SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission File Number: 000-25423
EAGLE SUPPLY GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3889248
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 East 42nd Street, Suite 1116, New York, New York 10168
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 986-6190
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock Boston Stock Exchange
Redeemable Common Stock Purchase
Warrants Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
[X]
The aggregate market value of the common equity of the Registrant held
by non-affiliates on September 20, 2002, was approximately $6,721,855
based upon the closing price ($1.88 per share) as reported by the
NASDAQ SmallCap Market on that date. The number of shares outstanding
of the Registrant's common stock, as of September 20, 2002, was
9,055,455 shares.
DOCUMENTS INCORPORATED BY REFERENCE
2
TABLE OF CONTENTS
A NOTE ABOUT FORWARD-LOOKING STATEMENTS............................... 4
PART I................................................................ 5
ITEM 1. BUSINESS ................................................... 5
ITEM 2. PROPERTIES.................................................. 32
ITEM 3. LEGAL PROCEEDINGS........................................... 34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 34
PART II............................................................... 35
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 35
ITEM 6. SELECTED FINANCIAL DATA..................................... 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK................................................. 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 53
PART III.............................................................. 54
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.............. 54
ITEM 11. EXECUTIVE COMPENSATION...................................... 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 69
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 70
PART IV............................................................... 74
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K......................................... 74
SIGNATURES............................................................ 76
EAGLE SUPPLY GROUP, INC. CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDED JUNE 30, 2002, 2001
AND 2000, AND INDEPENDENT AUDITORS' REPORT
3
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
---------------------------------------
This document contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, 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 "believes," "expects," "anticipates," "plans,"
"estimates," "approximately," "intend," and other similar words and
phrases, or future or conditional verbs such as "will," "should,"
"would," "could," and "may." These forward-looking statements are
based largely on our current expectations, assumptions, estimates,
judgments and projections about our business and our industry, and
they involve inherent risks and uncertainties. Although we believe
our expectations are based on reasonable assumptions, judgments and
estimates, 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. In evaluating these statements,
some of the factors that you should consider include those described
in Item 1. "Business - Risk Factors" and elsewhere in this document,
and the following:
* general economic and market conditions, either nationally
or in the markets where we conduct our business, may be
less favorable than expected;
* inability to find suitable equity or debt financing when
needed on terms commercially reasonable to us;
* inability to locate suitable facilities or personnel to
open or maintain distribution center locations;
* inability to identify suitable acquisition candidates or,
if identified, an inability to consummate any such
acquisitions;
* interruptions or cancellation of sources of supply of
products to be distributed or significant increases in the
costs of such products;
* changes in the cost or pricing of, or consumer demand for,
our or our industry's distributed products;
* an inability to collect our accounts or notes receivables
when due or within a reasonable period of time after they
become due and payable;
* a significant increase in competitive pressures; and
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* changes in accounting policies and practices, as may be
adopted by regulatory agencies as well as the Financial
Accounting Standards Board.
Many of these factors are beyond our control and you should read
carefully the factors described in the "Risk Factors" under Item 1.
"Business." 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.
PART I
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ITEM 1. BUSINESS
Background
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Eagle Supply Group, Inc. ("us," "our," "we" or the "Company"),
with corporate offices in New York City and operations headquarters in
Mansfield, Texas, believes that it is one of the largest wholesale
distributors of residential roofing and masonry supplies and related
products in the United States. We sell primarily to contractors and
subcontractors engaged in roofing repair and construction of new
residences and commercial property through our own distribution
facilities and direct sales force. Historically, approximately 70% of
our revenues have been derived from sales to contractors and
subcontractors engaged in re-roofing or repair and 30% from new
construction. Additionally, approximately 90% of our revenues are from
the sale of residential building products and 10% from the sale of
commercial products. Moreover, our product mix is heavily weighted to
roofing supplies and related products, with 87% of revenues derived
from roofing products and 13% from masonry, drywall, plywood and
ancillary products. We currently operate a network of 37 distribution
centers in 12 states, including locations in Texas (12), Florida (9),
Colorado (5), Alabama (2), Nebraska (2), and one each in Illinois,
Indiana, Iowa, Kentucky, Minnesota, Mississippi and Missouri.
We are majority-owned by TDA Industries, Inc. ("TDA" or our
"Parent"), and we were organized to acquire, integrate and operate
seasoned, privately-held companies that distribute products to or
manufacture products for the building supplies/construction industry.
On March 17, 1999, we completed the sale of 2,500,000 shares of
our Common Stock at $5.00 per share and 2,875,000 Redeemable Common
Stock Purchase Warrants (the "Warrants") at $.125 per Warrant in
connection with our initial public offering ("Initial Public
Offering"). We received net proceeds aggregating approximately
$10,206,000 from our Initial Public Offering.
Upon consummation of our Initial Public Offering, the Company
acquired all of the issued and outstanding common shares of Eagle
Supply, Inc. ("Eagle"), JEH/Eagle Supply, Inc. ("JEH Eagle") and
MSI/Eagle Supply, Inc. ("MSI Eagle") (the "Acquisitions") from TDA for
consideration consisting of, among other things, 3,000,000 shares of
the Company's Common Stock.
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Upon the consummation of the Acquisitions, Eagle, JEH Eagle and
MSI Eagle became wholly-owned subsidiaries of the Company.
Effective May 31, 2000, MSI Eagle was merged with and into JEH
Eagle. As of July 1, 2000, the Texas operations of JEH Eagle were
transferred to a newly formed limited partnership entirely owned
directly and indirectly by JEH Eagle. Accordingly, the Company's
business operations are presently conducted through two wholly-owned
subsidiaries and a limited partnership.
Eagle distributes roofing supplies and related products to
contractors engaged in residential and commercial roofing repair and
the construction of new residential and commercial properties. Through
its 12 distribution centers and direct sales force, Eagle sells to
more than 4,500 customers in Florida, Alabama and Mississippi. JEH
Eagle operates 25 distribution centers from which it sells roofing,
masonry and drywall products to more than 4,400 customers, primarily
contractors and builders located in Texas, Colorado, Illinois,
Indiana, Iowa, Kentucky, Minnesota, Missouri and Nebraska.
Between our two subsidiaries, we have approximately 550 units of
equipment from conveyor trucks to material handlers and forklifts. The
type of equipment differs from site to site due to the type of
delivery market and other factors. Certain markets are referred to as
"roof load" in which the supplier loads the building materials on the
roof on the job site rather than the ground. This type of delivery
requires trucks with cranes or conveyor systems and other such
equipment, which are more expensive and increase potential liability.
Our principal executive offices are located at 122 East 42nd
Street, Suite 1116, New York, New York 10168, and our telephone number
is (212) 986-6190. Our operations are headquartered and located at
2500 U.S. Highway 287, Mansfield, Texas 76063. See Item 2
"Properties."
General
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We are wholesale distributors of a complete line of roofing
supplies and related products through our own sales force primarily to
roofing supply and related products contractors and subcontractors in
the geographic areas where we have distribution centers. Such
contractors and subcontractors are engaged in commercial and
residential roofing repair and the construction of new residential and
commercial properties.
We also distribute sheet metal products used in the roofing
repair and construction industries. Furthermore, we distribute
drywall, plywood and related products and, solely in Colorado, vinyl
siding to the construction industry. Products distributed by us
generally include equipment, tools and accessory products for the
removal of old roofing, re-roofing and roof construction, and related
materials such as shingles, tiles, insulation, liquid roofing
materials, fasteners and ventilation materials.
In addition, we also distribute a complete line of cements and
masonry supplies and related products through our own direct sales
force primarily to building and masonry contractors and
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sub-contractors in certain of the geographic areas where we have
distribution centers. In general, such products include cement, cement
mixtures and similar "bag" products (lime, sand, etc.), angle iron,
cinder blocks, cultured stones and bricks, fireplace and pool
construction materials, and equipment, tools and accessory products
for use in residential and commercial construction.
The following chart indicates the approximate percentage of the
indicated product categories sold by us for the periods indicated:
Drywall Bagged/
Residential Commecial and Bulk All Other
Roofing Roofing Sheet Metal Plywood Products Products
Fiscal Year
Ended June 30, Approximate Percentage
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2000 63 14 5 11 5 2
2001 61 18 5 10 4 2
2002 72 11 4 8 4 1
Potential Expansion By Acquisition
We continually evaluate and identify markets into which we can
further expand our operations and market share. In this regard, we
actively seek potential acquisition candidates primarily in the
roofing supplies and related products industry throughout the United
States, with greater emphasis on the Southeastern, Midwestern and
Western regions and less emphasis on the Northeastern region of the
United States. However, we may consider acquisition candidates in any
region of the United States if an appropriate opportunity arises.
In an effort to achieve our growth objectives, we seek out
prospective acquisition candidates in businesses that complement or
are otherwise related to our current businesses. We anticipate that we
will finance future acquisitions, if any, through a combination of
cash, issuances of shares of our capital stock, and additional equity
or debt financing.
Although we continually consider and evaluate potential strategic
expansion and acquisition opportunities, we do not have any current
understandings, arrangements, or agreements, whether written or oral,
with respect to any specific acquisition prospect, and we are not
currently negotiating with any party with respect thereto.
Accordingly, we can not give you any assurance that we will be able
successfully to negotiate or consummate any future acquisitions or
that we will be able to obtain the necessary financing therefor on
commercially reasonable terms.
Expansion By Internal Growth
In addition to our acquisition strategy, management intends to
continue to pursue expansion of our operations by adding new
distribution centers. During the fiscal year ended June 30, 2002, we
opened five new distribution centers, three of which will be temporary
and closed four distribution centers. We open temporary distribution
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centers in response to storms which have created temporary markets.
These are supported by our contractor customers that concentrate only
on storm damage. After opening a permanent new distribution center,
our initial focus is to develop a customer base, to develop and
improve the distribution center's market position and operational
efficiency and then to expand its customer base.
Our Business
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Distribution Centers
Our typical distribution center consists of showroom space,
office space, warehouse and receiving space, secure outdoor holding
space, and receiving and shipping facilities, including loading docks.
Distribution centers range in size from approximately 10,000 to
110,000 square feet of indoor space, with a typical size of
approximately 30,000 square feet of indoor office and storage space
and additional outdoor storage. Currently, our largest distribution
center based on sales is located in Mansfield, Texas, and also houses
our operational headquarters.
Each distribution center location is managed by a distribution
center manager who oversees the center's employees, including various
sales and office personnel, as well as delivery and warehouse
personnel. We require that each distribution center develop a sales
strategy specific to the local market, but our senior and regional
management maintain direction of each region in directing sales
efforts and altering the product mix of a given center to meet local
market demands and Company objectives. Our computer software provides
data which enables our executives to view sales, inventory and gross
margins daily as well as monthly and profitability reports for each
of our distribution centers.
We operate two types of distribution centers: "greenfield" and
"storm" distribution centers. Greenfield centers are distribution
centers in areas where our market analysis indicates a potential for
strong and sustainable demand for our products over the long term. The
opening of a greenfield center typically requires approximately six
months of planning and a net capital investment by the Company of
approximately $650,000 per center. Our management analyzes a
greenfield opportunity on the basis of competition, number of roofs,
type of market ("ground" or "roof" load) and availability of qualified
personnel, among other factors.
Our "storm" centers are opened to service areas recently affected
by severe or catastrophic weather conditions such as hailstorms or
hurricanes. Sales of building and roofing products generally increase
dramatically during and after severe storms, especially sizeable
hurricanes and hailstorms, which can cause significant roof damage.
This sharp increase in demand provides an opportunity for us to
generate additional revenues. New storm centers typically require a
net capital investment by the Company of approximately $750,000 or
more in inventory, equipment and other expenditures and may be staffed
by personnel from our other centers. The amount of this capital
investment can vary widely depending on many factors. After sales from
reconstruction and reroofing generated by the storm-related demand
slow down, storm centers generally are closed and the remaining
inventory returned to one of the Company's other distribution centers.
Because the opening of a storm center is in response to the occurrence
of extreme weather conditions and other factors, we cannot anticipate
how many new storm centers will be opened, if any. On occasion, we may
8
determine that the market area in which a storm center is located will
support a permanent distribution center. In that event, the
distribution center is not closed but becomes part of our distribution
center network.
Principal Products
We distribute a variety of roofing supplies and related products
and accessories for use in the commercial and residential roofing
repair and construction industries. Such products include the
following:
Residential Roofing Products. Shingles (asphalt, cedar, ceramic,
slate, concrete, cement fibered, fiberglass and tile), felt,
insulation, waterproof underlayment, ventilation systems and
skylights.
Commercial Roofing Products. Asphalt, fiberglass rolls (including
fire retardant), organic rolls, insulation, cements, tar, other
coatings, single plies, modified bitumen and roll roofing products.
Sheet Metal Products. Aluminum, copper, galvanized and stainless
sheet metal.
Drywall/Plywood Products. Sheetrock and plywood.
Slate and Antique Products. Black slate, Vermont and other
slates, historical or antique slates, antique clay tile, new clay
tile, Ludowici clay tile and antique tile.
Accessory Products. We also sell accessory products related to
each of the foregoing, including, but not limited to, roofing
equipment, power and hand tools, nails, fasteners and other accessory
products.
Principally in the Dallas/Fort Worth metropolitan area, we
distribute a variety of cement and masonry supplies and related
products and accessories for use in the residential and commercial
building and masonry industries. Such product lines include the
following:
Concrete and Masonry Products. Portland cement for use in housing
foundations, laying pavements, walkways and other similar uses.
Masonry cement for use in brick and stone masonry. Cement is
principally sold by bags of varying weight (approximately 10 pounds to
95 pounds) and is sold in a variety of mixtures such as concrete mixes
(portland cement, sand and gravel), sand mixes (portland cement and
sand), mortar mixes (masonry mortar cement and masonry sand) and grout
(cement and sand). Also sold are sand, gravel, underwater cement,
concrete and asphalt "patching" compounds.
Angle Iron. Iron forged at a ninety-degree angle which is cut to
customer's specification for use as support above windows and
doorways.
Bricks and Stones. Bricks, used bricks, firewall bricks,
"cultured" (man-made) stones in a variety of colors and shapes, cinder
blocks and glass blocks.
9
Fireplace Products. Fireboxes, dampers, flues, facings,
insulations, fireplace tools and accessories.
Swimming Pool Products. Cements and molds used in pool
construction.
Accessory Products. We also sell in that same metropolitan area a
variety of products related to the foregoing, including cement mixers,
rulers, levels, trowels and other tools, cleaning solvents, patching
compounds, supports and fasteners.
Vendors
We purchase products directly from more than 40 major
manufacturers, including GAF Materials Corporation ("GAF"), TAMKO
Roofing Products, Inc. ("TAMKO"), Atlas Roofing Corporation, Elk
Corporation , Owens Corning, Johns Manville and Certainteed
Corporation. Payment, discount and volume purchase programs are
negotiated directly with our major suppliers, with a significant
portion of our purchases made from suppliers offering the most
favorable programs.
During the fiscal years ended June 30, 2000, 2001 and 2002,
approximately 18%, 18% and 19%, respectively, of our product lines
were purchased from GAF. During the fiscal year ended June 30, 2001,
approximately 13% of our product lines were purchased from TAMKO. No
other supplier accounted for more than ten (10%) percent of our
product lines in each of our last three fiscal years.
We have no written long-term supply agreements with any vendors.
We believe that, in the event of any interruption of product
deliveries from any suppliers, we will be able to secure suitable
replacement suppliers on acceptable terms.
Customers, Sales and Marketing
Practically all customers purchase products pursuant to
short-term credit arrangements. Sales efforts are directed primarily
through our salespersons including "inside" counter persons who serve
walk-in and call-in customers and "outside" salespersons who call upon
past, current and potential customers. Our sales staff reports to
their local distribution center managers and regional sales managers
and are supported by inside customer service representatives either at
the distribution center or at the main administration center in
Mansfield, Texas. Additional sales support comes from a number of
regional sales and merchandising managers who educate our sales
personnel regarding technical specifications and how to market and
sell products recently added to our product line. Our marketing and
advertising efforts, although nominal, are targeted towards local
markets, generally consisting of advertisements in regional magazines.
Our suppliers have a vested interest in marketing their products to
the end user; therefore, they provide a wide variety of promotional
material including instructional videos, product and educational
materials and in-store displays. Additionally, our suppliers market
their products in industry publications, contractors' trade magazines
and trade shows.
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We have no written long-term sales agreements with any customers.
None of our customers accounted for 2% or greater of sales during our
fiscal year ended June 30, 2002.
Infrastructure and Technology
We maintain our own computer system and software supplied by J.D.
Edwards for inventory, sales management, financial control and
planning. We maintain this centralized computer and data processing
system to support decision making at many levels of operations,
including checking a customer's credit, inventory management, accounts
receivable and credit and collection management. Our executives are
able to view monthly and other periodic financial data of each
distribution center.
Competition
We face substantial competition in the wholesale distribution of
roofing, drywall cement and masonry supplies and related products from
relatively smaller distributors, retail distribution centers and from
a number of regional, multi-regional and national wholesale
distributors of building products, including suppliers of roofing
products and masonry products which have greater financial resources
and are larger than we are, some of which include:
* American Builders & Contractors Supply Co., Inc.,
* Cameron Ashley Building Products, Inc. (owned by Guardian
Industries, Inc. since June 2000 and now part of Guardian
Building Products),
* Allied Building Products (a division of a subsidiary of
CRH, plc since 1997), and
* Bradco Supply Corporation.
To a lesser degree, we also compete with larger, high volume,
discount general building supply stores selling standardized products,
sometimes at lower prices than ours, but not carrying the breadth of
product lines or offering the same service as provided by full service
wholesale distributors such as we are.
We currently compete on the basis of:
* price,
* breadth of product line and inventory,
* delivery,
* customer service, including credit and financial services,
* providing discounts for prompt payment,
* credit extension, and
* the abilities of personnel.
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We anticipate that we may experience competition from entities
and individuals (including venture capital partnerships and
corporations, equity funds, blind pool companies, operations of
competing wholesale roofing supply distribution centers, large
industrial and financial institutions, small business investment
companies and wealthy individuals) which are well-established and have
greater financial resources and more extensive experience than we have
in connection with identifying, financing and effecting acquisitions
of the type sought by us. Our financial resources are limited in
comparison to those of many of such competitors.
Backlog
Our business is conducted on the basis of short-term orders and
prompt delivery schedules precluding any substantial backlog.
Employees
At June 30, 2002, we employed approximately 607 full-time
employees, including 8 executives, 35 managerial employees, 117
salespersons (including 49 "inside" salespersons), 338 warehouse
persons, drivers and helpers, and 109 clerical and administrative
persons. Difficulties have been experienced on occasion in retaining
drivers and helpers because of the tight job market in our market
areas and the need for drivers to be certified by departments of motor
vehicles and to pass other testing standards, but suitable
replacements and new hirees have been found without material adverse
economic impact. We are not subject to any collective bargaining
agreement, and we believe that our relationship with our employees is
good.
Recent Developments
Four of our 37 distribution facilities were opened after our
fiscal quarter ended March 31, 2002. These distribution facilities
began generating revenues in July 2002. During this same period, for
reasons mostly related to the increase in the number of our
distribution facilities, changes in our product mix and source
requirements, we increased our workforce from approximately 586 to
approximately 611 persons. Based on the current economic environment,
we eliminated approximately 32 jobs in August 2002 representing
approximately 5% of our current workforce. We will make further
reductions in our workforce and continue to reduce expenses
commensurate with our sales and profits.
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Risk Factors
You should carefully review and consider the following risks as
well as all other information contained in this document, including
our consolidated financial statements and the notes to those
statements. The following risks and uncertainties are not the only
ones facing us. Additional risks and uncertainties of which we are
currently unaware or that we believe are not material also could
materially adversely affect our business, financial condition, results
of operations or cash flows. To the extent any of the information
contained in this document constitutes forward-looking information,
the risk factors set forth below are cautionary statements identifying
important factors that could cause our actual results for various
financial reporting periods to differ materially from those expressed
in any forward-looking statements made by us or on our behalf and
could materially adversely affect our financial condition, results of
operations or cash flows. See also, "A Note About Forward-Looking
Statements."
Risks Relating To Our Business
The Level Of Our Business
Operations, Revenues And
Income Is Directly Impacted
By Weather Conditions..........Our level of business operations, revenues
and operating income is directly impacted
by weather phenomena, such as hailstorms
and hurricanes, which have the result of
increasing business at the time of the
event of the weather phenomena and shortly
thereafter, but have the effect frequently
of resulting in a slowdown of business
thereafter. Similarly, weather phenomena
can also have a negative impact on our
customers which can cause certain of such
customers to become delinquent in the
payments of their accounts.
How Unforeseen Factors
May Adversely Affect Us........There can be no assurance that, in the
future, unforeseen developments, increased
competition, losses incurred by new
businesses that may be acquired or branches
that may be opened, losses incurred in the
expansion of product lines from certain
distribution centers to other distribution
centers, weather phenomena and other
circumstances may not have a material
adverse affect on our operations in current
market areas or areas into which we may
expand by acquisition or otherwise.
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We Acquired Our Business
Operations in Non-Arm's
Length Transactions With
Affiliates And Without
Independent Appraisal..........Simultaneously, with the completion of
our Initial Public Offering in March 1999,
we acquired our business operations from
TDA in exchange for, among other things,
3,000,000 shares of our Common Stock. The
determination of the number of shares paid
to TDA for the acquisitions was negotiated
and evaluated based upon the assessments
made by the parties to the negotiations
without independent appraisal. Such
negotiations were not conducted on an arm's
length basis.
As a result of this transaction, our
largest shareholder is TDA. The principal
officers, directors and principal
stockholders of TDA, Messrs. Douglas P.
Fields and Frederick M. Friedman, also are
directors and executive officers of the
Company and its subsidiaries. Mr. Fields
serves as Chief Executive Officer and
Chairman of our Board. Mr. Friedman serves
as our Executive Vice President, Secretary,
Treasurer and a Director. Messrs. Fields
and Friedman may be deemed to be in control
of TDA and, in turn, us. As a result, their
interests in us may conflict with their
interests in TDA.
Although we believe that the terms and
conditions of the acquisitions were fair
and reasonable to us, that belief must be
assessed in light of the lack of an
independent appraisal and the conflicted
positions of Messrs. Fields and Friedman.
We can provide no assurance that we were
correct in our assessment.
We May Make Acquisitions
And Open New Distribution
Centers Without Your
Approval.......................Although we will endeavor to evaluate the
risks inherent in any particular
acquisition or the establishment of new
distribution centers, there can be no
assurance that we will properly or
accurately ascertain all such risks. We
will have virtually unrestricted
flexibility in identifying and selecting
prospective acquisition candidates and
establishing new distribution centers and
in deciding if they should be acquired for
cash, equity or debt, and in what
combination of cash, equity and/or debt.
Locations selected for expansion efforts
will be made at the discretion of
management and will not be subject to
stockholder approval.
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We will not seek stockholder approval
for any acquisitionsor the opening of new
distribution centers unless required by
applicable law and regulations. Our
stockholders will not have an opportunity
to review financial and other information
on acquisition candidates or the opening of
any new distribution centers prior to
consummation of any acquisitions or the
opening of any new distribution centers
under most circumstances.
Investors will be relying upon our
management, upon whose judgment the
investor must depend, with only limited
information concerning management's
specific intentions. There can be no
assurance that any acquisitions will be
consummated or new distribution centers
opened.
Our Wholesale Distribution
Businesses Are Subject To
Economic And Other Changes.....The wholesale distribution of the building
supply products sold by us is seasonal,
cyclical and is affected by weather as well
as by changes in general economic and
market conditions either nationally or in
the markets where we conduct our business.
