U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended March 31, 1999
|_| Transition report under Section 13 OR 15(d) of the Exchange Act
For the transition period from ............. to ............
Commission file number: 000-25423
EAGLE SUPPLY GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3889248
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 East 42nd Street, Suite 1116, New York, New York 10168
(Address of Principal Executive Offices) (Zip Code)
212-986-6190
(Issuer's Telephone Number, Including Area Code)
- --------------------------
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant has filed all documents required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after distribution of securities
under a plan confirmed by a court.
Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 30, 1999, 8,450,000
shares of Common Stock, par value $.0001 per share.
<PAGE>
EAGLE SUPPLY GROUP, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Unaudited Balance Sheets as of March 31, 1999 and
1998 and Audited June 30, 1998 3
Consolidated Unaudited Statements of Operations for the Three
and Nine Months Ended March 31, 1999 and 1998 4
Consolidated Unaudited Statement of Shareholders' Equity for the
Nine Months Ended March 31, 1999 5
Consolidated Unaudited Statements of Cash Flows for the Three
and Nine Months Ended March 31, 1999 and 1998 6-7
Notes to Consolidated Unaudited Financial Statements 8-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
SIGNATURES 27
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<PAGE>
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, March 31, June 30,
1999 1998 1998
ASSETS (Unaudited) (Unaudited) (Audited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,694,820 $ 299,768 $ 1,686,003
Accounts and notes receivable - net 27,980,448 19,133,372 23,023,389
Inventories 17,680,500 16,068,011 15,176,215
Deferred tax assets 668,083 362,484 401,434
Other current assets 704,122 922,907 1,006,482
------------ ------------ ------------
Total Current Assets 54,727,973 36,786,542 41,293,523
IMPROVEMENTS AND EQUIPMENT - net 6,357,286 3,330,020 5,240,338
EXCESS COST OF INVESTMENTS OVER
NET ASSETS ACQUIRED - net 10,503,065 2,784,593 2,705,305
DEFERRED FINANCING COSTS 287,635 203,216 232,246
------------ ------------ ------------
$ 71,875,959 $ 43,104,371 $ 49,471,412
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 19,280,238 $ 19,077,038 $ 18,481,620
Accrued expenses and other current liabilities 3,629,656 2,214,845 2,888,315
Current portion of long-term debt 3,360,133 1,023,504 1,750,098
Notes payable - shareholders -- 300,000 300,000
Loan payable - affiliated company -- 400,000 --
Federal and state income taxes payable 72,582 -- --
Federal and state income taxes due to TDA Industries, Inc. 1,143,537 455,000 792,300
------------ ------------ ------------
Total current liabilities 27,486,146 23,470,387 24,212,333
LONG-TERM DEBT 29,465,114 19,228,430 25,294,523
DEFERRED TAX LIABILITIES 108,912 84,212 105,112
------------ ------------ ------------
Total Liabilities 57,060,172 42,783,029 49,611,968
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 and 5)
SHAREHOLDERS' EQUITY (DEFICIT):
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 - 8,450,000 shares, 1999;
5,400,000 shares, 1998; 845 540 540
Additional paid-in capital 16,811,308 2,702,865 2,702,865
Retained earnings (deficit) (1,510,004) 974,450 779,658
------------ ------------ ------------
15,302,149 3,677,855 3,483,063
Less: Due from TDA Industries, Inc.and affiliated companies (486,362) (3,356,513) (3,623,619)
------------ ------------ ------------
Total shareholders' equity (deficit) 14,815,787 321,342 (140,556)
------------ ------------ ------------
$ 71,875,959 $ 43,104,371 $ 49,471,412
============ ============ ============
</TABLE>
See notes to consolidated unaudited financial statements.
