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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 March 31, 2004
--------------
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
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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 May 12, 2004, was 10,265,455 shares.
EAGLE SUPPLY GROUP, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004
(Unaudited) and June 30, 2003 3
Consolidated Statements of Operations (Unaudited)
for the Three Months and Nine Months Ended
March 31, 2004 and 2003 4-5
Consolidated Statement of Stockholders' Equity
(Unaudited) for the Nine Months Ended March 31, 2004 6
Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended March 31, 2004 and 2003 7
Notes to Unaudited Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21-22
Item 4. Controls and Procedures 22-23
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERTIFICATIONS 26-29
-2-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
March 31, June 30,
2004 2003
(Unaudited)
------------- ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 393,751 $ 1,505,408
Accounts and notes receivable
- trade (net of allowance for
doubtful accounts) 32,718,006 40,176,822
Inventories 38,062,627 39,962,678
Deferred tax asset 2,528,000 1,871,000
Assets of discontinued operation - 157,724
Federal and state income taxes receivable 9,626 771,095
Other current assets 802,425 881,716
------------- ------------
Total current assets 74,514,435 85,326,443
PROPERTY AND EQUIPMENT, net 2,464,773 2,964,635
COST IN EXCESS OF NET ASSETS ACQUIRED 14,581,358 14,581,358
NOTES RECEIVABLE - TRADE (net of allowance
for doubtful accounts) 2,740,029 2,807,588
OTHER ASSETS 457,478 15,850
------------- ------------
TOTAL ASSETS $ 94,758,073 $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 26,714,334 31,876,367
Due to related parties - 259,778
Accrued expenses and other current
liabilities 5,033,360 5,988,543
------------- ------------
Total current liabilities 33,457,694 39,984,688
LONG-TERM DEBT 36,835,493 42,687,892
DEFERRED TAX LIABILITY 1,890,000 1,807,000
------------- ------------
Total liabilities 72,183,187 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 - March 31, 2004 - 10,265,455
shares; June 30, 2003 - 10,255,455 shares 1,026 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 19,370,111 19,325,064
Retained earnings 3,203,749 1,890,205
------------- ------------
Total stockholders' equity 22,574,886 21,216,294
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 94,758,073 $105,695,874
============= ============
See notes to unaudited consolidated financial statements.
-3-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003
- -----------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
2004 2003 2004 2003
------------- ------------- ------------- -------------
REVENUES $ 50,498,762 $ 44,410,764 $ 182,489,721 $ 156,468,812
COST OF SALES 38,226,242 34,288,889 138,888,057 119,259,565
------------- ------------- ------------- -------------
12,272,520 10,121,875 43,601,664 37,209,247
------------- ------------- ------------- -------------
OPERATING EXPENSES (including provisions
for doubtful accounts of $492,223,
$1,484,410, $2,098,938 and $2,710,247,
respectively) 12,341,694 13,343,141 40,126,164 39,620,392
DEPRECIATION AND AMORTIZATION 208,666 246,528 658,399 780,883
------------- ------------- ------------- -------------
12,550,360 13,589,669 40,784,563 40,401,275
------------- ------------- ------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS (277,840) (3,467,794) 2,817,101 (3,192,028)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 88,591 91,712 355,668 257,489
Interest expense (360,229) (340,414) (1,114,225) (1,282,430)
------------- ------------- ------------- -------------
(271,638) (248,702) (758,557) (1,024,941)
------------- ------------- ------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES (549,478) (3,716,496) 2,058,544 (4,216,969)
(BENEFIT) PROVISION FOR INCOME TAXES (165,000) (1,326,000) 745,000 (1,500,000)
------------- ------------- ------------- -------------
NET (LOSS) INCOME FROM
CONTINUING OPERATIONS (384,478) (2,390,496) 1,313,544 (2,716,969)
LOSS FROM DISCONTINUED OPERATION,
NET OF INCOME TAXES - - - (191,017)
------------- ------------- ------------- -------------
NET (LOSS) INCOME BEFORE EFFECT OF
ACCOUNTING CHANGE (384,478) (2,390,496) 1,313,544 (2,907,986)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF INCOME TAXES - - - (413,000)
------------- ------------- ------------- -------------
NET (LOSS) INCOME $ (384,478) $ (2,390,496) $ 1,313,544 $ (3,320,986)
============= ============= ============= =============
See notes to unaudited consolidated financial statements.