An economic downturn in any of those market
areas may have a material adverse effect on
the sale of our products in those markets
notwithstanding the general economic
conditions prevalent nationally.
Accordingly, an economic downturn in one or
more of the markets currently served or to
be served (as a result of acquisitions or
expansion efforts) could have a material
adverse effect on our operations.
We Depend Upon Certain
Vendors But We Lack
Written Long-Term Supply
Agreements With Them ..........We distribute products manufactured by a
number of major vendors. During the fiscal
years ended June 30, 2000, 2001 and 2002,
approximately 18%, 18% and 19%,
respectively, of our product lines were
purchased from one supplier. During the
fiscal year ended June 30, 2001, another
13% of our product lines were purchased
from a second supplier.
We do not have written long-term supply
agreements with any vendors. We believe
that, in the event of any interruption of
product deliveries from any of our vendors,
we will be able to secure suitable
replacement supplies on acceptable terms.
15
However, there can be no assurance of the
continued availability of supplies of
residential and commercial roofing supply,
drywall and masonry materials at acceptable
prices or at all.
To The Extent That
The Estimates, Assumptions
And Judgments Used
By Us In Formulating Our
Critical Accounting
Policies Should Prove
To Be Incorrect, Future
Financial Reports May Be
Materially And Adversely
Affected.......................Our discussion and analysis of financial
condition and results of operations set
forth in this document and other reports
filed with the Securities and Exchange
Commission ("SEC") are based upon our
consolidated financial statements, which
have been prepared in accordance with
accounting principles generally accepted in
the United States of America ("GAAP"). The
preparation of these financial statements
in accordance with GAAP requires us to make
estimates, assumptions and judgments that
affect the reported amounts of assets,
liabilities, revenues and expenses, and
related disclosure of contingent assets and
liabilities at the date of the financial
statements. Significant estimates in the
Company's consolidated financial statements
relate to, among other things, allowance
for doubtful accounts and notes receivable,
amounts reserved for 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 ongoing basis, we re-
evaluate our estimates, assumptions and
judgments, including those related to
accounts and notes receivable, inventories,
intangible assets, investments, other
receivables, expenses, income items, income
taxes and contingencies. We base our
estimates on historical experience and on
various other assumptions that we believe
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 and
expenses that are not readily apparent from
other sources. Actual results may differ
from these estimates and judgments, 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 and judgments prove
to be incorrect in the future, the
16
Company's results of operations, financial
condition or cash flows could be materially
adversely affected.
We believe that the following critical
accounting policies are based upon our more
significant judgments and estimates used in
the preparation of our consolidated
financial statements:
* We maintain allowances for doubtful
accounts and notes receivable for
estimated losses resulting from the
inability of our customers to make
payments when due or within a reasonable
period of time thereafter. If the
financial condition of our customers
were to deteriorate, resulting in an
impairment of their ability to make
required payments, additional allowances
may be required. If additional funds are
required to cover allowances for
doubtful accounts and notes receivable,
the Company's financial condition,
results of operations and cash flows
could be materially adversely affected.
* We write down our inventories for
estimated obsolete or slow-moving
inventories equal to the difference
between the cost of inventories and the
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 maintain accounts for goodwill and
other intangible assets in our financial
statements. Goodwill and intangible
assets with indeterminate lives are not
amortized but are tested for impairment
annually, except in certain
circumstances. There is a possibility
that, as a result of the annual test for
impairment or as the result of the
occurrence of certain circumstances or
an impairment, the value of goodwill or
intangible assets with indeterminate
lives may be written down or may be
written off either in one or in a number
of write-downs, either at a fiscal year
end or at any time during the fiscal
year. We analyze the value of goodwill
using the anticipated cash flows of the
related business, market comparables,
the total market capitalization of the
Company, and other factors, and
recognize any adjustment, if required,
to the asset's carrying value. Any
17
write-down or series of write-downs of
goodwill or intangible assets could be
substantial and could have a material
adverse effect on our reported results
of operations, and any such impairment
could occur in connection with a
material adverse event or development
and have a material adverse impact on
the Company's financial condition and
results of operations.
* 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 an acquired 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 the
Company's profitability, 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 results of operations and may incur
liabilities for taxes and related
charges which may materially adversely
affect the Company's financial
condition.
We May Need Additional
Future Financing That May
Result In Dilution To
Investors And Restrictions
On Us..........................We may require additional equity or debt
financing in order to consummate an
acquisition or for additional working
capital if we open new distribution
centers, or if we suffer losses or complete
the acquisition of a business that
subsequently suffers losses, or for other
reasons.
Any additional equity financing that may be
obtained may dilute investor voting power
and equity interests.
18
Any additional debt financing that may be
obtained may:
* impair or restrict our ability to
declare dividends;
* impose financial restrictions on our
ability to make acquisitions or
implement expansion efforts;
* cost more in interest, fees and other
charges than our current financing; and
* contain other provisions that are not
beneficial to us and may restrict our
flexibility in operating the Company.
There can be no assurance that we will be
able to obtain additional financing on
terms acceptable or at all. In the event
additional financing is unavailable, we may
be materially adversely affected.
Our Business Strategy
Is Unproven....................A significant element of our business
strategy is to acquire additional companies
engaged in the wholesale distribution of
roofing supplies and related products
industries and companies which manufacture
products for or supply products to such
industry. Our strategy is unproven and is
based on unpredictable and changing events.
We believe that suitable candidates for
potential acquisition exist. There can be
no assurance that any acquisitions, if
successfully completed:
* will be successfully integrated into our
operations;
* will perform as expected;
* will not result in significant
unexpected liabilities; or
* will ever contribute significant
revenues or profits to the Company.
If we are unable to manage growth
effectively, our financial condition,
operating results and cash flows could be
materially adversely affected.
19
Risks Relating To Our Management And Affiliates
Our Executive Officers
And Directors May Have
Potential Conflicts Of
Interest With Us...............Certain of our principal executive officers
and directors also are principal officers,
directors and the principal stockholders of
TDA, the entity that owns a majority of our
voting stock, and its affiliates and,
consequently, may be able, through TDA and
its affiliates, to direct the election of
our directors, effect significant corporate
events and generally direct our affairs.
Through June 30, 2002, TDA provided office
space for use as our New York corporate
executive offices and administrative
services to us in New York City pursuant to
an administrative services agreement that
has been terminated as of June 30, 2002.
Commencing July 1, 2002 we began to pay TDA
seventy-five (75%) percent of the occupancy
costs for our New York corporate executive
offices in the amount of approximately
$4,500 per month and seventy-five (75%)
percent of the remuneration and benefits of
our New York administrative assistant in
the amount of approximately $4,500 per
month. In addition, as of July 1, 2002, TDA
has paid twenty-five (25%) percent of such
monthly occupancy costs (approximately
$1,500) and twenty-five (25%) percent of
the monthly remuneration and benefits of
the administrative assistant (approximately
$1,500) in order to defray any expenses
that may be deemed to be attributable to
TDA.
Furthermore, a subsidiary of TDA, and James
E. Helzer, our President, lease
approximately one-half of our facilities to
us.
We do not intend to enter into any material
transaction with any of our affiliates in
the future unless we believe that such
transaction is fair and reasonable to us
and is approved by a majority of the
independent members of our Board of
Directors. Notwithstanding the foregoing,
there can be no assurance that future
transactions, if any, will not result in
conflicts of interest which will be
resolved in a manner favorable to us.
20
See Item 2. "Properties - Locations Owned
By and Leased from TDA" and Item 13.
"Certain Relationships and Related
Transactions."
We Depend Upon
Key Personnel..................Our success may depend upon the continued
contributions of our officers. Our business
could be adversely affected by the loss of
the services of Douglas P. Fields, our
Chief Executive Officer and Chairman of our
Board of Directors, Frederick M. Friedman,
our Executive Vice President, Secretary and
Treasurer, James E. Helzer, our President
and E.G. Helzer, our Senior Vice President.
Although we have "key person" life
insurance on the life of James E. Helzer in
the amount of $2,000,000 and on each of the
lives of Messrs. Fields and Friedman in the
amount of $1,000,000, there can be no
assurance that the foregoing amounts will
be adequate to compensate us in the event
of the loss of any of their lives.
Conflicts Of Interest May
Arise In The Allocation Of
Management's Time..............The employment agreements with
Messrs. Fields and Friedman do not require
either of them to devote a specified amount
of time to our affairs. Each of
Messrs. Fields, Friedman and Helzer have
significant outside business interests,
including but not limited to TDA (our
controlling stockholder) and its
subsidiaries (as to Messrs. Fields and
Friedman). Accordingly, Messrs. Fields,
Friedman and Helzer may have conflicts of
interest in allocating time among various
business activities. There can be no
assurance that any such conflicts will be
resolved in a manner favorable to us.
We Have Entered Into
Transactions With Affiliates
That Have Benefited Them.......Messrs. Fields and Friedman, two of our
principal executive officers and directors
are also principal executive officers,
directors and the principal stockholders of
TDA and have and will or may be deemed to
benefit, directly or indirectly, from our
transactions with TDA. James E. Helzer, our
President, previously owned one of our
acquisitions and has and will or may be
deemed to have benefited or to benefit
directly from his transactions with us.
21
During our fiscal year ended June 30, 1999,
we made dividend payments to TDA of
approximately $1,200,000.
After our Initial Public Offering, and in
connection with the Acquisitions, we
cancelled in the form of a non-cash
dividend all indebtedness of TDA to us at
that date, approximately $3,067,000. To the
extent TDA's indebtedness to us was
cancelled, TDA directly, and Messrs. Fields
and Friedman indirectly, derived a benefit.
In addition, through June 30, 2002, TDA
provided us with office space and
administrative services in New York City
for $3,000 per month pursuant to a
month-to-month administrative services
agreement. This agreement was terminated on
June 30, 2002.
Through June 30, 2002, TDA also provided
certain other services to us pursuant to a
five-year agreement requiring payments to
TDA of $3,000 per month. This agreement
expired on June 30, 2002.
We do not intend to enter into any material
transaction with any of our affiliates in
the future unless we believe that such
transaction is fair and reasonable to us
and is approved by a majority of the
independent members of our Board of
Directors. Notwithstanding the foregoing,
there can be no assurance that future
transactions, if any, will not result in
conflicts of interest which will be
resolved in a manner favorable to us.
See "- Our Executive Officers and Directors
May Have Potential Conflicts of Interest
With Us," Item 2. "Properties - Locations
Owned By and Leased from TDA," Item 7.
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Acquisitions," Item 10.
"Directors and Executive Officers of
Registrant," Item 11. "Executive
Compensation," Item 12. "Security Ownership
of Certain Beneficial Owners and
Management," and Item 13. "Certain
Relationships and Related Transactions."
22
We Are Controlled By
TDA And Lease Several Of
Our Facilities From TDA........TDA owns approximately 56.3% of our issued
and outstanding shares of common stock.
Douglas P. Fields, our Chief Executive
Officer and Chairman of our Board of
Directors, also is Chairman of the Board of
Directors, President and the Chief
Executive Officer of TDA as well as a
principal stockholder of TDA. Frederick M.
Friedman, our Executive Vice President,
Treasurer, Secretary and one of our
Directors also is the Executive Vice
President, Chief Financial Officer,
Treasurer and a director of TDA as well as
a principal stockholder of TDA. John E.
Smircina is one of our Directors and a
director of TDA.
Because Messrs. Fields, Friedman and
Smircina may be deemed to control TDA, they
also may be deemed to control our common
stock owned by TDA. As a result, they are
in a position to control the composition of
our Board of Directors, and, therefore our
business, policies and affairs and the
outcome of issues which may be subject to a
vote of our stockholders.
A TDA subsidiary has rented to us the
premises for several distribution
facilities pursuant to ten-year leases at
an approximate aggregate annual base rental
of $790,000 which we believe is fair and
reasonable to us.
See "- Our Executive Officers and Directors
May Have Potential Conflicts of Interest
With Us," Item 2. "Properties," Item 7.
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations-Acquisitions," Item 10.
"Directors and Executive Officers of
Registrant," Item 12. "Security Ownership
of Certain Beneficial Owners and
Management," and Item 13. "Certain
Relationships and Related Transactions."
Substantial Potential Future
Financial Benefits To Prior
Owners Of Subsidiaries.........JEH Eagle. In July 1997, JEH Eagle acquired
the business and substantially all of the
assets of JEH Company ("JEH Co."), a Texas
corporation, wholly-owned by James E.
Helzer, now our President and Vice Chairman
of our Board of Directors. The purchase
price, as adjusted, including transaction
expenses, was approximately $14,768,000,
consisting of a cash payment and a note.
Certain, substantial, contingent payments,
as additional consideration to JEH Co. or
23
its designee, were paid by us that may be
deemed to have resulted in substantial
financial benefits to JEH Co. or its
designee and may be deemed to have had a
material adverse effect on our financial
condition, cash flows and income. Upon
completion of our Initial Public Offering,
we issued 300,000 shares of our Common
Stock to James E. Helzer in fulfillment of
certain of such consideration.
Additionally, for the fiscal years ended
June 30, 1999, 2000 and 2001, approximately
$1,773,000, $1,947,000, and $315,000,
respectively, of such additional
consideration was paid to JEH Co. or its
designee. For the fiscal year ended June
30, 2002, no additional consideration is
payable to JEH Co. or its designee, and, as
of June 30, 2002, the Company has no future
obligation for such additional
consideration. James E. Helzer has rented
to us the premises for several distribution
facilities pursuant to five-year leases at
an approximate aggregate annual base rental
of $747,000 which we believe is fair and
reasonable to us.
MSI Eagle. In October 1998, MSI Eagle
acquired substantially all of the assets
and the business of Masonry Supply, Inc.
("MSI Co."), a Texas corporation,
wholly-owned by Gary L. Howard, formerly
one of our executive officers. The purchase
price, as adjusted, including transaction
expenses, was approximately $8,538,000
subject to further adjustments under
certain conditions. Certain, potentially
substantial, contingent payments, as
additional future consideration to MSI Co.
or its designee, are to be paid by us that
may result in substantial financial
benefits to MSI Co. or its designee and may
materially and adversely effect our
financial condition, cash flows and income.
After completion of our Initial Public
Offering, we issued 260,000 shares of our
Common Stock to Gary L. Howard in
fulfillment of certain of such future
consideration. Additionally, for the fiscal
years ended June 30, 2000 and 2001,
approximately $216,000 and $226,000,
respectively, of such additional
consideration, was paid to MSI Co. or its
designee. For the fiscal year ended June
30, 2002, approximately $315,000 of
additional consideration is payable to MSI
Co. or its designee. Gary L. Howard rents
to us the premises for certain offices and
a distribution center pursuant to a
three-year lease at an approximate annual
base rental of $112,000 which we believe is
fair and reasonable to us.
24
See Item 2. "Properties," Item 7.
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Acquisitions," Item 10.
"Directors and Executive Officers of
Registrant," Item 11. "Executive
Compensation," Item 12. "Security Ownership
of Certain Beneficial Owners and
Management," and Item 13. "Certain
Relationships and Related Transactions."
Risks Relating To Our Securities
Our Securities Must
Continue To Meet
Qualitative And
Quantitative Listing
Maintenance Criteria
For The NASDAQ SmallCap
Market And The Boston
Stock Exchange.................Our securities are quoted and traded on the
NASDAQ SmallCap Market and are listed on
the Boston Stock Exchange ("BSE"). There
can be no assurance that we will continue
to meet both the qualitative and
quantitative criteria for continued
quotation and trading of our securities on
the NASDAQ SmallCap Market. That criteria,
which undergoes periodic NASDAQ review,
include, among other things, at least:
* $35,000,000 in market capitalization,
$2,500,000 in stockholders' equity or
$500,000 in net income in an issuer's
last fiscal year or two of its last
three fiscal years;
* a $1.00 minimum bid price;
* two market makers;
* 300 round lot shareholders; and
* 500,000 shares publicly held
(excluding officers, directors and
persons owning 10% or more of the
Company's issued and outstanding
shares) with $1,000,000 in market
value.
The BSE also has similar continued
quotation criteria. If we are unable to
meet the continued quotation criteria of
the NASDAQ SmallCap Market and the BSE and
are suspended from trading on these
markets, our securities could possibly be
25
traded in the over-the-counter market and
be quoted in the so-called "pink sheets"
or, if then available, the OTC Bulletin
Board. In such an event, an investor would
likely find it more difficult to dispose
of, or even obtain accurate quotations of,
our securities. See "- We Will Also Be
Required To Meet Anticipated NASDAQ
Corporate Governance Criteria."
We Will Also Be Required To
Meet Anticipated NASDAQ
Corporate Governance
Criteria.......................Although the NASDAQ SmallCap Market
has always had certain corporate governance
criteria for the listing and continued
quotation of an issuer's securities, NASDAQ
has proposed, and we believe the SEC is
likely to approve, substantially expanded
issuer corporate governance criteria for
the issuers of those securities quoted on
the NASDAQ SmallCap Market. Although, in
the past, we have been able to satisfy
NASDAQ's SmallCap Market corporate
governance criteria, the new proposed
criteria is substantially more difficult to
comply with. The new proposed criteria
include, among other things:
* an increase in the degree of
independence of members of the board of
directors with a majority of board
members to be independent, and these
independent directors are to, among
other things: (i) hold regular meetings
among themselves only and (ii) approve
related party transactions, all with a
strict definition of an independent
director;
* an enhancement of independent director
responsibility, with, among other
things, the responsibility to approve:
(i) director nominations and (ii)
executive officer compensation;
* an empowerment of audit committees of
boards of directors with, among other
things: (i) sole authority to hire and
fire auditors and (ii) authority to hire
their own experts when appropriate;
* establishment of a code of conduct
addressing conflicts of interest and
compliance with laws; and
* a limit on payments to independent
directors and their family members
(other than for services on the board of
directors).
26
If adopted, NASDAQ has also proposed that
each listed company modify the composition
of its board of directors to comply with
these new corporate governance rules
effective immediately after the first
annual meeting of stockholders that occurs
at least 120 days after the SEC approves
the rules changes.
We believe that these proposed corporate
governance requirements, including the
expanded powers and responsibilities of
independent directors and a stricter
definition of an independent director will
make it more difficult to find independent
directors for our Board of Directors.
Increased competition for qualified
independent directors, including those
persons with accounting experience and
financial statement acumen to serve on
audit committees, can be anticipated. We
believe that compliance with NASDAQ's
proposed corporate governance requirements
will be difficult and will increase our
costs and expenses as the costs of finding
and compensating independent directors
escalate and the costs of administering
their new powers and responsibilities prove
to be an added financial burden. If
NASDAQ's corporate governance rules are
adopted and we are unable to attract a
sufficient number of independent directors
willing to take on the responsibilities
imposed by such rules on what we believe to
be commercially reasonable terms, our
securities may be delisted from NASDAQ.
The Market Price Of Our
Securities Has Declined
Substantially Since Our
Initial Public Offering........The initial offering prices of the shares
of our Common Stock and our Warrants issued
pursuant to our Initial Public Offering
were $5.00 and $.125 per share and warrant,
respectively. On September 20, 2002, the
closing prices for the shares of our common
stock and Warrants were $1.88 and $0.16,
respectively, as reported by the NASDAQ
SmallCap Market on that date. In addition
to the diminution of market value,
continued market price declines could
result in the delisting of our securities
from the NASDAQ SmallCap Market and the
BSE.
27
There Are Risks In
Purchasing Low-Priced
Securities.....................If our securities were to be suspended or
delisted from the NASDAQ SmallCap Market,
they could be subject to rules under the
Securities Exchange Act of 1934 ("Exchange
Act") which impose additional sales
practice requirements on broker-dealers who
sell such securities to persons other than
established clients and "accredited
investors" (for example, individuals with a
net worth in excess of $1,000,000 or an
annual income exceeding $200,000 or
$300,000 together with their spouses). For
transactions covered by such rules, a
broker-dealer must make a special
suitability determination of the purchaser
and have received the purchaser's written
consent to the transaction prior to the
sale. Consequently, such rules may affect
the ability of broker-dealers to sell our
securities and the ability to sell any of
our securities in any secondary market that
may develop for such securities.
The SEC has enacted rules that define a
"penny stock" to be any equity security
that has a price (as therein defined) of
less than $5.00 per share or an exercise
price of less than $5.00 per share, subject
to certain exceptions, including securities
listed on the NASDAQ SmallCap Market or on
designated exchanges. For any transaction
involving a penny stock, unless exempt, the
rules require the delivery, prior to any
transaction in a penny stock, of a
disclosure statement prepared by the SEC
relating to the penny stock market.
Disclosure also has to be made about the
risks of investing in penny stocks in both
public offerings and in secondary trading.
In the event our securities are no longer
listed on the NASDAQ SmallCap Market or are
not otherwise exempt from the provisions of
the SEC's "penny stock" rules, such rules
may also affect the ability of
broker-dealers and investors to sell our
securities.
There Is No Assurance Of A
Continued Public Market
For Our Securities.............There can be no assurance that a trading
market for any of our securities will be
sustained. Investors should be aware that
sales of our securities may have a
depressive effect on the price of our
securities in any market in which our
securities are traded or which may develop
for such securities.
28
We Have Outstanding
Options, Warrants And
Registration Rights That
May Limit Our Ability
To Obtain Equity Financing
And Could Cause Us To
Incur Expenses.................We have issued or are obligated to issue
warrants:
* in our Initial Public Offering, as well
as additional warrants on identical
terms to others;
* to the underwriter of our Initial Public
Offering; and
* in connection with a private placement
offering of our securities in May 2002
to certain private investors.
In accordance with the respective terms of
warrants issued to investors and any
options granted and that may be granted
under our stock option plan, the holders
are given an opportunity to profit from a
rise in the market price of our Common
Stock, with a resulting dilution in the
interests of the other stockholders. In
this regard, the warrants issued to the
underwriter of our Initial Public Offering
contain a cashless exercise provision. The
terms on which we may obtain additional
financing during the exercise periods of
any outstanding warrants and options may be
adversely affected by the existence of such
warrants, options and plan. The holders of
options or warrants may exercise such
options or warrants at a time when we might
be able to obtain additional capital
through offerings of securities on terms
more favorable than those provided by such
options or warrants. In addition, the
holders of the underwriter's warrants
issued in connection with our Initial
Public Offering have demand and "piggyback"
registration rights with respect to their
securities. Exercise of such registration
rights may involve substantial expense.
We Have Sold Shares
Below The Then Current
Market Price And Warrants
With A Lower Exercise Price
Than The IPO Warrants..........On May 15, 2002, in a private transaction,
we agreed to sell 1,090,909 shares of our
Common Stock at $2.75 per share, a discount
of approximately 8.6% below the closing bid
price for our shares of Common Stock on the
29
NASDAQ SmallCap Market on May 15, 2002, and
to issue warrants, without additional
consideration as part of that transaction,
to purchase 218,181 shares of our Common
Stock exercisable at $3.50 per share
("Private Placement"). The Private
Placement provided for two equal and
separate tranches of Common Stock and
warrants. The first such tranche closed.
The Company has been advised that the
investors in the Private Placement have
declined to make the additional investment
required. Accordingly, the second tranche
has not closed, and the Company believes
that the second tranche will not close. The
sale of securities pursuant to the Private
Placement transaction and any future sales
of our securities will dilute the
percentage equity ownership of then
existing owners of the shares of our Common
Stock and may have a dilutive effect on the
market price of our outstanding shares of
Common Stock, the warrants issued pursuant
to our Initial Public Offering, and the
value of any other of our previously issued
warrants. See Item 5. "Market for
Registrant's Common Equity and Related
Stockholder Matters - (c) Recent Sales of
Unregistered Securities."