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<PAGE>
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES $ 39,647,732 $ 29,355,250 $ 113,870,347 $ 91,774,516
COST OF SALES 30,181,967 22,794,178 87,123,878 71,565,721
------------- ------------- ------------- -------------
9,465,765 6,561,072 26,746,469 20,208,795
------------- ------------- ------------- -------------
OPERATING EXPENSES 7,694,118 5,641,411 20,688,830 17,380,206
DEPRECIATION AND
AMORTIZATION 236,985 198,782 843,632 594,193
AMORTIZATION OF EXCESS COST
OF INVESTMENTS OVER
NET ASSETS ACQUIRED 146,608 58,351 206,087 144,266
AMORTIZATION OF DEFERRED
FINANCING COSTS 19,854 14,515 51,386 43,546
------------- ------------- ------------- -------------
8,097,565 5,913,059 21,789,935 18,162,211
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 1,368,200 648,013 4,956,534 2,046,584
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 34,353 10,564 58,561 38,941
Interest expense (690,800) (496,883) (1,847,755) (1,268,849)
------------- ------------- ------------- -------------
(656,447) (486,319) (1,789,194) (1,229,908)
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 711,753 161,694 3,167,340 816,676
PROVISION FOR INCOME TAXES 260,673 94,350 1,190,000 315,000
------------- ------------- ------------- -------------
NET INCOME $ 451,080 $ 67,344 $ 1,977,340 $ 501,676
============= ============= ============= =============
BASIC AND DILUTED NET INCOME
PER SHARE $ .08 $ .01 $ .36 $ .09
============= ============= ============= =============
COMMON SHARES USED IN BASIC
AND DILUTED NET INCOME
PER SHARE 5,908,333 5,400,000 5,566,971 5,400,000
============= ============= ============= =============
</TABLE>
See notes to consolidated unaudited financial statements.
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<PAGE>
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Shares Common Shares
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998 -- $ -- 5,400,000 $ 540
Net income -- -- -- --
Proceeds from Initial Public Offering of Common
Shares and Warrants - Net -- -- 2,500,000 250
Shares issued to James E Helzer in connection
with the acquisition of JEH Co. -- -- 300,000 30
Shares issued to Gary L. Howard in connection
with the acquisition of MSI Co. -- -- 200,000 20
Shares issued to Gary L. Howard as a principal
payment of a note payable -- -- 50,000 5
Cash dividends paid to TDA Industries, Inc. -- -- -- --
Capital contribution from TDA Industries, Inc. -- -- -- --
Net change in Due from TDA Industries, Inc.
and affiliated companies -- -- -- --
Cancellation, in the form of a non-cash dividend, of all
indebtedness of TDA Industries, Inc. to Eagle except for $486,362
relating to and offsetting a mortgage in the same amount on
property previously owned by Eagle and for
which Eagle remains the primary obligor -- -- -- --
-------- -------- ------------ ------------
BALANCE, MARCH 31, 1999 -- $ -- 8,450,000 $ 845
======== ======== ============ ============
<CAPTION>
Additional Due from TDA
Paid-In Retained & Affiliated
Capital Earnings Companies Total
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998 $ 2,702,865 $ 779,658 $ (3,623,619) $ (140,556)
Net income -- 1,977,340 -- 1,977,340
Proceeds from Initial Public Offering of Common
Shares and Warrants - Net 10,358,498 -- -- 10,358,748
Shares issued to James E Helzer in connection
with the acquisition of JEH Co. 1,499,970 -- -- 1,500,000
Shares issued to Gary L. Howard in connection
with the acquisition of MSI Co. 999,980 -- -- 1,000,000
Shares issued to Gary L. Howard as a principal
payment of a note payable 249,995 -- -- 250,000
Cash dividends paid to TDA Industries, Inc. -- (1,200,000) -- (1,200,000)
Capital contribution from TDA Industries, Inc. 1,000,000 -- -- 1,000,000
Net change in Due from TDA Industries, Inc.
and affiliated companies -- -- 70,255 70,255
Cancellation, in the form of a non-cash dividend, of all
indebtedness of TDA Industries, Inc. to Eagle except for $486,362
relating to and offsetting a mortgage in the same amount on
property previously owned by Eagle and for
which Eagle remains the primary obligor -- (3,067,002) 3,067,002 --
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1999 $ 16,811,308 $ (1,510,004) $ (486,362) $ 14,815,787
============ ============ ============ ============
</TABLE>
See notes to consolidated unaudited financial statements.
