with TDA. TDA and/or certain of its subsidiaries derive
funds from the operation of an indoor tennis facility, commercial
realty and lease payments from us. These sources pay TDA's operating
expenses, including the payment of salaries and benefits to
Messrs. Fields and Friedman. See Item 10. "Directors and Executive
Officers of Registrant."
Messrs. Fields and Friedman are also officers, directors and
principal stockholders of TDA, and Mr. Smircina is a director of TDA,
and, consequently, they are able, through TDA, to direct the election
of our directors, effect significant corporate events and generally
direct our affairs. We do not intend to enter into any material
transactions, loans or forgiveness of loans with any affiliates, except
as contemplated or otherwise disclosed in our filings with the
Securities and Exchange Commission, unless such transaction is fair and
reasonable to us and is on terms no less favorable than we could obtain
from unaffiliated third parties. Additionally, any such event must be
approved by a majority of our directors who do not have an interest in
such a transaction and who have had access, at our expense, to
independent legal counsel.
The foregoing transactions that we have engaged in with James E.
Helzer have benefited or may be deemed to have benefited Mr. Helzer,
directly or indirectly. James E. Helzer is our President.
The foregoing transactions that we have engaged in with Gary L.
Howard have benefited or may be deemed to have benefited Mr. Howard.
Mr. Howard is one of our Senior Vice Presidents-Operations.
37
Fairness
Our management believes that the foregoing transactions are fair
and reasonable to us and were made on terms no less favorable to us
than terms and conditions that could have been entered into with
independent third parties.
Each of TDA and Messrs. Fields and Friedman may be deemed to be a
"promoter" of our enterprise as such term is defined under the federal
securities laws.
General
Simultaneously with the closing of the Offering, we acquired
Eagle, JEH Eagle and MSI Eagle (the "Subsidiaries") from TDA, and TDA
received 3,000,000 shares of our Common Stock. TDA also purchased
100,000 shares of our Common Stock in the Offering at $5.00 per share.
Additionally, as part of the acquisition of the Subsidiaries, TDA
had guaranteed that the Subsidiaries would have a book value of no less
than $1,000,000 after Eagle cancelled, in the form of a non-cash
dividend, all indebtedness of TDA to Eagle, except for an approximately
$486,000 receivable from TDA relating to and offsetting a mortgage in
the same amount on property previously owned by Eagle. At March 17,
1999, the combined book value of the Subsidiaries was approximately
$2,180,000, which exceeded the required $1,000,000 combined book value
by approximately $1,180,000 after assuming cancellation by Eagle, in
the form of a non-cash dividend, of all indebtedness of TDA to Eagle,
at that date, excluding the foregoing receivable offsetting such
mortgage. At June 30, 1999, TDA's indebtedness to Eagle, excluding the
foregoing receivable offsetting such mortgage, was approximately
$487,000. No such indebtedness existed at June 30, 2000.
As a result of the Offering, 300,000 and 200,000 shares of our
Common Stock were issued to Messrs. Helzers and Howard, respectively,
as additional consideration in connection with JEH Eagle's acquisition
of JEH Co. and MSI Eagle's acquisition of MSI Co.
Other Related Party Transactions
For details concerning the employment agreements and arrangements
with Messrs. Fields, Friedman, Helzers and Howard, see Item 10.
"Directors and Executive Officers of Management - Executive
Compensation."
For details concerning the 1997 Acquisition of JEH Co. by JEH
Eagle and the 1998 Acquisition of MSI Co. by MSI Eagle, see Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Acquisitions" and the Financial Statements and
Notes thereto.
38
PART IV
-------
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit 10.37 First Amendment to Employment Agreement among the
Registrant, Eagle Supply, Inc. and Douglas P. Fields (1)
Exhibit 10.38 First Amendment to Employment Agreement among the
Registrant, Eagle Supply, Inc. and Frederick M.
Friedman (1)
Exhibit 10.39 Second Amendment to Employment Agreement between
JEH/Eagle Supply, Inc. and Douglas P. Fields (1)
Exhibit 10.40 Second Amendment to Employment Agreement between
JEH/Eagle Supply, Inc. and Frederick M. Friedman (1)
Exhibit 10.41 Amended, Restated and Consolidated Loan and Security
Agreement (including Appendix A -- General
Definitions) (2)
Exhibit 10.42 Amended, Restated and Consolidated Revolving Credit
Note (2)
Exhibit 10.43 Amended, Restated and Consolidated Equipment Term Note
(2)
Exhibit 10.44 Amended, Restated and Consolidated Acquisition Term
Note (2)
Exhibit 27 Financial Data Schedule (3)
(b) All other schedules are omitted, as the required information
is either inapplicable or presented in the financial statements or
related notes.
- ---------------------
(1) Incorporated by Reference, filed with Registrant's Report on Form 10Q
for the quarter ended September 30, 1999.
(2) Incorporated by Reference, filed with Registrant's Report on Form 8K
(Event date June 20, 2000).
(3) Filed herewith.
39
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 in the City of New
York, State of New York, on the 28 day of September, 2000.
EAGLE SUPPLY GROUP, INC.
By: /s/ Douglas P. Fields
----------------------------------
Douglas P. Fields, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Douglas P. Fields Chairman of the Board September 28, 2000
Douglas P. Fields of Directors and Chief
Executive Officer
(Principal Executive Officer)
/s/ Frederick M. Friedman Executive Vice President, September 28, 2000
Frederick M. Friedman Treasurer, Secretary and
Director (Principal Financial
and Accounting Officer)
/s/ James E. Helzer Vice Chairman of the Board September 28, 2000
James E. Helzer of Directors
- ------------------------- Director
Paul D. Finkelstein
/s/ George Skakel III Director September 28, 2000
George Skakel III
/s/ John E. Smircina Director September 28, 2000
John E. Smircina
- ------------------------- Director
Steven R. Andrews
40
Eagle Supply Group, Inc.