We Are Not Likely To
Receive All The Proceeds
From The Private Placement.....As a result of the decision of the
investors in our Private Placement not to
purchase the second tranche of securities
as required in our agreements with them, we
will not receive the additional $1,500,000
of gross proceeds therefrom as anticipated
although substantially all of the costs
associated therewith have already been
incurred by the Company. Although we are
currently considering the most appropriate
course of action to take with respect to
these developments and anticipate future
negotiations with such investors to seek
amicably to resolve the matter, we may not
be able to reach a mutually agreeable
solution, and we may be faced with the
prospect of either absorbing some or all of
the additional costs incurred without
receipt of any additional proceeds or the
potential commencement of litigation which
also is likely to be costly. See Item 5.
"Market for Registrant's Common Equity and
Related Stockholder Matters - (c) Recent
Sales of Unregistered Securities."
30
We Have No Plans To
Pay Cash Dividends.............Except for cash dividends paid to TDA prior
to the consummation of our Initial Public
Offering, we have not paid any dividends on
our Common Stock and our Board of Directors
does not presently intend to declare any
dividends in the foreseeable future.
Instead, the Board of Directors intends to
retain all earnings, if any, for use in our
business operations. Additionally, our
credit facility contains provisions that
could restrict our ability to pay dividends
if we do not satisfy certain financial
requirements.
We Have Anti-Takeover
Provisions That Authorize
Our Directors To Issue And
Determine The Rights Of
Shares Of Preferred Stock
In Our Certificate
Of Incorporation...............Our Certificate of Incorporation permits
our directors to designate the terms of and
issue shares of preferred stock. The
issuance of shares of preferred stock by
the Board of Directors could adversely
effect the rights of holders of Common
Stock by, among other matters, establishing
preferential dividends, liquidation rights
and voting power. Although we have no
present intention to issue shares of
preferred stock, their issuance might
render it more difficult, and therefore
discourage, an unsolicited takeover
proposal such as a tender offer, proxy
contest or the removal of incumbent
management, even if such actions would be
in the best interest of our stockholders.
Our Certificate Of
Incorporation Limits
Directors' Liability...........Our Certificate of Incorporation provides
that our directors will not be held liable
to us or our stockholders for monetary
damages upon breach of a director's
fiduciary duty with certain exceptions. The
exceptions include a breach of the
director's duty of loyalty, acts or
omissions not in good faith or which
involve intentional misconduct or knowing
violation of law, improper declarations of
dividends and transactions from which the
director derived an improper personal
benefit.
31
ITEM 2. PROPERTIES
Locations Owned By and Leased From TDA
--------------------------------------
We lease approximately 15,000 square feet of executive office
space located at 1451 Channelside Drive, Tampa, Florida 33605 from a
wholly-owned subsidiary of TDA, at an approximate base annual rental
of $120,000.
Additionally, we lease nine (9) locations from the TDA
subsidiary, two (2) in Alabama (Birmingham and Mobile) and six (6) in
Florida (Fort Myers, Holiday, Lakeland, Pensacola, St. Petersburg and
Tampa). We also lease one (1) location in Littleton, Colorado, from an
entity owned one-half by the TDA subsidiary and one-half by James E.
Helzer, our President, and his spouse.
The aggregate approximate square footage and aggregate
approximate base annual rental for the locations leased from the TDA
subsidiary are 250,000 square feet (exclusive of land used for storage
and other purposes) and $790,000, respectively.
In March 1999, we entered into written ten-year leases with the
TDA subsidiary providing for base annual rentals as set forth above
for the first five years of such leases with provisions for increases
in rent based upon the consumer price index at the beginning of the
sixth year of such ten-year leases and with provisions for five-year
renewal options, increases in rent based upon the consumer price
index, and lease terms, additional rental and other charges
customarily included in such leases, including provisions requiring us
to insure and maintain and pay real estate taxes on the premises. We
believe that the rent and other terms of our lease agreements with the
TDA subsidiary are on at least as favorable terms as we would expect
to negotiate with unaffiliated third parties. Neither party is
permitted to terminate the leases before the end of their term without
a breach or default by the other party.
As part of the foregoing leasing arrangements, additional
undeveloped land is leased to us from the TDA subsidiary. That
undeveloped land is used for storage or reserved for future use. The
locations and approximate acreage of the undeveloped land are as
follows: Birmingham (one), Littleton (three), Ft. Myers (one and a
third), Holiday (three), Pensacola (two and a half), St. Petersburg
(two) and Tampa (one).
Through June 30, 2002, TDA provided office space for use as our
New York corporate executive offices pursuant to an administrative
services agreement that has been terminated. Commencing July 1, 2002,
the Company began to pay to TDA seventy-five (75%) percent of the
occupancy cost (approximately $4,500 per month) for our executive
offices, and TDA began to pay twenty-five (25%) percent of such
occupancy cost (approximately $1,500 per month) in order to defray any
expenses that may be deemed to be attributable to TDA. The current
lease for the Company's New York corporate executive offices expires
in October 2002 with TDA as the named lessee. A new lease is
anticipated to be entered into by and between the Company and the
landlord for these premises at a base rental of approximately $6,900
per month with customary additional rental charges (proportionate
32
share of real estate taxes, electricity, etc.), of which TDA will
continue to pay twenty-five (25%) percent.
See Item 13. "Certain Relationships and Related Transactions."
Locations Owned By and Leased From James E. Helzer
--------------------------------------------------
We lease approximately 8,000 square feet of executive office
space, used as our operational headquarters, located at 2500 U.S.
Highway 287, Mansfield, Texas 76063 from James E. Helzer, our
President.
We also lease seven (7) other locations from James E. Helzer, two
(2) in Colorado (Colorado Springs and Henderson) and five (5) in Texas
(Colleyville, North Fort Worth, Frisco, Mansfield and Mesquite). One
(1) additional location in Littleton, Colorado, is leased from an
entity owned one-half by James E. Helzer and his spouse and one-half
by the TDA subsidiary.
The aggregate approximate square footage and aggregate
approximate base annual rental for the locations leased from James E.
Helzer are 254,700 square feet (exclusive of land used for storage and
other purposes) and $747,000, respectively.
The foregoing premises, except for the Frisco, Texas, premises,
are leased to us from James E. Helzer pursuant to five-year leases
expiring in June 2007 providing for base annual rentals as set forth
above with provisions for initial five (5%) percent increases that
first take effect in July 2003. The Frisco, Texas premises is leased
to us on a month-to-month basis. Additional rental and other charges
for the foregoing leases include provision for us to insure and
maintain and pay all taxes on the premises. We also have a right of
first refusal to purchase the foregoing premises. We believe that such
leases are on terms no less favorable than we could have obtained from
unaffiliated third parties.
As part of the foregoing leases, additional undeveloped land is
leased to us from James E. Helzer. That undeveloped land is used for
storage or reserved for future use. The locations and approximate
acreage of the undeveloped land is as follows: Colorado Springs
(three), Henderson (six), Littleton (three), Colleyville (one and a
half), Frisco (two and a half), Mansfield (twelve and a half) and
Mesquite (two).
See Item 13. "Certain Relationships and Related Transactions."
Location Owned By and Leased From Gary L. Howard
------------------------------------------------
We lease approximately 30,000 square feet of office, showroom and
warehouse space, and approximately four acres of outdoor storage space
in Mansfield, Texas, from Gary L. Howard, a former executive officer
of the Company, at a base annual rental of approximately $112,000
pursuant to a lease expiring in October 2004. We have the right to
one, three-year renewal at a base annual rental of five (5%) percent
over the prior term. Additional rental and other charges for the
foregoing lease include provisions for us to insure and maintain and
pay taxes on the premises. We have a right of first refusal to
33
purchase the foregoing premises. We believe that the foregoing lease
is on terms no less favorable than we could have obtained from an
unaffiliated third party.
See Item 13. "Certain Relationships and Related Transactions."
Locations Leased From Third Parties
-----------------------------------
We lease twenty-two (22) locations (including a parcel of land
and property subleased to a third party) from third parties (two (2)
in Colorado (Eagle and Fort Collins), four (4) in Florida (Clearwater,
Orlando, Panama City and Tallahassee), one (1) each in Illinois (Lake
Zurich), Indiana (Indianapolis), Iowa (Mason City), Kentucky
(Elizabethtown), Minnesota (Eagan), Mississippi (Gulfport), Missouri
(Hazelwood) and two (2) in Nebraska (Omaha), and seven (7) in Texas
(Addison, Austin, Denton, Houston, North Fort Worth, Lubbock and
Southlake)). The aggregate approximate square footage and base annual
rentals for the locations leased from third parties are 614,000 square
feet and $2,240,000, respectively.
As part of the foregoing leases, additional undeveloped land is
leased from third parties. That undeveloped land is used for storage or
reserved for future use. The locations and approximate acreages of the
undeveloped land is as follows: Austin (six), Denton (six), Eagle
(two), Elizabethtown (five), Fort Collins (one and a half), Hazelwood
(three), Houston (four), Indianapolis (two), Kearney (two) and Rosedale
(three).
Other than one lease, which is on a month-to-month basis, the
leases with third parties expire at varying times through September
2008, and several leases contain renewal options. These leases
generally contain provisions requiring us, among other things, to pay
various occupancy costs.
ITEM 3. LEGAL PROCEEDINGS
We are not subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this
Report, no matters were submitted to a vote of security holders.
34
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
We have two classes of securities presently registered: Common
Stock and Warrants. These securities are presently traded on the
NASDAQ SmallCap Market under the trading symbols "EEGL" and "EEGLW,"
respectively, and on the Boston Stock Exchange under the trading
symbols "EGL" and "EGLW," respectively, and have been since the
Initial Public Offering in March 1999.
The high and low bid price quotations for our Common Stock, as
reported by NASDAQ, are as follows for the periods indicated:
High Low
--------- --------
Fiscal Year Ended June 30, 2001:
- --------------------------------
From July 1 through September 30, 2000 $4.063 $1.938
From October 1 through December 31, 2000 $3.906 $0.125
From January 1 through March 31, 2001 $1.719 $0.250
From April 1 through June 30, 2001 $1.410 $1.188
Fiscal Year Ended June 30, 2002:
- --------------------------------
From July 1 through September 30, 2001 $1.380 $1.010
From October 1 through December 31, 2001 $1.990 $0.990
From January 1 through March 31, 2002 $3.800 $1.510
From April 1 through June 30, 2002 $4.140 $2.300
Fiscal Year To End June 30, 2003:
- ---------------------------------
From July 1 through September 20, 2002 $2.680 $0.010
The Common Stock was held by approximately 20 holders of record
as of September 20, 2002.
The high and low bid price quotations for the Warrants sold in
our Initial Public Offering, as reported by NASDAQ, are as follows for
the periods indicated:
High Low
--------- --------
Fiscal Year Ended June 30, 2001:
- --------------------------------
From July 1 through September 30, 2000 $0.813 $0.406
From October 1 through December 31, 2000 $0.563 $0.063
From January 1 through March 31, 2001 $0.219 $0.063
From April 1 through June 30, 2001 $0.160 $0.050
35
High Low
--------- --------
Fiscal Year Ended June 30, 2002:
- --------------------------------
From July 1 through September 30, 2001 $0.140 $0.080
From October 1 through December 31, 2001 $0.240 $0.070
From January 1 through March 31, 2002 $0.470 $0.120
From April 1 through June 30, 2002 $0.680 $0.200
Fiscal Year To End June 30, 2003:
- ---------------------------------
From July 1 through September 20, 2002 $0.300 $0.010
The Warrants sold in our Initial Public Offering were held by
approximately 6 holders of record as of September 20, 2002.
Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
We believe that the NASDAQ SmallCap Market is the principal
market for our Common Stock and Warrants.
(b) Dividends
Except for cash dividends paid to TDA prior to the consummation
of our Initial Public Offering, we have not paid dividends on our
Common Stock. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and are subject to the
terms of our credit facility that could restrict our ability to pay
dividends if we do not satisfy certain financial requirements. The
payment of dividends, if any, in the future will depend upon our
earnings, capital requirements, financial condition and other relevant
factors. Our Board of Directors does not presently intend to declare
any dividends in the foreseeable future. Instead, our Board of
Directors intends to retain all earnings, if any, for use in our
business operations.
(c) Recent Sales of Unregistered Securities
On May 15, 2002, we entered into a Securities Purchase Agreement
("Securities Purchase Agreement") with certain accredited investors
("Investors") to sell 1,090,909 shares of our Common Stock and
warrants to purchase up to 109,091 shares of Common Stock (the
"Purchaser Warrants") in the Private Placement for gross proceeds to
us prior to the deduction of fees, expenses, and commissions of
$3,000,000. The Securities Purchase Agreement provided for the
issuance and sale of the Common Stock and Purchaser Warrants in two
equal and separate tranches. We believe that the Private Placement was
exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), pursuant to the provisions of
Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D
promulgated by the SEC under the Securities Act.
In the first tranche, which closed on May 16, 2002, we received
$1,500,000 in gross proceeds for the sale of 545,455 shares of Common
Stock and the issuance of Purchaser Warrants for the purchase of up to
54,545 shares of Common Stock. In addition to the payment of cash
36
commissions of $150,000 plus $12,250 for attorneys' fees, offering
expenses were approximately $47,000, resulting in net proceeds to us
of approximately $1,291,000. We also issued warrants to purchase up to
54,545 shares of Common Stock ("Finder Warrants") to vFinance
Investments, Inc. for its services in connection with the Private
Placement.
In connection with the Private Placement, we entered into a
registration rights agreement with the Investors pursuant to which we
agreed, at our expense, to register for sale under the Securities Act
all shares of Common Stock issued in the Private Placement, as well as
shares of Common Stock issuable upon the exercise of the Purchaser
Warrants (the "Registration Rights Agreement"). We also provided
similar registration rights for the shares of Common Stock underlying
the Finder Warrants. A registration statement on Form S-3 (the
"Registration Statement") was timely filed for these purposes and
declared effective by the SEC on September 6, 2002.
Under the terms of the Securities Purchase Agreement, the second
tranche was required to close no later than the fifth calendar day
(September 11, 2002) following the effectiveness of the Registration
Statement. We were advised on September 12, 2002, by vFinance
Investments, Inc., and its counsel that the Investors have declined to
make the additional investment required by the Securities Purchase
Agreement. Accordingly, the second tranche has not closed, and we
believe that the second tranche will not close. We are currently
analyzing the situation to determine the most appropriate course of
action with respect to these developments. We have already incurred
the costs associated with respect to the closing of the second tranche
and will seek to negotiate an amicable solution with the Investors
with respect to these developments. We can not give you any assurance
as to whether or not a mutually agreeable solution can be achieved.
(d) Equity Compensation Plans
The following table provides information about our Common Stock
that may be issued upon the exercise of stock options issued pursuant
to our Stock Option Plan, our only equity compensation plan, as of
June 30, 2002.
Equity Compensation Plan Information
------------------------------------
Number of Securities
Remaining Available
For Future Issuance
Under Equity
Number of Securities to Weighted Average Compensation Plans
be Issued Upon Exercise Exercise Price of (excluding securities
of Outstanding Options Outstanding Options reflected in column (a))
---------------------- ------------------- ------------------------
Plan Category (a) (b) (c)
- -------------
Equity compensation
plans approved by
securityholders 764,080 $4.98 435,920
37
Number of Securities
Remaining Available
For Future Issuance
Under Equity
Number of Securities to Weighted Average Compensation Plans
be Issued Upon Exercise Exercise Price of (excluding securities
of Outstanding Options Outstanding Options reflected in column (a))
---------------------- ------------------- ------------------------
Equity compensation
plans not approved
by securityholders N/A N/A N/A
Our Stock Option Plan provides for a proportionate adjustment to
the number of shares reserved for issuance in the event of any stock
dividend, stock split, combination, recapitalization, or similar
event.
ITEM 6. SELECTED FINANCIAL DATA
Prior to our Initial Public Offering and the acquisitions
described in Note 2 of the consolidated financial statements, the
Company had limited operations. The historical selected financial
information included in the statement of operations data has been
prepared on a basis which combines the Company (organized on May 1,
1996), Eagle, JEH Eagle (which acquired JEH Co. as of July 1, 1997)
and MSI Eagle (which acquired MSI Co. on October 22, 1998) as four
entities controlled by TDA. Information with respect to the Company,
Eagle and JEH Eagle is included for all periods presented (including
the operations of MSI Eagle from June 1, 2000), and information with
respect to MSI Eagle is included from October 22, 1998 through May 31,
2000, the effective date of its merger with and into JEH Eagle.
The selected financial information presented below should be read
in conjunction with the consolidated financial statements and the
notes thereto.
38
Selected Financial Information
Year Ended June 30, Combined(1)
-------------------------------
Statement of
Operations Data: 1998 1999 2000 2001 2002
- ---------------- ------------ ------------ ------------ ------------ ------------
Revenues $129,502,812 $159,844,520 $187,714,736 $196,240,714 $237,275,209
Gross Profit 27,975,391 37,706,722 45,292,922 49,364,915 57,563,903
Income From
Operations 3,016,155 6,743,995 5,760,988 4,139,640 4,060,743
Net Income 756,884 2,703,352 2,010,746 848,842 1,385,164
Other
Financial Data: 1998 1999 2000 2001 2002
- --------------- ------------ ------------ ------------ ------------ ------------
EBITDA(2) $ 4,171,186 $ 8,195,013 $ 8,248,961 $ 6,845,102 $ 5,824,616
Net Cash Provided
by (Used In)
Operating Activities (258,827) 938,846 (3,019,242) (4,186,473) (2,237,081)
Net Cash
Provided by
Financing Activities 4,614,314 9,326,486 3,913,744 5,424,224 3,039,609
Net Cash Used In
Investing Activities (3,704,624) (3,431,929) (2,248,030) (2,723,738) (1,127,349)
Balance Sheet Data: 1998 1999 2000 2001 2002
- ------------------- ------------ ------------ ------------ ------------ ------------
Working Capital $ 17,081,190 $ 26,593,105 $ 31,886,555 $ 39,464,538 $ 45,188,428
Total Assets 49,471,412 75,692,955 84,509,141 93,275,175 99,699,035
Long Term Debt 25,294,523 30,139,072 33,089,454 38,336,642 40,425,435
Total Liabilities 49,611,968 60,305,160 66,323,395 74,240,587 77,988,467
Shareholders' Equity
(Deficiency) (140,556) 15,387,795 18,185,746 19,034,588 21,710,568
39
- ------------------------
(1) The historical financial data included in the statement of
operations data has been prepared on a basis which combines the
Company (organized May 1, 1996), Eagle, JEH Eagle (which acquired
JEH Co. on July 1, 1997), and MSI Eagle (which acquired MSI Co.
on October 22, 1998) as four entities controlled by TDA, because
the separate financial data of the Company would not be
meaningful. Information with respect to the Company, Eagle and
JEH Eagle is included for all periods presented (including the
operations of MSI Eagle from June 1, 2000), and information for
MSI Eagle is included from October 22, 1998 through May 31, 2000,
the effective date of its merger with and into JEH Eagle.
(2) As used herein, EBITDA reflects net income increased by the
effects of interest expense, federal income tax provisions,
depreciation and amortization expense. EBITDA is used by
management, along with other measures of performance, to assess
the Company's financial performance. EBITDA should not be
considered in isolation or as an alternative to measures of
operating performance or cash flows pursuant to generally
accepted accounting principles. In addition, the measure of
EBITDA may not be comparable to similar measures reported by
other companies. The following is a reconciliation of net income
to EBITDA for each of the fiscal years presented above in the
Selected Financial Information:
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Net Income $ 756,884 $2,703,352 $2,010,746 $ 848,842 $1,385,164
Add: Interest Expense 1,861,485 2,500,655 3,069,472 3,201,013 2,293,445
Taxes 364,000 1,369,000 1,080,000 487,000 625,000
Depreciation 958,926 1,212,046 1,387,761 1,410,544 1,420,944
Amortization 229,891 409,960 700,982 897,703 100,063
---------- ---------- ---------- ---------- ----------
EBITDA $4,171,186 $8,195,013 $8,248,961 $6,845,102 $5,824,616
========== ========== ========== ========== ==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, 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 "believes," "expects," "anticipates," "plans,"
"estimates," "approximately," "intend," and other similar words and
phrases, or future or conditional verbs such as "will," "should,"
"would," "could," and "may." These forward-looking statements are
40
based largely on our current expectations, assumptions, estimates,
judgments, and projections about our business and our industry, and
they involve inherent risks and uncertainties. Although we believe
our expectations are based on reasonable assumptions, judgments, and
estimates, 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. In evaluating these statements,
some of the factors that you should consider include those described
under "Risk Factors" and elsewhere in this document, and the
following:
* general economic and market conditions, either nationally
or in the markets where we conduct our business, may be
less favorable than expected;
* inability to find suitable equity or debt financing when
needed on terms commercially reasonable to us;
* inability to locate suitable facilities or personnel to
open or maintain distribution center locations;
* inability to identify suitable acquisition candidates or,
if identified, an inability to consummate any such
acquisitions;
* interruptions or cancellation of sources of supply of
products to be distributed or significant increases in the
costs of such products;
* changes in the cost or pricing of, or consumer demand for,
our or our industry's distributed products;
* an inability to collect our accounts or notes receivables
when due or within a reasonable period of time after they
become due and payable;
* a significant increase in competitive pressures; and
* changes in accounting policies and practices, as may be
adopted by regulatory agencies as well as the Financial
Accounting Standards Board.
Many of these factors are beyond our control and you should read
carefully the factors described in the "Risk Factors" under Item 1.
"Business" of this document. 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.
41
The following discussion and analysis should be read in
conjunction with the financial statements and related notes thereto
which are included elsewhere herein.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and
results of operation are based on the Company's Consolidated Financial
Statements, which have been prepared in accordance with accounting
principals generally accepted in the United States of America and
which require the Company to make estimates, assumptions and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure and reported amounts of contingent assets
and liabilities at the dates of the financial statements. Significant
estimates which are reflected in these Consolidated Financial
Statements relate to, among other things, allowances for doubtful
accounts and notes receivable, amounts reserved for 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 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 and
expenses 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:
The Company maintains allowances for doubtful accounts and notes
receivable for estimated losses resulting from the inability of its
customers to make payments when due or within a reasonable period of
time thereafter. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make required payments, additional allowances may be
required. Conversely, if the financial condition of the Company's
customers is stronger than that estimated by the Company, then the
Company's estimates of allowances for doubtful accounts and notes
receivable may prove to be too large and reductions in its allowances
for doubtful accounts and notes receivable may be required. If
additions are required to allowances for doubtful accounts and notes
receivable, the Company's financial condition, results of operations
and cash flows could be materially adversely affected.
The Company writes down its inventories for estimated obsolete or
slow-moving inventories equal to the difference between the cost of
inventories and the estimated market value based upon assumed market
conditions. If actual market conditions are or become less favorable
42
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.
The Company maintains accounts for goodwill and other intangible
assets in its financial statements. In conformity with accounting
principals generally accepted in the United States of America, since
goodwill and intangible assets with indeterminate lives are not
amortized but are tested for impairment annually, except in certain
circumstances and whenever there is an impairment, there is a
possibility that, as a result of an annual test for impairment or as
the result of the occurrence of certain circumstances or an
impairment, the value of goodwill or other intangible assets with
indeterminate lives may be written down or may be written off either
in one write-down or in a number of write-downs, either at a fiscal
year end or at any time during the fiscal year. The Company analyzes
the value of goodwill using the estimated future cash flows of the
related business, the total market capitalization of the Company, and
other factors, and recognizes any adjustment to the asset's carrying
value. Any such write-down or series of write-downs could be
substantial and could have a material adverse effect on the Company's
reported results of operations, and any such impairment could occur in
connection with a material adverse event or development and have a
material adverse impact on the Company's financial condition, results
of operations and cash flows.
