SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
------------------
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
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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 1618, New York, New York 10168
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(Address of Principal Executive Offices) (Zip Code)
212-986-6190
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(Registrant's Telephone Number, Including Area Code)
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 past 12 months (or for
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of the Registrant's Common
Stock, as of November 11, 2003, was 10,255,455 shares.
EAGLE SUPPLY GROUP, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003
(Unaudited) and June 30, 2003 3
Consolidated Statements of Operations (Unaudited) for
the Three Months Ended September 30, 2003 and 2002 4-5
Consolidated Statement of Shareholders' Equity (Unaudited)
for the Three Months Ended September 30, 2003 6
Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended September 30, 2003 and 2002 7
Notes to Unaudited Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22-23
Item 4. Controls and Procedures 23-24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CERTIFICATIONS 27-30
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
2003 2003
(Unaudited)
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 432,359 $ 1,505,408
Accounts and notes receivable
- trade (net of allowance
for doubtful accounts) 41,420,933 40,176,822
Inventories 36,803,535 39,962,678
Deferred tax asset 2,170,000 1,871,000
Assets of discontinued operation - 157,724
Federal and state income taxes receivable - 771,095
Other current assets 1,098,401 881,716
------------ ------------
Total current assets 81,925,228 85,326,443
PROPERTY AND EQUIPMENT, net 2,736,098 2,964,635
COST IN EXCESS OF NET ASSETS ACQUIRED
(net of accumulated amortization) 14,581,358 14,581,358
NOTES RECEIVABLE - TRADE (net of allowance
for doubtful accounts) 2,585,870 2,807,588
OTHER ASSETS 3,485 15,850
------------ ------------
$101,832,039 $105,695,874
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 860,000 $ 860,000
Note payable - TDA Industries, Inc. 1,000,000 1,000,000
Accounts payable 26,997,911 31,876,367
Due to related parties 259,778 259,778
Accrued expenses and other current
liabilities 5,962,906 5,988,543
Federal and state income taxes payable 493,586 -
------------ ------------
Total current liabilities 35,574,181 39,984,688
LONG-TERM DEBT 41,654,186 42,687,892
DEFERRED TAX LIABILITY 1,715,000 1,807,000
------------ ------------
Total liabilities 78,943,367 84,479,580
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SHAREHOLDERS' EQUITY:
Preferred Stock, $.0001 par value per share,
10,000,000 shares authorized; none issued
and outstanding - -
Common Stock, $.0001 par value per share,
30,000,000 shares authorized; issued and
outstanding - 10,255,455 shares 1,025 1,025
Class A Non-Voting Common Stock, $.0001 par
value per share, 10,000,000 shares
authorized; none issued and outstanding - -
Additional paid-in capital 19,375,064 19,325,064
Retained earnings 3,512,583 1,890,205
------------ ------------
Total shareholders' equity 22,888,672 21,216,294
------------ ------------
$101,832,039 $105,695,874
============ ============
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
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2003 2002
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REVENUES $ 72,417,856 $ 60,389,627
COST OF SALES 54,612,910 46,075,863
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17,804,946 14,313,764
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OPERATING EXPENSES (including provisions
for doubtful accounts of $1,105,363 and
$660,305, respectively) 14,847,762 13,636,362
DEPRECIATION AND AMORTIZATION 228,973 338,623
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15,076,735 13,974,985
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INCOME FROM CONTINUING OPERATIONS 2,728,211 338,779
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OTHER INCOME (EXPENSE):
Interest income 153,448 49,937
Interest expense (389,281) (505,271)
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(235,833) (455,334)
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INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 2,492,378 (116,555)
PROVISION (BENEFIT) FOR INCOME TAXES 870,000 (45,000)
------------- ------------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS 1,622,378 (71,555)
LOSS FROM DISCONTINUED OPERATION,
NET OF INCOME TAXES - (77,423)
------------- ------------
NET INCOME (LOSS) BEFORE EFFECT OF
ACCOUNTING CHANGE 1,622,378 (148,978)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF INCOME TAXES - (413,000)
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NET INCOME (LOSS) $ 1,622,378 $ (561,978)
============= ============
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (Contd.)
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2003 2002
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BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) from continuing operations $ .16 $ (.01)
Loss from discontinued operation - (.01)
Cumulative effect of accounting change - (.05)
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$ .16 $ (.07)
============= ============
SHARES OF COMMON STOCK USED IN
BASIC NET INCOME (LOSS) PER SHARE 10,255,455 9,055,455
============= ============
DILUTED NET INCOME (LOSS) PER SHARE:
Net (loss) income from continuing operations $ .16 $ (.01)
Loss from discontinued operation - (.01)
Cumulative effect of accounting change - (.05)
------------- ------------
$ .16 $ (.07)
============= ============
SHARES OF COMMON STOCK USED IN
DILUTED NET INCOME (LOSS) PER SHARE 10,422,122 9,055,455
============= ============
See notes to unaudited consolidated financial statements.