Consolidated Financial Statements for the
Years Ended June 30, 2000, 1999 and 1998,
and Independent Auditors' Report
EAGLE SUPPLY GROUP, INC.
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED JUNE 30, 2000, 1999 AND 1998:
Balance Sheets 2
Statements of Operations 3
Statements of Shareholders' Equity 4
Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Eagle Supply Group, Inc.
We have audited the accompanying consolidated balance sheets of Eagle
Supply Group, Inc. (the "Company") and subsidiaries as of June 30,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for the three years ended June
30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Eagle
Supply Group, Inc. and subsidiaries as of June 30, 2000 and 1999, and
the results of their operations and their cash flows for the three
years ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Fort Worth, Texas
September 21, 2000
F-1
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
- ----------------------------------------------------------------------------
ASSETS 2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 7,165,878 $ 8,519,406
Accounts and notes receivable - trade
(net of allowance for doubtful
accounts of $1,496,000 and $1,600,000,
respectively) 29,444,868 27,172,426
Inventories 26,321,681 18,972,548
Deferred tax asset 601,426 654,474
Due from related party - 250,000
Other current assets 1,122,431 1,092,827
------------ ------------
Total current assets 64,656,284 56,661,681
PROPERTY AND EQUIPMENT, Net 5,542,722 6,617,261
EXCESS COST OF INVESTMENTS OVER NET ASSETS
ACQUIRED (net of accumulated amortization
of $1,130,522, and $508,957, respectively) 14,123,363 12,147,824
DEFERRED FINANCING COSTS 186,772 266,189
------------ ------------
$ 84,509,141 $ 75,692,955
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,000,000 $ 2,523,843
Accounts payable 22,504,89 20,138,146
Due to related parties 2,162,474 1,923,658
Accrued expenses and other current
liabilities 3,534,110 3,731,232
Income taxes due to TDA Industries, Inc. 1,143,537 1,143,537
Federal and state income taxes payable 424,715 608,160
------------ ------------
Total current liabilities 32,769,729 30,068,576
LONG-TERM DEBT 33,089,454 30,139,072
DEFERRED TAX LIABILITY 464,212 97,512
------------ ------------
Total liabilities 66,323,395 60,305,160
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 6, 7 and 8)
SHAREHOLDERS' EQUITY:
Preferred shares, $.0001 par value per
share 2,500,000 shares authorized - none
issued and outstanding - - -
Common shares, $.0001 par value per share
25,000,000 shares authorized - issued
and outstanding - 2000 - 8,510,000
shares; 1999 - 8,450,000 shares 851 845
Additional paid-in capital 16,958,141 16,658,147
Retained earnings (deficit) 1,226,754 (783,992)
------------ ------------
18,185,746 15,875,000
Less: Due from TDA Industries, Inc. and
affiliated companies - (487,205)
------------ ------------
Total shareholders' equity 18,185,746 15,387,795
$ 84,509,141 $ 75,692,955
============ ============
See notes to consolidated financial statements.
F-2
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
- ----------------------------------------------------------------------------
2000 1999 1998
REVENUES $187,714,736 $159,844,520 $129,502,812
COST OF SALES 142,421,814 122,137,798 101,527,421
------------ ------------ ------------
45,292,922 37,706,722 27,975,391
------------ ------------ ------------
OPERATING EXPENSES (including a
provision for doubtful accounts
of $732,890, $1,348,860 and
$1,212,112, respectively) 37,443,191 29,340,721 23,770,419
DEPRECIATION 1,387,761 1,212,046 958,926
AMORTIZATION OF EXCESS COST OF
INVESTMENTS OVER NET ASSETS
ACQUIRED 621,565 337,128 171,829
AMORTIZATION OF DEFERRED
FINANCING COSTS 79,417 72,832 58,062
------------ ------------ ------------
39,531,934 30,962,727 24,959,236
------------ ------------ ------------
INCOME FROM OPERATIONS 5,760,988 6,743,995 3,016,155
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Investment and other income 489,230 125,012 51,214
Interest expense (3,069,472) (2,500,655) (1,861,485)
------------ ------------ ------------
(2,580,242) (2,375,643) (1,810,271)
------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 3,180,746 4,368,352 1,205,884
PROVISION FOR INCOME TAXES 1,170,000 1,665,000 449,000
------------ ------------ ------------
NET INCOME $ 2,010,746 $ 2,703,352 $ 756,884
============ ============ ============
BASIC AND DILUTED NET INCOME
PER SHARE $ .24 $ .43 $ .14
============ ============ ============
COMMON SHARES USED IN BASIC AND
DILUTED NET INCOME PER SHARE 8,510,000 6,285,753 5,400,000
============ ============ ============
See notes to consolidated financial statements.