-4-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (Cont'd)
- -----------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
2004 2003 2004 2003
------------- ------------- ------------- -------------
BASIC NET (LOSS) INCOME PER SHARE:
Net (loss) income from continuing
operations $ (.04) $ (.25) $ .13 $ (.29)
Loss from discontinued operation - - - (.02)
Cumulative effect of accounting change - - - (.05)
------------- ------------- ------------- -------------
$ (.04) $ (.25) $ .13 $ (.36)
============= ============= ============= =============
SHARES OF COMMON STOCK USED IN
BASIC NET (LOSS) INCOME PER SHARE 10,265,455 9,644,344 10,262,110 9,248,886
============= ============= ============= =============
DILUTED NET (LOSS) INCOME PER SHARE:
Net (loss) income from continuing
operations $ (.04) $ (.25) $ .12 $ (.29)
Loss from discontinued operation - - - (.02)
Cumulative effect of accounting change - - - (.05)
------------- ------------- ------------- -------------
$ (.04) $ (.25) $ .12 $ (.36)
============= ============= ============= =============
SHARES OF COMMON STOCK USED IN
DILUTED NET (LOSS) INCOME PER SHARE 10,265,455 9,644,344 10,577,178 9,248,886
============= ============= ============= =============
See notes to unaudited consolidated financial statements.
-5-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2004
- -----------------------------------------------------------------------------
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 - - - - - - - 1,313,544 1,313,544
Issuance of Common Stock for
services - - - - 10,000 1 9,449 - 9,450
Refund of expenses related to
private placement, net - - - - - - 35,598 - 35,598
------ ------ ------ ------ ---------- ------ ----------- ---------- -----------
BALANCE, MARCH 31, 2004 - $ - - $ - 10,265,455 $1,026 $19,370,111 $3,203,749 $22,574,886
====== ====== ====== ====== ========== ====== ===========
See notes to unaudited consolidated financial statements.
-6-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
- -----------------------------------------------------------------------------
2004 2003
------------- ------------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 1,313,544 $ (2,716,969)
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 658,399 795,937
Deferred income taxes (574,000) (664,000)
Increase in allowance for doubtful accounts 2,201,817 2,398,319
Loss on sale of equipment 1,361 -
Changes in assets and liabilities:
Decrease in accounts and notes receivable 5,324,558 4,989,571
Decrease (increase) in inventories 1,900,051 (3,314,660)
Decrease in assets of discontinued operation 157,724 1,465,923
Decrease in other current assets 79,291 36,749
(Decrease) increase in accounts payable (5,162,033) 1,267,761
Decrease in accrued expenses and other
current liabilities (955,183) (1,485,715)
Increase (decrease) in federal and state
income taxes 761,469 (1,190,073)
------------- ------------
Net cash provided by operating activities 5,706,998 978,826
------------- ------------
INVESTING ACTIVITIES:
Capital expenditures (180,048) (46,879)
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 (403,826) (46,879)
------------- ------------
FINANCING ACTIVITIES:
Principal borrowings of long-term debt 200,045,897 172,901,330
Principal reductions of long-term debt (206,048,296) (179,693,736)
Proceeds from private placement, net of
related expenses - 963,280
Increase from issuance of Common Stock for services 9,450 -
Increase in deferred financing costs (457,478) -
Increase in additional paid-in capital 35,598 -
------------- ------------
Net cash used in financing activities (6,414,829) (5,829,126)
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,111,657) (4,680,512)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,505,408 5,355,070
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 393,751 $ 674,558
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,114,225 $ 1,282,430
============= ============
Cash paid during the period for income taxes $ 594,016 $ 29,548
============= ============
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 nine months ended March 31, 2004 and 2003
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 and options.