-5-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------
Class A Non-Voting Additional
Preferred Stock Common Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ---------- ------ ---------- ---------- -----------
BALANCE, JULY 1, 2003 - $ - - $ - 10,255,455 $1,025 $19,325,064 $1,890,205 $21,216,294
Net income - - - - - - - 1,622,378 1,622,378
Refund of expenses from
private placement - - - - - - 50,000 - 50,000
------ ------ ------ ------ ---------- ------ ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 2003 - $ - - $ - 10,255,455 $1,025 $19,375,064 $3,512,583 $22,888,672
====== ====== ====== ====== ========== ====== =========== ========== ===========
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
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2003 2002
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OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 1,622,378 $ (71,555)
Loss from discontinued operation, net of
income taxes - (77,423)
Cumulative effect of accounting change,
net of income taxes - (413,000)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 228,973 346,146
Deferred income taxes (391,000) (331,000)
Increase in allowance for doubtful accounts 1,260,032 638,265
Loss on sale of equipment 1,361 -
Changes in assets and liabilities:
Increase in accounts and notes receivable (2,282,425) (392,395)
Decrease in inventories 3,159,143 1,957,914
Decrease (increase) in assets of
discontinued operation 157,724 (508,942)
Increase in other current assets (216,685) (27,973)
Decrease in accounts payable (4,878,4 (1,307,006)
Decrease in accrued expenses and other
current liabilities (25,637) (431,634)
Increase (decrease) in federal and
state income taxes 1,264,681 (6,393)
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Net cash used in operating activities (99,911) (624,996)
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INVESTING ACTIVITIES:
Capital expenditures (25,432) (97,870)
Proceeds from sales of fixed assets 36,000 -
------------- ------------
Net cash provided by (used in)
investing activities 10,568 (97,870)
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FINANCING ACTIVITIES:
Principal borrowings of long-term debt 75,466,583 65,310,151
Principal reductions of long-term debt (76,500,289) (66,387,710)
Increase (decrease) in additional paid-in capital 50,000 (5,024)
------------- ------------
Net cash used in financing activities (983,706) (1,082,583)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,073,049) (1,805,449)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,505,408 5,355,070
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 432,359 $ 3,549,621
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 389,281 $ 505,271
============= ============
Cash paid during the period for income taxes $ 596 $ 23,393
============= ============
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements
of Eagle Supply Group, Inc. and its subsidiaries and limited
partnership (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United
States of America for interim financial information and in a
manner consistent with that used in the preparation of the
annual consolidated financial statements of the Company at
June 30, 2003. In the opinion of management, the
accompanying unaudited consolidated financial statements
reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the
financial position and results of operations and cash flows
for the periods presented.
Operating results for the three months ended September 30,
2003 and 2002 are not necessarily indicative of the results
that may be expected for a full year. In addition, the
unaudited consolidated financial statements do not include
all information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of
America. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes thereto which are included in
the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2003 filed with the Securities and Exchange
Commission.
Business Description - The Company is a majority-owned
----------------------
subsidiary of TDA Industries, Inc. ("TDA") and was organized
on May 1, 1996, as a Delaware corporation, to acquire,
integrate and operate seasoned, privately-held companies
which distribute products to or manufacture products for the
building supplies/construction industry.
Basis of Presentation - The Company operates in a single
-----------------------
industry segment and all of its revenues are derived from
sales to third party customers in the United States.
Basic Net Income (Loss) Per Share - Basic net income (loss)
per share was calculated by dividing net income (loss) by the
weighted average number of shares of common stock outstanding
during the periods presented and excludes any potential
dilution. Diluted net income (loss) per share was calculated
similarly and includes potential dilution, unless anti-
dilutive, from the exercise of common stock warrants.
Comprehensive Income (Loss) - For the three months ended
-----------------------------
September 30, 2003 and 2002, comprehensive income (loss) was
equal to net income (loss).
Shipping and Handling Fees and Costs - The Company includes
--------------------------------------
shipping and handling charges billed to customers in
revenues. The related costs associated with shipping and
handling are included as a component of cost of sales.
Advertising Costs - The Company expenses advertising costs as
-----------------
incurred. The Company's advertising expenses are net of the
portion of advertising costs shared with manufacturers.
-8-
Revenue Recognition - The Company recognizes revenues when
--------------------
the earnings process is complete, title is transferred to the
customer, and when collectability of the fixed sales price is
reasonably assured. Title transfers to the customer upon
delivery to the customer's job site or upon pick up by the
customer at a Company distribution center.
Stock-based Compensation - 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
dates of the grants. Had compensation costs for the
Company's Stock Option Plan been determined based on the fair
value at the grant dates consistent with the method of SFAS
No. 123, Accounting for Stock-Based Compensation, and SFAS
No. 148, Accounting for Stock-Based Compensation -Transition
and Disclosure, the Company's net income (loss) and basic and
diluted net income (loss) per share for the three-month
periods ended September 30, 2003 and 2002 would have been
reduced to the proforma amounts indicated below:
Three Months
2003 2002
------------ -----------
Net income (loss) $ 1,622,378 $ (561,978)
Compensation costs (17,345) (25,849)
------------ -----------
Proforma $ 1,605,033 $ (587,827)
Basic net income (loss)
per share $ .16 $ (.07)
Compensation costs - -
------------ -----------
Proforma $ .16 $ (.07)
============ ===========
Diluted net income (loss)
per share $ .16 $ (.07)
Compensation costs - -
------------ -----------
Proforma $ .16 $ (.07)
============ ===========
The Company used the Black-Scholes model with the following
assumptions in the calculation of fair value: risk-free
interest rate of 5.5%, expected life of three years, expected
volatility of 19.72% and a dividend yield of 0%.
Reclassifications and Restatements - Certain reclassifications
-----------------------------------
have been made in the prior period's financial statements
in order to conform to the classifications in the current
period.
As reported in the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2002, in January 2003, the
Company sold its Birmingham, Alabama, distribution center and
realized a loss of approximately $90,000 on the sale. The
reported results of operations for the 2002 three-month
period have been restated to reclassify the operations of
this distribution center as discontinued.