F-3
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
- -----------------------------------------------------------------------------
Additional Due from TDA
Preferred Shares Common Shares Paid-In Retained and Affiliated
Shares Amount Shares Amount Capital Earnings Companies Total
BALANCE, JULY 1, 1997 - $ - 5,400,000 $ 540 $ 1,352,865 $ 1,222,774 $(2,555,054) $ 21,125
Net income - - - - - 756,884 - 756,884
Cash dividends paid to
TDA Industries, Inc. - - - - - (1,200,000) - (1,200,000)
Capital contribution from
TDA Industries, Inc. - - - - 1,350,000 - - 1,350,000
Net change in Due from
TDA Industries, Inc.
and affiliated companies - - - - - - (1,068,565) (1,068,565)
------ ------ ---------- ----- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1998 - - 5,400,000 540 2,702,865 779,658 (3,623,619) (140,556)
Net income - - - - - 2,703,352 - 2,703,352
Proceeds from initial
public offering of
Common Shares and
Warrants - net - - 2,500,000 250 10,205,337 - - 10,205,587
Shares issued in
connection with the
acquisition of JEH Co. - - 300,000 30 1,499,970 - - 1,500,000
Shares issued in
connection with the
acquisition of MSI Co. - - 200,000 20 999,980 - - 1,000,000
Shares issued as a
principal payment of
a note payable - - 50,000 5 249,995 - - 250,000
Cash dividends paid to
TDA Industries, Inc. - - - - - (1,200,000) - (1,200,000)
Capital contribution
from TDA Industries, Inc. - - - - 1,000,000 - - 1,000,000
Net change in Due from
TDA Industries, Inc.
and affiliated companies - - - - - - 69,412 69,412
Non-cash dividend to TDA
Industries, Inc. - net - - - - - (3,067,002) 3,067,002 -
------ ------ ---------- ----- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1999 - - 8,450,000 845 16,658,147 (783,992) (487,205) 15,387,795
Net income 2,010,746 2,010,746
Shares issued in
connection with the
acquisition of MSI Co. - - 60,000 6 299,994 - - 300,000
Net change in Due from
TDA Industries, Inc.
and affiliated companies - - - - - - 487,205 487,205
------ ------ ---------- ----- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2000 - $ - 8,510,000 $ 851 $16,958,141 $ 1,226,754 $ - $18,185,746
====== ====== ========== ===== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-4
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
- -----------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,010,746 $ 2,703,352 $ 756,884
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,088,743 1,622,006 1,188,817
Deferred income taxes 419,748 (260,640) (178,676)
(Decrease) increase in allowance for
doubtful accounts (104,000) 622,595 527,794
Loss (gain) on sale of equipment 26,966 (9,472) (26,161)
Changes in operating assets and liabilities:
Increase in accounts and notes receivable (2,168,442) (3,257,580) (6,754,467)
Increase in inventories (7,349,133) (2,393,992) (1,261,379)
(Increase) decrease in other current assets (29,604) (238,908) 842,645
Increase in accounts payable 2,366,747 929,926 3,241,273
(Decrease) increase in accrued expenses and
other current liabilities (197,122) 488,231 608,946
Decrease in due from related party 250,000 - -
(Decrease) increase in due to related
parties (150,446) 7,249 143,197
Increase in income taxes due to TDA
Industries, Inc. - 117,919 652,300
(Decrease) increase in federal and state
income taxes payable (183,445) 608,160 -
Net cash (used in) provided by operating ------------ ------------ ------------
activities (3,019,242) 938,846 (258,827)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (967,462) (1,982,860) (2,122,397)
Proceeds from sale of fixed assets 627,274 70,771 76,786
Payment for purchase of net assets of JEH Co. - - (1,659,013)
Payment of additional consideration for the
purchase of JEH Co. (1,907,842) - -
Payment for purchase of net assets of MSI Co. - (1,519,840) -
------------ ------------ ------------
Net cash used in investing activities (2,248,030) (3,431,929) (3,704,624)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering,
net of related expenses - 10,205,587 (223,488)
Principal borrowings on long-term debt 199,350,576 170,481,066 139,493,028
Principal reductions on long-term debt (195,924,037) (170,930,422) (134,036,661)
Proceeds from issuance of notes payable
- shareholders - 200,000 300,000
Repayments of notes payable - shareholders - (500,000) -
Capital contributions from TDA Industries, Inc. - 1,000,000 1,350,000
Cash dividends to TDA Industries, Inc. - (1,200,000) (1,200,000)
Decrease (increase) in amounts due from
TDA Industries, Inc. and affiliated
companies 487,205 70,255 (1,068,565)
------------ ------------ ------------
Net cash provided by financing activities 3,913,744 9,326,486 4,614,314
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,353,528) 6,833,403 650,863
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,519,406 1,686,003 1,035,140
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,165,878 $ 8,519,406 $ 1,686,003
============ ============ ============
See notes to consolidated financial statements.
F-5
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
- -----------------------------------------------------------------------------
2000 1999 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 3,069,472 $ 2,500,655 $ 1,861,485
=========== =========== ===========
Cash paid for income taxes $ 933,697 $ 966,243 $ -
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Non-cash dividend to TDA Industries, Inc.
- net $ - $ 3,067,002 $ -
=========== =========== ===========
300,000 Common Shares issued in connection
with the acquisition of JEH Co. $ - $ 1,500,000 $ -
=========== =========== ===========
200,000 Common Shares issued in connection
with the acquisition of MSI Co. $ - $ 1,000,000 $ -
=========== =========== ===========
50,000 Common Shares issued as a principal
payment of a note payable $ - $ 250,000 $ -
=========== =========== ===========
60,000 Common Shares issued in connection
with the acquisition of MSI Co. $ 300,000 $ - $ -
=========== =========== ===========
Additional consideration pursuant to the
acquisition of JEH Co. $ 1,946,824 $ 1,773,212 $ -
=========== =========== ===========
Additional consideration pursuant to the
acquisition of MSI Co. $ 215,650 $ - $ -
=========== =========== ===========
Acquisitions of MSI Co. and JEH Co.:
MSI Co. JEH Co.