Comprehensive Income (Loss) - For the three and nine months ended
- ---------------------------
March 31, 2004 and 2003, 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
-8-
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 Statement of Financial Accounting Standards
("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 nine-month
periods ended March 31, 2004 and 2003 would have been reduced to
the proforma amounts indicated below:
Three Months Nine Months
2004 2003 2004 2003
------------ ------------- ------------- -------------
Net (loss) income $ (384,478) $ (2,390,496) $ 1,313,544 $ (3,320,986)
Compensation costs (17,344.50) (25,849) (52,035) (77,547)
------------ ------------- ------------- -------------
Proforma $ (401,823) $ (2,416,345) $ 1,261,509 $ (3,398,533)
============ ============= ============= =============
Basic net (loss) income per share $ (.04) $ (.25) $ .12 $ (.36)
Compensation costs - - - (.01)
------------ ------------- ------------- -------------
Proforma $ (.04) $ (.25) $ .12 $ (.37)
============ ============= ============= =============
Diluted net (loss) income per share $ (.04) $ (.25) $ .12 $ (.36)
Compensation costs - - - (.01)
------------ ------------- ------------- -------------
Proforma $ (.04) $ (.25) $ .12 $ (.37)
============ ============= ============= =============
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.
-9-
2. ACCOUNTS AND NOTES RECEIVABLE - TRADE
Accounts and notes receivable - trade are as follows:
March 31, June 30,
2004 2003
------------ ------------
Accounts receivable $ 35,498,047 $ 41,597,677
Notes receivable 6,960,894 6,185,822
------------ ------------
42,458,941 47,783,499
Allowance for doubtful accounts (7,000,906) (4,799,089)
------------ ------------
$ 35,458,035 $ 42,984,410
============ ============
Current $ 32,718,006 $ 40,176,822
Long-term 2,740,029 2,807,588
------------ ------------
$ 35,458,035 $ 42,984,410
============ ============
During the three-month period ended March 31, 2004 and the fiscal
year ended June 30, 2003, the Company reclassified approximately
$1.1 million and $2.8 million, respectively, 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 March 31, 2004. 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 March 2003, the Emerging Issues Task Force ("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 guidance, 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.
4. LONG-TERM DEBT
On March 10, 2004, Eagle Supply Group, Inc. ("Eagle") completed a
refinancing of its existing credit facility by entering into the
Second Amended and Restated Loan and Security Agreement (the
"Amended Loan Agreement") with its current lender, Fleet Capital
Corporation, and a new lender, General Electric Capital
Corporation, with its subsidiaries and limited partnership as the
borrowers.
-10-
The Amended Loan Agreement provides for an increased credit
facility in the aggregate amount of $60,000,000. This credit
facility was initially comprised of (a) a $59,296,100 sixty-month
senior secured formula-based revolving credit facility and (b) a
$703,900 ten-month term loan. As the term loan is reduced, the
amount available under the revolving credit facility increases by a
like amount. The revolving credit facility bears interest, at the
borrowers' election, at either LIBOR plus two and one-half percent
(2.5%) or Fleet National Bank's prime rate plus one-half percent
(0.5%). The term loan bears interest, at the borrowers' election,
at either LIBOR plus two and one-half percent (2.5%) or Fleet
National Bank's prime rate plus one-half percent (0.5%).
The credit facility, which matures on March 9, 2009, is
collateralized by substantially all of the tangible and intangible
assets of the Company and is guaranteed by Eagle. In addition to
the standard affirmative and negative covenants typically contained
in similar credit facilities, the Amended Loan Agreement contains
four specific financial covenants that require the borrowers to:
* maintain a Net Worth (as defined in the Amended Loan
Agreement) of not less than (i) $8,500,000 at each quarter
end from March 31, 2004 through March 31, 2005, (ii)
$8,500,000 plus 25% of positive net income for each
quarter being tested on a cumulative basis at each quarter
end from June 30, 2005 through March 31, 2006, and (iii)
an amount equal to the previously required amount for the
immediately preceding quarter plus 50% of the positive net
income for each quarter being tested on a cumulative basis
at each quarter end after March 31, 2006;
* maintain a Fixed Charge Coverage Ratio (as defined in the
Amended Loan Agreement) of not less than 1.10 to 1.00, to
be tested monthly on a trailing twelve-month basis;
* maintain a Bad Debt Reserve Ratio (as defined in the
Amended Loan Agreement) of not less than 0.55 to
1.00, to be tested monthly; and
* refrain from making payments to (i) Eagle for management
expenses in excess of $2,100,000 in any twelve-month
period or $175,000 in any one month, (ii) Eagle for
interest expenses in excess of $648,000 in any twelve-
month period or $54,000 in any one month, and (iii) TDA
for interest expenses in excess of $87,600 in any twelve-
month period or $7,300 in any one month.