The consolidated statements of operations and cash flows of
the Company for the three-month period ended September 30,
2002 have been restated for the change during the second
quarter of fiscal 2003 in the adoption of Emerging Issues
Task Force ("EITF") No. 02-16, effective July 1, 2002. In
adopting the new guidance, the Company changed its previous
method of accounting, which was consistent with generally
-9-
accepted accounting principles. Under the previous accounting
method, vendor allowances were treated as a reduction of cost
of sales when such allowances were earned. Under the new
accounting guidance, vendor allowances are considered a
reduction in inventory and a subsequent reduction in cost of
goods sold when the related product is sold. The adoption of
EITF 02-16, effective July 1, 2002, resulted, during the
three-month period ended September 30, 2002, in a cumulative
effect of accounting change of $413,000, net of $222,000 of
income taxes, to reflect the deferral of certain allowances
as a reduction of inventory cost.
2. ACCOUNTS AND NOTES RECEIVABLE - TRADE
Accounts and notes receivable - trade are as follows:
September 30, June 30,
2003 2003
------------- ------------
Accounts receivable $ 43,944,007 $ 41,597,677
Notes receivable 6,121,917 6,185,822
50,065,924 47,783,499
Allowance for doubtful accounts (6,059,121) (4,799,089)
------------- ------------
$ 44,006,803 $ 42,984,410
============= ============
Current $ 41,420,933 $ 40,176,822
Long-term 2,585,870 2,807,588
------------- ------------
$ 44,006,803 $ 42,984,410
============= ============
During the fiscal year ended June 30, 2003, the Company
reclassified approximately $2.8 million, net of allowance for
doubtful accounts and notes receivable, from current accounts
and notes receivable to long-term notes receivable.
Management met with the Company's largest customers which
were unable to make sufficient payments on their accounts
when due or within a reasonable period of time after they
became due to negotiate a formal payment schedule on terms
that would enable the Company to begin collecting on past due
accounts and notes receivable in amounts reasonably
satisfactory to the Company. As a result, the Company
accepted notes from these customers, with personal guarantees
and additional collateral wherever possible. These notes
bear interest at rates ranging from 6% to 18% with repayment
periods ranging between 3 months and slightly less than 10
years as of September 30, 2003. Those notes receivable with
maturity dates longer than 12 months were reclassified to
long-term notes receivable. Given the uncertainty associated
with these notes receivable, the Company is recognizing
interest income on these notes on a cash basis.
3. NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board
("FASB") issued Interpretation No. 46, Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51
("FIN 46"). FIN 46 addresses consolidation by business
enterprises of variable interest entities (formerly special
purpose entities or SPEs). In general, a variable interest
entity is a corporation, partnership, trust or any other
legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial
resources for the entity to support its activities. The
objective of FIN 46 is not to restrict the use of variable
interest entities but to improve financial reporting by
-10-
companies involved with variable interest entities. FIN 46
requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of FIN 46
apply to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after
June 15, 2003. However, certain of the disclosure
requirements apply to financial statements issued after
January 31, 2003, regardless of when the variable interest
entity was established. The Company does not have any
variable interest entities as defined in FIN 46.
Accordingly, this pronouncement currently is not applicable
to the Company.
In March 2003, the EITF issued final transition guidance
regarding accounting for vendor allowances EITF No. 02-16.
The EITF decision to allow retroactive application was made
by the task force on March 20, 2003. As a result of the EITF
change to its transition, the Company has adopted the new
guidance on a retroactive basis to July 1, 2002, the
beginning of its fiscal year ended June 30, 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for
hedging activities under SFAS Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. The
Company has not used derivative instruments and does not
expect the adoption of this statement to have a material
effect on the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an
asset in some circumstances). It is effective at the
beginning of the first interim period beginning after June
15, 2003. The effect of implementing this pronouncement did
not have any impact on the Company's financial condition,
results of operations or cash flows.
4. LONG-TERM DEBT
In June 2000, and as subsequently amended, with the last
amendment dated as of May 12, 2003, the Company's credit
facilities were consolidated into an amended, restated and
consolidated loan agreement with the Company's subsidiaries
and limited partnership as borrowers. The loan agreement
provides a credit facility of $44,975,000, including up to
$8 million in borrowing available for acquisitions (subject
to an adequate borrowing base and other conditions). The
credit facility bears interest as follows (with the
alternatives at the borrowers' 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.
-11-
* Revolving Credit Loans - Libor, plus two (2%) percent or
the lender's Prime Rate.
The credit facility is collateralized by substantially all of
the tangible and intangible assets of the borrowers, is
guaranteed by the Company and originally was to mature on
October 21, 2003. The credit facility contains an evergreen
provision which provides for an automatic one-year extension
of the maturity date provided either the borrowers or the
lender does not notify the other in writing of its intention
not to renew within 180 days of the scheduled maturity date.
Since neither the borrowers nor the lender provided the other
with the required notice, the maturity date of the credit
facility has been extended to October 21, 2004.
The credit facility contained two specific financial
covenants in addition to standard affirmative and negative
covenants. The specific financial covenants required that
the borrowers (a) maintain minimum Adjusted Tangible Net
Worth, as defined, of not less than an amount equal to 80% of
the actual Net Worth, as defined, as shown on the June 30,
1999 balance sheets of the borrowers; and (b) achieve Cash
Flow, as defined, of not less than $300,000 for the trailing
12-month periods ending as of each calendar quarter. The
borrowers were in compliance with the Minimum Adjusted
Tangible Net Worth covenant but did not meet the Cash Flow
requirement as of March 31, 2003. By an amendment to the
loan agreement dated as of May 12, 2003, the borrowers
received a waiver, and certain terms of the loan agreement
were modified. The Cash Flow financial covenant was
eliminated in its entirety and replaced with a Fixed Charge
Coverage Ratio, as defined; the Applicable Inventory
Sublimit, as defined, was increased to $22.5 million from $20
million through July 31, 2003; the amount of aggregate
Rentals, as defined, for property and equipment under
operating leases during any current or future consecutive
twelve-month period was increased to $7 million from $6
million; and certain definitions were changed. The Company
was in compliance with all such covenants at September 30,
2003.