Fair value of assets acquired $ 9,284,007 $23,734,747
Liabilities assumed (1,359,698) (8,960,882)
Notes issued to sellers (2,045,972) (864,852)
Due to related party (250,000) -
Due from related party - 250,000
Bank debt incurred (4,108,497) (12,500,000)
----------- -----------
Cash paid $ 1,519,840 $ 1,659,013
=========== ===========
See notes to consolidated financial statements.
F-6
EAGLE SUPPLY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
- ----------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Business Description - Eagle Supply Group, Inc. (the "Company") is
a majority-owned subsidiary of TDA Industries, Inc. ("TDA" or the
"Parent") and was organized to acquire, integrate and operate
seasoned, privately-held companies which distribute products to or
manufacture products for the building supplies/construction
industry.
Initial Public Offering - On March 17, 1999, the Company completed
the sale of 2,500,000 shares of Common Stock at $5.00 per share and
2,875,000 Redeemable Common Stock Purchase Warrants at $.125 per
warrant in connection with its initial public offering (the
"Offering"). The net proceeds to the Company aggregated
approximately $10,206,000.
Acquisitions and Basis of Presentation - Upon consummation of the
Offering, the Company acquired all of the issued and outstanding
common shares of Eagle Supply, Inc. ("Eagle"), JEH/Eagle Supply,
Inc. ("JEH Eagle") and MSI/Eagle Supply, Inc. ("MSI Eagle") (the
"Acquisitions") from TDA for consideration consisting of 3,000,000
of the Company's common shares. The Acquisitions have been
accounted for as the combining of four entities under common
control, similar to a pooling of interests, with the net assets of
Eagle, JEH Eagle and MSI Eagle recorded at historical carryover
values. The 3,000,000 common shares of the Company issued to TDA
were recorded at Eagle's, JEH Eagle's and MSI Eagle's historical
net book values at the date of acquisition. Accordingly, this
transaction did not result in any revaluation of Eagle's, JEH
Eagle's or MSI Eagle's assets or the creation of any goodwill.
Upon the consummation of the Acquisitions, Eagle, JEH Eagle and MSI
Eagle became wholly-owned subsidiaries of the Company. Effective
May 31, 2000, MSI Eagle was merged with and into JEH Eagle. As of
July 1, 2000, the Texas operations of JEH Eagle were transferred to
a newly formed limited partnership owned directly and indirectly by
JEH Eagle. Accordingly, the Company's business operations are
presently conducted through two wholly-owned subsidiaries and a
limited partnership.
As a result of the Acquisitions, the consolidated financial
statements of the Company, Eagle, JEH Eagle and MSI Eagle have been
prepared as if all of the entities had operated as a single
consolidated group for all periods subsequent to each entity's
respective date of acquisition by TDA. Eagle is included in the
consolidated financial statements for all periods presented. JEH
Eagle is included in the consolidated financial statements from
July 1, 1997 and MSI Eagle is included in the consolidated
financial statements from October 22, 1998, the dates that the
business and substantially all of the assets of JEH Co. and MSI Co.
were acquired by JEH Eagle and MSI Eagle, respectively. Eagle, JEH
Eagle and MSI Eagle operate in a single industry segment and all of
their revenues are derived from sales to third party customers in
the United States.
Inventories - Inventories are valued at the lower of cost or
market. Cost is determined by using the first-in, first-out
("FIFO"), last-in, first-out ("LIFO"), or average cost methods. If
LIFO inventories (approximately $6,489,000, $6,033,000 and
$6,210,000 at June 30, 2000, 1999 and 1998, respectively) had been
valued at the lower of FIFO cost or market, inventories would be
higher by approximately $720,000, $530,000 and $520,000 for fiscal
2000, 1999 and 1998, respectively, and income before provision for
income taxes would have increased by approximately $190,000,
$10,000 and $9,000 in fiscal 2000, 1999 and 1998, respectively.
Depreciation and Amortization - Depreciation and amortization of
property and equipment are provided principally by straight-line
methods at various rates calculated to extinguish the carrying
values of the respective assets over their estimated useful lives.
Excess Cost of Investments Over Net Assets Acquired - Excess cost
of investments over net assets acquired ("goodwill") is being
amortized on a straight-line method over 15 to 40 years.
Management of the Company routinely evaluates the recoverability of
goodwill based upon expectations of future non-discounted cash
flows. Should management determine that impairment has occurred,
goodwill would be reduced by the excess, if any, of the carrying
value of goodwill over management's estimate of the anticipated
non-discounted future net cash flows.
F-7
Deferred Financing Costs - Deferred financing costs are related to
the acquisition financing obtained in connection with the
Acquisitions described in Note 2 and are being amortized on a
straight-line method over the term of the related debt obligations.
Income Taxes - Prior to the completion of the Offering, the Company
was included in the consolidated federal and state income tax
returns of its Parent. Income taxes were calculated on a separate
return filing basis. Subsequent to the Offering, the Company files
a consolidated federal income tax return with its subsidiaries.
Net Income Per Share - Basic net income per share was calculated by
dividing net income by the weighted average number of shares
outstanding during the periods presented and excluded any potential
dilution. Diluted net income per share was calculated similarly
and would generally include potential dilution from the exercise of
stock options and warrants. There were no dilutive options or
warrants for any of the periods presented. Both basic and diluted
net income per share includes, for all periods presented, the
3,000,000 common shares of the Company issued to TDA in connection
with the Acquisitions.
