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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 December 31, 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: 1-14904
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EAGLE SUPPLY GROUP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3889248
- ------------------------------- -------------------
(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
- ----------------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
212-986-6190
----------------------------------------------------
(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 February 9, 2004, 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 December 31, 2003
(Unaudited) and June 30, 2003 3
Consolidated Statements of Operations (Unaudited)
for the Three Months and Six Months Ended December 31,
2003 and 2002 4-5
Consolidated Statement of Stockholders' Equity
(Unaudited) for the Six Months Ended December 31, 2003 6
Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended December 31, 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 13-23
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 23
Item 4. Controls and Procedures 24-25
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 26
Item 4. Submission of Matters to a Vote of Securities Holders 26-27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29-32
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------
December 31, June 30,
2003 2003
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,744,695 $ 1,505,408
Accounts and notes receivable
- trade (net of allowance for
doubtful accounts) 32,312,393 40,176,822
Inventories 30,265,553 39,962,678
Deferred tax asset 2,378,000 1,871,000
Assets of discontinued operation - 157,724
Federal and state income taxes receivable - 771,095
Other current assets 1,210,956 881,716
------------ ------------
Total current assets 67,911,597 85,326,443
PROPERTY AND EQUIPMENT, net 2,635,057 2,964,635
COST IN EXCESS OF NET ASSETS ACQUIRED, net 14,581,358 14,581,358
NOTES RECEIVABLE - TRADE (net of allowance
for doubtful accounts) 2,591,455 2,807,588
OTHER ASSETS - 15,850
------------ ------------
TOTAL ASSETS $ 87,719,467 $105,695,874
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 710,000 $ 860,000
Note payable - TDA Industries, Inc. 1,000,000 1,000,000
Accounts payable 16,950,451 31,876,367
Due to related parties - 259,778
Accrued expenses and other current
liabilities 5,875,473 5,988,543
Federal and state income taxes payable 300,300 -
------------ ------------
Total current liabilities 24,836,224 39,984,688
LONG-TERM DEBT 38,131,329 42,687,892
DEFERRED TAX LIABILITY 1,802,000 1,807,000
------------ ------------
Total liabilities 64,769,553 84,479,580
------------ ------------
STOCKHOLDERS' 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 19,360,662 19,325,064
Retained earnings 3,588,227 1,890,205
------------ ------------
Total stockholders' equity 22,949,914 21,216,294
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 87,719,467 $105,695,874
============ ============
See notes to unaudited consolidated financial statements.
-3-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERTIONS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
- ----------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
------------ ------------ ------------- -------------
REVENUES $ 59,573,103 $ 51,668,421 $ 131,990,959 $112,058,048
COST OF SALES 46,048,905 38,894,813 100,661,815 84,970,676
------------ ------------ ------------- -------------
13,524,198 12,773,608 31,329,144 27,087,372
------------ ------------ ------------- -------------
OPERATING EXPENSES (including
provisions for doubtful accounts of
$501,352, $565,532, $1,606,715 and
$1,225,837, respectively) 12,936,708 12,640,889 27,784,470 26,277,251
DEPRECIATION AND AMORTIZATION 220,760 195,732 449,733 534,355
------------ ------------ ------------- -------------
13,157,468 12,836,621 28,234,203 26,811,606
INCOME (LOSS) FROM CONTINUING
OPERATIONS 366,730 (63,013) 3,094,941 275,766
------------ ------------ ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 113,629 115,840 267,077 165,777
Interest expense (364,715) (436,745) (753,996) (942,016)
------------ ------------ ------------- -------------
(251,086) (320,905) (486,919) (776,239)
------------ ------------ ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 115,644 (383,918) 2,608,022 (500,473)
PROVISION (BENEFIT) FOR INCOME TAXES 40,000 (129,000) 910,000 (174,000)
------------ ------------ ------------- -------------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS 75,644 (254,918) 1,698,022 (326,473)
LOSS FROM DISCONTINUED OPERATION,
NET OF INCOME TAXES - (113,594) - (191,017)
------------ ------------ ------------- -------------
NET INCOME (LOSS) BEFORE EFFECT OF
ACCOUNTING CHANGE 75,644 (368,512) 1,698,022 (517,490)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF INCOME TAXES - - - (413,000)
------------ ------------ ------------- -------------
NET INCOME (LOSS) $ 75,644 $ (368,512) $ 1,698,022 $ (930,490)
============ ============ ============= =============
See notes to unaudited consolidated financial statements.