During the fiscal year ending June 30, 2004, management
intends to attempt to refinance and extend the maturity date
of the Company's existing asset based credit facility with
the objective of increasing the size of the credit facility
and extending the maturity date three to five years from the
October 21, 2004 current maturity date.
*****
-12-
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
------------------------------------------------
This document contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, Section
21E of the Securities Exchange Act of 1934, and the Private
Securities Litigation Reform Act of 1995, such as statements
relating to our financial condition, results of operations,
plans, objectives, future performance and business
operations. These statements relate to expectations
concerning matters that are not historical fact.
Accordingly, statements that are based on management's
projections, estimates, assumptions and judgments are forward-
looking statements. These forward-looking statements are
typically identified by words or phrases such as "believe,"
"expect," "anticipate," "plan," "estimate," "approximately,"
"intend," and other similar words and expressions, or future
or conditional verbs such as "will," "should," "would,"
"could," and "may." In addition, the Company may from time
to time make such written or oral forward-looking statements
in future filings with the Securities and Exchange Commission
(including exhibits thereto), in its reports to stockholders,
and in other communications made by or with the approval of
the Company.
These forward-looking statements are based largely on our
current expectations, assumptions, plans, estimates,
judgments and projections about our business and our
industry, and they involve inherent risks and uncertainties.
Although we believe that these forward-looking statements are
based upon reasonable estimates, judgments and assumptions,
we can give no assurance that our expectations will in fact
occur or that our estimates, judgments or assumptions will be
correct, and we caution that actual results may differ
materially and adversely from those in the forward-looking
statements. Forward-looking statements involve known and
unknown risks, uncertainties, contingencies and other factors
that could cause our or our industry's actual results, level
of activity, performance or achievement to differ materially
from those discussed in or implied by any forward-looking
statements made by or on behalf of us and could cause our
financial condition, results of operations or cash flows to
be materially adversely affected. Accordingly, investors and
all others are cautioned not to place undue reliance on such
forward-looking statements.
Potential risks, uncertainties, and other factors which could
cause the Company's financial performance or results of
operations to differ materially from current expectations or
such forward-looking statements include, but are not limited
to:
* general economic and market conditions, either nationally
or in the markets where we conduct our business, may be
less favorable than expected;
* we may be unable to find adequate and suitable equity or
debt financing when our current loan facilities mature or
when otherwise needed on terms as favorable to us as our
current financing or on terms that are commercially
reasonable to us;
* our costs of capital including interest rates and related
fees and expenses may increase;
* we may be unable to collect our accounts or notes
receivables when due, within a reasonable period of time
after they become due and payable, or at all;
-13-
* there may be significant increases in competitive
pressures in our major market areas;
* weather conditions in our market areas may adversely
affect our business;
* there may be interruptions or cancellations of sources of
supply of products that we distribute, significant
increases in the costs of such products, or changes in
the terms of purchase that may be less favorable to us;
* there may be changes in the cost or pricing of, or
consumer demand for, our or our industry's distributed
products that may adversely affect our ability to sell
our products at certain levels of markup (gross profit
margin);
* there may be changes in the new housing market or the
market for construction, renovation and repair relating
to the product lines that we sell in various market areas
that may adversely affect our business;
* we may be adversely affected by changes in our costs of
doing business including costs of fuel, labor and related
benefits, occupancy, and the cost and availability of
insurance;
* we may be unable to locate suitable facilities or
personnel to open or maintain distribution center
locations;
* we may be unable to identify suitable acquisition
candidates or, if identified, unable to consummate any
such acquisitions and, if consummated, unable to obtain
favorable results of operations from such acquisitions;
* the number of shares of common stock that the Company has
outstanding and the number of shares of common stock used
to calculate our basic and diluted earnings per share may
increase and adversely affect our earnings per share
calculations; and
* there may be changes in accounting policies and practice
and in internal controls and requirements and disclosure
controls and procedures and requirements that may be
adopted by regulatory agencies as well as the Financial
Accounting Standards Board that may adversely affect our
costs and operations.
Many of these factors are beyond our control, and you should
read carefully the factors described in "Risk Factors" in the
Company's filings (including its Forms 10-K and registration
statements) with the Securities and Exchange Commission for a
description of some, but not all, risks, uncertainties and
contingencies. These forward-looking statements speak only
as of the date of this document. We do not undertake any
obligation to update or revise any of these forward-looking
statements to reflect events or circumstances occurring after
the date of this document or to reflect the occurrence of
unanticipated events.
-14-
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition
and results of operations are based on the Company's
consolidated financial statements which have been prepared in
accordance with accounting principals generally accepted in
the United States of America and which require the Company to
make estimates, assumptions and judgments that affect the
reported amounts of assets, liabilities, revenues and
expenses, and the disclosure and reported amounts of
contingent assets and liabilities at the dates of the
financial statements. Significant estimates which are
reflected in these consolidated financial statements relate
to, among other things, allowances for doubtful accounts and
notes receivable, valuation of obsolete and slow-moving
inventories, net realizable value of inventories, estimates
of future cash flows associated with assets, asset
impairments, and useful lives for depreciation and
amortization. On an on-going basis, the Company evaluates
its estimates, assumptions and judgments, including those
related to allowances for doubtful accounts and notes
receivable, inventories, intangible assets, investments,
other receivables, expenses, income items, income taxes and
contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets, liabilities, certain receivables,
allowances, income items, expenses, and contingent assets and
liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates
under different assumptions or conditions, and there can be
no assurance that estimates, assumptions and judgments that
are made will prove to be valid in light of future conditions
and developments. If such estimates, assumptions or
judgments prove to be incorrect in the future, the Company's
financial condition, results of operations and cash flows
could be materially adversely affected.