Long-Lived Assets - Long-lived assets are stated at the lower of
the expected net realizable value or cost. The carrying value of
long-lived assets is periodically reviewed to determine whether
impairment exists. The review is based on comparing the carrying
amount of the asset to the undiscounted estimated cash flows over
the remaining useful lives. No impairment is indicated as of June
30, 2000.
Fair Value of Financial Instruments - The estimated fair value of
financial instruments have been determined by the Company using
available market information and appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and Cash Equivalents, Accounts and Notes Receivable, Accounts
Payable and Accrued Expenses - The carrying amounts of these items
are a reasonable estimate of their fair value.
Long-Term Debt - Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for bank debt. The
carrying amounts comprising this item are reasonable estimates of
fair value, except for a 6% note due in October 2000 and a 6% note
due in July 2002. Such notes have carrying values of $1,000,000
and $864,852, respectively, and estimated fair market values of
$975,000 and $790,000, respectively.
The fair value estimates are based on pertinent information
available to management as of June 30, 2000. Although management
is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date and current estimates of fair value may differ
significantly from the amounts presented.
Concentration of Credit Risk - The financial instruments, which
potentially subject the Company to concentration of credit risk,
consist principally of commercial paper which is included in cash
and cash equivalents and accounts receivable. The Company grants
credit to customers based on an evaluation of the customer's
financial condition and in certain instances obtains collateral in
the form of liens on both business and personal assets of its
customers. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company
controls its exposure to credit risks through credit approvals,
credit limits and monitoring procedures and establishes allowances
for anticipated losses.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Revenue Recognition - The Company recognizes revenues from the sale
of inventory when title passes to the purchaser.
Comprehensive Income - The Company has no components of
comprehensive income except for net income.
F-8
Significant Vendor - During the fiscal years ended June 30, 2000,
1999 and 1998, the Company purchased approximately 18%, 17% and
20%, respectively, of its product lines from one supplier. Since
similar products are available from other suppliers, the loss of
this supplier would not have a material adverse effect on the
Company's business.
Statements of Cash Flows - The Company considers money market
accounts and commercial paper to be cash equivalents for the
purpose of these financial statements. Cash equivalents amounted
to approximately $5,988,000 and $5,700,000 at June 30, 2000 and
1999, respectively.
Recently Issued Pronouncements - In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and measurement
of those instruments at fair value. The accounting for changes in
the fair value of a derivative is dependent upon the intended use
of the derivative. SFAS No. 133 will be effective in the Company's
first quarter of the fiscal year ending June 30, 2001 and
retroactive application is not permitted. Management does not
believe that this Statement will have a significant impact on the
Company.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements, which summarizes the application of generally accepted
accounting principles to revenue recognition in financial
statements and which is effective for the Company's fiscal year
2001 financial statements. Management does not believe that the
adoption of this Bulletin will have a significant impact on the
Company.
Reclassifications - Certain reclassifications have been made in the
prior years' financial statements in order to conform to the
classifications used in the current year.
2. ACQUISITIONS
On July 8, 1997, effective as of July 1, 1997, JEH Eagle acquired
the business and substantially all of the assets of JEH Company,
Inc. ("JEH Co."), engaged in the wholesale distribution of roofing
supplies and related products utilized primarily in the
construction industry. The purchase price, as adjusted, including
transaction expenses, was $14,767,852 consisting of $13,878,000 in
cash, net of $250,000 due from JEH Co., and a five-year, 6% per
annum note in the principal amount of $864,852. The purchase price
and the note are subject to further adjustment under certain
conditions. Further, JEH Eagle is obligated for potentially
substantial additional payments if, among other factors, the
business acquired attains certain levels of income, as defined,
during the five-year period ending June 30, 2002 (the "JEH
Applicable Period"). Additionally, with respect to certain Total
Accounts Receivable Reserves, as defined (the "JEH Reserves"),
which were established at date of acquisition, if JEH Eagle reduces
the amount of the JEH Reserves in any fiscal year during the JEH
Applicable Period, JEH Co. or its designee is to be paid a portion
of such reduction based on a formula as described in the
acquisition agreement. Additionally, if the Offering was
consummated prior to June 30, 2002 and in the event certain JEH
EBITDA levels, as defined, had been reached during the period July
1, 1997 through the date of consummation of the Offering, JEH Co.
or its designee would have been entitled to receive $1,000,000 or
$1,350,000 (either in cash or in common shares of the Company
valued at the public offering price) depending upon the JEH EBITDA
level. Upon consummation of the Offering, the Company issued
300,000 of its common shares to James E. Helzer the owner of JEH
Co. and president of the Company in fulfillment of the obligation
set forth in the immediately preceding sentence. For the fiscal
year ended June 30, 1999, approximately $1,773,000 of additional
consideration was paid to JEH Co. For the fiscal year ended June
30, 2000, approximately $1,947,000 of additional consideration is
payable to JEH Co. All of such additional consideration increased
goodwill and is being amortized over the remaining life of the
goodwill. No additional consideration was payable to JEH Co. for
fiscal 1998.
The foregoing transaction was accounted for as a purchase and,
accordingly, the results of the operations acquired from JEH Co.
have been included in the statements of operations from the
effective date of the acquisition.