The Company seeks revenue and income growth by expanding its
existing customer base, by opening new distribution centers and by
pursuing strategic acquisitions that meet the Company's various
criteria. If the Company's evaluation of the prospects for opening a
new distribution center or of acquiring an acquired company misjudges
its 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 the Company's profitability, financial condition and cash
flows.
The Company files income tax returns in every jurisdiction in
which it has reason to believe it is subject to tax. Historically,
the Company has 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 the Company regarding one or
more of its transactions is contrary to that jurisdiction's laws or
regulations. In such an event, the Company may incur charges to its
income statement which would adversely affect its net income and may
incur liabilities for taxes and related charges which may adversely
affect its financial condition.
Results of Operations
Fiscal Year Ended June 30, 2002 Compared to the Fiscal Year Ended June
30, 2001
Revenues of the Company during the fiscal year ended June 30,
2002 increased by approximately $41,034,000 (20.9%) compared to the
2001 fiscal year. This increase may be attributed primarily to
revenues generated from new distribution centers opened in fiscal 2002
and during the last quarter of fiscal 2001 (approximately
$52,684,000), offset by the loss of revenues that had been generated
from distribution centers closed or consolidated (approximately
$17,761,000).
43
Cost of sales increased between the 2002 and 2001 fiscal years at
a greater rate than the increase in revenues between these fiscal
years. Accordingly, cost of sales as a percentage of revenues
increased to 75.7% in the fiscal year ended June 30, 2002 from 74.8%
in the fiscal year ended June 30, 2001, and gross profit as a
percentage of revenues decreased to 24.3% in the fiscal year ended
June 30, 2002 from 25.2% in the fiscal year ended June 30, 2001. This
decline is attributable to competitive pricing pressures in certain
market areas and a product mix in certain market areas which did not
yield as high a gross profit margin as other product mixes that were
achieved in other market areas. In addition, in light of the economic
uncertainties that arose as a result of the events of September 11,
2001, certain sales and collection incentives were instituted in
October 2001 which negatively impacted gross profit margins. These
incentives cost the Company approximately $1 million in gross profit,
although they resulted in a then substantial reduction in the
Company's accounts and notes receivable and strengthened the Company's
then financial position.
Operating expenses (including non-cash charges for depreciation
and amortization) increased by approximately $8,278,000 (18.3%)
between the 2002 and 2001 fiscal years. Approximately $8,025,000 of
this increase may be attributed to the operating expenses of the new
distribution centers and approximately $3,212,000 may be attributed to
increased payroll and related expenses, offset by decreases in
operating expenses of closed or consolidated distribution centers of
approximately $3,461,000. Additionally, in light of the softening of
economic conditions in certain of our market areas during fiscal 2002,
particularly in the fourth quarter, the Company added approximately
$1,297,000 to its reserve for doubtful accounts. Depreciation and
amortization, and amortization of cost in excess of net assets
acquired (goodwill) and deferred financing costs decreased by an
aggregate of approximately $787,000 (34.1%) between the 2002 and 2001
fiscal years. This decrease is primarily attributable to the early
adoption, effective July 1, 2001, of SFAS No. 142, Goodwill and Other
Intangible Asset, which provides that goodwill will no longer be
subject to periodic amortization. See Notes to the Consolidated
Financial Statements. Operating expenses (including depreciation and
amortization) as a percentage of revenues were 22.5% in the fiscal
year ended June 30, 2002 compared to 23% in the fiscal year ended June
30, 2001.
Interest income decreased by approximately $142,000 (29%) between
the 2002 and 2001 fiscal years. This decrease is due to lower rates
of interest earned on short-term investments.
Interest expense decreased by approximately $908,000 (28.4%)
between the 2002 and 2001 fiscal years. This decrease is due to lower
rates of interest charged on borrowings under credit facility loans.
Net income and EBITDA (earnings before interest, taxes,
depreciation and amortization) for the fiscal year ended June 30, 2002
were approximately $1,385,000 and $5,825,000, respectively, compared
to net income and EBITDA of approximately $849,000 and $6,845,000,
respectively, for fiscal 2001. See Item 6, "Selected Financial Data,"
Note 2 for a reconciliation of net income to EBITDA.
Earnings per share for the fiscal year ended June 30, 2002 were
$.16 compared to $.10 for fiscal 2001. EBITDA per share for the fiscal
year ended June 30, 2002 was $.68 compared to $.80 for fiscal 2001.
44
Fiscal Year Ended June 30, 2001 Compared to the Fiscal Year Ended June
30, 2000
Revenues of the Company during the fiscal year ended June 30,
2001 increased by approximately $8,526,000 (4.5%) compared to the 2000
fiscal year. This increase may be attributed to the revenues generated
from new distribution centers opened in fiscal 2001 and during the
last quarter of fiscal 2000 (approximately $20,480,000), offset by the
loss of revenues that had been generated from distribution centers
closed (approximately $10,267,000). Revenue growth during the twelve-
month period ended June 30, 2001 was negatively impacted by the loss
of revenues during the three-month periods ended December 31, 2000 and
March 31, 2001, which was caused by adverse weather conditions in the
Company's Texas, Colorado and Midwest market areas.
Cost of sales increased between the 2001 and 2000 fiscal years at
a lesser rate than the increase in revenues between these fiscal
years. Accordingly, cost of sales as a percentage of revenues
decreased to 74.8% in the fiscal year ended June 30, 2001 from 75.9%
in the fiscal year ended June 30, 2000, and gross profit as a
percentage of revenues increased to 25.2% in the fiscal year ended
June 30, 2001 from 24.1% in the fiscal year ended June 30, 2000. This
increase may be attributed primarily to an increase in out-of-
warehouse sales, which carry higher gross profit margins than direct
sales. Also, included in cost of sales for the fiscal year ended
June 30, 2000 is a charge of approximately $190,000 ($1,000 credit in
fiscal 2001) resulting from valuing a portion of the year-end
inventories using the last-in, first-out ("LIFO") method. See Notes to
the Consolidated Financial Statements.
Operating expenses of the Company (including non-cash charges for
depreciation and amortization) increased by approximately $5,693,000
(14.4%) between the 2001 and 2000 fiscal years. Approximately
$3,539,000 of this increase may be attributed to the operating
expenses of new distribution centers opened in fiscal 2001 and during
the last quarter of fiscal 2000, approximately $363,000 consists of
corporate operating expenses, approximately $2,042,000 is attributable
to an increase in payroll costs and delivery expenses due primarily to
the need to service the increased sales revenues, an increase in
reserve for doubtful accounts of $602,000, offset by decreases in
expenses of closed distribution centers of approximately $1,043,000
and decreases in other expense areas. Depreciation and amortization,
and amortization of cost in excess of net assets acquired (goodwill)
and deferred financing costs increased by an aggregate of
approximately $220,000 between the 2001 and 2000 fiscal years.
Approximately $23,000 of this increase is additional depreciation,
approximately $13,000 is additional amortization of deferred financing
costs and approximately $184,000 is additional amortization of
goodwill. The increase in amortization of goodwill may be attributed
primarily to the increase in goodwill arising from the additional
consideration paid for the purchases of the businesses and
substantially all of the assets of JEH Co. and MSI Co. by JEH Eagle
and MSI Eagle, respectively. Operating expenses as a percentage of
revenues were 23% in the 2001 fiscal year compared to 21.1% in the
2000 fiscal year.
Interest expense increased by approximately $132,000 (4.3%)
between the 2001 and 2000 fiscal years. This increase is due primarily
to the interest expense incurred on increased borrowings under
revolving credit loans.
45
Net income and EBITDA (earnings before interest, taxes,
depreciation and amortization) for the fiscal year ended June 30, 2001
were approximately $849,000 and $6,845,000, respectively, compared to
net income and EBITDA of approximately $2,011,000 and $8,249,000,
respectively, for fiscal 2000. See Item 6. "Selected Financial Data,"
Note 2 for a reconciliation of net income to EBITDA.
Earnings per share for the fiscal year ended June 30, 2001 were
$.10 compared to $.24 for fiscal 2000. EBITDA per share for the fiscal
year ended June 30, 2001 was $.80 compared to $.97 for fiscal 2000.
Fiscal Year Ended June 30, 2000 Compared to the Fiscal Year Ended June
30, 1999
Revenues of the Company during the fiscal year ended June 30, 2000
increased by approximately $27,870,000 (17.4%) compared to the 1999
fiscal year. Approximately $4,194,000 of this increase was as a result
of the acquisition in fiscal 1999 (on October 22, 1998) of MSI Co. by
MSI Eagle, which operations were included in fiscal 2000 for the full
year. The remaining increase may be attributed to revenues generated
from new distribution centers opened in fiscal 2000 or during the last
quarter of fiscal 1999 and a general improvement in market conditions,
offset by revenues that had been generated from distribution centers
closed or consolidated.
Cost of sales increased between the 2000 and 1999 fiscal years at
a lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of sales as a percentage of revenues decreased to
75.9% in the fiscal year ended June 30, 2000 from 76.4% in the fiscal
year ended June 30, 1999, and gross profit as a percentage of revenues
increased to 24.1% in the fiscal year ended June 30, 2000 from 23.6% in
the fiscal year ended June 30, 1999. This increase may be attributed
primarily to the increased revenues generated from sales of masonry
supplies and related products many of which generally carry higher
gross profit margins than sales of roofing products. Included in cost
of sales for the fiscal year ended June 30, 2000 is a charge of
approximately $190,000 ($10,000 in fiscal 1999) resulting from valuing
a portion of the year-end inventories using the last-in, first-out
("LIFO") method. See Notes to the Consolidated Financial Statements.
Operating expenses of the Company (including non-cash charges for
depreciation and amortization) increased by approximately $8,569,000
(27.7%) between the 2000 and 1999 fiscal years. Approximately $677,000
of this increase was as a result of the acquisition of MSI Co. by MSI
Eagle, which operations were included in fiscal 2000 for the full
year. Approximately $3,677,000 of this increase may be attributed to
the operating expenses of new distribution centers opened in fiscal
2000 or during the last quarter of fiscal 1999, approximately
$1,181,000 consists of corporate operating expenses incurred
subsequent to our Initial Public Offering, approximately $3,103,000 is
attributable to an increase in payroll costs and delivery expenses due
primarily to the need to service the increased sales revenues, an
increase in advertising costs of $330,000 and smaller increases in
other expense areas, offset by a decrease in the reserve for doubtful
accounts of approximately $616,000. Depreciation and amortization,
and amortization of excess cost in excess of net assets acquired
(goodwill) and deferred financing costs increased by an aggregate of
approximately $467,000 between the 2000 and 1999 fiscal years.
Approximately $176,000 of this increase is additional depreciation and
approximately $284,000 is additional amortization of goodwill. The
46
increase in amortization of goodwill may be attributed primarily to
the increase in goodwill arising from the additional consideration in
the amount of approximately $1,908,000 paid for the purchase of the
business and substantially all of the assets of JEH Co. by JEH Eagle.
Operating expenses as a percentage of revenues were 21.1% in the 2000
fiscal year compared to 19.4% in the 1999 fiscal year.
Interest expense increased by approximately $569,000 (22.7%)
between the 2000 and 1999 fiscal years. This increase was due primarily
to the interest expense incurred on borrowings under revolving credit
loans ($427,000) and the interest expense for a full fiscal year on the
debt incurred to finance the acquisition of MSI Co. by MSI Eagle
($115,000).
Net income and EBITDA (earnings before interest, federal income
taxes, depreciation and amortization) for the fiscal year ended June
30, 2000 were approximately $2,011,000 and $8,249,000, respectively,
compared to net income and EBITDA of approximately $2,703,000 and
$8,195,000, respectively, for fiscal 1999. See Item 6. "Selected
Financial Data," Note 2 for a reconciliation of net income to EBITDA.
Earnings per share for the fiscal year ended June 30, 2000 were
$.24 compared to $.43 for fiscal 1999. EBITDA per share for the fiscal
year ended June 30, 2000 was $.97 compared to $1.30 for fiscal 1999.
Liquidity and Capital Resources
The Company's working capital was approximately $45,188,428 at
June 30, 2002 compared to approximately $39,465,000 at June 30, 2001.
At June 30, 2002, the Company's current ratio was 2.24 to 1 compared
to 2.13 to 1 at June 30, 2001.
Cash used in operating activities for the fiscal year ended June
20, 2002 was approximately $2,237,000. Such amount consisted primarily
of increased levels of accounts and notes receivable of $6,117,000,
inventories of $2,855,000, other current assets of $215,000, deferred
income taxes of $598,000 and a decreased level of due to related
parties of $96,000, offset by net income of approximately $1,385,000,
depreciation and amortization of $1,521,000, increased levels of
allowance for doubtful accounts of $2,199,000, accounts payable of
$1,025,000, accrued expenses and other current liabilities of
$791,000, federal and state income taxes of $667,000 and loss on sale
of equipment of $56,000.
Cash used in investing activities for the fiscal year ended June
30, 2002 was approximately $1,127,000. Such amount consisted primarily
of payment of additional consideration for the purchase of the
business and substantially all of the net assets of JEH Co. by JEH
Eagle of $315,000, payment of additional consideration for the
purchase of the business and substantially all of the net assets of
MSI Co. by MSI Eagle of $226,000 and capital expenditures of $771,000,
offset by proceeds from the sale of equipment of $185,000.
Capital expenditures were approximately $771,000 for the fiscal
year ended June 30, 2002. Management of the Company presently
anticipates such expenditures in the next twelve months of not less
than $120,000, of which approximately $30,000 will be financed and
used primarily for the purchase of trucks and forklifts for the
Company's currently existing operations in anticipation of increased
47
business and to upgrade its vehicles to compete better in its market
areas. Management's anticipation of increased business is based on
sales to be generated by the opening of new distribution centers, the
locations of some of which have not yet been decided.
Cash provided by financing activities for the fiscal year ended
June 30, 2002 was approximately $3,040,000. Such amount consisted
primarily of principal borrowings on long-term debt of $270,235,000
and the proceeds, net of related expenses, from the Private Placement
of $1,291,000, offset by principal reductions on long-term debt of
$268,486,000.
The Company believes that its available sources for liquidity will
be adequate to sustain its normal operations during the twelve-month
period beginning July 1, 2002, 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 (see below).
As of June 30, 2002, our long-term debt obligations, capital lease
obligations and future minimum lease obligations under non-cancelable
operating leases are summarized as follows:
Payments Due by Period
----------------------
Less Than 1-3 4-5 After
Contractural Obligations Total 1 Year Years Years 5 Years
- ------------------------ --------------- -------------- -------------- -------------- --------------
Long-term debt $ 43,199,895 $ 2,774,460 $ 40,298,000 $ 127,435 -
Capital lease obligations 125,540 125,540 - - -
Operating lease obligations 19,537,000 5,730,000 8,101,000 3,960,000 1,746,000
Acquisitions
In July 1997, JEH Eagle acquired the business and substantially
all of the assets of JEH Co., a Texas corporation, wholly-owned by
James E. Helzer, now the President of the Company. The purchase price,
as adjusted, including transaction expenses, was approximately
$14,768,000, consisting of $13,878,000 in cash, net of $250,000 due
from JEH Co., and a five-year note bearing interest at the rate of 6%
per annum in the original principal amount of $864,852. As of June 30,
2002, the principal amount of the note was adjusted to $655,284 and is
due on October 15, 2002 with interest at the rate of 8.75% per annum
from July 1, 2002. The purchase price and the note were subject to
further adjustments under certain conditions. Certain, substantial,
contingent payments, as additional consideration to JEH Co. or its
designee, were paid by JEH Eagle. Upon consummation of our Initial
Public Offering, the Company issued 300,000 shares of its Common Stock
to James E. Helzer, the designee of JEH Co., in fulfillment of certain
of such future consideration. For the fiscal years ended June 30,
1999, 2000 and 2001, approximately $1,773,000, $1,947,000 and
$315,000, respectively, of such additional consideration was paid to
JEH Co. or its designee. For the fiscal year ended June 30, 2002, no
additional consideration is payable to JEH Co. or its designee, and,
as of June 30, 2002, the Company has no future obligation for such
additional consideration. All of such additional consideration
increased goodwill and, through the fiscal year 2001, was amortized
over the remaining life of the goodwill. During the fiscal year 2002,
pursuant to SFAS 142, which the Company adopted as of July 1, 2001,
48
the Company did not amortize goodwill. See "- Impact of Recently
Issued Accounting Pronouncements."
In October 1998, MSI Eagle acquired the business and
substantially all of the assets of MSI Co., a Texas corporation,
wholly-owned by Gary L. Howard, a former executive officer of the
Company. The purchase price, as adjusted, including transaction
expenses, was approximately $8,538,000, consisting of $6,492,000 in
cash and a five-year note bearing interest at the rate of 8% per annum
in the principal amount of $2,045,972. The purchase price is subject
to further adjustment under certain conditions. Upon consummation of
our Initial Public Offering, the Company issued 50,000 shares of its
Common Stock to Gary L. Howard, the designee of MSI Co., in payment of
$250,000 principal amount of the note. The balance of the note was
paid in full in March 1999 out of the proceeds of our Initial Public
Offering. Certain, potentially substantial, contingent payments, as
additional future consideration to MSI Co. or its designee, are to be
paid by JEH Eagle. (Effective May 31, 2000, MSI Eagle was merged with
and into JEH Eagle.) Upon consummation of our Initial Public Offering,
the Company issued 200,000 shares of its Common Stock, and, as of July
1, 1999, the Company issued 60,000 shares of its Common Stock, to Mr.
Howard in fulfillment of certain of such future consideration. For the
fiscal years ended June 30, 2000 and 2001, approximately $216,000 and
$226,000, respectively, of such additional consideration was paid to
MSI Co. or its designee. For the fiscal year ended June 30, 2002,
approximately $315,000 of additional consideration is payable to MSI
Co. or its designee. All of such additional consideration increased
goodwill and, through the fiscal year 2001, was amortized over the
remaining life of the goodwill. During the fiscal year 2002, pursuant
to SFAS 142, which the Company adopted as of July 1, 2001, the Company
did not amortize goodwill. See "- Impact of Recently Issued Accounting
Pronouncements."
Credit Facilities
Prior to June 2000, Eagle was a party to a loan agreement which
provided for a credit facility in the aggregate amount of $10,900,000.
In order to finance the purchase of substantially all of the
assets and business of JEH Co. and to provide for working capital
needs, in July 1997 JEH Eagle had entered into a loan agreement for a
credit facility in the aggregate amount of $20 million.
In order to finance the purchase of substantially all of the
assets and business of MSI Co. and to provide for working capital
needs, in October 1998 MSI Eagle had entered into a loan agreement for
a credit facility in the aggregate amount of $9,075,000.
In June 2000, the Company's credit facilities were consolidated
into an amended, restated and consolidated loan agreement with JEH
Eagle and Eagle as borrowers. In October 2000, JEH/Eagle, L.P., the
Company's limited partnership, was added to the credit facility as a
borrower. The amended loan agreement increased our credit facility by
$5 million, to $44,975,000, and lowered the average interest rate by
approximately one-half of one (1/2%) percent. Furthermore, up to $8
million in borrowing (subject to the available borrowing base) was
made available for acquisitions. This credit facility currently bears
interest as follows (with the alternatives at our election):
49
* 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.
In February 2001, the credit facility was amended to change
certain definitions, to amend the cash flow covenant, to provide for
limited overadvances, and to increase the annual interest rate by
twenty-five (25) basis points under certain conditions. The credit
facility was amended in July 2001 to provide for a $5,000,000 overline
for a period of ninety days ending on November 15, 2001.
Management believes that the Company is in compliance with the
financial covenants provided in its credit facility at June 30, 2002.
The credit facility is collateralized by substantially all of our
tangible and intangible assets and is guaranteed by the Company.
In October 1998, in connection with the purchase of substantially
all of the assets and business of MSI Co. by MSI Eagle, TDA lent MSI
Eagle $1,000,000 pursuant to a six (6%) percent two-year note. The
note was payable in full in October 2000, and TDA had agreed to defer
the interest payable on the note until its maturity. In October 2000,
interest on the note was paid in full, and TDA and JEH Eagle (as
successor by merger to MSI Eagle) agreed to finance the $1,000,000
principal amount of the note pursuant to a new eight and three-fourths
(8.75%) percent per annum demand promissory note payable to TDA.
Impact of Inflation
General inflation in the economy has driven the operating
expenses of many businesses higher, and, accordingly, we have
experienced increased salaries and higher prices for supplies, goods
and services. We continuously seek methods of reducing costs and
streamlining operations while maximizing efficiency through improved
internal operating procedures and controls. While we are subject to
inflation as described above, our management believes that inflation
currently does not have a material effect on our operating results,
but there can be no assurance that this will continue to be so in the
future.
Impact of Recently Issued Accounting Pronouncements
On June 29, 2001, the FASB approved for issuance SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Intangible Assets.
Major provisions of these Statements are as follows: all business
combinations initiated after June 30, 2001 must use the purchase method
of accounting; the pooling of interest method of accounting is
prohibited, except for transactions initiated before July 1, 2001;
50
intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized but are tested for
impairment annually, except in certain circumstances and whenever there
is an impairment; all acquired goodwill must be assigned to reporting
units for purposes of impairment testing; and, effective January 1,
2002, goodwill will no longer be subject to amortization. The Company
was permitted to early adopt effective July 1, 2001, and management
elected to do so. Management believes that these Statements did not
have a material impact on the Company's financial condition or results
of operations, other than from the cessation of the amortization of
goodwill. During the fiscal year ended June 30, 2001, goodwill
amortization totaled approximately $806,000 ($.09 per share). During
the fiscal year ended June 30, 2002, the Company amortized no goodwill
on its financial statements.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS No. 143 addresses financial accounting and reporting for
obligations and costs associated with the retirement of tangible long-
lived assets. The Company is required to implement SFAS No. 143 on
July 1, 2002. Management believes that the effect of implementing
this pronouncement will not have a material impact on the Company's
financial condition or results of operations.
The Company is required to adopt SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" on July 1, 2002. SFAS No.
144 replaces SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" and
establishes accounting and reporting standards for long-lived assets
to be disposed of by sale. SFAS No. 144 requires that those assets be
measured at the lower of carrying amount or fair value less cost to
sell. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that
can be distinguished from the rest of the entity that will be
eliminated from the ongoing operations of the entity in a disposal
transaction. The Company is currently evaluating the impact of SFAS
No. 144 on its results of operations and financial positions.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishments of Debt," and an
amendment of that statement, SFAS No. 64, "Extinguishment of Debt Made
to Satisfy Sinking-Fund Requirements." This statement also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
This statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-
leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-
leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed
conditions. The provisions of this statement related to SFAS No. 13
and the technical corrections are effective for transactions occurring
after May 15, 2002. All other provisions of SFAS No. 145 shall be
effective for financial statements issued on or after May 15, 2002.
The Company will adopt the provisions of SFAS No. 145 upon the
51
relative effective dates and does not expect it to have a material
effect on the Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. This statement also established that fair value
is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is
currently evaluating the impact of SFAS No. 146 on its results of
operations and financial position.
Management believes that these Statements will not have a
material impact on the Company's financial condition, results of
operations or cash flows, other than from the cessation of the
amortization of goodwill.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The estimated fair value of financial instruments have been
determined by the Company using available market information and what
it believes are appropriate valuations and methodologies. However,
considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates
presented here are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the
fair value of the financial instruments:
Cash and Cash Equivalents, Accounts and Notes Receivable,
Accounts Payable and Accrued Expenses - The carrying amounts of these
items are a reasonable estimate of their fair value.
Long-Term Debt - Interest rates that are currently available to
the Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for bank debt. The carrying
amounts comprising this item are reasonable estimates of fair value,
except for a note due in October 2002. Such note has a carrying value
of $655,284 and an estimated fair market value of approximately
$655,000 at June 30, 2002.