-4-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERTIONS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (Contd.)
- ----------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
------------ ------------ ------------- -------------
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) from continuing
operations $ .01 $ (.03) $ .17 $ (.04)
Loss from discontinued operation - (.01) - (.02)
Cumulative effect of accounting change - - - (.05)
------------ ------------ ------------- -------------
$ .01 $ (.04) $ .17 $ (.11)
============ ============ ============= =============
SHARES OF COMMON STOCK USED IN
BASIC NET INCOME (LOSS) PER SHARE 10,265,455 9,055,455 10,262,085 9,055,455
DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) from continuing
operations $ .01 $ (.03) $ .16 $ (.04)
Loss from discontinued operation - (.01) - (.02)
Cumulative effect of accounting change - - - (.05)
------------ ------------ ------------- -------------
$ .01 $ (.04) $ .16 $ (.11)
============ ============ ============= =============
SHARES OF COMMON STOCK USED IN
DILUTED NET INCOME (LOSS) PER SHARE 10,681,797 9,055,455 10,577,154 9,055,455
============ ============ ============= =============
See notes to unaudited consolidated financial statements.
-5-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 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 - - - - - - - 1,698,022 1,698,022
Refund of expenses related
to private placement, net - - - - - - 35,598 - 35,598
------ ------ ------ ------ ---------- ------ ----------- ---------- -----------
BALANCE, DECEMBER 31, 2003 - $ - - $ - 10,255,455 $1,025 $19,360,662 $3,588,227 $22,949,914
====== ====== ====== ====== ========== ====== =========== ========== ===========
See notes to unaudited consolidated financial statements.
-6-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
- ----------------------------------------------------------------------------
2003 2002
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 1,698,022 $ (326,473)
Loss from discontinued operation, net of income taxes - (191,017)
Cumulative effect of accounting change, net of income taxes - (413,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 449,733 549,365
Deferred income taxes (512,000) (271,000)
Increase in allowance for doubtful accounts 1,780,774 922,501
Loss on sale of equipment 1,361 -
Changes in assets and liabilities:
Decrease in accounts and notes receivable 6,299,788 3,895,223
Decrease in inventories 9,697,125 5,846,161
Decrease in assets of discontinued operation 157,724 267,768
Increase (decrease) in other current assets (329,240) 78,513
Decrease in accounts payable (14,925,916) (5,484,263)
Decrease in accrued expenses and other current liabilities (113,070) (414,158)
Increase (decrease) in federal and state income taxes 1,071,395 (262,303)
------------- -------------
Net cash provided by operating activities 5,275,696 4,197,317
------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (141,666) (113,015)
Proceeds from sales of fixed assets 36,000 -
Payment of contingent consideration for the purchase of
Masonry Supply, Inc. (259,778) -
------------- -------------
Net cash used in investing activities (365,444) (113,015)
------------- -------------
FINANCING ACTIVITIES:
Principal borrowings of long-term debt 146,007,644 120,937,907
Principal reductions of long-term debt (150,714,207) (128,602,100)
Increase (decrease) in additional paid-in capital 35,598 (5,024)
------------- -------------
Net cash used in financing activities (4,670,965) (7,669,217)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 239,287 (3,584,915)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,505,408 5,355,070
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,744,695 $ 1,770,155
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 753,996 $ 942,016
============= =============
Cash paid during the period for income taxes $ 379,921 $ 23,393
============= =============
See notes to unaudited consolidated financial statements.
-7-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
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 six months ended December 31, 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 considered 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 six months ended December 31,
- ---------------------------
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.
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
-8-
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 and six-month periods ended December 31, 2003 and 2002
would have been reduced to the proforma amounts indicated below:
Three Months Six Months
2003 2002 2003 2002
---------- ---------- ----------- -----------
Net income (loss) $ 75,644 $ (368,512) $ 1,698,022 $ (930,490)
Compensation costs (17,345) (25,849) (34,690) (51,698)
---------- ---------- ----------- -----------
Proforma $ 58,299 $ (394,361) $ 1,663,331 $ (982,188)
========== ========== =========== ===========
Basic net income (loss) per share $ .01 $ (.04) $ .17 $ (.11)
Compensation costs - - - -
---------- ---------- ----------- -----------
Proforma $ .01 $ (.04) $ .17 $ (.11)
========== ========== =========== ===========
Diluted net income (loss) per share $ .01 $ (.04) $ .16 $ (.11)
Compensation costs - - - -
---------- ---------- ----------- -----------
Proforma $ .01 $ (.04) $ .16 $ (.11)
========== ========== =========== ===========
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 periods' financial statements in order to
conform to the classifications in the current periods.