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<PAGE>
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,977,340 $ 501,676
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,101,105 782,005
Deferred income taxes (262,849) (160,626)
Increase in allowance for doubtful accounts 687,801 606,055
Changes in assets and liabilities:
Increase in accounts and notes receivable (4,130,808) (2,942,711)
Increase in inventories (1,101,944) (2,153,175)
Decrease in other current assets 399,797 702,732
Increase in accounts payable 72,018 3,836,691
Increase in accrued expenses and other current liabilities 253,899 78,673
Increase in federal and state taxes payable 72,582 --
Increase in federal and state taxes payable due to TDA Industries, Inc. 117,919 315,000
------------- -------------
Net cash (used in) provided by operating activities (813,140) 1,566,320
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,301,025) (822,139)
Payment for purchase of net assets of JEH Co. -- (1,659,013)
Payment for purchase of net assets of MSI Co. (1,519,840) --
------------- -------------
Net cash used in investing activities (2,820,865) (2,481,152)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of related expenses 10,358,748 --
Principal borrowings on long-term debt 121,815,008 86,115,577
Principal reductions on long-term debt (122,101,189) (86,434,658)
Proceeds from loans payable from affiliated company -- 400,000
Proceeds from issuance of notes payable - shareholders 200,000 300,000
Repayments of notes payable - shareholders (500,000) --
Capital contribution from TDA Industries, Inc. 1,000,000 1,350,000
Dividends to TDA Industries, Inc. (1,200,000) (750,000)
Decrease (increase) in intercompany accounts 70,255 (801,459)
------------- -------------
Net cash provided by financing activities 9,642,822 179,460
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,008,817 (735,372)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,686,003 1,035,140
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,694,820 $ 299,768
============= =============
</TABLE>
See notes to consolidated unaudited financial statements.
-6-
<PAGE>
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,847,755 $ 1,268,849
============ ============
Cash paid during the period for income taxes $ 999,499 $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
OnMarch 17, 1999, the Company cancelled, in the form of a non-cash
dividend, all indebtedness of TDA Industries, Inc. to Eagle except for
$486,362 relating to and offsetting a mortgage in the same amount on
property previously owned by Eagle and for which
Eagle remains the primary obligor $ 3,067,002 $ --
============ ============
On March 17, 1999, the Company issued 300,000 of its Common Shares
to James E. Helzer in connection with the acquisition of JEH Co. $ 1,500,000 $ --
============ ============
On March 17, 1999, the Company issued 200,000 of its Common Shares
to Gary L. Howard in connection with the acquisition of MSI Co. $ 1,000,000 $ --
============ ============
On March 17, 1999, the Company satisfied a portion of its note payable
to Gary L. Howard by issuing 50,000 of its Common Shares $ 250,000 $ --
============ ============
<CAPTION>
MSI Co. JEH Co.
<S> <C> <C>
Acquisitions of MSI Co. and JEH Co.:
Fair value of assets acquired $ 9,284,007 $ 23,734,747
Liabilities assumed (1,359,698) (8,960,882)
Note issued to seller (2,045,972) 250,000
Due to related party (250,000) (864,852)
Bank debt incurred (4,108,497) (12,500,000)
------------ ------------
Cash paid $ 1,519,840 $ 1,659,013
============ ============
</TABLE>
See notes to consolidated unaudited financial statements.
-7-
<PAGE>
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Consolidated Unaudited Interim Financial Statements - The accompanying
consolidated unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and in a manner consistent with that used in the
preparation of the annual financial statements of the Company, Eagle
Supply, Inc. and JEH/Eagle Supply, Inc. at June 30, 1998. In the opinion
of management, the accompanying consolidated unaudited interim financial
statements reflect all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations and cash flows for the periods
presented.
Operating results for the nine months ended March 31, 1999 and 1998 are
not necessarily indicative of the results that may be expected for a full
year. In addition, the unaudited interim consolidated financial statements
do not include all information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles. These consolidated unaudited interim financial
statements should be read in conjunction with the financial statements and
related notes thereto which are included in the Company's Registration
Statement on Form S-1, as amended and filed with the Securities and
Exchange Commission. The information for June 30, 1998 was derived from
audited financial statements.