The fair value estimates are based on pertinent information
available to management as of June 30, 2002. Although management is
not aware of any factors that would significantly affect the estimated
fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since June 30,
2002 and current estimates of fair value may differ significantly from
52
the amounts presented. The Company has not entered into, and does not
expect to enter into, financial instruments for trading or hedging
purposes.
The Company is currently exposed to material future earnings or
cash flow exposures from changes in interest rates on long-term debt
obligations since the majority of the Company's long-term debt
obligations are at variable rates. The Company does not currently
anticipate entering into interest rate swaps and/or similar
instruments. Based on the amount outstanding as of June 30, 2002, a
100 basis point change in interest rates would result in an
approximate $409,000 change in the Company's annual interest expense.
For fixed rate interest rate obligations, changes in market interest
rates affect the fair market value of such debt but do not impact the
Company's earnings or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements annexed to this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
53
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Our directors and executive officers are as follows:
<TABLE
Name Age Position
- ---- --- --------
Douglas P. Fields(1) 60 Chairman of the Board and Chief Executive Officer
James E. Helzer(1) 62 President, Vice Chairman of the Board of Directors
Frederick M. Friedman(1) 62 Executive Vice President, Treasurer, Secretary and a Director
E.G. Helzer 51 Senior Vice President-Operations
Steven R. Andrews, Esq.(2) 47 Director
Paul D. Finkelstein(2)(3) 60 Director
George Skakel III(2)(3) 52 Director
John E. Smircina, Esq.(1)(3) 71 Director
Management believes that Messrs. Andrews, Finkelstein, Smircina
and Skakel are independent directors.
- ----------------------------
(1) Members of the Executive Committee of our Board of Directors.
(2) Members of the Audit Committee of our Board of Directors. Mr.
Finkelstein is Chairman of the Audit Committee.
(3) Members of the Compensation Committee of our Board of Directors.
Set forth below is a brief background of the foregoing executive
officers and directors, based on information supplied by them.
Douglas P. Fields has been our Chairman of the Board of
Directors, Chief Executive Officer and a Director since our inception.
From our inception until July 1996, Mr. Fields also served as our
President. For more than the past five years, Mr. Fields has been the
Chairman of the Board of Directors, President and Chief Executive
Officer of TDA and Chief Executive Officer and a Director of each of
its subsidiaries. TDA is a holding company that is our majority
stockholder and whose operating subsidiaries are engaged in the
operation of an indoor tennis facility and the management of real
estate. Mr. Fields devotes no less time to our affairs than he deems
reasonably necessary to discharge his duties to us. Mr. Fields
received a Masters degree in Business Administration from the Harvard
University Graduate School of Business Administration in 1966 and a
B.S. degree from Fordham University in 1964.
Frederick M. Friedman has been our Executive Vice President,
Chief Financial Officer, Treasurer, Secretary and a Director since
inception. For more than the past five years, Mr. Friedman has been
Executive Vice President, Chief Financial Officer, Treasurer,
Secretary and a Director of TDA and Vice President, Chief Financial
Officer, Treasurer, Secretary and a Director of each of its
subsidiaries. Mr. Friedman devotes no less time to our affairs than he
54
deems reasonably necessary to discharge his duties to us. Mr. Friedman
received a B.S. degree in Economics from The Wharton School of the
University of Pennsylvania in 1962.
James E. Helzer has been our President since December 1997 and
Vice Chairman of our Board of Directors since March 1999. He was
President of JEH Eagle from July 1997 through June 30, 2002 and
President of Eagle from December 1997 through June 30, 2002. From 1982
until July 1997, Mr. James E. Helzer was the owner and Chief Executive
Officer of JEH Co.
E.G. Helzer has been Senior Vice President-Operations since
December 1997. He was Senior Vice President-Operations of JEH Eagle
from July 1997 through June 30, 2002, and has been President of JEH
Eagle since June 30, 2002; he was Senior Vice President-Operations of
Eagle from December 1997 through June 30, 2002, and has been President
of Eagle since June 30, 2002. From 1994 until July 1997, Mr. E.G.
Helzer was the Vice President-Operations and Colorado Manager of JEH
Co. From 1982 until 1994, he was JEH Co.'s Manager-Production and
Service. E.G. Helzer is the brother of James E. Helzer.
Messrs. Fields, Friedman and James E. Helzer have been and are
executive officers and directors of our operating subsidiaries. E.G.
Helzer has been and is an executive officer of our operating
subsidiaries.
Steven R. Andrews, Esq. has been a Director since May 1996. For
more than the past five years, Mr. Andrews has been engaged in the
private practice of law. Mr. Andrews received a Juris Doctor degree
and an L.L.M. degree in 1977 and 1978 from Stetson University and New
York University, respectively. Since March 1999 he has also served as
our vice president-legal. Mr. Andrews has entered into an agreement
with us requiring him to review our and our officers' and directors'
compliance with their obligations under federal and state securities
laws. Mr. Andrews is required to report his findings to the Audit
Committee of our Board of Directors.
Paul D. Finkelstein has been the President and Director of the
Regis Corporation, an operator of beauty salons and a cosmetic sales
company, for more than the past five years and that corporation's
Chief Executive Officer since July 1996. Mr. Finkelstein became a
member of our Board of Directors in February 1999. Mr. Finkelstein
received a Masters degree in Business Administration from the Harvard
University Graduate School of Business Administration in 1966 and a
B.S. degree in Economics from The Wharton School of the University of
Pennsylvania in 1964.
George Skakel III has been a private investor for more than the
past five years. Mr. Skakel became a member of our Board of Directors
in February 1999. Mr. Skakel received a B.S. degree in Economics from
the University of Delaware in 1973 and a Masters degree in Business
Administration from the Harvard University Graduate School of Business
Administration in 1978.
55
John E. Smircina, Esq. had been a partner in the law firm of
Wade, Hughes and Smircina, P.C. from April 1993 until July 1996. Since
July 1996, Mr. Smircina has been a sole practitioner. For more than
the past five years, Mr. Smircina has been a Director of TDA. Mr.
Smircina became a member of our Board of Directors in March 1999.
Mr. Smircina received a Masters degree in Industrial Management from
Ohio University in 1954 and a B.A. degree in Political Science from
Ohio University in 1953.
Our Directors serve until the next annual meeting of stockholders
and until their successors are elected and duly qualified. Our
officers are elected annually by the Board of Directors and serve at
the discretion of the Board of Directors. Our independent directors
are responsible for reviewing and approving all material related party
transactions, including potential conflicts of interest, and ensuring
stockholder approval is obtained when they believe it is warranted.
The Board of Directors has established an Executive Committee
which is composed of Douglas P. Fields, Frederick M. Friedman, James
E. Helzer and John E. Smircina, Esq. Our Board of Directors can
delegate to the Executive Committee all of the powers and authority
(other than those reserved by statute to the full Board of Directors)
of the full Board of Directors in the management of our business and
affairs.
Messrs. Fields, Friedman and the Helzers hold the positions set
forth opposite their names for the Company and our operating
subsidiaries as indicated below:
Name The Company Eagle JEH Eagle
- ---- ----------- ----- ---------
Douglas P. Fields Chairman of the Chairman of the Chairman of the
Board and Chief Board and Chief Board and Chief
Executive Officer Executive Officer Executive Officer
James E. Helzer President and Vice Director Director
Chairman of the
Board of Directors
Frederick M. Friedman Executive Vice Executive Vice Executive Vice
President, Treasurer, President, Treasurer, President, Treasurer
Secretary and Secretary and Secretary and
Director Director Director
E.G. Helzer Senior Vice President President
President-Operations
56
In connection with certain transactions which occurred in 1971
and 1973, Messrs. Fields and Friedman and TDA, then a public company,
without admitting or denying the allegations set forth in a civil
action commenced by the Commission in 1976, consented to a final
judgment of permanent injunction which, in summary, provided that
Messrs. Fields and Friedman and TDA were permanently enjoined from
violating the registration, reporting, proxy and the anti-fraud
provisions of the federal securities laws and rules. Additionally,
Messrs. Fields and Friedman agreed to certain ancillary relief which
included their agreements, for a period of two years, to resign as
directors of TDA and a publicly held subsidiary of TDA and not to vote
any securities of TDA and the subsidiary owned or controlled by them.
The Commission's complaint alleged, among other things, that in 1973
TDA and Messrs. Fields and Friedman, in connection with TDA's
acquisition of Eagle, caused an improper finder's fee to be paid to
Messrs. Fields' and Friedman's designee with a portion of such
finder's fee being paid back to Mr. Friedman. Based upon facts related
to the injunctive action, in 1979, Messrs. Fields and Friedman were
found guilty of conspiring to violate the federal securities laws and
making false statements in filings made with the Commission.
Messrs. Fields and Friedman were sentenced to six and three months
incarceration, respectively, and both were fined. Also, on facts
related to the injunctive action, Mr. Friedman was found guilty of
mail and wire frauds. Mr. Friedman was sentenced to one month
incarceration on each of three counts.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and persons who beneficially own more
than 10% of a registered class of our equity securities to file with
the Commission initial reports of ownership and reports of changes in
ownership of our equity securities.
Based on our review of copies of such reports filed with the
Commission and information we received from our executive officers,
directors and TDA, we believe that all Section 16(a) filing
requirements applicable to our executive officers and directors and
TDA were complied with during our fiscal year ended June 30, 2002. One
person, Barry Segal, has reported in filings made with the Commission
that he beneficially owned greater than 10% of our Common Stock during
certain periods of time during our fiscal year ended June 30, 2002.
Based solely upon our review of Mr. Segal's filings with the
Commission, without inquiry or investigation, it appears that Mr.
Segal complied with his Section 16(a) filing requirements during our
fiscal year ended June 30, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information with
respect to the compensation paid by us (including our subsidiaries)
for services rendered in all capacities during each of the last three
fiscal years by those persons indicated (the Company's four most
highly compensated executive officers and its Chief Executive
Officer). Neither the Company nor any of its subsidiaries have had any
other executive officer whose total annual salary and bonus exceeded
$100,000 for either of said fiscal years.
57
Summary Compensation Table(1)
- -----------------------------
Bonus
Name and Principal Position Fiscal Year and Other All
Ended Performance Annual Other
June 30, Salary Bonus Compensation(3) Compensation(4)
----------- -------- ----------- --------------- ---------------
Douglas P. Fields 2002 $400,000 $ 0 $ 60,000 $150,000
Chief Executive Officer 2001 $260,000 $100,000 $ 10,000 $ 0
2000 $260,000 $100,000 $ 0 $ 0
Frederick M. Friedman 2002 $400,000 $ 0 $ 60,000 $150,000
Executive Vice President 2001 $260,000 $100,000 $ 10,000 $ 0
and Treasurer 2000 $260,000 $100,000 $ 0 $ 0
James E. Helzer 2002 $450,000 $ 0 $ 60,000 $150,000
President 2001 $300,000 $100,000 $ 0 $ 0
2000 $300,000 $100,000 $ 0 $ 0
Gary L. Howard 2002 $260,000 $ 31,200 $ 0 $ 0
formerly Senior Vice 2001 $260,000 $ 31,200 $ 0 $ 0
President - Operations(2) 2000 $260,000 0 $ 0 $ 0
E.G. Helzer 2002 $175,000 $ 0 $ 55,000 $ 0
Senior Vice President 2001 $175,000 $ 45,000 $ 0 $ 0
- Operations 2000 $162,500 $ 0 $ 0 $ 0
- ---------------------
(1) Each of the above persons also received such benefits as are
available to all of our employees. For the fiscal years ended
June 30, 2000 and 2001, the value of perquisites or other
personal benefits received was less than ten (10%) percent of the
total annual salary and bonus reported for each of the identified
persons. See "- Other Compensation."
(2) Mr. Howard resigned his position as an executive officer in
December 2001 but continues to be employed in a non-officer
capacity by the Company.
(3) Represents the approximate value of the personal benefits derived
from such individual's automobile allowances and life insurance
premiums paid by the Company on the named person's behalf. For
E.G. Helzer, represents a housing allowance.
(4) Represents retirement and deferred compensation account
contributions made by the Company on the named person's behalf or
amounts paid directly to the executive as a retirement
contribution made in lieu of a formal retirement plan.
Employment Agreements and Arrangements (including Bonuses and
Incentive Compensation)
On September 28, 2001, the Company's Board of Directors, upon the
recommendation of the Company's Compensation Committee, authorized the
implementation, effective July 1, 2001, of a new executive
compensation plan (the "Plan") for the Company's three most senior
58
executive officers, Douglas P. Fields, the Company's Chief Executive
Officer, James E. Helzer, the Company's President, and Frederick M.
Friedman, the Company's Executive Vice-President, Secretary, Treasurer
and Chief Financial Officer, and the extension of their employment
agreements to June 30, 2006. Definitive amendments to their respective
employment agreements reflecting the new executive compensation plan
were entered into on November 1, 2001.
Under the Plan, James E. Helzer's annual base salary is $450,000
and each of Douglas P. Fields' and Frederick M. Friedman's annual base
salary is $400,000, and each receives an annual retirement
contribution of $150,000. Under the Plan, as incentive compensation,
an annual basic bonus is payable to each of these three executive
officers equal to thirty-five (35%) percent of each executive
officer's salary including annual retirement contribution if the
defined EBIT (earnings before interest expense, taxes, amortization of
certain expenses, and intercompany fees, charges and expenses) of the
Company's operating subsidiaries (excluding extraordinary items, as
determined by the Company's Compensation Committee) reaches
$6,500,000.
As additional incentive compensation, an annual performance bonus
is payable to the three above executive officers equal in the
aggregate to twenty-five (25%) percent of the defined EBIT of the
Company's operating subsidiaries in excess of $6,500,000 (excluding
extraordinary items, as determined by the Company's Compensation
Committee) which would be divided equally among them and payable up to
a maximum of $275,000 for each executive officer. Any amount earned in
excess of this maximum annual cash performance bonus compensation will
be credited to a non-qualified deferred compensation account and be
payable at the respective executive's retirement, death or disability
or upon sale of the Company.
The maximum total cash compensation, including salary, retirement
contribution, basic and performance bonus (but exclusive of stock
options) paid in a fiscal year cannot exceed $875,000 for James E.
Helzer and $825,000 for each of Messrs. Fields and Friedman.
Furthermore, the total of all such compensation, including amounts
credited to the above-mentioned deferred compensation accounts, shall
not exceed $1,250,000 for each executive officer for any fiscal year.
Executive officers' salaries are subject to annual inflation
adjustment increases at the sole discretion of the Company's Board of
Directors.
Although, under the Plan, the term of each executive's employment
agreement continues through June 30, 2006, each agreement terminates
earlier upon sale of substantially all of the assets or the capital
stock of the Company with severance to each of the three executive
officers of six (6) months' base salary and retirement contributions
and the continuation of certain benefits.
Under the Plan, the Company's Board of Directors authorized for
each of the three foregoing executive officers $10,000 per year
automobile allowances and $50,000 annual life insurance premiums in
addition to their continued participation in other employee benefits
available to management and employees of the Company.
There is no stock or stock option component of compensation
payable pursuant to the Plan.
59
The Plan falls within the recommendations for executive
compensation made by an independent, non-affiliated compensation
consultant hired by the Company to review such arrangements, and the
defined EBIT is as set forth in such recommendations.
In the Board of Directors' adoption of the Plan, Messrs. Fields,
Friedman and James E. Helzer abstained from voting as to each of their
respective compensation arrangements.
JEH Eagle had also entered into an employment agreement with E.G.
Helzer pursuant to which he served as Senior Vice President-Operations
of JEH Eagle for a term of three years, which commenced in July 1997,
at a rate of $125,000 per year, subject to annual review by JEH Eagle's
Board of Directors. Additionally, in December 1997, E.G. Helzer
accepted the positions of Senior Vice President-Operations of the
Company and Eagle. As a result, E.G. Helzer's rate of compensation was
increased by $25,000 to $150,000 per year, and, in 1999, his
compensation was further increased by $25,000 to $175,000 per year. As
of July 1, 2002, E.G. Helzer accepted the positions of President of
Eagle and JEH Eagle. Since July 1, 2002, E.G. Helzer's salary has been
at an annual rate of $250,000. In addition, E.G. Helzer receives a
housing allowance of $5,000 per month in connection with his move to
the Dallas/Fort Worth area. Additionally, E.G. Helzer is entitled to
receive 6% of Eagle's earnings before taxes in excess of $600,000 per
year. E.G. Helzer is employed as Senior Vice President-Operations of
the Company and President of Eagle and JEH Eagle pursuant to oral
agreements that can be terminated by either party without notice or
penalty. The written employment agreement with E.G. Helzer expired on
June 30, 2000. He performs his duties without a written agreement.
Steven R. Andrews, Esq. serves as our vice president-legal, a
compliance position, and he was compensated at the rate of $1,000 per
month until October 2000. As this position was created as a result of
our agreement with NASDAQ in connection with our listing on NASDAQ, we
believe that he is not one of our employees, and he is compensated in
his capacity as an independent director at the same rate as other non-
employee Directors.
We have granted to each of Messrs. James E. Helzer, E.G. Helzer
and Steven R. Andrews, Esq. options exercisable to purchase 120,000,
60,000, and 100,000 shares of Common Stock, respectively. Such options
have a term of ten years and are exercisable at $5.00 per share. Such
options vest as to 20% (up to a maximum of 20,000 shares per year) of
the underlying shares of Common Stock on each successive anniversary
of the date of grant commencing one year from March 17, 1999, provided
that those persons continue in our service on such dates.
Compensation of Directors
Effective October 2000, non-employee Directors (Messrs. Andrews,
Finkelstein, Skakel and Smircina) are each compensated at the rate of
$1,000 per month. Prior to that date, non-employee Directors did not
receive compensation for their services as directors. Directors are
reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties.
60
Limitation on Liability of Directors
The Delaware General Corporation Law permits a corporation,
through its Certificate of Incorporation, to exonerate its directors
from personal liability to the corporation or to its stockholders for
monetary damages for breach of fiduciary duty of care as a director,
with certain exceptions. The exceptions include a breach of the
director's duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law,
improper declarations of dividends, and transactions from which the
directors derived an improper personal benefit. Our Certificate of
Incorporation exonerates its directors from monetary liability to the
extent permitted by this statutory provision. We have been advised
that it is the position of the Commission that, insofar as the
foregoing provision may be invoked to disclaim liability for damages
arising under the Securities Act, that provision is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Stock Option Plan
In December 1998, the Board of Directors and the stockholders
adopted and approved, as the case may be, our 1998 Stock Option Plan
(the "Stock Option Plan"). The Stock Option Plan provides for the
grant of (i) options that are intended to qualify as incentive stock
options ("Incentive Stock Options") within the meaning of Section 422A
of the Internal Revenue Code, as amended (the "Code"), to certain
employees, directors and consultants, and (ii) options not intended to
so qualify ("Non-Qualified Stock Options") to employees (including
directors and officers who are employees of the Company), directors
and consultants. The total number of shares of the Company's Common
Stock for which options may be granted under the Stock Option Plan is
1,200,000 shares. Options to purchase 764,080 shares of our Common
Stock have been granted to various of our personnel, including options
to purchase an aggregate of 280,000 shares to Messrs. James E. Helzer,
E.G. Helzer and Steven R. Andrews, Esq., of which 749,080 are
outstanding at a $5.00 per share exercise price and of which 15,000
are outstanding at a $4.00 per share exercise price.
Weighted
Average
Number Exercise Exercise
of Price Price
Shares Per Share Per Share
------- --------- ---------
Outstanding, July 1, 1999 878,300 $5.00 $5.00
Granted - - -
Exercised - - -
Forfeited (35,760) 5.00 5.00
Expired - - -
------- ----- -----
61
Outstanding, June 30, 2000 842,540 5.00
Granted 15,000 4.00 4.00
Exercised - - -
Forfeited (70,500) 5.00 5.00
Expired - - -
------- ----- -----
Outstanding, June 30, 2001 787,040 4.98
Granted - - -
Exercised - - -
Forfeited (22,960) 5.00 5.00
Expired - - -
------- -----
Outstanding, June 30, 2002 764,080 $4.98
======= =====
At June 30, 2002, 469,720 options were exercisable at $5.00 per
share and 3,000 options were exercisable at $4.00 per share.
Messrs. Finkelstein and Skakel have each been granted options to
purchase 10,000 shares of Common Stock pursuant to our Stock Option
Plan. Such options have a term of ten years, are exercisable at $5.00
per share and have vested.
The Stock Option Plan is administered by the Board of Directors
and can be administered by a committee appointed by the Board of
Directors, either of which determines the terms of options granted,
including the exercise price, the number of shares subject to the
option and the terms and conditions of exercise. No option granted
under the Stock Option Plan is transferable by the optionee other than
by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the Stock
Option Plan must be at least equal to the fair market value of such
shares on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting rights of all classes of
our outstanding capital stock, the exercise price of any Incentive
Stock Option must be not less than 110% of the fair market value on
the date of grant. The term of each option granted pursuant to the
Stock Option Plan may be established by the Board of Directors or a
committee of the Board of Directors, in its sole discretion; provided,
however, that the maximum term of each Incentive Stock Option granted
pursuant to the Stock Option Plan is ten years. With respect to any
Incentive Stock Option granted to a participant who owns stock
possessing more than 10% of the voting rights of all classes of our
outstanding capital stock, the maximum term is five years. Options
shall become exercisable at such times and in such installments as the
Board of Directors or a committee of the Board of Directors shall
provide in the terms of each individual option.
Options Granted Pursuant to the Stock Option Plan to Our Executive
Officers and Directors
The table below shows, as to each of our executive officers and
directors named below and as to all of our executive officers and
directors as a group, the aggregate amounts of shares of Common Stock
62
subject to options granted. All such options have a per share exercise
price of $5.00. No options have been exercised to date.
Names of Executive Shares Subject Number of
Officers and Directors To Options(2) Vested Options(2)
- ---------------------- -------------- -----------------
James E. Helzer(1) 120,000 60,000
E.G. Helzer(1) 60,000 36,000
Steven R. Andrews, Esq.(1) 100,000 60,000
Paul D. Finkelstein 10,000 10,000
George Skakel III 10,000 10,000
---------- ----------
Total (All Executive Officers and
Directors as a group) 300,000 176,000
========== ==========
- --------------------------
(1) All of the options granted to Messrs. James E. Helzer, E.G.
Helzer and Steven R. Andrews, Esq. vest at a rate of 20% per year
from March 17, 1999, limited, however, such that the total amount
of all options granted to each of them and vesting in any single
year does not exceed $100,000 at the exercise price.
(2) Does not include options previously granted to a former executive
officer that vests at the same rate and subject to the same
limitations as to those options set forth in footnote (1).
Other Compensation
We provide basic health, major medical and life insurance for our
employees, including executive officers. Eagle and JEH Eagle have also
adopted 401(k) Retirement Savings Plans for eligible employees, as
described below. No other retirement, pension or similar program has
been adopted. These and other benefits may be adopted by us for our
employees or the employees of our subsidiaries in the future.
In July 1992 and January 1998, Eagle and JEH Eagle adopted 401(k)
Retirement Savings Plans for employees of Eagle and JEH Eagle,
respectively (the "401(k) Plan"). Eligible employees include all
employees of Eagle and JEH Eagle (including those formerly employed by
MSI Eagle until its merger into and with JEH Eagle) who have completed
one year of employment and have attained the age of 21. The 401(k)
Plan permits employees to make voluntary contributions to the 401(k)
Plan up to a dollar limit set by law. Eagle and JEH Eagle may
contribute discretionary matching contributions equal to a determined
percentage of the employees' contributions. Benefits under the 401(k)
Plan are distributable upon retirement, disability, termination of
employment or certain financial hardship, subject to regulatory
requirements. Each participant's share of Eagle's and JEH Eagle's
contributions vests at the rate of 20% per year until after six years
of service, at which time the participant becomes fully vested.