The consolidated statements of operations and cash flows of the
Company for the three and six-month periods ended December 31, 2002
have been restated for the change during the third 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 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.
-9-
2. ACCOUNTS AND NOTES RECEIVABLE - TRADE
Accounts and notes receivable - trade are as follows:
December 31, June 30,
2003 2003
------------ ------------
Accounts receivable $ 35,629,203 $ 41,597,677
Notes receivable 5,854,508 6,185,822
------------ ------------
41,483,711 47,783,499
Allowance for doubtful accounts (6,579,863) (4,799,089)
------------ ------------
$ 34,903,848 $ 42,984,410
============ ============
Current $ 32,312,393 $ 40,176,822
Long-term 2,591,455 2,807,588
------------ ------------
$ 34,903,848 $ 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 collateral or additional collateral wherever
possible. These notes bear interest at rates ranging from 6% to
18% with repayment periods ranging between 6 months and less than
10 years as of December 31, 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
clarifies existing accounting for whether variable interest
entities, as defined in FIN 46, should be consolidated in financial
statements based upon the investee's ability to finance activities
without additional financial support and whether investors possess
characteristics of a controlling financial interest. FIN 46 applies
to public entities that have interests in special purpose entities
for periods ending after December 15, 2003. Application for all
other types of variable interest entities is required in financial
statements for periods ending after March 15, 2004. The Company
does not have any interests in variable interest entities and
therefore this adoption will not have any effect on the Company's
results of operations or financial position.
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,
-10-
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. Accordingly, this
pronouncement currently is not applicable to 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.
* 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 matures on January 21, 2005.
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
-11-
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 December 31, 2003.
The Company received a commitment letter from its lender to
refinance its existing credit facility with a new $60 million
credit facility for a term of five years. The commitment letter
provides for interest at Libor, as defined, plus two and one-half
(2.5%) percent, or at the lender's Prime Rate, as defined, plus
one-half of one (1/2%) percent, with the alternative at the
borrowers' election. The commitment letter also provides for
certain specific financial covenants in addition to standard and
affirmative and negative covenants, including the requirement that
the borrowers maintain a minimum Net Worth, as defined, and a Fixed
Charge Coverage Ratio, as defined. As with the existing credit
facility, the new credit facility will have the Company's
subsidiaries and limited partnership as the borrowers, and it will
be collateralized by substantially all of the tangible and
intangible assets of the borrowers and guaranteed by the Company.
It presently is anticipated that the closing of the new credit
facility will occur on or before February 27, 2004.
* * * * *
-12-
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking Statements
- --------------------------
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 or at all;
* 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;
-12-
* 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,
in internal controls and requirements, and in disclosure
controls and procedures and related requirements that may
be adopted by regulatory agencies as well as the related
Financial Accounting Standards Board that may adversely
affect our costs and operations; and we may incur costs and
liabilities in adhering to Nasdaq, federal, and state
regulations, rules, or laws or arising from violations or
alleged violations of Nasdaq, federal, and state
securities' regulations, rules, or laws.
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. Any forward-
looking statements are not guarantees of future performance.
-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 consolidated 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
-15-
our allowance for doubtful accounts and notes receivable
by applying estimated loss percentages against our aging
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 or operating performance indicators,
sustained and increased 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. The valuation determined by this
method is based on management's estimates, and such
valuation 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
-16-
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.
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 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.
* * * * *
-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 December 31, 2003
Compared to the Three Months Ended December 31, 2002
- ----------------------------------------------------
Revenues of the Company during the three-month period ended
December 31, 2003 increased by approximately $7.9 million (15.3%)
to approximately $59.6 million from approximately $51.7 million in
the three-month period ended December 31, 2002. This increase may
be attributed primarily to net increases in revenues of
approximately $7.6 million generated from "greenfield" distribution
centers opened for more than one year and approximately $1.3
million from a "storm" distribution center opened since June 2003,
offset by a decrease in revenues of approximately $1 million from
distribution centers that were closed. As discussed in previous
filings, most 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
for the fiscal year ending June 30, 2004.