The Company was in compliance with all such covenants at March 31,
2004.
* * * * *
-11-
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;
-12-
* we may be unable to collect our accounts or notes
receivables when due and payable, within a reasonable
period of time after they become due and payable, or at
all;
* certain of our distribution centers may experience losses,
and, if management decides to close or sell such
distribution centers, we may incur additional losses in
connection with such closure or sale;
* 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 not be favorable to us or
changes in policies of our vendors that may not be
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 our reported results; 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 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,
-13-
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.
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 estimates and judgments 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, for
example, 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
-14-
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 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
-15-
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.
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.
* * * * *
-16-
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. The results of operations for
the three and nine months ended March 31, 2004 are not necessarily
indicative of the results to be expected for the full fiscal year
ending June 30, 2004.
Results of Operations
Three Months Ended March 31, 2004
Compared to the Three Months Ended March 31, 2003
Revenues of the Company during the three-month period ended March
31, 2004 increased by approximately $6.1 million (13.7%) to
approximately $50.5 million from approximately $44.4 million in the
three-month period ended March 31, 2003. This increase may be
attributed primarily to net increases in revenues of approximately
$5.5 million generated from "greenfield" distribution centers
opened for more than one year and approximately $1.4 million from
"storm" distribution centers opened since June 2003, offset by a
decrease in revenues of approximately $800,000 from distribution
centers that were closed. As discussed in previous filings, a
portion 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
believes 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 2004 and 2003 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 75.7% in the three-month period
ended March 31, 2004 from 77.2% in the three-month period ended
March 31, 2003, and gross profit as a percentage of revenues
increased to 24.3% in the three-month period ended March 31, 2004
from 22.8% in the three-month period ended March 31, 2003. 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 March 31, 2003 was
an increase of $405,000 in cost of sales.
Operating expenses (including non-cash charges for depreciation and
amortization) decreased by approximately $1 million (7.6%) between
the 2004 and 2003 three-month periods presented. This decrease may
be attributed to a decrease in the provision for doubtful accounts
and notes receivable of approximately $1 million. Depreciation and
amortization decreased by an aggregate of approximately $38,000
(15.4%) between the 2004 and 2003 three-month periods. Operating
expenses (including depreciation and amortization) as a percentage
of revenues were 24.9% in the three-month period ended March 31,
2004 compared to 30.6% in the three-month period ended March 31,
2003.
Interest income and interest expense were approximately the same
for both three-month periods presented.
-17-
Nine Months Ended March 31, 2004
Compared to the Nine Months Ended March 31, 2003
- ------------------------------------------------
Revenues of the Company during the nine-month period ended March
31, 2004 increased by approximately $26 million (16.6%) to
approximately $182 million from approximately $156 million in the
nine-month period ended March 31, 2003. This increase may be
attributed primarily to increases in revenues of approximately
$25.8 million generated from "greenfield" distribution centers
opened for more than one year and approximately $4.5 million from
"storm" distribution centers opened since June 30, 2003, offset by
a decrease in revenues of approximately $4.3 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 believes that last spring's 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 2004 and 2003 nine-month
periods at a lesser rate than the increase in revenues between
these nine-month periods. Accordingly, cost of sales as a
percentage of revenues decreased to 76.1% in the nine-month period
ended March 31, 2004 from 76.2% in the nine-month period ended
March 31, 2003, and gross profit as a percentage of revenues
increased to 23.9% in the nine-month period ended March 31, 2004
from 23.8% in the nine-month period ended March 31, 2003. 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 for the nine-month period ended March 31, 2003 was an
increase of $20,000 in cost of sales.