On October 22, 1998, MSI Eagle acquired the business and
substantially all of the assets of Masonry Supply, Inc. ("MSI
Co."), engaged in the wholesale distribution of masonry supplies
and related products utilized primarily in the construction
industry. The purchase price, as adjusted, including transaction
expenses, was $8,537,972 consisting of $6,492,000 in cash and a
five-year, 8% per annum note in the principal amount of $2,045,972.
The purchase price and the note are subject to further adjustment
under certain conditions. The note was paid in full in March 1999
out of the proceeds of the Offering. Further, MSI Eagle is
F-9
obligated for potentially substantial additional payments if, among
other factors, the business acquired attains certain levels of
income, as defined, during the five-year period ending June 30,
2003. Additionally, if the Offering was consummated prior to
October 22, 2003 and certain MSI EBITA levels, as defined, had been
reached, MSI Co. or its designee would have been entitled to
receive (i) $1,000,000 or (ii) $750,000 (either in cash or in
common shares of the Company valued at the public offering price)
if the MSI EBITA level was (i) not less than $2,000,000 per year or
(ii) less than $2,000,000 but not less than $1,500,000 per year,
respectively. Upon the consummation of the Offering, the Company
issued 200,000 of its common shares, and, as of July 1, 1999, the
Company issued 60,000 of its common shares, to Gary L. Howard, the
designee and owner of MSI Co. and a senior vice president of the
Company, in fulfillment of the obligation set forth in the
immediately preceding sentence and in fulfillment of certain of
such future additional consideration. For the fiscal year ended
June 30, 2000, approximately $216,000 of additional consideration
is payable to MSI Co. All of such additional consideration
increased goodwill and is being amortized over the remaining life
of the goodwill. No additional consideration was payable to MSI
Co. for fiscal 1999.
The foregoing transaction was accounted for as a purchase and,
accordingly, the results of the operations acquired from MSI Co.
have been included in the statements of operations from the date of
the acquisition.
The following pro forma information represents the consolidated
results of operations of the Company as if the MSI Co. acquisition
had been consummated as of July 1, 1997:
Year Ended June 30,
1999 1998
Revenues $163,821,000 $141,463,000
============ ============
Net income $ 2,949,000 $ 1,044,000
============ ============
The pro forma information is not necessarily indicative of the
operating results that would have occurred if the MSI Co.
acquisition had been consummated as of July 1 of each respective
period, nor is it necessarily indicative of future operating
results. The actual results of operations of MSI Co. are included
in the Company's consolidated financial statements only from the
date of acquisition.
3. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
June 30, Estimated
2000 1999 Useful Lives
Land $ - $ 100,000
Buildings and improvements - 292,535 25 years
Furniture, fixtures and equipment 2,973,393 3,000,569 5 years
Automotive equipment 4,641,059 4,853,812 5-7 years
Leasehold improvements 1,798,197 1,379,900 10 years
Assets acquired under capitalized
leases 970,278 1,017,239 2-6 years
---------- ----------
10,382,927 10,644,055
Less: Accumulated depreciation
and amortization 4,840,205 4,026,794
---------- ----------
$5,542,722 $6,617,261
========== ==========
F-10
4. INCOME TAXES
Components of the provision for income taxes are as follows:
Year Ended June 30,
2000 1999 1998
Current:
Federal $ 660,252 $1,629,640 $ 542,676
State and local 90,000 296,000 85,000
Deferred 419,748 (260,640) (178,676)
---------- ---------- ----------
$1,170,000 $1,665,000 $ 449,000
========== ========== ==========
A reconciliation of income taxes at the federal statutory rate and
the amounts provided, is as follows:
Year Ended June 30,
2000 1999 1998
Tax using the statutory rate $ 1,081,000 $ 1,485,000 $ 410,000
State and local income taxes 59,000 195,000 56,000
Other 30,000 (15,000) (17,000)
----------- ----------- -----------
$ 1,170,000 $ 1,665,00 $ 449,000
=========== =========== ===========
Temporary differences which give rise to a net deferred tax asset
are as follows:
June 30,
2000 1999
Deferred tax assets:
Provision for doubtful accounts $ 569,506 $ 620,654
Inventory capitalization 31,920 33,820
---------- ----------
601,426 654,474
Deferred tax liability:
Depreciation (464,212) (97,512)
---------- ----------
Net deferred tax asset $ 137,214 $ 556,962
========== ==========
Management believes that no valuation allowance against the net
deferred tax asset is necessary.
F-11
5. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
2000 1999
Variable rate collateralized revolving credit note (D) $ 28,215,788 $ -
Variable rate collateralized equipment note (D) 1,826,641 -
Variable rate collateralized term note (D) 3,243,900 -
Variable rate collateralized revolving credit note (A) (D) - 8,746,117
Variable rate collateralized equipment note (A) (D) - 679,000
Variable rate collateralized revolving credit note (B) (D) - 829,895
Variable rate collateralized term note (B) (D) - 2,816,400
Variable rate collateralized revolving credit note (C) (D) - 13,007,944
Variable rate collateralized equipment note (C) (D) - 1,598,500
Variable rate collateralized term note (C) - 1,562,500
Note payable - TDA Industries, Inc. (E) 1,000,000 1,000,000
6% promissory note, due July 2002 (Note 2) 864,852 864,852
Capitalized equipment lease obligations, at various
rates, for various terms through 2003 (E) 541,528 780,136
Variable rate mortgage (Note 7) - 487,205
8.50% equipment loan, payable in monthly
installments through February 13, 2003 136,415 181,195
8.50% equipment loan, payable in monthly
installments through April 23, 2003 49,646 63,816
8.50% equipment loan, payable in monthly
installments through April 27, 2003 24,363 31,242
9.25% equipment loan, payable in monthly
installments through March 20, 2005 155,255 -
9.25% equipment loan, payable in monthly
installments through May 5, 2005 28,969 -
7.99% equipment loan, payable in monthly
installments through August 31, 2000 2,097 14,113
------------ -----------
36,089,454 32,662,915
Less: Current portion of long-term debt 3,000,000 2,523,843
------------ -----------
$ 33,089,454 $30,139,072
============ ===========
F-12
(A) Eagle was a party to a loan agreement which provided for a
credit facility in the aggregate amount of $10,900,000. The
credit facility consisted of a $10 million revolving credit
loan and a $900,000 equipment loan.