63
Contributions in the amounts of approximately $102,000 and
$126,000 were made to the 401(k) Plan for the fiscal years ended June
30, 2001 and 2002, respectively. Amounts to be contributed in the
future are discretionary. Accordingly, it is not possible to estimate
the amount of benefits that will be payable to participants in the
401(k) Plan upon their retirement.
Board and Committee Meetings
During its fiscal year ended June 30, 2002, our Board of
Directors held five (5) meetings.
The Committees of our Board if Directors met on the number of
occasions set forth below:
Audit -- 2 occasions.
Compensation -- 1 occasion.
Executive -- No occasion.
A brief description of the functions of these Committees of our
Board of Directors follows:
Audit - The Audit Committee reviews the performance and
independence of our auditors, makes an annual recommendation to the
Board of Directors with respect to the appointment of auditors,
approves the general nature of the services to be performed and
solicits and reviews the recommendations of the auditors. The Audit
Committee also consults with our financial officers and internal
auditors. During our fiscal year ended June 30, 2000, we adopted a
charter for the Audit Committee.
Executive - The Executive Committee can be delegated all of the
powers and authority (other than those reserved by statute) of the
full Board of Directors in the management of our business and affairs.
Compensation - The Compensation Committee reviews our
compensation policies and executive compensation changes and makes
recommendations on compensation plans.
Executive Compensation-Policy and Components of Compensation
The Compensation Committee's fundamental executive compensation
philosophy is to enable us to attract and retain key executive personnel
and to motivate those executives to achieve our objectives which include
obtaining satisfactory sales and income levels and maintaining a sound
financial condition in light of the business environment in which we
operate. The method of evaluating executive performance includes
reviewing our sales, income levels and financial condition, and
assessing each executive's performance in connection with attaining such
sales, income levels and financial condition.
64
Each executive officer's compensation package is reviewed
periodically and is comprised of five components: base salary, basic
bonus, performance bonus, retirement contribution, incentive
compensation and stock option grants. In addition, our executive
officers are eligible to participate in all benefit programs generally
available to other employees as well as certain additional life
insurance and other benefits.
Mr. Fields' compensation for the fiscal year ended June 30, 2002
included his current base salary compensation of $400,000 and a
retirement contribution of $150,000. During the fiscal year ended June
30, 2002, Mr. Fields also received an automobile allowance of
approximately $10,000 and $50,000 for payments toward insurance
premiums for life insurance policies for which Mr. Fields has
designated the beneficiaries. No short-term or long-term incentive
compensation, or stock options were awarded to Mr. Fields during the
fiscal year ended June 30, 2002. Mr. Fields' duties and
responsibilities include, among others, managing the long term
financial and economic resources of our Company, the continuity of
strong management, our strategic position both financially and within
our industry and striving to manage these duties and responsibilities
in light of the fact that we operate in a seasonal and cyclical
business with cyclical markets which frequently are subject to and
dependent upon unpredictable weather, difficult competitive
environments and other challenging conditions. The levels of our
annual revenues, net income and EBIT (earnings before interest expense
and federal income taxes) are among the factors considered and to be
considered in the future by our Compensation Committee and Board of
Directors in determining compensation for Mr. Fields (or other
executive officers). Other relevant factors include competitive market
conditions in each of our market areas, economic conditions and
weather related factors affecting business in each of our market
areas, availability of product and product lines in each of our market
areas, availability of personnel at acceptable wage levels in each of
our market areas, levels of compensation of other executive officers
in the building products industry, success in managing the opening and
closing of new and old distribution centers to maximize and balance
our short term and long term business objectives and financial
returns, experience, management of banking relationships and financial
resources especially in light of both general and building industry
related conditions in the financial markets, ability both to take
advantage of market and financial opportunities that may arise and to
avoid potential problem areas that may appear attractive but, in fact,
are not (such as the "e-commerce" bubble), ability to foster and
maintain a corporate culture that maintains a high degree of employee
morale and relatively low level of employee turnover in light of local
market conditions, ability to maintain close contacts within the
industry to take advantage of potential acquisitions or consolidation
situations that may become available to the Company on terms that may
be attractive to us, effectiveness in managing the purchasing function
to achieve favorable prices and terms from our most important vendors
and to maximize our gross profit margins in light of industry
conditions, implementation of long term business, financial and
acquisition strategies, as well as other factors. Mr. Fields met the
basic objectives of the Company, satisfactorily fulfilled his duties
and responsibilities in light of relevant competitive market,
financial, and economic conditions affecting the Company, as
determined by our Compensation Committee, and has received his base
level of compensation and retirement contribution, Mr. Fields has
entered into an employment agreement with the Company which expires on
June 30, 2006 and which sets forth levels of annual base compensation,
annual retirement contribution, formulas for determining annual basic
65
bonus and performance bonus, and payments toward life insurance
premiums and a car allowance as well as the right to participate in
and receive other benefits received by Company employees.
The Compensation Committee reviews compensation and incentive
plans for the most senior executive officers and makes recommendations
to our Board of Directors. In performing its reviews, the Compensation
Committee has in the past and may in the future engage the services of
an independent, outside consultant to render an opinion on proposed
compensation for our most senior executive officers.
Base Salary
In setting the base salary levels of each executive officer, the
Committee may consider making recommendations to the Board of Directors
regarding the base salaries of our executive officers based on the base
salaries and other elements of compensation paid to executive officers
in comparable positions in other similarly situated companies which are
known to the Committee to the extent permitted by our executive
officers' respective employment agreements. The Committee considers the
individual experience level and actual performance of each executive
officer in view of our needs and objectives.
Compensation Committee Members
------------------------------
Paul D. Finkelstein George Skakel III John E. Smircina, Esq.
The following table and graph, based on data provided by the
Center for Research in Securities Prices ("CSRP"), shows changes in
the value of $100 invested on March 12, 1999, when the trading in
shares of our common stock commenced following the Offering, of:
(a) shares of our common stock; (b) the Nasdaq Stock Market Index
(U.S. companies); and (c) a Company determined peer group. The values
of each investment at the end of each period are derived from
compounded daily returns that include all dividends. Total stockholder
returns from each investment can be calculated from the period-end
investment values shown in the table and graph provided below.
The Company's Self-Determined Peer Group which is used in the
accompanying Performance Table and Performance Graph is comprised of a
sampling of publicly traded companies of which the Company is aware
that participate in the building, construction and industrial
materials and supplies distribution industry and companies which
manufacture certain construction and construction industry related
materials. The Company is unaware of any publicly traded companies
whose primary business is the wholesale distribution of residential
roofing, drywall, masonry products and supplies and related products.
Many of the companies that participate in the wholesale distribution
of residential roofing, drywall, masonry supplies and related products
industry are not publicly owned. The names, stock market symbols and
exchanges or marketplaces on which the companies in the Self-
Determined Peer Group are traded are listed below. The index level for
all three series that are shown in the Performance Graph below was set
66
to $100 on March 12, 1999, the day that the Company consummated its
Offering. The indexes are re-weighted daily using the market
capitalizations on the previous trading day.
Self-Determined Peer Group
--------------------------
Statistical Information and Graph Prepared by the Center for
Research in Security Prices on August 2, 2002 including data through
June 28, 2002.
Exchange/
Company Name Trading Symbol Market Place
- ------------ -------------- ------------
American Standard Companies, Inc. ASD NYSE(3)
Berger Holdings Inc. BGRH NASDAQ-SCM(4)
Black & Decker Corporation BDK NYSE(3)
Building Materials Holding Corp. BMHC NASDAQ-NMS(5)
C R H PLC(1) CRHCY NASDAQ-NMS(5)
Elcor Corp. ELK NYSE(3)
Fastenal Company FAST NASDAQ-NMS(5)
Fortune Brands, Inc. FO NYSE(3)
Genuine Parts Company GPC NYSE(3)
Hughes Supply Inc. HUG NYSE(3)
Huttig Building Products, Inc. HBP NYSE(3)
Leggett & Platt, Incorporated LEG NYSE(3)
Masco Corporation MAS NYSE(3)
MSC Industrial Direct Co., Inc.(2) MSM NYSE(3)
Owens Corning OWC NYSE(3)
Royal Group Technologies Limited RYG NYSE(3)
Sherwin-Williams Company SHW NYSE(3)
Stanley Works SWK NYSE(3)
Tech Data Corporation TECD NASDAQ-NMS(5)
United Stationers Inc. USTR NASDAQ-NMS(5)
USG Corp. USG NYSE(3)
W.W. Granger, Inc. GWW NYSE(3)
Watsco Inc.(2) WSO NYSE(3)
Wesco International Inc. WCC NYSE(3)
Wickes Inc. WIKS NASDAQ-NMS(5)
- -------------------------
(1) American Depository Receipt
(2) Class A equity
(3) New York Stock Exchange
(4) NASDAQ SmallCap Market
(5) NASDAQ National Market System
67
Comparison of Five - Year Cumulative Total Returns
Performance Graph for
EAGLE SUPPLY GROUP, INC.
Produced on 08/02/2002 including date to 06/28/2002
[GRAPH - DETAILS REFLECTED BELOW]
Legend
Symbol CRSP Total Returns Index for: 03/1999 06/1999 06/2000 06/2001 06/2002
- ------ ----------------------------- ------- ------- ------- ------- -------
_____ [] EAGLE SUPPLY GROUP, INC. 100.0 91.3 80.0 26.0 54.1
- -- -- * Nasdaq Stock Market (US Companies) 100.0 113.1 167.3 90.7 61.8
- - - - X Self-Determined Peer Groups 100.0 120.7 80.9 104.9 125.0
Notes:
A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily using the market capitalization on
the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 03/12/1999.
E. Based on client's request, the closing price on 03/12/1999 was
substituted with the IPO price.
Prepared by CRSP (www.crsp.uchicago.edu), Center for Research in Security
Prices, Gradute School of Business, 11505/80204060 The University of
Chicago. Used with permission. All rights reserved.
[C]Copyright 2002
68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of August 31, 2002, except as
noted in the next sentence, based upon our records and information
obtained from the persons named below, certain information concerning
beneficial ownership of our shares of Common Stock with respect to
(i) each person known to own 5% or more of our outstanding shares of
Common Stock, (ii) each of our executive officers and directors, and
(iii) all of our officers and directors as a group. The information
set forth below as to Bradco Supply Corporation and Barry Segal is
based solely upon filings made by such entity and person with the SEC.
Amount Approximate
and Nature Percentage
of Beneficial of Common
Identity(1) Ownership Stock Owned
- ---------- ------------- -----------
TDA Industries, Inc. 5,100,000(2) 56.3%
Douglas P. Fields 5,100,000(2) 56.3%
Frederick M. Friedman 5,100,000(2) 56.3%
James E. Helzer 360,000(3) 4.0%(5)
E.G. Helzer 36,000(3) *(5)
Steven R. Andrews, Esq. 140,000(3) 1.5%(5)
Paul D. Finkelstein 10,000(3) *(5)
John E. Smircina, Esq. 5,100,000(2) 56.3%
George Skakel III 10,000(3) *(5)
All Executive Officers and Directors
as a group (8 persons) 5,656,000(2)(3) 61.3%(5)
Barry Segal(4) 862,510 9.5%
- -----------------------------
* Denotes less than 1%.
(1) The addresses for the foregoing entities and persons are:
- TDA Industries, Inc., 122 East 42nd Street, New York, New York
10168.
- Messrs. Fields and Friedman, c/o Eagle Supply Group, Inc., 122
East 42nd Street, New York, New York 10168.
- Mr. James E. Helzer, 2500 U.S. Highway 287, Mansfield, Texas
76063.
- Mr. Andrews, 822 North Monroe Street, Tallahassee, Florida
32303.
- Mr. E.G. Helzer, 2500 U.S. Highway 287, Mansfield, Texas
76063.
- Mr. Finkelstein, c/o Regis Corp., 7201 Metro Blvd.,
Minneapolis, MN 55439-2130.
- Mr. Smircina, 221S Alfred Street, Alexandria, Virginia 22314.
- Mr. Skakel, 115 Maple Avenue, Greenwich, Connecticut 06830.
- Mr. Segal, c/o Bradco Supply Corporation, 13 Production Way,
Avenel, NJ 07001.
69
(2) Messrs. Fields and Friedman are officers and directors and
principal stockholders of TDA. Mr. Smircina is a director of TDA.
Each of Messrs. Fields, Friedman and Smircina may be deemed to
exercise voting control over our securities owned by TDA. See
Item 10. "Directors and Executive Officers of Registrant" and
Item 13. "Certain Relationships and Related Transactions."
(3) Does not include options granted under our Stock Option Plan
which have not vested but includes such options which have
vested. See Item 10. "Directors and Executive Officers of
Registrant."
(4) According to filings made with the SEC, Mr. Segal directly owns
805,510 shares of our Common Stock with an additional 57,000
shares owned by Bradco Supply Corporation, a corporation of which
Mr. Segal is the majority shareholder and Chief Executive
Officer.
(5) The Company has 9,055,455 shares of Common Stock issued and
outstanding as of September 20, 2002. The percentage of ownership
reflected for each individual who has vested stock options and
for all officers and directors as a group includes any shares of
Common Stock actually owned by such individuals plus such vested
options in calculating both the number of shares owned and the
number of shares issued and outstanding, as is required by the
rules and regulations promulgated by the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JEH Eagle
In 1997, JEH Eagle acquired the business and substantially all of
the assets of JEH Co., which is wholly-owned by James E. Helzer, now
our President. Certain potentially substantial, contingent payments,
as additional future consideration to JEH Co. or its designee are to
be paid by JEH Eagle. For the fiscal year ended June 30, 2002, no
additional consideration is to be paid to JEH Co. or its designee,
and, as of June 30, 2002, the Company has no future obligation for
such additional consideration. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations-
Acquisitions."
James E. Helzer rents to JEH Eagle the premises for several of
JEH Eagle's distribution centers and JEH Eagle's executive offices.
Base rental payments to Mr. Helzer for the several distribution
facilities he leases to JEH Eagle aggregated approximately $747,000
during the fiscal year ended June 30, 2002. See Item 2. "Properties."
During its fiscal year ended June 30, 2002, JEH Eagle made sales
aggregating approximately $286,000 to entities owned by James E.
Helzer. Payment for $209,568 of such sales was made by reducing the
principal amount of the note payable by the Company to Mr. Helzer. As
of June 30, 2002, the balance of such sales was paid in full.
During its fiscal year ended June 30, 2002, JEH Eagle made sales
aggregating approximately $848,000 to entities owned by Jay James
Helzer, the son of James E. Helzer, and other family members. As of
70
June 30, 2002, approximately $258,000 of such sales were owed to JEH
Eagle.
Gary L. Howard, formerly an executive officer of the Company,
rents to JEH Eagle certain office, showroom, warehouse and outdoor
storage space for one of JEH Eagle's distribution centers. Base rental
payments to Mr. Howard for the distribution facility he leases to JEH
Eagle aggregated approximately $112,000 during the fiscal year ended
June 30, 2002. See Item 2. "Properties."
JEH Eagle rents a distribution center from a limited liability
company fifty (50%) percent owned by James E. Helzer and his spouse
and fifty (50%) percent owned by a subsidiary of TDA. Base rental
payments to this limited liability company for the distribution
facility it leases to JEH Eagle aggregated approximately $46,000
during the fiscal year ended June 30, 2002. See Item 2. "Properties."
The limited liability company acquired these premises from JEH Eagle
as of July 1, 1999, which had itself acquired the premises from one of
its customers.
MSI Eagle
In October 1998, MSI Eagle acquired the business and
substantially all of the assets of MSI Co., which is wholly-owned by
Mr. Howard, a former executive officer of the Company. Certain,
potentially substantial, contingent payments, as additional future
consideration to MSI Co. or its designee, are to be paid by JEH Eagle.
For the fiscal year ended June 30, 2002, approximately $315,000 of
additional consideration is to be paid to MSI Co. or its designee. See
Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Acquisitions."
In October 1998, in connection with the purchase of substantially
all of the assets and business of MSI Co. by MSI Eagle, TDA lent MSI
Eagle $1,000,000 pursuant to a six (6%) percent two-year note. The
note was payable in full in October 2000, and TDA had agreed to defer
the interest payable on the note until its maturity. In October 2000,
interest on the note was paid in full, and TDA and JEH Eagle (as
successor by merger to MSI Eagle) agreed to refinance the $1,000,000
principal amount of the note pursuant to a new eight and three-fourths
(8.75%) percent per annum demand promissory note.
TDA-Eagle
TDA is a holding company which operated several business
enterprises that included Eagle, JEH Eagle and MSI Eagle until our
acquisition of them in March 1999.
A wholly-owned subsidiary of TDA rents to Eagle the premises for
several of Eagle's distribution centers. Base rental payments to the
TDA subsidiary for the several distribution centers it leases to Eagle
aggregated approximately $790,000 for the fiscal year ended June 30,
2002. See Item 2. "Properties."
Pursuant to a strategic services agreement which expired June 30,
2002, TDA provided JEH Eagle with certain services including: (i)
managerial, (ii) strategic planning, (iii) banking negotiation, (iv)
71
investor relations, and (v) advisory services relating to acquisitions
for a five-year term which commenced in July 1997. A $3,000 monthly
fee commenced in March 1999 and terminated June 30, 2002.
Through June 30, 2002, TDA provided office space for use as our
New York corporate executive offices pursuant to a $3,000 per month,
month-to-month administrative services agreement that has been
terminated. Commencing July 1, 2002, the Company began to pay to TDA
seventy-five (75%) percent of the occupancy cost (approximately $4,500
per month) for our executive offices and seventy-five (75%) percent of
the remuneration and benefits of our New York administrative assistant
(approximately $4,500 per month), and TDA began to pay twenty-five
(25%) percent of such occupancy cost (approximately $1,500 per month),
and twenty-five (25%) percent of the remuneration and benefits of our
New York administrative assistant (approximately $1,500 per month) in
order to defray any expenses that may be deemed to be attributable to
TDA. The current lease for the Company's New York corporate executive
offices expires in October 2002 with TDA as the named lessee. A new
lease is anticipated to be entered into by and between the Company and
the landlord for these premises at a base annual rental of
approximately $6,900 per month with customary additional rental
charges (proportionate share of real estate taxes, electricity, etc.),
of which TDA will continue to pay twenty-five (25%) percent.
The foregoing transactions that Eagle, JEH Eagle and MSI Eagle
have engaged in with TDA have benefited or may be deemed to have
benefited TDA, directly or indirectly. Messrs. Fields and Friedman,
our Chief Executive Officer and Chairman of our Board of Directors and
our Executive Vice President, Chief Financial Officer, Treasurer,
Secretary, and Director, respectively, are also executive officers,
directors and principal stockholders of TDA and have benefited or may
be deemed to have benefited, directly or indirectly, from the
foregoing transactions with TDA. TDA and/or certain of its
subsidiaries derive funds from the operation of an indoor tennis
facility, commercial lease payments from us and others and income from
investments. These sources help to defray TDA's operating expenses,
including the payment of salaries and benefits to Messrs. Fields and
Friedman. See Item 10. "Directors and Executive Officers of
Registrant."
Messrs. Fields and Friedman are officers, directors and principal
stockholders of TDA, and Mr. Smircina is a director of TDA, and,
consequently, they are able, through TDA, to direct the election of
our directors, effect significant corporate events and generally
direct our affairs. We do not intend to enter into any material
transactions, loans or forgiveness of loans with any affiliates,
except as contemplated or otherwise disclosed in our filings with the
Commission, unless we believe that such transaction is fair and
reasonable to us and we believe that it is on terms no less favorable
than we could obtain from unaffiliated third parties. Additionally,
any such event must be approved by a majority of our directors who do
not have an interest in such a transaction and who have had access, at
our expense, to independent legal counsel.
See "- JEH Eagle" and "- MSI Eagle."
72
The foregoing transactions that we have engaged in with James E.
Helzer have benefited or may be deemed to have benefited Mr. Helzer,
directly or indirectly. James E. Helzer is our President.
The foregoing transactions that we have engaged in with Mr.
Howard have benefited or may be deemed to have benefited Mr. Howard.
Mr. Howard was one of our executive officers.
For certain details concerning our 1999 acquisition of Eagle, JEH
Eagle, and MSI Eagle, the 1997 acquisition of JEH Co. by JEH Eagle and
the 1998 acquisition of MSI Co. by MSI Eagle, see Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Acquisitions" and the Financial Statements and
Notes thereto.
Fairness
Our management believes that the foregoing transactions were and
are fair and reasonable to us and were made on terms no less favorable
to us than terms and conditions that could have been entered into with
independent third parties.
General
As a result of our Initial Public Offering, 300,000 and 200,000
shares of our Common Stock were issued to Messrs. Helzers and Howard,
respectively, as additional consideration in connection with JEH
Eagle's acquisition of JEH Co. and MSI Eagle's acquisition of MSI Co.
For details concerning the employment agreements and arrangements
with Messrs. Fields, Friedman and Helzers, see Item 10. "Directors and
Executive Officers of Registrant," and Item 11. "Executive
Compensation."
73
PART IV
-------
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Exhibits
10.46 Amended, Consolidated, and Restated Employment
Agreement, dated as of November 1, 2001, between Registrant,
JEH/Eagle Supply, Inc., and James E. Helzer(1)
10.47 Amended, Consolidated, and Restated Employment
Agreement, dated as of November 1, 2001, between Registrant,
JEH/Eagle Supply, Inc., Eagle Supply, Inc., and Douglas P.
Fields(1)
10.48 Amended, Consolidated, and Restated Employment
Agreement, dated as of November 1, 2001, between Registrant,
JEH/Eagle Supply, Inc., Eagle Supply, Inc., and Frederick M.
Friedman(1)
10.49 Letter Agreement with vFinance Investments, Inc.
regarding compensation for services in connection with the
May 2002 private placement transaction (Filed as Exhibit 1.1
to the filing incorporated by reference as noted below)(2)
10.50 Form of Warrants to purchase common stock issued by
the Registrant to investors in the May 2002 private placement
transaction (Filed as Exhibit 4.1 to the filing incorporated
by reference as noted below)(2)
10.51 Form of Warrant to purchase common stock issued by
the Registrant to vFinance Investments, Inc. as compensation
for services in the May 2002 private placement transaction
(Filed as Exhibit 4.2 to the filing incorporated by reference
as noted below)(2)
10.52 Securities Purchase Agreement, dated as of May 15,
2002, by and between the Registrant and each of the investors
in the May 2002 private placement transaction (Filed as
Exhibit 4.3 to the filing incorporated by reference as noted
below)(2)
10.53 Registration Rights Agreement, dated as of May 15,
2002, by and between the Registrant and each of the investors
in the May 2002 private placement transaction (Filed as
Exhibit 4.4 to the filing incorporated by reference as noted
below)(2)
- ------------------------
(1) Incorporated by reference. Filed with Registrant's Report on Form
10-Q for the quarter ended September 30, 2001.
(2) Incorporated by reference. Filed with Registrant's Report on Form
8-K filed on May 22, 2002.
74
(b) Reports on Form 8-K. During the last quarter of the fiscal
period covered by this Report, the Registrant filed (1) on May 22,
2002 a Report on a Form 8-K reporting on an Item 5 event of said form,
specifically the private placement transaction more fully discussed in
Item 5(c) "Market For Registrant's Common Equity and Related
Stockholder Matters - Recent Sales of Unregistered Securities" of this
Report and (2) on June 20 and June 24, 2002, Forms 8-K and 8-K/A
reporting on an Item 9 event of said form, specifically providing
further disclosure of Registrant's business, pursuant to Regulation F-
D.
(c) All schedules are omitted, as the required information is
either inapplicable or presented in the financial statements or
related notes.