Cost of sales increased between the 2003 and 2002 three-month
periods at a greater rate than the increase in revenues between
these three-month periods. Accordingly, cost of sales as a
percentage of revenues increased to 77.3% in the three-month period
ended December 31, 2003 from 75.3% in the three-month period ended
December 31, 2002, and gross profit as a percentage of revenues
decreased to 22.7% in the three-month period ended December 31,
2003 from 24.7% in the three-month period ended December 31, 2002.
This decline resulted from competitive pricing pressures in certain
geographical market areas and a product mix in certain market areas
that did not yield as high a gross profit margin as other product
mixes that were achieved in other market areas. 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 December 31, 2002 was a decrease of
$270,000 in cost of sales.
Operating expenses (including non-cash charges for depreciation and
amortization) increased by approximately $321,000 (2.5%) between
the 2003 and 2002 three-month periods presented. Of this increase,
approximately $279,000 may be attributed to an increase in delivery
expenses and increases in various other operating expenses.
Depreciation and amortization increased by an aggregate of
approximately $25,000 (12.8%) between the 2003 and 2002 three-month
periods. Operating expenses (including depreciation and
amortization) as a percentage of revenues were 22.1% in the three-
month period ended December 31, 2003 compared to 24.8% in the
three-month period ended December 31, 2002.
Interest income was approximately the same for both three-month
periods presented.
-18-
Interest expense decreased by approximately $72,000 (16.5%) between
the 2003 and 2002 three-month periods presented. This decrease is
due to lower rates of interest charged on borrowings as well as a
reduction of borrowings under the Company's revolving credit
facility.
Six Months Ended December 31, 2003
Compared to the Six Months Ended December 31, 2002
- --------------------------------------------------
Revenues of the Company during the six-month period ended December
31, 2003 increased by approximately $19.9 million (17.8%) to
approximately $132 million from approximately $112.1 million in the
six-month period ended December 31, 2002. This increase may be
attributed primarily to increases in revenues of approximately
$20.4 million generated from "greenfield" distribution centers
opened for more than one year and approximately $3 million from
"storm" distribution centers opened since June 30, 2003, offset by
a decrease in revenues of approximately $3.5 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, most 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
for the fiscal year ending June 30, 2004.
Cost of sales increased between the 2003 and 2002 six-month periods
at a greater rate than the increase in revenues between these six-
month periods. Accordingly, cost of sales as a percentage of
revenues increased to 76.3% in the six-month period ended December
31, 2003 from 75.9% in the six-month period ended December 31,
2002, and gross profit as a percentage of revenues decreased to
23.7% in the six-month period ended December 31, 2003 from 24.1% in
the six-month period ended December 31, 2002. This decline
resulted from competitive pricing pressures in certain geographical
market areas and a product mix in certain market areas that did not
yield as high a gross profit margin as other product mixes that
were achieved in other market areas. 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 six-
month period ended December 31, 2002 was a decrease of $385,000 in
cost of sales.
Operating expenses (including non-cash charges for depreciation and
amortization) increased by approximately $1.4 million (5.3%)
between the 2003 and 2002 six-month periods presented. Of this
increase, approximately $381,000 may be attributed to an increase
in the allowance for doubtful accounts and notes receivable,
approximately $787,000 to increased payroll and related costs and
approximately $403,000 to an increase in delivery expenses, offset
by decreases in various other operating expenses. Depreciation and
amortization decreased by an aggregate of approximately $85,000
(15.8%) between the 2003 and 2002 six-month periods. Operating
expenses (including depreciation and amortization) as a percentage
of revenues were 21.4% in the six-month period ended December 31,
2003 compared to 23.9% in the six-month period ended December 31,
2002.
Interest income increased by approximately $101,000 (61.1%) between
the 2003 and 2002 six-month periods presented. This increase is
primarily attributable to interest collected on notes receivable.
-19-
Interest expense decreased by approximately $188,000 (20%) between
the 2003 and 2002 six-month periods presented. This decrease is
due to lower rates of interest charged on borrowings as well as a
reduction of borrowings under the Company's revolving credit
facility.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital was approximately $43,075,000 and
$45,342,000 at December 31, 2003 and June 30, 2003, respectively.