(B) In order to finance the purchase of substantially all of the
assets and business of MSI Co. and to provide for working
capital needs, MSI Eagle had entered into a loan agreement
for a credit facility in the aggregate amount of $9,075,000.
The credit facility consisted of a $3,075,000 term loan and
the balance in the form of a revolving credit loan.
(C) In order to finance the purchase of substantially all of the
assets and business of JEH Co. and to provide for working
capital needs, JEH Eagle had entered into a loan agreement
for a credit facility in the aggregate amount of $20
million. The credit facility consisted of a $3,000,000 term
loan, a $2,475,000 equipment loan and the balance in the
form of a revolving credit loan.
(D) In June 2000, the Eagle, MSI Eagle and JEH Eagle credit
facilities were combined into an amended, restated and
consolidated loan agreement, which matures in October 2003,
for an increased credit facility in the aggregate amount of
$44,975,000 with the same lender, with Eagle and JEH Eagle
as the borrowers. This credit facility consists of a
$3,243,900 term loan, a $1,826,641 equipment loan and the
balance in the form of a revolving credit loan.
The revolving credit loan bears interest at the lender's
prime rate or at the London interbank offered rate, plus two
(2%) percent, at the option of the borrowers.
The term loan is payable in equal monthly installments,
commencing July 1, 2000, each in the amount of $99,500, with
a balloon payment due on the earlier of November 1, 2005 or
the end of the loan agreement's initial or renewal term. The
term loan bears interest at the lender's prime rate, plus
three-fourths of one (3/4%) percent, or at the London
interbank offered rate, plus two and three-fourths (2.75%)
percent, at the option of the borrowers.
The equipment loan is payable in equal monthly installments,
commencing July 1, 2000, each in the amount of $37,000, with
a balloon payment due on the earlier of August 1, 2004 or
the end of the loan agreement's initial or renewal term. The
equipment loan bears interest at the lender's prime rate
plus one-half of one (1/2%) percent or at the London
interbank offered rate, plus two and one-half (2.50%)
percent, at the option of the borrowers.
Obligations under the credit facility are collateralized by
substantially all of the tangible and intangible assets of
Eagle and JEH Eagle, and the credit facility is guaranteed
by the Company.
(E) In October 1998, in connection with the purchase of
substantially all of the assets and business of MSI Co. by
MSI Eagle, TDA lent MSI Eagle $1,000,000 pursuant to a 6%
two-year note. The note is payable in full in October 2000,
and TDA has agreed to defer the interest payable on the note
until its maturity.
(F) Future minimum lease payments for capitalized equipment
lease obligations at June 30, 2000 are as follows:
Year Ending
June 30, Amount
2001 $ 285,937
2002 187,396
2003 131,181
-----------
604,514
Less: Interest 62,986
-----------
Present value of net
minimum payments $ 541,528
===========
F-13
The aggregate future maturities of long-term debt, excluding
capitalized equipment lease obligations, are as follows:
Year Ending
June 30, Amount
2001 $ 2,753,305
2002 2,619,093
2003 1,394,141
2004 28,746,393
2005 34,994
-----------
$35,547,926
===========
6. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries have entered into various
employment agreements which expire at various times through
June 2004. Pursuant to such agreements, the annual base
compensation payable aggregates approximately $1,080,000. The
aggregate base compensation incurred in fiscal 2000 aggregated
approximately $1,080,000.
b. The Company's subsidiaries have a defined contribution
retirement plan covering eligible employees. This plan
provides for contributions at the discretion of the
subsidiaries. No contributions were made to these plans in
fiscal 2000, 1999 or 1998.
c. At June 30, 2000, the Company and its subsidiaries were liable
under various long-term leases for property and automotive and
other equipment which expire on various dates through 2009.
Certain of the leases include options to renew. In addition,
real property leases generally provide for payment of taxes and
other occupancy costs. Rent expense charged to operations in
2000, 1999 and 1998 was approximately $4,650,591, $3,560,000
and $2,023,000, respectively, which includes taxes and various
occupancy costs, as well as rent for equipment under short-term
leases (less than one year).
The approximate future minimum rental commitments under all of
the above leases are as follows:
Year Ending
June 30, Amount
2001 $ 5,321,000
2002 4,356,000
2003 3,078,000
2004 2,383,000
2005 1,872,000
Thereafter 3,455,000
------------
Total future minimum rental commitments $ 20,465,000
============
d. The Company is involved in certain litigation arising in the
ordinary course of business. Management believes that the
ultimate resolution of such litigation will not be significant
to the Company.
F-14
7. TRANSACTIONS WITH THE COMPANY AND OTHER RELATED PARTIES
The Chief Executive Officer and Chairman of the Board of Directors
of the Company is an officer and a director of TDA; the Executive
Vice President, Secretary, Treasurer and a director of the Company
is also an officer and a director of TDA; and another director of
the Company is also a director of TDA.