Operating expenses (including non-cash charges for depreciation and
amortization) increased by approximately $400,000 (1%) between the
2004 and 2003 nine-month periods presented. Of this increase,
approximately $900,000 may be attributed to an increase in the
operating expenses of new distribution centers and net increases in
various other operating expenses, offset by a decrease in the
provision for doubtful accounts and notes receivable of
approximately $600,000. Depreciation and amortization decreased by
an aggregate of approximately $120,000 (15.7%) between the 2004 and
2003 nine-month periods. Operating expenses (including
depreciation and amortization) as a percentage of revenues were
22.3% in the nine-month period ended March 31, 2004 compared to
25.8% in the nine-month period ended March 31, 2003.
Interest income increased by approximately $98,000 (38.1%) between
the 2004 and 2003 nine-month periods presented. This increase is
primarily attributable to interest collected on notes receivable.
Interest expense decreased by approximately $168,000 (13.1%)
between the 2004 and 2003 nine-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.
-18-
Liquidity and Capital Resources
- -------------------------------
The Company's working capital was approximately $41,057,000 and
$45,342,000 at March 31, 2004 and June 30, 2003, respectively. At
March 31, 2004, the Company's current ratio was 2.23 to 1 compared
to 2.13 to 1 at June 30, 2003.
Net cash provided by operating activities during the nine-month
period ended March 31, 2004 increased by approximately $4.7 million
to approximately $5.7 million from approximately $1 million during
the nine-month period ended March 31, 2003. This increase may be
attributed principally to an improvement in net income (compared to
a prior period net loss) of approximately $4.6 million, increases
in accrued expenses and other current liabilities of approximately
$530,000, federal and state income taxes of approximately $2
million, and deferred income taxes of approximately $90,000, and
decreases in accounts and notes receivable of approximately
$330,000, inventories of approximately $5.2 million, and other
current assets of approximately $40,000, offset by decreases in
accounts payable of approximately $6.4 million, the allowance for
doubtful accounts of approximately $200,000, depreciation and
amortization of approximately $140,000, and net assets of a
discontinued operation of approximately $1.3 million..
Net cash used in investing activities during the nine-month period
ended March 31, 2004 increased by approximately $357,000 to
approximately $404,000 from approximately $47,000 during the nine-
month period ended March 31, 2003. This increase may be attributed
to approximately $260,000 in a contingent consideration payment for
an acquired company and capital expenditures of approximately
$97,000. Management of the Company presently anticipates capital
expenditures in the next twelve months of not less than $960,000,
of which approximately $530,000 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 $325,000 for leasehold
improvements.
Net cash used in financing activities during the nine-month period
ended March 31, 2004 increased by approximately $580,000 to
approximately $6.4 million from approximately $5.8 million during
the nine-month period ended March 31, 2003. This increase may be
attributed to a private placement of common stock and warrants, net
of expenses, of approximately $920,000 in 2003 that did not recur
in 2004 and an increase in deferred financing costs of
approximately $450,000 related to the Company's refinancing of its
credit facility, offset by a decrease in the net principal
reductions of long-term debt of approximately $790,000.
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
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
-19-
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 May 7, 2004,
the last reported sales price for the Company's common stock was
$2.20 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 April 1, 2004.
Credit Facilities
- -----------------
On March 10, 2004, Eagle Supply Group, Inc. ("Eagle") completed a
refinancing of its existing credit facility by entering into the
Second Amended and Restated Loan and Security Agreement (the
"Amended Loan Agreement") with its current lender, Fleet Capital
Corporation, and a new lender, General Electric Capital
Corporation, with its subsidiaries and limited partnership as the
borrowers.