The Company believes the following critical accounting
policies are based upon its more significant judgments and
estimates used in the preparation of its consolidated
financial statements:
* We maintain allowances for doubtful accounts and notes
receivable for estimated losses resulting from the
failure of our customers to make payments when due or
within a reasonable period of time thereafter. Although
many factors can affect the failure of customers to make
required payments when due, one of the most unpredictable
is weather, which can have a positive as well as negative
impact on the Company's customers. For example, severe
or catastrophic weather conditions, such as hail storms
or hurricanes, will generally increase the level of
activity of our customers, thus enhancing their ability
to make required payments. On the other hand, weather
conditions such as heavy rain or snow or ice storms will
generally preclude customers from installing the
Company's products on job sites and collecting from their
own customers, which conditions could result in the
inability of the Company's customers to make payments
when due. The allowance for doubtful accounts and notes
receivable is intended to adjust the value of our
accounts and notes receivable for possible credit losses
as of the balance sheet date in accordance with generally
accepted accounting principles. Calculating such
allowances involves significant judgment. We estimate
our allowance for doubtful accounts and notes receivable
by applying estimated loss percentages against our aging
-15-
of accounts receivables and based on our estimate of the
credit worthiness of the customers from which the notes
are payable. Changes to such allowances may be required
if the financial condition of our customers deteriorates
or improves or if we adjust our credit standards, thereby
resulting in reserve or write-off patterns that differ
from historical experience. Misjudgments by the Company
in estimating our allowance for doubtful accounts and
notes receivable could have a material adverse affect on
the Company's financial condition, results of operations,
and cash flow.
* We write down our inventories for estimated obsolete or
slow-moving inventories equal to the difference between
the cost of inventories and their estimated market value
based upon assumed market conditions. If actual market
conditions are less favorable than those assumed by
management, additional inventory write-downs may be
required. If inventory write-downs are required, the
Company's financial condition, results of operations, and
cash flows could be materially adversely affected.
* We test for impairment of the carrying value of goodwill
annually and when indicators of impairment occur.
Indicators of impairment could include, among other
things, a significant change in the business climate,
including a significant sustained decline in an entity's
market value, operating performance indicators,
competition, sale or disposition of a significant portion
of the business, legal or other factors. In connection
with the annual test for impairment, management reviews
various generally accepted valuation methodologies for
valuing goodwill. Management reviewed the carrying value
of the goodwill on its balance sheet as of June 30, 2003
in light of the fact that the Company's stock market
capitalization of our outstanding equity securities as of
that date was below our total shareholders' equity (book
value). Management concluded that the market price of
the Company's common stock is not the best indication of
the fair market value of the Company. Management believes
that, with respect to the Company, the better indicator of
fair market value results from the use of the discounted
estimated future cash flow method, which includes an
estimated terminal value component. This method is based
on management's estimates, which will vary if the
judgments and assumptions used to estimate the related
business's future revenues, gross profit margins,
operating expenses, interest rates, and other factors,
prove to be inaccurate. If such judgments, assumptions
and estimates prove to be incorrect, then the Company's
carrying value of goodwill may be overstated on the
Company's balance sheet, and the Company's results of
operations may not reflect the impairment charge that
would have resulted if such judgments, assumptions
and estimates had been correct. Any failure to write
down goodwill for impairment correctly during any period
could have a material adverse effect on the Company's
future financial condition and results of operations, as
well as cause historical statements of operations,
financial condition, and cash flows to have been
incorrectly stated in light of the failure to take any
such write downs correctly.
-16-
In conducting the required goodwill impairment test, we
identified reporting units by determining the level
at which separate financial statements are prepared
and reviewed by management. The test was required by
only one of our operating subsidiaries. As a result of
the required test, we determined that no write down of
our goodwill was required at June 30, 2003. While we
do not use our stock market capitalization to
determine the fair value of our reporting unit, we
expect convergence between our stock market value
capitalization and our discounted cash flow valuation
to occur over time or from time to time. If this
does not occur, it may signal the need for impairment
charges.
* We seek revenue and income growth by expanding our
existing customer base, by opening new distribution
centers, and by pursuing strategic acquisitions that
meet our various criteria. If our evaluation of the
prospects for opening a new distribution center or of
acquiring a company misjudges our estimated future
revenues or profitability, such a misjudgment could
impair the carrying value of the investment and result
in operating losses for the Company, which could
materially adversely affect our results of operations,
financial condition, and cash flows.
* We file income tax returns in every jurisdiction in
which we have reason to believe we are subject to tax.
Historically, we have been subject to examination by
various taxing jurisdictions. To date, none of these
examinations has resulted in any material additional tax.
Nonetheless, any tax jurisdiction may contend that a
filing position claimed by us regarding one or more of
our transactions is contrary to that jurisdiction's laws
or regulations. In any such event, we may incur charges
to our income statement which could materially adversely
affect our net income and may incur liabilities for
taxes and related charges which may materially adversely
affect our financial condition and cash flows.
The Company's discussion and analysis of financial condition
and results of operations are based upon the Company's
unaudited consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America.
*****
-17-
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
related notes thereto which are included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
2003 filed with the Securities and Exchange Commission.