75
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of
New York, State of New York, on the 27th day of September 2002.
EAGLE SUPPLY GROUP, INC.
By: /s/Douglas P. Fields
-------------------------------------
Douglas P. Fields,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/Douglas P. Fields Chairman of the Board of September 27, 2002
- ---------------------------------- Directors and Chief
Douglas P. Fields Executive Officer
(Principal Executive Officer)
/s/Frederick M. Friedman Executive Vice President, September 27, 2002
- ---------------------------------- Treasurer, Secretary and
Frederick M. Friedman Director (Principal Financial
and Accounting Officer)
/s/James E. Helzer Vice Chairman of the Board September 27, 2002
- ---------------------------------- of Directors
James E. Helzer
Director , 2002
- ----------------------------------
Paul D. Finkelstein
/s/George Skakel III Director September 27, 2002
- ----------------------------------
George Skakel III
Director , 2002
- ----------------------------------
John E. Smircina
Director , 2002
- ----------------------------------
Steven R. Andrews
76
CERTIFICATIONS
--------------
I, Douglas P. Fields, certify that:
1. I have reviewed this annual report on Form 10-K of Eagle
Supply Group, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: September 27, 2002
/s/Douglas P. Fields
----------------------------------
Douglas P. Fields
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATIONS
--------------
I, Frederick M. Friedman, certify that:
1. I have reviewed this annual report on Form 10-K of Eagle
Supply Group, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: September 27, 2002
/s/Frederick M. Friedman
------------------------------------
Frederick M. Friedman
Executive Vice President, Treasurer,
Secretary and Director
(Principal Financial Officer)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Eagle Supply Group, Inc.
We have audited the accompanying consolidated balance sheets of Eagle
Supply Group, Inc. (the "Company") and subsidiaries as of June 30,
2002 and 2001, and the related consolidated statements of operations,
shareholders' equity and cash flows for the three years ended June 30,
2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Eagle Supply
Group, Inc. and subsidiaries as of June 30, 2002 and 2001, and the
results of their operations and their cash flows for the three years
ended June 30, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As described in Note 1, effective July 1, 2001, in connection with the
adoption of SFAS No. 142, Goodwill and Intangible Other Assets, the
Company ceased amortization of goodwill.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Fort Worth, Texas
September 20, 2002
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
- -----------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 5,355,070 $ 5,679,891
Accounts and notes receivable - trade
(net of allowance for doubtful accounts
of $4,551,675 and $2,352,491, respectively) 39,632,004 35,714,565
Inventories 33,635,992 30,781,359
Deferred tax asset 1,910,000 1,028,649
Federal and state income taxes receivable - 444,516
Other current assets 1,072,394 856,951
------------ ------------
Total current assets 81,605,460 74,505,931
PROPERTY AND EQUIPMENT, Net 3,623,897 4,514,225
COST IN EXCESS OF NET ASSETS ACQUIRED
(net of accumulated amortization of $1,936,216) 14,412,014 14,097,292
DEFERRED FINANCING COSTS 57,664 157,727
------------ ------------
$ 99,699,035 $ 93,275,175
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,900,000 $ 3,240,000
Accounts payable 27,695,079 26,670,560
Due to related parties 314,722 636,884
Accrued expenses and other current liabilities 5,284,787 4,493,949
Federal and state income taxes payable 222,444 -
------------ ------------
Total current liabilities 36,417,032 35,041,393
LONG-TERM DEBT 40,425,435 38,336,642
DEFERRED TAX LIABILITY 1,146,000 862,552
------------ ------------
Total liabilities 77,988,467 74,240,587
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8)
SHAREHOLDERS' EQUITY:
Preferred shares, $.0001 par value per share
2,500,000 shares authorized - none issued
and outstanding - -
Common shares, $.0001 par value per share
25,000,000 shares authorized - issued and
outstanding - 2002 - 9,055,455;
2001 - 8,510,000 905 851
Additional paid-in capital 18,248,903 16,958,141
Retained earnings 3,460,760 2,075,596
------------ ------------
Total shareholders' equity 21,710,568 19,034,588
------------ ------------
$ 99,699,035 $ 93,275,175
============ ============
See notes to consolidated financial statements.
F-2
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------
2002 2001 2000
REVENUES $ 237,275,209 $ 196,240,714 $ 187,714,736
COST OF SALES 179,711,306 146,875,799 142,421,814
------------- ------------- -------------
57,563,903 49,364,915 45,292,922
------------- ------------- -------------
OPERATING EXPENSES (including provisions
for doubtful accounts of $2,761,007,
$1,464,418 and $732,890, respectively) 51,982,153 42,917,028 37,443,191
DEPRECIATION 1,420,944 1,410,544 1,387,761
AMORTIZATION OF COST IN EXCESS OF
NET ASSETS ACQUIRED - 805,694 621,565
AMORTIZATION OF DEFERRED
FINANCING COSTS 100,063 92,009 79,417
------------- ------------- -------------
53,503,160 45,225,275 39,531,934
------------- ------------- -------------
INCOME FROM OPERATIONS 4,060,743 4,139,640 5,760,988
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Investment and other income 347,866 490,215 489,230
Interest expense (2,293,445) (3,201,013) (3,069,472)
------------- ------------- -------------
(1,945,579) (2,710,798) (2,580,242)
------------- ------------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,115,164 1,428,842 3,180,746
PROVISION FOR INCOME TAXES 730,000 580,000 1,170,000
------------- ------------- -------------
NET INCOME $ 1,385,164 $ 848,842 $ 2,010,746
============== ============= =============
BASIC AND DILUTED NET INCOME
PER SHARE $ .16 $ .10 $ .24
============== ============= =============
COMMON SHARES USED IN BASIC AND
DILUTED NET INCOME PER SHARE 8,578,742 8,510,000 8,510,000
============== ============= =============
See notes to consolidated financial statements.
F-3
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------
Additional Due from TDA
Preferred Shares Common Shares Paid-In Retained and Affiliated
Shares Amount Shares Amount Capital Earnings Companies Total
BALANCE, JULY 1, 1999 - $ - 8,450,000 $ 845 $16,658,147 $ (783,992) $ (487,205) $ 15,387,795
Net income - - - - - 2,010,746 - 2,010,746
Common Shares issued in connection
with the acquisition of MSI Co. - - 60,000 6 299,994 - - 300,000
Net change in Due from TDA
Industries, Inc. and affiliated
companies - - - - - - 487,205 487,205
------ ------ --------- ----- ----------- ---------- ----------- ------------
BALANCE, JUNE 30, 2000 - - 8,510,000 851 16,958,141 1,226,754 - 18,185,746
Net income - - - - - 848,842 - 848,842
------ ------ --------- ----- ----------- ---------- ----------- ------------
BALANCE, JUNE 30, 2001 - - 8,510,000 851 16,958,141 2,075,596 - 19,034,588
Net income - - - - - 1,385,164 - 1,385,164
Proceeds from private placement
of Common Shares and Warrants
- net (Note 8) - - 545,455 54 1,290,762 - - 1,290,816
------ ------ --------- ----- ----------- ---------- ----------- ------------
BALANCE, JUNE 30, 2002 - $ - 9,055,455 $ 905 $18,248,903 $3,460,760 $ - $ 21,710,568
====== ====== ========= ===== =========== ========== =========== ============
See notes to consolidated financial statements.
F-4
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,385,164 $ 848,842 $ 2,010,746
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,521,007 2,308,247 2,088,743
Deferred income taxes (597,903) (28,883) 419,748
Increase (decrease) in allowance for doubtful
accounts 2,199,184 856,491 (104,000)
Loss (gain) on sale of equipment 55,888 (15,413) 26,966
Changes in operating assets and liabilities:
Increase in accounts and notes receivable (6,116,623) (7,126,188) (2,168,442)
Increase in inventories (2,854,633) (4,459,678) (7,349,133)
(Increase) decrease in other current assets (215,443) 265,480 (29,604)
Increase in accounts payable 1,024,519 4,165,667 2,366,747
Increase (decrease) in accrued expenses and
other current liabilities 790,838 959,839 (197,122)
(Decrease) increase in due to related parties (96,039) 51,891 99,554
Decrease in income taxes due to TDA
Industries, Inc. - (1,143,537) -
Increase (decrease) in federal and state
income taxes 666,960 (869,231) (183,445)
------------ ------------ ------------
Net cash used in operating activities (2,237,081) (4,186,473) (3,019,242)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (771,430) (592,045) (967,462)
Proceeds from sale of fixed assets 184,926 225,411 627,274
Payment of contingent consideration for the
purchase of JEH Co. (314,864) (2,141,454) (1,907,842)
Payment of contingent consideration for the
purchase of MSI Co. (225,981) (215,650) -
------------ ------------ ------------
Net cash used in investing activities (1,127,349) (2,723,738) (2,248,030)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement, net of related
expenses 1,290,816 - -
Principal borrowings on long-term debt 270,234,853 217,424,596 199,350,576
Principal reductions on long-term debt (268,486,060) (211,937,408) (195,924,037)
Increase in deferred financing costs - (62,964) -
Decrease in amounts due from TDA Industries, Inc.
and affiliated companies - - 487,205
------------ ------------ ------------
Net cash provided by financing activities 3,039,609 5,424,224 3,913,744
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (324,821) (1,485,987) (1,353,528)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,679,891 7,165,878 8,519,406
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,355,070 $ 5,679,891 $ 7,165,878
============ ============ ============
See notes to consolidated financial statements.
F-5
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
- -----------------------------------------------------------------------------
2002 2001 2000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 2,293,445 $ 3,201,013 $ 3,069,472
============ ============ ============
Cash paid for income taxes $ 660,943 $ 1,478,114 $ 933,697
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
60,000 Common Shares issued in connection
with the acquisition of MSI Co. $ - $ - $ 300,000
============ ============ ============
See notes to consolidated financial statements.
F-6
EAGLE SUPPLY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Business Description - Eagle Supply Group, Inc. (the "Company") is
a majority-owned subsidiary of TDA Industries, Inc. ("TDA" or the
"Parent") and was organized to acquire, integrate and operate
seasoned, privately-held companies which distribute products to or
manufacture products for the building supplies/construction
industry.
Initial Public Offering - On March 17, 1999, the Company completed
the sale of 2,500,000 of its common shares at $5.00 per share and
2,875,000 Redeemable Common Stock Purchase Warrants at $.125 per
warrant in connection with its initial public offering (the
"Offering"). The net proceeds to the Company aggregated
approximately $10,206,000.
Acquisitions and Basis of Presentation - Upon consummation of the
Offering, the Company acquired all of the issued and outstanding
common shares of Eagle Supply, Inc. ("Eagle"), JEH/Eagle Supply,
Inc. ("JEH Eagle") and MSI/Eagle Supply, Inc. ("MSI Eagle") (the
"Acquisitions") from TDA for consideration consisting of 3,000,000
of the Company's common shares. The Acquisitions have been
accounted for as the combining of four entities under common
control, similar to a pooling of interests, with the net assets of
Eagle, JEH Eagle and MSI Eagle recorded at historical carryover
values. The 3,000,000 common shares of the Company issued to TDA
were recorded at Eagle, JEH Eagle's and MSI Eagle's historical net
book values at the date of acquisition. Accordingly, this
transaction did not result in any revaluation of Eagle's, JEH Eagle
or MSI Eagle's assets or the creation of any goodwill. Upon the
consummation of the Acquisitions, Eagle, JEH Eagle and MSI Eagle
became wholly-owned subsidiaries of the Company. Effective May 31,
2000, MSI Eagle was merged with and into JEH Eagle. As of July 1,
2000, the Texas operations of JEH Eagle were transferred to a newly
formed limited partnership owned directly and indirectly by JEH
Eagle. Accordingly, the Company's business operations are
presently conducted through two wholly-owned subsidiaries and a
limited partnership. Eagle, JEH Eagle and MSI Eagle operate in a
single industry segment and all of their revenues are derived from
sales to third party customers in the United States.
Inventories - Inventories are valued at the lower of cost or
market. Cost is determined by using the first-in, first-out
("FIFO"), last-in, first-out ("LIFO"), or average cost methods. If
LIFO inventories (approximately $7,817,000, $7,665,000 and
$6,489,000 at June 30, 2002, 2001 and 2000, respectively) had been
valued at the lower of FIFO cost or market, inventories would be
higher by approximately $729,000, $719,000 and $720,000 for fiscal
2002, 2001 and 2000, respectively, and income before provision for
income taxes would have increased by approximately $10,000 and
$190,000 in fiscal 2002 and 2000, respectively, and decreased by
approximately $1,000 in fiscal 2001
Depreciation and Amortization - Depreciation and amortization of
property and equipment are provided principally by straight-line
methods at various rates calculated to extinguish the carrying
values of the respective assets over their estimated useful lives.
Cost in Excess of Net Assets Acquired - Prior to fiscal year ending
June 30, 2002, cost in excess of net assets acquired ("goodwill")
had been amortized on a straight-line method over 15 to 40 years.
Effective July 1, 2001, in connection with the adoption of SFAS No.
142, Goodwill and Intangible Assets, and the Company ceased
amortization of goodwill.
Since goodwill and intangible assets with indeterminate lives are
not currently being amortized but are tested for impairment
annually, except in certain circumstances and whenever there is an
impairment, there is a possibility that, as a result of an annual
test for impairment or as the result of the occurrence of certain
circumstances or an impairment, the value of goodwill or intangible
assets with indeterminate lives may be written down or may be
written off either in one write-down or in a number of write-downs,
either at a fiscal year end or at any time during the fiscal year.
The Company analyzes the value of goodwill using the related future
cash flows of the related business, the total market capitalization
of the Company, and other factors, and recognizes any adjustment
that may be required to the asset's carrying value. Any such
write-down or series of write-downs could be substantial and could
have a material adverse effect on the Company's reported results of
operations, and any such impairment could occur in connection with
a material adverse event or development and have a material adverse
impact on the Company's financial condition and results of
operations.
F-7
Based on an independent valuation performed as of June 30, 2002,
management has concluded that no impairment of the recorded
goodwill existed at July 1, 2002. Subsequent impairment losses, if
any, will be reflected in operating income or loss in the
consolidated statement of operations for the period in which such
loss is identified.
Had the Company been accounting for goodwill under SFAS No. 142 for
the fiscal years ended June 30, 2001 and 2000, the Company's net
income and basic and diluted net income per share would have been
as follows:
Year Ended June 30,
2001 2000
Reported net income $ 848,842 $ 2,010,746
Add: amortization of cost in excess
of net assets acquired, net of tax 531,758 410,233
----------- -----------
Pro forma adjusted net income $ 1,380,600 $ 2,420,979
=========== ===========
Basic and diluted net income per share:
Reported net income $ .10 $ .24
Amortization of cost in excess of
net assets acquired, net of tax .06 .04
----------- -----------
Pro forma basic and diluted
net income per share $ .16 $ .28
=========== ===========
Deferred Financing Costs - Deferred financing costs are related to
the acquisition financing obtained in connection with the
Acquisitions described in Note 2 and are being amortized on a
straight-line method over the term of the related debt obligations.
Income Taxes - Prior to the completion of the Offering, the Company
was included in the consolidated federal and state income tax
returns of its Parent. Income taxes were calculated on a separate
return filing basis. Subsequent to the Offering, the Company files
a consolidated federal income tax return with its subsidiaries.
The Company uses the liability method of computing deferred income
taxes on all material temporary differences. Temporary differences
are the differences between current taxes payable verses taxes that
may be payable in the future arising as a result of differences
between the reported amounts of assets and liabilities and their
tax bases.
Net Income Per Share - Basic net income per share was calculated by
dividing net income by the weighted average number of shares
outstanding during the periods presented and excluded any potential
dilution. Diluted net income per share was calculated similarly
but would generally include potential dilution from the exercise of
stock options and warrants (see Note 8). There were no dilutive
options or warrants for any of the periods presented. In 2002,
2001 and 2000, 4,398,170, 4,512,040 and 4,567,540, respectively, of
options and warrants have been excluded from the calculation of
diluted net income per share. Both basic and diluted net income per
share includes, for all periods presented, the 3,000,000 common
shares of the Company issued to TDA in connection with the
Acquisitions.
Long-Lived Assets - Long-lived assets are stated at the lower of
the expected net realizable value or cost. The carrying value of
long-lived assets is periodically reviewed to determine whether
impairment exists. The review is based on comparing the carrying
amount of the asset to the undiscounted estimated cash flows over
the remaining useful lives. No impairment is indicated as of June
30, 2002.
Fair Value of Financial Instruments - The estimated fair value of
financial instruments have been determined by the Company using
certain market information and valuation methodologies considered
to be reasonable by the Company. However, considerable judgment is
required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Cash and Cash Equivalents, Accounts and Notes Receivable, Accounts
Payable and Accrued Expenses - The carrying amounts of these items
are a reasonable estimate of their fair value.
Long-Term Debt - Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for bank and other debt.
The carrying amounts comprising this item are reasonable estimates
F-8
of fair value, except for a note due in October 2002. Such note
has a carrying value of $655,284 and an estimated fair market value
of approximately $655,000 at June 30, 2002.
The fair value estimates are based on information available to
management as of June 30, 2002 that the Company believes to be
relevant. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of
these financial statements since that date and current estimates of
fair value may differ significantly from the amounts presented.
Concentration of Credit Risk - The financial instruments, which
potentially subject the Company to concentration of credit risk,
consist principally of commercial paper which is included in cash
and cash equivalents and accounts and notes receivable. The
Company grants credit to customers based on an evaluation of the
customer's financial condition and in certain instances obtains
collateral in the form of liens on both business and personal
assets of its customers. Exposure to losses on receivables is
principally dependent on each customer's financial condition.
Collection of receivables is dependent upon many factors beyond the
control of the Company and, in some cases, beyond the control of
the Company's customers, such as the strength of the economy and
many other factors. The Company controls its exposure to credit
risks through credit approvals, credit limits and monitoring
procedures and establishes allowances for anticipated losses.
There can be no assurance the actual future losses will be in
amounts greater or less than amounts that have been provided in the
financial statements. If actual future losses occur in amounts
greater than established allowances, such losses could have a
material adverse impact on the Company's financial condition,
results of operations and cash flows.
Estimates - The preparation of these financial statements in
conformity with generally accepted accounting principles requires
the Company to make estimates, assumptions and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosures of contingent assets and liabilities at
the dates of the financial statements. Significant estimates which
are reflected in these consolidated financial statements relate to,
among other things, allowances for doubtful accounts and notes
receivable, amounts reserved for 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 accounts and notes
receivable, inventories, intangible assets, investments, other
receivables, expenses, income items, income taxes and
contingencies. The Company bases its estimates on an assessment of
contractual obligations, 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 and expenses 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:
The Company maintains allowances for doubtful accounts and notes
receivable for estimated losses resulting from the inability of its
customers to make payments when due or within a reasonable period
of time thereafter. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make required payments, additional allowances may be
required. Conversely, if the financial condition of the Company's
customers is stronger than that estimated by the Company, then the
Company's estimates of allowances for doubtful accounts and notes
receivable may prove to be too large and reductions in its
allowances for doubtful accounts and notes receivable may be
required. If additions are required to allowances for doubtful
accounts and notes receivable, the Company's financial condition,
results of operations and cash flows could be materially adversely
affected.
The Company writes down its inventories for estimated obsolete or
slow-moving inventories equal to the difference between the cost of
inventories and the estimated market value based upon assumed
market conditions. If actual market conditions are or become 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.
The Company maintains accounts for goodwill and other intangible
assets in its financial statements. In conformity with accounting
principals generally accepted in the United States of America,
since goodwill and intangible assets with indeterminate lives are
not currently being amortized but are tested for impairment
annually, except in certain circumstances and whenever there is an
impairment, there is a possibility that, as a result of an annual
test for impairment or as the result of the occurrence of certain
circumstances or an impairment, the value of goodwill or intangible
assets with indeterminate lives may be written down or may be
written off either in one write-down or in a number of write-downs,
F-9
either at a fiscal year end or at any time during the fiscal year.
The Company analyzes the value of goodwill using the estimated
related future cash flows of the related business, the total market
capitalization of the Company, and other factors, and recognizes
any adjustment that may be required to the asset's carrying value.
Any such write-down or series of write-downs could be substantial
and could have a material adverse effect on the Company's reported
results of operations, and any such impairment could occur in
connection with a material adverse event or development and have a
material adverse impact on the Company's financial condition and
results of operations.
The Company seeks revenue and income growth by expanding its
existing customer base, by opening new distribution centers and by
pursuing strategic acquisitions that meet the Company's various
criteria. If the Company's evaluation of the prospects for opening
a new distribution center or of acquiring an acquired company
misjudges its 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 the Company's profitability, financial condition
and cash flows.
The Company files income tax returns in every jurisdiction in which
it has reason to believe it is subject to tax. Historically, the
Company has 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 the Company regarding one
or more of its transactions is contrary to that jurisdiction's laws
or regulations. In such an event, the Company may incur charges
which would adversely affect its net income and may incur
liabilities for taxes and related charges which may adversely
affect its financial condition.
Revenue Recognition - The Company recognizes revenues from the sale
of inventory when title passes to the purchaser.
Comprehensive Income - The Company has no components of
comprehensive income except for net income.
Significant Vendors - During the fiscal years ended June 30, 2002,
2001 and 2000 the Company purchased approximately 19%, 18% and 18%,
respectively, of its product lines from one supplier and
approximately 13% of its product lines from a second supplier in
fiscal 2001. Since similar products are currently available from
other suppliers, the Company believes that the loss of these
suppliers would not have a long-term material adverse effect on the
Company's business.
Cash and Cash Equivalents - The Company considers any highly liquid
investments with an original maturity of three months or less at
date of acquisition to be cash equivalents. Cash equivalents
amounted to approximately $4,255,000 and $5,000,000 at June 30,
2002 and 2001, respectively.
Risks - The Company purchases the products that it sells from many
vendors and sells those products to many thousands of customers,
primarily building contractors and subcontractors, as well as
builders. In doing so, the Company maintains large inventories of
products and carries substantial accounts and notes receivable from
its customers. The Company has also built its business through
acquisitions and has substantial amounts of goodwill on its
financial statements. The nature of the Company's business is
seasonal, and, to some degree, it is weather related. The Company
carries insurance to insure against certain risks.
The Company's business is subject to many risks, including, but not
limited to: changes in the cost or pricing of, or demand for, the
Company's or the Company's industry's distributed products; the
inability to collect accounts and notes receivables when due or
within a reasonable period of time after they become due; increases
in competitive pressures in some or all of the Company's markets;
misjudging the future profitability of an acquired company; changes
in accounting policies and principles, or other laws or rules, as
may be adopted by regulatory agencies or by the Financial
Accounting Standards Board; general economic and market conditions,
either nationally or in the markets in which the Company conducts
its business, may be less favorable than expected; changes in terms
of purchase of products from the Company's vendors; interruptions
or cancellations of the supply or availability of products or
significant increases in the cost of such products; reductions in
the value of the Company's inventory; impairment of the value of
the Company's goodwill and other intangible assets; fluctuations in
the Company's financial results due to the seasonal nature of the
Company's business; unsatisfactory performance of acquired
companies which could lead to impairment of the Company's goodwill;
the ability to find and maintain equity and debt financing when
needed on terms commercially reasonable to the Company; and a loss
that is not covered by the Company's insurance or that is in excess
of the Company's insurance coverage. The occurrence of any one of
these and other risks could have a material adverse impact on the
Company's financial condition, results of operations and cash
flows.