Business Description - Eagle Supply Group, Inc. (the "Company") is a
majority-owned subsidiary of TDA Industries, Inc. ("TDA") 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. The Company operates in a single
industry segment and all of its revenues are derived from third party
customers in the United States.
Initial Public Offering - On March 17, 1999, the Company completed the
sale of 2,500,000 shares of Common Stock at $5.00 per share and 2,875,000
Redeemable Common Stock Purchase Warrants at $.125 per warrant in
connection with it's initial public offering (the "Offering"). The net
proceeds to the Company aggregated $10,358,748.
Acquisitions and Basis of Presentation - Upon consummation of the
Offering, the Company acquired all of the issued and outstanding common
shares of Eagle Supply, Inc. ("Eagle"), JEH/Eagle Supply, Inc. ("JEH
Eagle") and MSI/Eagle Supply, Inc. ("MSI Eagle") (the "Acquisitions") from
TDA for consideration consisting of 3,000,000 of the Company's common
shares. The Acquisitions have been accounted for as the combining of four
entities under common control, similar to a pooling of interests, with the
net assets of Eagle, JEH Eagle and MSI Eagle recorded at historical
carryover values. The 3,000,000 common shares of the Company issued to TDA
were recorded at Eagle's, JEH Eagle's and MSI Eagle's historical net book
values at the date of acquisition. Accordingly, this transaction did not
result in any revaluation of Eagle's, JEH Eagle's or MSI Eagle's assets or
the creation of any goodwill. Upon the consummation of the Acquisitions,
Eagle, JEH Eagle and MSI Eagle became wholly-owned subsidiaries of the
Company and currently constitute the sole business operations of the
Company.
As a result of the Acquisitions, the consolidated unaudited interim
financial statements of the Company, Eagle, JEH Eagle and MSI Eagle have
been prepared as if all of the entities had operated
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<PAGE>
as a single consolidated group for all periods presented. The unaudited
interim financial statements of Eagle and JEH Eagle have been included in
the consolidated unaudited interim financial statements for all periods
presented and the unaudited interim financial statements of MSI Eagle have
been included in the consolidated unaudited interim financial statements
for periods subsequent to the acquisition of MSI Co. by MSI Eagle on
October 22, 1998. Eagle, JEH Eagle and MSI Eagle operate in a single
industry segment and all of their revenues are derived from third party
customers in the United States.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined by using either the last-in, first-out (LIFO) method or the
first-in, first-out (FIFO) method.
Depreciation and Amortization - Depreciation and amortization of
improvements and equipment are provided principally by straight-line
methods at various rates calculated to extinguish the carrying values of
the respective assets over their estimated useful lives.
Excess Cost of Investment Over Net Assets Acquired - Excess cost of
investment over net assets acquired ("goodwill") is being amortized on a
straight-line method over 15 to 40 years. Management of the Company
routinely evaluates the realizability of goodwill based upon expectations
of future non-discounted cash flows. Should management determine that
impairment has occurred, goodwill would be reduced by the excess, if any,
of the carrying value of goodwill over management's estimate of the
anticipated non-discounted future net cash flows.
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 March 17, 1999, the Company will file a consolidated federal
income tax return with its subsidiaries.
Net Income Per Share - Basic net income per share was calculated by
dividing net income by the weighted average number of shares outstanding
during the periods presented and excluded any potential dilution. Diluted
net income per share was calculated similarly and would generally include
potential dilution from the exercise of stock options and warrants. There
were no dilutive options or warrants for any of the periods presented.
Both basic and diluted net income per share includes, for all periods
presented, the 3,000,000 shares issued to TDA in connection with the
Acquisitions.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments - The following disclosure of the
estimated fair value of financial instruments is made in accordance with
the requirements of Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. Accordingly, the estimates
-9-
<PAGE>
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, 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 debt issues for which no market quotes
are available. The carrying amount of this item is a reasonable estimate
of fair value, except for a 6% note due July 2002. Such note has a
carrying value of $864,852 and an estimated fair market value of $775,000.