Results of Operations
Three Months Ended September 30, 2003
Compared to the Three Months Ended September 30, 2002
-----------------------------------------------------
Revenues of the Company during the three-month period ended
September 30, 2003 increased by approximately $12 million
(19.9%) to approximately $72.4 million from approximately
$60.4 million in the three-month period ended September 30,
2002. This increase may be attributed primarily to increases
in revenues of approximately $12.8 million generated from
"greenfield" distribution centers opened for more than one
year and approximately $1.7 million from "storm" distribution
centers opened during the current three-month period, offset
by a decrease in revenues of approximately $2.5 million from
a combination of distribution centers that were closed and
those that have been opened for more than one year. As
discussed in previous filings, all of the increase in
revenues from greenfield distribution centers was from storm
activity that occurred last spring in certain of the
Company's existing market areas. The Company continues to
believe that such storm activity will continue to have a
positive impact on the Company's results of operations in the
2004 fiscal year.
Cost of sales increased between the 2003 and 2002 three-month
periods at a lesser rate than the increase in revenues
between these three-month periods. Accordingly, cost of
sales as a percentage of revenues decreased to 75.4% in the
three-month period ended September 30, 2003 from 76.3% in the
three-month period ended September 30, 2002, and gross profit
as a percentage of revenues increased to 24.6% in the three-
month period ended September 30, 2003 from 23.7% in the three-
month period ended September 30, 2002. As stated in Note 3
to the unaudited consolidated financial statements, the
Company adopted EITF 02-16, effective July 1, 2002. The
impact of the accounting change resulting from the adoption
of EITF 02-16 during the three-month period ended September
30, 2002 was a decrease of $115,000 in cost of sales.
Operating expenses (including non-cash charges for
depreciation and amortization) increased by approximately
$1.1 million (7.9%) between the 2003 and 2002 three-month
periods presented. Of this increase, approximately $445,000
may be attributed to an increase in the allowance for
doubtful accounts and notes receivable and approximately
$740,000 in increased payroll and related costs.
Depreciation and amortization decreased by an aggregate of
approximately $110,000 (32.4%) between the 2003 and 2002
three-month periods. Operating expenses (including
depreciation and amortization) as a percentage of revenues
were 20.8% in the three-month period ended September 30, 2003
compared to 23.1% in the three-month period ended September
30, 2002.
Interest income increased by approximately $104,000 (207.3%)
between the 2003 and 2002 three-month periods presented.
This increase is primarily attributable to the interest
collected on notes receivable.
-18-
Interest expense decreased by approximately $116,000 (23%)
between the 2003 and 2002 three-month periods presented.
This decrease is due to lower rates of interest charged on
borrowings under the Company's revolving credit facility.
As reported in the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 2002, in January 2003, the
Company sold its Birmingham, Alabama, distribution center and
realized a loss of approximately $90,000 on the sale. The
reported results of operations for the 2002 three-month
period have been restated to reclassify the operations of
this distribution center as discontinued.
Liquidity and Capital Resources
The Company's working capital was approximately $46,351,000
and $45,342,000 at September 30, 2003 and June 30, 2003,
respectively. At September 30, 2003, the Company's current
ratio was 2.3 to 1 compared to 2.13 to 1 at June 30, 2003.
Net cash used in operating activities during the three-month
period ended September 30, 2003 decreased by approximately
$525,000 to approximately $100,000 from approximately
$625,000 during the three-month period ended September 30,
2002. This decrease may be attributed principally to
increases in net income of approximately $2.2 million,
allowance for doubtful accounts of approximately $620,000
attributed to the deterioration in the aging of the Company's
accounts and notes receivable and federal and state income
taxes of approximately $1.3 million and decreases in
inventories of $1.2 million, assets of discontinued operation
of approximately $670,000 and accrued expenses and other
current liabilities of approximately $410,000, offset by a
decrease in depreciation and amortization of approximately
$120,000 and increases in accounts and notes receivable of
approximately $1.9 million and other current assets of
approximately $200,000 and decreases in accounts payable of
approximately $3.6 million and deferred income taxes of
approximately $60,000.
Net cash provided by (used in) investing activities during
the three-month period ended September 30, 2003 increased by
approximately $108,000 to approximately $11,000 from
approximately ($97,000) during the three-month period ended
September 30, 2002. This increase may be attributed to a
decrease in capital expenditures of approximately $72,000 and
an increase of approximately $36,000 from sales of fixed
assets. Management of the Company presently anticipates
capital expenditures in the next twelve months of not less
than $400,000, of which approximately $100,000 is anticipated
to be financed, for the purchase of trucks and forklifts for
the Company's currently existing operations in anticipation
of increased business and to upgrade its vehicles and upgrade
and maintain its facilities to compete in its market areas,
and $300,000 for leasehold improvements.
Net cash used in financing activities during the three-month
period ended September 30, 2003 decreased by approximately
$100,000 to approximately $1 million from approximately $1.1
million during the three-month period ended September 30,
2002. This decrease may be attributed to a decrease in the
net principal repayments of long-term debt of approximately
$50,000 and a recovery of expenses of $50,000 relating to the
May 2002 private placement of common stock and warrants.
On February 6, 2003, the Company entered into a Securities
Purchase Agreement ("Securities Purchase Agreement") with
James E. Helzer, the President, Chief Operating Officer, and
Vice Chairman of the Board of Directors of the Company, to
sell in a private placement transaction (the "Helzer
Transaction") for gross proceeds to the Company of $1 million
-19-
(a) 1,000,000 authorized but previously unissued shares of
the Company's common stock, and (b) warrants to purchase up
to an additional 1,000,000 authorized but previously unissued
shares of the Company's common stock at an exercise price of
$1.50 per share exercisable for 5 years from the date of
issuance (the "Helzer Warrant"). Although the closing price
for the Company's common stock at the close of business on
the day before the Helzer Transaction closed was $0.81 and
the Company received two separate fairness opinions
indicating that the consideration received by the Company in
the Helzer Transaction was fair, Mr. Helzer will be able to
benefit from any appreciation in the market price of the
Company's common stock. On September 30, 2003, the last
reported sales price for the Company's common stock was $2.40
per share.