The Company has entered into an agreement pursuant to which TDA
provides the Company with certain services including (i)
managerial, (ii) strategic planning, (iii) banking negotiations,
(iv) investor relations, and (v) advisory services relating to
acquisitions for a five-year term which commenced in July 1997.
The monthly fee, the payment of which commenced upon the
consummation of the Offering and the Acquisitions, for the
foregoing services is $3,000.
The Company also entered into an agreement pursuant to which TDA
provides the Company with office space and administrative services
on a month-to-month basis. The monthly fee, the payment of which
commenced upon the consummation of the Offering and the
Acquisitions, for the foregoing services is $3,000.
JEH Eagle leases several of its distribution center facilities and
its executive offices from the President of the Company pursuant to
five-year written leases at base annual rentals aggregating
approximately $670,000.
Eagle operates a substantial portion of its business from
facilities leased from a subsidiary of TDA pursuant to ten-year
written leases at base annual rentals aggregating approximately
$790,000.
JEH Eagle leases offices, showroom, warehouse and storage
space in Mansfield, Texas, from a senior vice president of the
Company and his spouse pursuant to a three-year written lease at a
base annual rental aggregating approximately $107,000.
JEH Eagle leases a distribution center from a limited liability
company fifty (50%) percent owned by a wholly-owned subsidiary of
TDA and fifty (50%) owned by the President of the Company and his
spouse pursuant to a five-year written lease at a base annual
rental aggregating approximately $46,000.
During the fiscal year ended June 30, 2000, JEH Eagle made sales
aggregating approximately $740,000 to an entity owned by the son of
the President. Management believes that such sales were made on
terms no less favorable than sales made to independent third
parties.
The Due from TDA Industries, Inc. and affiliated companies account
in the amount of $487,205 at June 30, 1999 related to and offset a
mortgage in the same amount on property previously owned by Eagle
and for which Eagle had been the primary obligor. On September 2,
1999, this mortgage was paid in full and Eagle was relieved of any
and all obligations thereunder.
8. SHAREHOLDERS' EQUITY
Preferred Shares - The preferred shares may be issued in one or
more series, the terms of which may be determined at the time of
issuance by the Board of Directors of the Company, without further
action by shareholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences
as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions.
Common Shares - Holders of common shares are entitled to one vote
for each share held of record on each matter submitted to a vote of
shareholders. There is no cumulative voting for election of
directors. Subject to the prior rights of any series of preferred
shares which may from time to time be outstanding and to
limitations imposed by any credit agreements to which the Company
is a party, holders of common shares are entitled to receive
dividends when and if declared by the Board of Directors out of
funds legally available therefor and, upon the liquidation,
dissolution or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities and
payment of accrued dividends and liquidation preferences on the
preferred shares, if any. Holders of common shares have no pre-
emptive rights and have no rights to convert their common shares
into any other securities.
Warrants - The Company has outstanding 275,000 warrants which
entitle the registered holder to purchase one common share at an
exercise price of $5.00 per share (subject to adjustment) for three
years commencing on the date of the Offering, provided that during
F-15
such time a current prospectus relating to the common shares is
then in effect and the common shares are qualified for sale or
exempt from qualification under applicable state securities laws.
In addition, 2,950,000 warrants are outstanding which are
exercisable at $5.50 per share through March 12, 2004, provided
that during such time a current prospectus relating to the common
shares is then in effect and the common shares are qualified for
sale or exempt from qualification under applicable state securities
laws.
In connection with the Offering, the Company granted the
underwriters warrants entitling the holders thereof to purchase an
aggregate of 500,000 of the Company's common shares at an exercise
price of $8.25 per share for five years commencing on the date of
the Offering.
Stock Option Plan - In August 1996, last amended in 1999, the Board
of Directors adopted and shareholders approved the Company's Stock
Option Plan (the "Stock Option Plan"). The Stock Option Plan
provides for the grant of options that are intended to qualify as
incentive stock options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code, as amended
(the "Code"), to certain employees, officers and directors. The
total number of common shares for which options may be granted
under the Stock Option Plan is 1,200,000 common shares. Options
exercisable into 842,540 common shares to various employees and
certain officers and directors have been granted at a $5.00 per
share exercise price. All of such options have a term of ten years.
The options granted to employees and officers (822,540) vest at a
rate of 20% per year commencing on the first anniversary of the
date of grant, and the options granted to two directors (20,000)
fully vested one year from the date of the grant.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations in accounting for its stock option plan.
Accordingly, no compensation expense has been recognized for the
Company's stock option plan, since the exercise price of the
Company's stock option grants was the fair market value of the
underlying stock on the date of the grant. Had compensation costs
for the stock option plan been determined based on the fair value
at the grant date consistent with SFAS No. 123, "Accounting for
Stock Based Compensaton", the Company's net income for fiscal 1999
and 2000 would not have been significantly affected. The Company
used the Black-Scholes model with the following assumptions: risk-
free interest rate of 5.5%, expected life of three years and
expected volatility and dividends of 0%.
9. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at
Year Ending Beginning Balance at
June 30, of Year Provision Writeoffs End of Year
1998 $ 449,611 $1,212,112 $(684,723) $ 977,000
=========== ========== ========= ==========
1999 $ 977,000 $1,348,860 $(725,860) $1,600,000
=========== ========== ========= ==========
2000 $ 1,600,000 $732,890 $(836,890) $1,496,000
=========== ========== ========= ==========
* * * * *
F-16