The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1999. 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 consolidated unaudited interim financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
Concentrations of Credit Risk - The financial instruments, which
potentially subject the Company to concentration of credit risk, consist
principally of accounts receivable. The Company grants credit to customers
based on an evaluation of the customer's financial condition and in
certain instances obtains collateral in the form of liens on both business
and personal assets of its customers. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The Company
controls its exposure to credit risks through credit approvals, credit
limits and monitoring procedures and establishes allowances for
anticipated losses.
Comprehensive Income - During the fiscal year ended June 30, 1998, the
Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. This Statement
establishes standards for reporting of comprehensive income and its
components in the financial statements. For the three and nine months
ended March 31, 1999 and 1998, comprehensive income was equal to net
income.
Impact of New Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This Statement
establishes standards for reporting selected financial data and
descriptive information about an enterprise's reportable operating
segments (as defined). This Statement also requires the reconciliation of
total segment information presented to the corresponding amounts in the
general-purpose financial statements. Additionally, SFAS No. 131
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company operates in a single
industry segment and all of its revenues are derived from third party
customers in the United States. Other required disclosures will be
presented in the Company's Annual Report on Form 10-K for the fiscal year
ending June 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
It requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and measurement of
those instruments at fair value. The accounting for changes in the fair
value of a derivative is dependent upon the intended use of the
derivative. SFAS No. 133 will be effective in the first quarter of the
Company's fiscal year ending
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<PAGE>
June 30, 2000 and retroactive application is not permitted. Management
does not believe that this Statement will have a significant impact on the
Company.
In April 1998, the American Institute of Certified Public Accountants'
("AICPA") Accounting Standards Executive Committee issued Statement of
Position No. 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that costs of start-up activities, including
organization costs, be expensed as incurred. SOP 98-5 will be effective in
the first quarter of the Company's fiscal year ending June 30, 2000.
Management does not believe that this Statement will have a significant
impact on the Company.
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, was $14,767,852 consisting of $13,878,000 in
cash, net of $250,000 due from JEH Co., and a five-year, 6% per annum note
in the principal amount of $864,852. The purchase price and the note are
subject to further adjustment under certain conditions. Further, JEH Eagle
is obligated for potentially substantial additional payments if, among
other factors, the business acquired attains certain levels of income, as
defined, during the five-year period ending June 30, 2002. More
specifically, JEH Co. or its designee is to receive a percentage of the
EBITDA or the modified EBITDA (as defined) of the business acquired (the
"JEH EBITDA") on a per year, non-cumulative basis for each of JEH Eagle's
fiscal years ending during the five-year period (the "JEH Applicable
Period"). If the JEH EBITDA reaches $3,000,000, $4,000,000 and $5,000,000
in the foregoing fiscal years, JEH Co. or its designee is to receive 35%,
40% and 50%, respectively, of that fiscal year's JEH EBITDA in excess of
those levels, respectively. If the JEH EBITDA (plus $50,000 attributable
to an employment agreement) (x) for any fiscal year in the JEH Applicable
Period is not less than $4,400,000, JEH Eagle is to pay JEH Co. or its
designee $1,000,000, provided that the aggregate amount of such payments
is not to exceed $2,000,000; and (y) in the aggregate during the JEH
Applicable Period is not less than $20,000,000, JEH Eagle is to pay JEH
Co. or its designee the sum of $1,350,000 plus the amount of the
difference, if any, between $2,000,000 and the amount paid under (x).
Additionally, with respect to certain Total Accounts Receivable Reserves,
as defined (the "JEH Reserves"), which were established at date of
acquisition, if JEH Eagle reduces the amount of the JEH Reserves in any
fiscal year during the JEH Applicable Period, JEH Co. or its designee is
to be paid 100% of the reduction until the JEH Reserves are not less than
$2,500,000 and 50% of the reduction in the JEH Reserves below $2,300,000
down to $600,000. Both of the immediately foregoing percentage payments to
JEH Co. or its designee are subject to adjustment in certain instances.