During the fiscal year ending June 30, 2004, management
intends to attempt to refinance and extend the maturity date
of the Company's existing asset based credit facility with
the objective of increasing the size of the credit facility
and extending the maturity date three to five years from the
October 21, 2004 current maturity date. There can be no
assurance that the Company will be able refinance or extend
the maturity of its credit facility or that it will be able
to do so on terms that are satisfactory to the Company.
The Company believes that its currently available sources of
liquidity will be adequate to sustain its normal operations
during the twelve-month period beginning July 1, 2003,
assuming the Company is able to amend its credit facility to
provide for limited over advances and overlines, if required,
as it has in the past.
Credit Facilities
In June 2000, and as subsequently amended, with the last
amendment dated as of May 12, 2003, the Company's credit
facilities were consolidated into an amended, restated and
consolidated loan agreement with the Company's subsidiaries
and limited partnership as borrowers. The loan agreement
provides a credit facility of $44,975,000, including up to
$8 million in borrowing available for acquisitions (subject
to an adequate borrowing base and other conditions). The
credit facility bears interest as follows (with the
alternatives at the borrowers' 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
the tangible and intangible assets of the borrowers, is
guaranteed by the Company and originally was to mature on
October 21, 2003. The credit facility contains an evergreen
provision which provides for an automatic one-year extension
of the maturity date provided either the borrowers or the
lender does not notify the other in writing of its intention
not to renew within 180 days of the scheduled maturity date.
Since neither the borrowers nor the lender provided the other
-20-
with the required notice, the maturity date of the credit
facility has been extended to October 21, 2004.
During the fiscal year ending June 30, 2004, management
intends to attempt to refinance and extend the maturity date
of the Company's existing asset based credit facility with
the objective of increasing the size of the credit facility
and extending the maturity date three to five years from the
October 21, 2004 current maturity date. There can be no
assurance that the Company will be able refinance or extend
the maturity of its credit facility or that it will be able
to do so on terms that are satisfactory to the Company.
The credit facility originally contained two specific
financial covenants in addition to standard affirmative and
negative covenants. The specific financial covenants
required that the borrowers (a) maintain minimum Adjusted
Tangible Net Worth, as defined, of not less than an amount
equal to 80% of the actual Net Worth, as defined, as shown on
the June 30, 1999 balance sheets of the borrowers; and (b)
achieve Cash Flow, as defined, of not less than $300,000 for
the trailing 12-month periods ending as of each calendar
quarter. The borrowers were in compliance with the Minimum
Adjusted Tangible Net Worth covenant but did not meet the
Cash Flow requirement as of March 31, 2003. By an amendment
to the loan agreement dated as of May 12, 2003, the borrowers
received a waiver, and certain terms of the loan agreement
were modified. The Cash Flow financial covenant was
eliminated in its entirety and replaced with a Fixed Charge
Coverage Ratio, as defined; the Applicable Inventory
Sublimit, as defined, was increased to $22.5 million from $20
million through July 31, 2003; the amount of aggregate
Rentals, as defined, for property and equipment under
operating leases during any current or future consecutive
twelve-month period was increased to $7 million from $6
million; and certain definitions were changed. The Company
was in compliance with all such covenants at September 30,
2003.
Recent Developments
Revenues for the month of October 2003, on a preliminary
basis, increased by more than $5 million (25%) compared to
the month of October 2002. This rate of growth should not be
deemed to be indicative of the rate of growth that is likely
to be achieved during the Company's current six-month or
ensuing nine-month periods or fiscal year. Management
believes that the current growth is due largely to increased
revenues generated by the Company's distribution centers
located in certain of the Company's existing market areas
affected by storm activity that occurred last spring
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51 ("FIN 46"). FIN 46 addresses
consolidation by business enterprises of variable interest
entities (formerly special purpose entities or SPEs). In
general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that
do not provide sufficient financial resources for the entity
to support its activities. The objective of FIN 46 is not to
restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable
interest entities. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The
-21-
consolidation requirements of FIN 46 apply to variable
interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15,
2003. However, certain of the disclosure requirements apply
to financial statements issued after January 31, 2003,
regardless of when the variable interest entity was
established. The Company does not have any variable interest
entities as defined in FIN 46. Accordingly, this
pronouncement currently is not applicable to the Company.
In March 2003, the EITF issued final transition guidance
regarding accounting for vendor allowances EITF No. 02-16.
The EITF decision to allow retroactive application was made
by the task force on March 20, 2003. As a result of the EITF
change to its transition, the Company has adopted the new
guidance on a retroactive basis to July 1, 2002, the
beginning of its fiscal year ended June 30, 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for
hedging activities under SFAS Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. The
Company has not used derivative instruments and does not
expect the adoption of this statement to have a material
effect on the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an
asset in some circumstances). It is effective at the
beginning of the first interim period beginning after June
15, 2003. The effect of implementing this pronouncement did
not have any impact on the Company's financial condition,
results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
The Company's carrying value of cash and cash equivalents,
trade accounts and notes receivable, inventories, deferred
tax asset, income taxes receivable, goodwill, accounts
payable, accrued expenses, deferred tax liability and its
existing line of credit facility are a reasonable
approximation of their fair value.