The Amended Loan Agreement provides for an increased credit
facility in the aggregate amount of $60,000,000. This credit
facility was initially comprised of (a) a $59,296,100 sixty-month
senior secured formula-based revolving credit facility and (b) a
$703,900 ten-month term loan. As the term loan is reduced, the
amount available under the revolving credit facility increases by a
like amount. The revolving credit facility bears interest, at the
borrowers' election, at either LIBOR plus two and one-half percent
(2.5%) or Fleet National Bank's prime rate plus one-half percent
(0.5%). The term loan bears interest, at the borrowers' election,
at either LIBOR plus two and one-half percent (2.5%) or Fleet
National Bank's prime rate plus one-half percent (0.5%).
The credit facility, which matures on March 9, 2009, is
collateralized by substantially all of the tangible and intangible
assets of the Company and is guaranteed by Eagle. In addition to
the standard affirmative and negative covenants typically contained
in similar credit facilities, the Amended Loan Agreement contains
four specific financial covenants that require the borrowers to:
* maintain a Net Worth (as defined in the Amended Loan
Agreement) of not less than (i) $8,500,000 at each quarter
end from March 31, 2004 through March 31, 2005, (ii)
$8,500,000 plus 25% of positive net income for each
quarter being tested on a cumulative basis at each quarter
end from June 30, 2005 through March 31, 2006, and (iii)
an amount equal to the previously required amount for the
immediately preceding quarter plus 50% of the positive net
income for each quarter being tested on a cumulative basis
at each quarter end after March 31, 2006;
* maintain a Fixed Charge Coverage Ratio (as defined in the
Amended Loan Agreement) of not less than 1.10 to 1.00, to
be tested monthly on a trailing twelve-month basis;
* maintain a Bad Debt Reserve Ratio (as defined in the
Amended Loan Agreement) of not less than 0.55 to
1.00, to be tested monthly; and
* refrain from making payments to (i) Eagle for management
expenses in excess of $2,100,000 in any twelve-month
period or $175,000 in any one month, (ii) Eagle for
interest expenses in excess of $648,000 in any twelve-
-20-
month period or $54,000 in any one month, and (iii) TDA
for interest expenses in excess of $87,600 in any twelve-
month period or $7,300 in any one month.
The Company was in compliance with all such covenants at March 31,
2004.
Recent Developments
- -------------------
Business Strategy - As discussed in previous filings, 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 Special Committee, John A. Shulman, and George
Skakel III. Currently, the Financial Advisor and the Special
Committee are focused on evaluating a possible sale of the Company.
However, presently there are no agreements, arrangements, or
understandings with respect to any such transaction and there is no
assurance that any sale or other transaction will take place.
New Accounting Pronouncements
- -----------------------------
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
guidance, 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.
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 March 31, 2004, a 100 basis point change in interest rates
would result in an approximate $364,000 charge to the Company's
annual interest expense. The Company does not currently anticipate
entering into interest rate swaps and/or other similar instruments.
-21-
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 terms of purchase of supplies from our vendors,
changes in business conditions in our industry, 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
our financial statements in accordance with accounting principles
generally accepted in the United States of America and the
preparation of reports that we are required to file with regulatory
authorities. 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, omissions, 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, oversight, or mistake.
Disclosure controls and procedures also can be circumvented by the
-22-
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, omission, oversight, 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 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.
* * * * *
-23-
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 entitled 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, on February 23, 2004,
the Company's management extended the exercise period of the
Warrants from March 12, 2004 to September 12, 2004. All other
terms regarding the Warrants, including the exercise price, remain
the same.
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:
On February 9, 2004, the Company filed a Current Report on Form
8-K under Item 9 to provide information regarding the Company's
engaging the services of a financial advisor to assist it in
analyzing and evaluating the range of strategic
alternatives available to the Company and the appointing of a
special committee of independent directors to evaluate these
alternatives.
On February 23, 2004, the Company filed a Current Report on Form
8-K under Item 5 to provide information regarding the Company's
extending the exercise period of its Redeemable Common Stock
Purchase Warrants from March 12, 2004 to September 12, 2004.
On March 12, 2004, the Company filed a Current Report on Form 8-
K under Item 5 to provide information regarding the Company's
completing the refinancing of its existing credit facility.
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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: May 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: May 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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