At December 31, 2003, the Company's current ratio was 2.73 to 1
compared to 2.13 to 1 at June 30, 2003.
Net cash provided by operating activities during the six-month
period ended December 31, 2003 increased by approximately $1.1
million to approximately $5.3 million from approximately $4.2
million during the six-month period ended December 31, 2002. This
increase may be attributed principally to increases in net income
of approximately $2.6 million, allowance for doubtful accounts of
approximately $860,000 attributed to the deterioration in the aging
of the Company's accounts and notes receivable, federal and state
income taxes of approximately $1.3 million, decreases in accounts
and notes receivable of approximately $2.4 million and inventories
of approximately $3.9 million, and an increase in accrued expenses
and other current liabilities of approximately $300,000, offset by
decreases in depreciation and amortization of approximately
$100,000, assets of discontinued operation of approximately
$110,000, accounts payable of approximately $9.4 million and
increases in other current assets of approximately $410,000 and
deferred income taxes of approximately $240,000.
Net cash used in investing activities during the six-month period
ended December 31, 2003 increased by approximately $250,000 to
approximately $365,000 from approximately $113,000 during the six-
month period ended December 31, 2002. This increase may be
attributed to an increase of approximately $260,000 in a contingent
consideration payment for an acquired company. Management of the
Company presently anticipates capital expenditures in the next
twelve months of not less than $330,000, of which approximately
$180,000 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 $150,000 for leasehold improvements.
Net cash used in financing activities during the six-month period
ended December 31, 2003 decreased by approximately $3 million to
approximately $4.7 million from approximately $7.7 million during
the six-month period ended December 31, 2002. This decrease may be
attributed to a decrease in the net principal repayments of long-
term debt of approximately $3 million and a recovery of expenses of
$50,000 relating to the May 2002 private placement of common stock
and warrants offset by expenses of the February 2003 private
placement of approximately $15,000.
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 (a) 1,000,000 authorized but previously
unissued shares of the Company's common stock, and (b) a warrant to
purchase up to an additional 1,000,000 authorized but previously
-20-
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 February 4,
2004, the last reported sales price for the Company's common stock
was $2.12 per share.
The Company believes that its currently available sources of
liquidity will be adequate to sustain its normal operations during
the twelve-month period beginning January 1, 2004, 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,
and to close on its new credit facility (see below), or to continue
its existing credit facility beyond its current January 21, 2005
maturity date on terms satisfactory to it.
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 matures on January 21, 2005.
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
-21-
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 December 31, 2003.
The Company received a commitment letter from its lender to
refinance its existing credit facility with a new $60 million
credit facility for a term of five years. The commitment letter
provides for interest at Libor, as defined, plus two and one-half
(2.5%) percent, or at the lender's Prime Rate, as defined, plus
one-half of one (1/2%) percent, with the alternative at the
borrowers' election. The commitment letter also provides for
certain specific financial covenants in addition to standard and
affirmative and negative covenants, including the requirement that
the borrowers maintain a minimum Net Worth, as defined, and a Fixed
Charge Coverage Ratio, as defined. As with the existing credit
facility, the new credit facility will have the Company's
subsidiaries and limited partnership as the borrowers, and it will
be collateralized by substantially all of the tangible and
intangible assets of the borrowers and guaranteed by the Company.
It presently is anticipated that the closing of the new credit
facility will occur on or before February 27, 2004.
Recent Developments
- -------------------
On January 26, 2004, the Company engaged the services of Morgan
Joseph & Co., Inc., New York, NY, a financial advisor (the
"Financial Advisor"), to assist it in analyzing and evaluating the
range of strategic alternatives available to the Company,
including, among other things, a possible sale or management buyout
of the Company, merger and acquisition transactions, or remaining
independent. The Company has appointed a special committee of
independent directors (the "Special Committee") to work with, and
to consider the various strategic alternatives presented by, the
Financial Advisor. The Special Committee consists of Paul D.
Finkelstein, who is serving as the chairman of the committee, John
A. Shulman, and George Skakel III.
Although the Company has retained the services of the Financial
Advisor to assist it in evaluating strategic alternatives, the
Company does not have any current understandings, arrangements, or
agreements with respect to any specific transaction and has not
received any offers relating to any such transactions.
Furthermore, even though the Company has received, from time to
time, expressions of interest regarding potential transactions, no
negotiations, formal or informal, are currently taking place with
respect to any such transaction.