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 fluctuations 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.
Based on the amount outstanding as of September 30, 2003, a
100 basis point change in interest rates would result in an
approximate $410,000 charge to the Company's annual interest
expense. The Company does not currently anticipate entering
into interest rate swaps and/or other similar instruments.
-22-
The Company's business is subject to certain risks,
including, but not limited to, differing economic conditions,
competition, loss of significant customers, customers'
inability to make required payments, changes in political
climate, differing tax structures, changes in accounting
rules and requirements, and other governmental regulations
and restrictions. The Company's future results could be
materially and adversely impacted by changes in these or
other factors. (See also "Risk Factors" in the Company's
filings with the Securities and Exchange Commission
(including its Forms 10-K and registration statements) for a
description of some, but not all, risks, uncertainties and
contingencies.)
There have been no material changes in the Company's market
risk since June 30, 2003. For information regarding the
Company's market risk, please refer to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2003.
Item 4. Controls and Procedures
In seeking to meet our responsibility for the reliability of
our financial statements, the Company maintains a system of
internal controls. This system is designed to provide
management with reasonable assurance that assets are
safeguarded and transactions are executed in accordance with
the appropriate corporate authorization and recorded properly
to permit the preparation of the financial statements in
accordance with accounting principles generally accepted in
the United States of America. The concept of reasonable
assurance recognizes that the design, monitoring and revision
of internal accounting and other controls involve, among
other considerations, management's judgments with respect to
the relative costs and expected benefits of specific control
measures. An effective system of internal controls, no
matter how well designed, has inherent limitations and may
not prevent or detect a material misstatement in published
financial statements. Nevertheless, management believes that
its system of internal controls provides reasonable assurance
with respect to the reliability of its consolidated financial
statements.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, have evaluated the
effectiveness of our disclosure controls and procedures, as
such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of the end of the period covered by this
Form 10-Q.
The Company's management, including its Chief Executive
Officer and Chief Financial Officer, does not expect that its
disclosure controls and procedures will prevent all error and
all fraud. A disclosure control system, no matter how well
designed and operated, can provide only reasonable, not
absolute, assurance that the disclosure control system's
objectives will be met. Further, the design of a disclosure
control system must reflect the fact that there are resource
constraints, and the benefits of disclosure controls must be
considered relative to their costs. Because of the inherent
limitations in all disclosure control systems, no evaluation
of controls can provide absolute assurance that all
disclosure control issues, errors, and instances of fraud, if
any, within the Company have been or will be detected. The
inherent limitations include, among other things, the
realities that judgments in decision-making can be faulty and
that breakdowns can occur because of simple error or mistake.
Disclosure controls and procedures also can be circumvented
by the individual acts of some persons, by collision of two
or more people, or by management or employee override of
disclosure controls and procedures. The design of any system
-23-
of disclosure controls and procedures is based in part upon
certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions. Over time, disclosure controls and procedures
may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-
effective disclosure control system, misstatements due to
error or fraud may occur and not be detected. If and when
management learns that any disclosure control or procedure is
not being properly implemented or has become inadequate,
management (a) immediately reviews our disclosure controls
and procedures to determine whether they are appropriate to
accomplish the control objective and, if necessary, modifies
and improves our disclosure controls and procedures to assure
compliance with our control objectives(b) takes immediate
action to cause our disclosure controls and procedures to be
strictly adhered to, (c) immediately informs all relevant
managers of the requirement to adhere to such disclosure
controls, as well as all relevant personnel throughout our
organization, and (d) implements in our training program
specific emphasis on such disclosure controls and procedures
to assure compliance with such disclosure controls and
procedures. The development, modification, improvement,
implementation and evaluation of our systems of disclosure
controls and procedures is a continuous project that requires
changes and modifications to them to remedy deficiencies, to
improve training, and to improve implementation in order to
assure the achievement of our overall control objectives.
Based upon the evaluation of our disclosure controls and
procedures, our Chief Executive Officer and Chief Financial
Officer have concluded that, subject to the limitations noted
above, the Company's disclosure controls and procedures were
effective to ensure that material information relating to the
Company and the Company's consolidated subsidiaries is made
known to them by others within those entities to allow timely
decisions regarding required disclosures.
There have been no significant changes in our internal
controls, or in other factors that could significantly affect
internal controls, subsequent to the date the Chief Executive
Officer and the Chief Financial Officer completed their
evaluation, including any significant corrective actions with
regard to significant deficiencies and material weaknesses.
*****
-24-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this Report:
Exhibit Description
------- -----------
31.1 Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(a)).
31.2 Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(a)).
32.1 Certificate of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(b)).
32.2 Certificate of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(b)).
(b) Reports on Form 8-K:
During the quarterly period covered by this Report, the
Registrant filed the following Report on Form 8-K:
On August 11, 2003, the Company filed a Current Report on
Form 8-K under Item 9 to provide information regarding the
Company's preliminary unaudited fiscal 2003 fourth quarter
results and anticipated projected revenues, net income,
and basic earnings per share for the 2004 fiscal year
ending June 30, 2004.
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SIGNATURES
In accordance with the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
EAGLE SUPPLY GROUP, INC.
Dated: November 13, 2003 By:/s/ Douglas P. Fields
---------------------------
Douglas P. Fields,
Chairman of the
Board of Directors,
Chief Executive
Officer and a Director
(Principal Executive Officer)
Dated: November 13, 2003 By:/s/ Frederick M. Friedman
---------------------------
Frederick M. Friedman,
Executive Vice President,
Treasurer, Secretary
and a Director
(Principal Financial
and Accounting Officer)
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