Recently Issued Accounting Pronouncements - On June 29, 2001, the
FASB approved for issuance SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Intangible Assets. Major provisions of
these Statements are as follows: all business combinations initiated
after June 30, 2001 must use the purchase method of accounting; the
pooling of interest method of accounting is prohibited, except for
transactions initiated before July 1, 2001; intangible assets
acquired in a business combination must be recorded separately from
goodwill if they arise from contractual or other legal rights or are
separable from the acquired entity and can be sold, transferred,
F-10
licensed, rented or exchanged, either individually or as part of a
related contract, asset or liability; goodwill and intangible assets
with indefinite lives are not amortized but are tested for
impairment annually, except in certain circumstances and whenever
there is an impairment; all acquired goodwill must be assigned to
reporting units for purposes of impairment testing; and goodwill
will no longer be subject to amortization. The Company was
permitted to early adopt effective July 1, 2001, and management
elected to do so. Management believes that these Statements did not
have a material impact on the Company's financial condition or
results of operations, other than from the cessation of the
amortization of goodwill. During the fiscal year ended June 30,
2001, goodwill amortization totaled approximately $806,000 ($.09 per
share). During the fiscal year ended June 30, 2002, there was no
goodwill amortization.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations".
SFAS No. 143 addresses financial accounting and reporting for
obligations and costs associated with the retirement of tangible
long-lived assets. The Company is required to implement SFAS No.
143 on July 1, 2002. Management believes that the effect of
implementing this pronouncement will not have a material impact on
the Company's financial condition or results of operations.
The Company is required to adopt SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" on July 1, 2002. SFAS
No. 144 replaces SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
establishes accounting and reporting standards for long-lived
assets to be disposed of by sale. SFAS No. 144 requires that those
assets be measured at the lower of carrying amount or fair value
less cost to sell. SFAS No. 144 also broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity
that will be eliminated from the ongoing operations of the entity
in a disposal transaction. The Company is currently evaluating the
impact of SFAS No. 144 on its results of operations and financial
position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". This statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishments of Debt", and an
amendment of that statement, SFAS No. 64, "Extinguishment of Debt
Made to Satisfy Sinking-Fund Requirements". This statement also
rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers". This statement amends SFAS No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings or describe
their applicability under changed conditions. The provisions of
this statement related to SFAS No. 13 and the technical corrections
are effective for transactions occurring after May 15, 2002. All
other provisions of SFAS No. 145 shall be effective for financial
statements issued on or after May 15, 2002. The Company will adopt
the provisions of SFAS No. 145 upon the relative effective dates
and does not expect it to have a material effect on the Company's
results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity
be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial
measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is currently evaluating the impact
of SFAS No. 146 on its results of operations and financial
position.
2. ACQUISITIONS
On July 8, 1997, effective as of July 1, 1997, JEH Eagle acquired
the business and substantially all of the assets of JEH Company,
Inc. ("JEH Co."), engaged in the wholesale distribution of roofing
supplies and related products utilized primarily in the
construction industry. The purchase price, as adjusted, including
transaction expenses, was $14,767,852 consisting of $13,878,000 in
cash, net of $250,000 due from JEH Co., and a five-year, 6% per
annum note in the original principal amount of $864,852. As of
June 30, 2002, the principal amount of the note was adjusted to
$655,284 to reflect an offset of certain related party transactions
and is due on October 15, 2002 with interest at the rate of 8.75%
per annum from July 1, 2002 (Note 7). The purchase price and the
note were subject to further adjustment under certain conditions.
Further, JEH Eagle was obligated for substantial additional
payments if, among other factors, the business acquired attained
certain levels of income, as defined, during the five-year period
ended June 30, 2002. Upon consummation of the Offering, the
Company issued 300,000 of its common shares to James E. Helzer, the
owner of JEH Co. and President of the Company, in fulfillment of
certain of such future additional consideration. For the fiscal
years ended June 30, 2001 and 2000, approximately $315,000 and
$1,947,000, respectively, of additional consideration was paid to
F-11
JEH Co. or its designee. All of such additional consideration
increased goodwill. No additional consideration is payable to JEH
Co. or its designee for fiscal 2002, and the Company has no future
obligation for such additional consideration as of June 30, 2002.
On October 22, 1998, MSI Eagle acquired the business and
substantially all of the assets of Masonry Supply, Inc. ("MSI
Co."), engaged in the wholesale distribution of masonry supplies
and related products utilized primarily in the construction
industry. The purchase price, as adjusted, including transaction
expenses, was $8,537,972 consisting of $6,492,000 in cash and a
five-year, 8% per annum note in the principal amount of $2,045,972.
The purchase price and the note are subject to further adjustment
under certain conditions. The note was paid in full in March 1999
out of the proceeds of the Offering. Further, MSI Eagle is
obligated for potentially substantial additional payments if, among
other factors, the business acquired attains certain levels of
income, as defined, during the five-year period ending June 30,
2003. Upon the consummation of the Offering, the Company issued
200,000 of its common shares, and, as of July 1, 1999, the Company
issued 60,000 of its common shares to Gary L. Howard, the designee
and owner of MSI Co. and a former executive officer of the Company,
in fulfillment of certain of such future additional consideration.
For the fiscal years ended June 30, 2001 and 2000, approximately
$226,000 and $216,000, respectively, of additional consideration
was paid to MSI Co. or its designee. For the fiscal year ended
June 30, 2002, approximately $315,000 of additional consideration
is payable to MSI Co. or its designee. All of such additional
consideration increased goodwill. No additional consideration was
payable to MSI Co. for fiscal 1999.
3. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
June 30, Estimated
2002 2001 Useful Lives
Furniture, fixtures and equipment $ 2,058,906 $ 2,599,915 5 years
Automotive equipment 4,840,314 4,575,651 5-7 years
Leasehold improvements 2,060,037 1,945,353 10 years
Assets acquired under capitalized leases 700,267 831,766 1 year
----------- -----------
9,659,524 9,952,685
Less: Accumulated depreciation and
amortization 6,035,627 5,438,460
----------- -----------
$ 3,623,897 $ 4,514,225
=========== ===========
F-12
4. INCOME TAXES
Components of the provision for income taxes are as follows:
Year Ended June 30,
2002 2001 2000
Current:
Federal $ 1,222,903 $ 515,883 $ 660,252
State and local 105,000 93,000 90,000
Deferred (597,903) (28,883) 419,748
----------- ---------- ----------
$ 730,000 $ 580,000 $1,170,000
=========== ========== ==========
A reconciliation of income taxes at the federal statutory rate and
the amounts provided, is as follows:
Year Ended June 30,
2002 2001 2000
Tax using the statutory rate $ 719,000 $ 486,000 $1,081,000
State and local income taxes 69,000 61,000 59,000
Other (58,000) 33,000 30,000
----------- ---------- ----------
$ 730,000 $ 580,000 $1,170,000
=========== ========== ==========
Temporary differences which give rise to a net deferred tax asset
are as follows:
June 30,
2002 2001
Deferred tax assets:
Provision for doubtful accounts $1,730,000 $ 893,947
Inventory capitalization 180,000 134,702
---------- ----------
1,910,000 1,028,649
----------- ----------
Deferred tax liability:
Goodwill (676,000) (292,640)
Depreciation (470,000) (569,912)
----------- ----------
(1,146,000) (862,552)
----------- ----------
Net deferred tax asset $ 764,000 $ 166,097
=========== ==========
Management believes that no valuation allowance against the net
deferred tax asset is necessary.
F-13
5. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
2002 2001
Variable rate collateralized revolving credit note (A) $ 38,641,438 $ 35,631,826
Variable rate collateralized equipment note (A) 804,654 1,328,218
Variable rate collateralized term note (A) 1,480,900 2,049,900
Note payable - TDA Industries, Inc. (B) 1,000,000 1,000,000
8.75% promissory note, due October 15, 2002
(see Notes 2 and 7) 655,284 -
6% promissory note, due July 1, 2002 (see Notes 2 and 7) - 864,852
Capitalized equipment lease obligations, at various
rates, for various terms through 2003 (C) 125,540 280,499
8.50% equipment loan, payable in monthly
installments through February 13, 2003 32,346 86,613
8.50% equipment loan, payable in monthly
installments through April 23, 2003 15,668 33,386
8.50% equipment loan, payable in monthly
installments through April 27, 2003 7,740 16,408
9.25% equipment loan, payable in monthly
installments through March 20, 2005 98,145 128,041
9.25% equipment loan, payable in monthly
installments through May 5, 2005 18,760 24,103
9.5% equipment loan, payable in monthly
installments through July 31, 2005 8,323 12,472
9.5% equipment loan, payable in monthly
installments through July 24, 2005 9,849 10,536
9.25% equipment loan, payable in monthly
installments through November 6, 2004 8,429 11,456
9.25% equipment loan, payable in monthly
installments through September 4, 2004 11,691 16,348
11.5% equipment loan, payable in monthly
installments through November 14, 2001 - 43,952
11.5% equipment loan, payable in monthly
installments through December 31, 2001 - 17,193
11.5% equipment loan, payable in monthly
installments through February 28, 2002 - 20,839
8.25% equipment loan, payable in monthly
installments through July 1, 2003 8,260 -
8.25% equipment loan, payable in monthly
installments through August 1, 2003 16,177 -
8.226% equipment loan, payable in monthly
installments through August 1, 2003 61,173 -
F-13
6.5% equipment loan, payable in monthly
installments through September 4, 2006 190,075 -
6.5% equipment loan, payable in monthly
installments through September 4, 2006 35,274 -
7.25% equipment loan, payable in monthly
installments through May 2, 2007 13,627 -
7.25% equipment loan, payable in monthly
installments through May 2, 2007 82,082 -
------------ ------------
43,325,435 41,576,642
Less: Current portion of long-term debt 2,900,000 3,240,000
------------ ------------
$ 40,425,435 $ 38,336,642
============ ============
(A) In June 2000, the Eagle, MSI Eagle and JEH Eagle credit
facilities were combined into an amended, restated and
consolidated loan agreement, which matures in October 2003,
for an increased credit facility in the aggregate amount of
$44,975,000 with the same lender, with Eagle and JEH Eagle
as the borrowers. This credit facility consisted of a
$3,243,900 term loan, a $1,826,641 equipment loan and the
balance in the form of a revolving credit loan.
In February 2001, the credit facility was amended to change
certain definitions, to amend the cash flow covenant, to
provide for limited overadvances and to increase the annual
interest rate by twenty-five (25) basis points under certain
conditions. In July 2001, the credit facility was amended
to provide for a $5,000,000 overline for a period of ninety
(90) days ending on November 15, 2002.
The revolving credit loan bears interest at the lender's
prime rate or at the London interbank offered rate, plus two
(2%) percent, at the option of the borrowers.
The term loan is payable in equal monthly installments, each
in the amount of $42,000, with a balloon payment due on the
earlier of November 1, 2005 or the end of the loan
agreement's initial or renewal term. The term loan bears
interest at the lender's prime rate, plus three-fourths of
one (3/4%) percent, or at the London interbank offered rate,
plus two and three-fourths (2.75%) percent, at the option of
the borrowers.
The equipment loan is payable in equal monthly installments,
each in the amount of $37,000, with a balloon payment due on
the earlier of August 1, 2004 or the end of the loan
agreement's initial or renewal term. The equipment loan
bears interest at the lender's prime rate plus one-half of
one (1/2%) percent or at the London interbank offered rate,
plus two and one-half (2.50%) percent, at the option of the
borrowers.
The loan agreement, as amended, provides for certain
financial covenants, including, among others, minimum cash
flow, as defined, and minimum tangible net worth.
Management believes that the Company was in compliance with
all such covenants at June 30, 2002.
Obligations under the credit facility are collateralized by
substantially all of the tangible and intangible assets of
Eagle and JEH Eagle, and the credit facility is guaranteed
by the Company.
(B) In October 1998, in connection with the purchase of
substantially all of the assets and business of MSI Co. by
MSI Eagle, TDA lent MSI Eagle $1,000,000 pursuant to a 6%
two-year note that was due in October 2000. In October
2000, the note was converted into a $1,000,000 8_% demand
note. TDA had agreed to defer the interest payable on the
old note until its maturity. In October 2000, interest on
that note was paid in full. Interest on the demand note is
payable monthly.
F-15
(C) Future minimum lease payments for capitalized equipment
lease obligations at June 30, 2002 are as follows:
Year Ending
June 30, Amount
2003 $ 130,903
Less: Interest 5,363
-----------
Present value of net minimum payments $ 125,540
===========
The aggregate future maturities of long-term debt, excluding
capitalized equipment lease obligations, are as follows:
Year Ending
June 30, Amount
2003 $ 2,774,460
2004 40,180,000
2005 118,000
2006 79,000
2007 48,435
-----------
$43,199,895
===========
6. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries have entered into various
written employment agreements which expire at various times
through June 2006. Pursuant to such agreements, the annual
base compensation payable aggregates approximately $2,135,000.
b. The Company's subsidiaries have a defined contribution
retirement plan covering eligible employees. The plan provides
for contributions at the discretion of the subsidiaries.
Contributions in the amount of approximately $126,000 and
$102,000 were made for fiscal 2002 and 2001, respectively. No
contribution was made to the plan in fiscal 2000.
c. At June 30, 2001, the Company and its subsidiaries were liable
under various long-term leases for property and automotive and
other equipment (including leases with related parties) which
expire on various dates through 2009. Certain of the leases
include options to renew. In addition, real property leases
generally provide for payment of taxes and other occupancy
costs. Rent expense charged to operations in 2002, 2001 and
2000 was approximately $6,013,000, $5,099,000 and $4,651,000,
respectively, which includes taxes and various occupancy costs,
as well as rent for equipment under short-term leases (less
than one year).
The approximate future minimum rental commitments under all of
the above leases are as follows:
Year Ending
June 30, Amount
2003 $ 5,730,000
2004 4,685,000
2005 3,416,000
2006 2,267,000
2007 1,693,000
Thereafter 1,746,000
-----------
Total future minimum rental
commitments $19,537,000
===========
See Note 7 for information on lease obligations with related
parties.
d. The Company is involved in certain litigation arising in the
ordinary course of business. Management believes that the
ultimate resolution of such litigation will not have a
significant impact on the Company's financial condition and
results of operations.
F-16
7. TRANSACTIONS WITH THE COMPANY AND OTHER RELATED PARTIES
The Chief Executive Officer and Chairman of the Board of Directors
of the Company is an officer and a director of TDA; the Executive
Vice President, Secretary, Treasurer and a director of the Company
is also an officer and a director of TDA; and another director of
the Company is also a director of TDA.
The Company had entered into an agreement pursuant to which TDA
provided the Company with certain services including (i)
managerial, (ii) strategic planning, (iii) banking negotiations,
(iv) investor relations, and (v) advisory services relating to
acquisitions for a five-year term which commenced in July 1997.
The monthly fee, the payment of which commenced upon the
consummation of the Offering and the Acquisitions, for the
foregoing services was $3,000. This agreement expired on June 30,
2002.
The Company also entered into an agreement pursuant to which TDA
provided the Company with office space and administrative services
on a month-to-month basis. The monthly fee, the payment of which
commenced upon the consummation of the Offering and the
Acquisitions, for the foregoing services was $3,000. This
agreement was terminated on June 30, 2002.
Commencing July 1, 2002, the Company began to pay to TDA seventy-
five (75%) percent of the occupancy cost (approximately $4,500 per
month) for our New York corporate executive offices, and seventy-
five (75%) percent of the remuneration and benefits of our New York
administrative assistant (approximately $4,500 per month), and TDA
began to pay twenty-five (25%) percent of such occupancy cost
(approximately $1,500 per month), and twenty-five (25%) percent of
the remuneration and benefits of our New York administrative
assistant (approximately $1,500 per month) in order to defray any
expenses that may be deemed to be attributable to TDA. The current
lease for the Company's New York corporate executive offices
expires in October 2002 with TDA as the named lessee. A new lease
is anticipated to be entered into by and between the Company and
the landlord for these premises at a base rental of approximately
$6,900 per month with customary additional rental charges
(proportionate share of real estate taxes, electricity, etc.), of
which TDA will continue to pay twenty-five (25%) percent.
JEH Eagle leases several of its distribution center facilities and
its executive offices from the President of the Company pursuant to
five-year written leases at base annual rentals aggregating
approximately $747,000.
Eagle operates a substantial portion of its business from
facilities leased from a subsidiary of TDA pursuant to ten-year
written leases at base annual rentals aggregating approximately
$790,000.
JEH Eagle leases offices, showroom, warehouse and storage space
from a former executive officer of the Company and his spouse
pursuant to a three-year written lease at a base annual rental
aggregating approximately $112,000.
JEH Eagle leases a distribution center from a limited liability
company fifty (50%) percent owned by a wholly-owned subsidiary of
TDA and fifty (50%) owned by the President of the Company and his
spouse pursuant to a five-year written lease at a base annual
rental aggregating approximately $46,000.
During the fiscal year ended June 30, 2002, JEH Eagle made sales
aggregating approximately $1,133,000 to entities owned by the
President of the Company and entities owned by a member of his
family. Payment for $209,568 of such sales was made by reducing
the principal amount of the note payable by the Company to Mr.
Helzer. Management believes that such sales were made on terms no
less favorable than sales made to independent third parties. As of
June 30, 2002, approximately $258,000 of such sales were owed to
JEH Eagle.
8. SHAREHOLDERS' EQUITY
Preferred Shares - The preferred shares may be issued in one or
more series, the terms of which may be determined at the time of
issuance by the Board of Directors of the Company, without further
action by shareholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences
as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions.
Common Shares - Holders of common shares are entitled to one vote
for each share held of record on each matter submitted to a vote of
shareholders. There is no cumulative voting for election of
directors. Subject to the prior rights of any series of preferred
shares which may from time to time be outstanding and to
limitations imposed by any credit agreements to which the Company
is a party, holders of common shares are entitled to receive
dividends when and if declared by the Board of Directors out of
funds legally available therefor and, upon the liquidation,
dissolution or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities and
payment of accrued dividends and liquidation preferences on the
preferred shares, if any. Holders of common shares have no pre-
emptive rights and have no rights to convert their common shares
into any other securities.
F-17
Private Placement - On May 15, 2002, the Company entered into a
Securities Purchase Agreement ("Securities Purchase Agreement")
with certain accredited investors to sell 1,090,909 common shares
and warrants to purchase up to 109,091 common shares at $3.50 per
share (the "Purchaser Warrants") in a private placement transaction
("Private Placement") for gross proceeds of $3,000,000.
The Securities Purchase Agreement provided for the issuance and
sale of the common shares and Purchaser Warrants in two equal and
separate tranches. The first tranche closed on May 16, 2002 and
consisted of 545,455 common shares and 54,545 Purchaser Warrants.
The Company received net proceeds of approximately $1,291,000 from
the first tranche. In addition to the payment of the expenses of
the first tranche, the Company issued warrants ("Finder Warrants")
to purchase 54,545 common shares at $3.50 per share. The second
tranche was to close September 11, 2002. The investors, however,
declined to fund the second tranche. Accordingly, the second
tranche has not closed, and the Company believes that it is
unlikely that the second tranche will close. The Company is
currently assessing what actions the Company will take in
connection with this matter.
Warrants - The Company has outstanding 3,025,000 warrants which are
exercisable at $5.50 per share through March 12, 2004, provided
that during such time a current prospectus relating to the common
shares is then in effect and the common shares are qualified for
sale or exempt from qualification under applicable securities laws.
In connection with the Offering, the Company granted the
underwriters warrants entitling the holders thereof to purchase an
aggregate of 500,000 of the Company's common shares at an exercise
price of $8.25 per share for five years commencing on the date of
the Offering.
The aggregate of the 109,090 Purchaser Warrants and Finder Warrants
outstanding as of June 30, 2002 are exercisable at $3.50 per share
through May 15, 2007, provided that during such time a current
prospectus relating to the common shares is then in effect and the
common shares are qualified for sale or exempt from qualification
under applicable securities laws.
Stock Option Plan - In August 1996, last amended in 2000, the Board
of Directors adopted and shareholders approved the Company's Stock
Option Plan (the "Stock Option Plan"). The Stock Option Plan
provides for the grant of options that are intended to qualify as
incentive stock options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code, as amended
(the "Code"), to certain employees, officers and directors. The
total number of common shares for which options may be granted
under the Stock Option Plan is 1,200,000 common shares. Options to
purchase 764,080 common shares have been granted to various
employees and certain officers and directors, 749,080 at a $5.00
per share exercise price and 15,000 at a $4.00 per share exercise
price. All of such options have a term of ten years. The options
granted to employees and officers (744,080) vest at a rate of 20%
per year commencing on the first anniversary of the date of grant,
and the options granted to two directors (20,000) fully vested one
year from the date of the grant.
F-18
Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
Outstanding, July 1, 1999 878,300 $5.00 $ 5.00
Granted - - -
Exercised - - -
Forfeited (35,760) 5.00 5.00
Expired - - -
--------- ------
Outstanding, June 30, 2000 842,540 5.00
Granted 15,000 4.00 4.00
Exercised - - -
Forfeited (70,500) 5.00 5.00
Expired - - -
--------- ------
Outstanding, June 30, 2001 787,040 4.98
Granted - - -
Exercised - - -
Forfeited (22,960) 5.00 5.00
Expired - - -
--------- ------
Outstanding, June 30, 2002 764,080 $ 4.98
========= ======
At June 30, 2002, 469,720 options were exercisable at $5.00 per
share and 3,000 options were exercisable at $4.00 per share.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock option plan.
Accordingly, no compensation expense has been recognized for the
Company's stock option plan, since the exercise price of the
Company's stock option grants was the fair market value of the
underlying stock on the date of the grant. Had compensation costs
for the stock option plan been determined based on the fair value
at the grant date consistent with SFAS No. 123, Accounting for
Stock Based Compensation, the Company's net income for fiscal 2000,
2001 and 2002 would not have been significantly affected. The
Company used the Black-Scholes model with the following
assumptions: risk-free interest rate of 5.5%, expected life of
three years and expected volatility and dividends of 0%.
9. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts for the fiscal
years ended June 30, 2002, 2001 and 2000 is as follows:
Balance at
Year Ending Beginning Balance at
June 30, of Year Provision Writeoffs End of Year
2000 $ 1,600,000 $ 732,890 $ (836,890) $ 1,496,000
=========== ========== ========== ===========
2001 $ 1,496,000 $ 1,464,418 $ (607,927) $ 2,352,491
=========== ========== ========== ===========
2002 $ 2,352,491 $ 2,761,007 $ (561,823) $ 4,551,675
=========== ========== ========== ===========
F-19
10. QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in
thousands, except per share amounts):
Fiscal 2002 Quarter Ended
Sept. 30 Dec. 31 Mar. 31 June 30
Revenues $ 67,614 $ 61,146 $ 46,408 $ 62,107
--------- --------- --------- ---------
Income (loss) from operations $ 2,712 $ 1,760 $ (227) $ (184)
--------- --------- --------- ---------
Net income (loss) $ 1,352 $ 823 $ (419) $ (371)
========= ========= ========= =========
Basic and diluted net income (loss)
per share $ .16 $ .10 $ (0.05) $ (0.04)
========= ========= ========= =========
Common shares used in basic and
diluted net income (loss) per share 8,510 8,510 8,510 8,786
========= ========= ========= =========
Fiscal 2001 Quarter Ended
Sept. 30 Dec. 31 Mar. 31 June 30
Revenues $ 54,491 $ 44,193 $ 41,916 $ 55,641
--------- --------- --------- ---------
Income from operations $ 2,388 $ 412 $ 17 $ 1,323
--------- --------- --------- ---------
Net income (loss) $ 1,163 $ (231) $ (415) $ 332
========= ========= ========= =========
Basic and diluted net income (loss)
per share $ .14 $ (0.03) $ (0.05) $ .04
========= ========= ========= =========
Common shares used in basic and
diluted net income (loss) per share 8,510 8,510 8,510 8,510
========= ========= ========= =========
* * * * *
F-20