New Accounting Pronouncements
- -----------------------------
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
clarifies existing accounting for whether variable interest
entities, as defined in FIN 46, should be consolidated in financial
statements based upon the investee's ability to finance activities
without additional financial support and whether investors possess
characteristics of a controlling financial interest. FIN 46 applies
to public entities that have interests in special purpose entities
for periods ending after December 15, 2003. Application for all
other types of variable interest entities is required in financial
statements for periods ending after March 15, 2004. The Company
does not have any interests in variable interest entities and
-22-
therefore this adoption will not have any effect on the Company's
results of operations or financial position.
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. Accordingly, this
pronouncement currently is not applicable to 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,
goodwill, accounts payable, accrued expenses, deferred tax
liability, income taxes payable 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 December 31, 2003, a 100 basis point change in interest rates
would result in an approximate $383,000 charge to the Company's
annual interest expense. The Company does not currently anticipate
entering into interest rate swaps and/or other similar instruments.
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.)
-23-
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
our 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 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 such
disclosure controls and procedures to determine whether they are
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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 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.
* * * * *
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PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
-------------------------------------------------
In connection with the Company's initial public offering in March
1999, the Company issued 2,875,000 redeemable common stock purchase
warrants ("Warrants"). Subsequent to the closing of its initial
public offering, the Company issued an additional 150,000 Warrants.
Each Warrant entitles the holder to purchase one share of the
Company's common stock at an exercise price of $5.50 per share
until March 12, 2004.
On December 19, 2003, the Board of Directors of the Company
authorized the Company's management to extend the exercise period
of the Warrants in its sole discretion, and the Company's
management intends to extend the exercise period of the Warrants
from March 12, 2004 to September 12, 2004. All other terms
regarding the Warrants, including the exercise price, will remain
the same.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The following matters were submitted to a vote of the Company's
security holders at the Company's annual meeting on January 29,
2004:
1. To elect three Class I Directors to serve on the Board of
Directors of the Company for a term of three years and until
their successors have been duly elected and qualified. The
following individuals were nominated for election as Class I
Directors of the Company with terms expiring at the 2006
annual meeting of the Company's stockholders:
Number of Shares
----------------------------------
Nominee For Against Withheld
- ------- --------- ------- --------
Douglas P. Fields 9,938,812 -0- 150,232
Steven R. Andrews, Esq. 9,938,812 -0- 150,232
John A. Shulman 9,938,812 -0- 150,232
Of the total of 10,255,455 shares of common stock eligible to
vote, there were 10,089,044 shares present in person or by
proxy. The above-named Class I Directors were elected by a
plurality vote with the results for each noted above.
The following directors' terms of office as directors
continued after the annual meeting:
Class II Directors: Term Expires
- ------------------ ------------
Paul D. Finkelstein 2004 Annual Meeting of Stockholders
George Skakel III 2004 Annual Meeting of Stockholders
Class III Directors: Term Expires
- ------------------- ------------
Frederick M. Friedman 2005 Annual Meeting of Stockholders
James E. Helzer 2005 Annual Meeting of Stockholders
John E. Smircina, Esq. 2005 Annual Meeting of Stockholders
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2. To consider and vote on the approval of (a) the exercise of a
warrant issued by the Company pursuant to a private placement
sale of its securities to James E. Helzer (the "Warrant") to
the extent that it is exercised to purchase in excess of
811,090 shares of the Company's common stock (up to the
maximum 1,000,000 shares subject to such Warrant), and (b) the
application of certain anti-dilution adjustments to the
exercise price of the Warrant in the event that the Company
enters into certain future transactions at prices below the
Warrant exercise price to the extent that such adjustments
would cause the exercise price of the Warrant to fall below
$0.875 per share (the "Helzer Proposal").
Of the total of 10,255,455 shares of common stock eligible to
vote, there were 10,089,044 shares present in person or by
proxy, with 7,230,811 shares voting for the Helzer Proposal,
331,790 shares voting against the Helzer Proposal, 7,100
shares abstaining from voting, and 2,519,343 broker non-votes.
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:
None
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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: February 17, 2004 By: /s/ Douglas P. Fields
----------------------------
Douglas P. Fields, Chairman
of the Board of Directors,
Chief Executive Officer
and a Director (Principal
Executive Officer)
Dated: February 17, 2004 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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