Additionally, if the Offering was consummated prior to June 30, 2002 and
in the event certain JEH EBITDA levels had been reached during the period
July 1, 1997 through the date of consummation of the Offering, JEH Co. or
its designee would have been entitled to receive $1,000,000 or $1,350,000
(either in cash or in common shares of the Company valued at the public
offering price) depending upon the JEH EBITDA level. Upon consummation of
the Offering, the Company issued 300,000 of its common shares to James E.
Helzer the owner of JEH Co. and president of the Company in fulfillment of
the obligation set forth in the immediately preceding sentence.
The foregoing transaction was accounted for as a purchase and,
accordingly, the results of the operations acquired from JEH Co. have been
included in the statement of operations from the effective date of the
acquisition. This transaction gave rise to approximately $4,377,000 of
goodwill, which is being amortized over a fifteen-year period. Any
additional payments to which
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<PAGE>
JEH Co. or its designee will be entitled will be accounted for as
additional goodwill, which will be amortized over the then remaining
fifteen-year period.
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. Upon the consummation of the
Offering, the Company issued 50,000 of its common shares to Gary L.
Howard, the designee and owner of MSI Co. and a vice president of the
Company, in payment of $250,000 principal amount of the note. The balance
of the note was paid in full in March 1999 out of the proceeds of the
Offering. 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. More specifically, MSI Co. or its designee is to receive a
percentage of the EBITA or the modified EBITA (as defined) of the business
acquired (the "MSI EBITA") on a per year, non-cumulative basis for each of
the MSI Eagle's fiscal years ending on June 30 of 1999 through 2003 (the
"MSI Applicable Period"). If the MSI EBITA reaches $2,000,000 and
$2,750,000 in the foregoing fiscal years, MSI Co. or its designee is to
receive 25% and 35%, respectively, of that fiscal year's MSI EBITA in
excess of those levels, respectively. Additionally, if the Offering was
consummated prior to October 22, 2003 and certain MSI EBITA levels had
been reached for MSI Eagle, MSI Co. or its designee would have been
entitled to receive (i) $1,000,000 or (ii) $750,000 (either in cash or in
common shares of the Company valued at the public offering price) if the
MSI EBITA level was (i) not less than $2,000,000 per year or (ii) less
than $2,000,000 but not less than $1,500,000 per year, respectively. Upon
the consummation of the Offering, the Company issued 200,000 of its common
shares to Gary L. Howard, the designee of MSI Co., in fulfillment of the
obligation set forth in the immediately preceding sentence.
The foregoing transaction was accounted for as a purchase and,
accordingly, the results of the operations acquired from MSI Co. have been
included in the statement of operations from the date of the acquisition.
This transaction gave rise to approximately $6,506,000 of goodwill, which
is being amortized over a forty-year period. Any additional payments to
which MSI Co. or its designee will be entitled will be accounted for as
additional goodwill, which will be amortized over the then remaining
forty-year period.
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<PAGE>
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
1999 1998
<S> <C> <C>
Revolving credit loan (A) $ 8,164,943 $ 6,407,919
Equipment loan (A) 712,000 --
Revolving credit loan (B) 1,017,079 --
Term loan (B) 2,927,400 --
Revolving credit loan (C) 13,243,682 8,322,013
Term loan (C) 1,750,000 2,500,000
Equipment loan (C) 1,676,500 1,561,000
Note payable - TDA Industries, Inc. (D) 1,000,000 --
Variable rate mortgage (7-3/4% at March 31, 1999),
payable in monthly installments through 1999 (E) 486,362 503,301
6% promissory note due July 2002 (Note 2) 864,852 864,852
Capitalized equipment lease obligations 982,429 92,849
----------- -----------
32,825,247 20,251,934
Less: Current portion of long-term debt 3,360,133 1,023,504
----------- -----------
$29,465,114 $19,228,430
=========== ===========
</TABLE>
(A) The Company is a guarantor of a loan agreement (last amended
December 11, 1998) which provides for a credit facility in the
aggregate amount of $10,900,000, guaranteed by TDA. The credit
facility consists of a $10 million revolving credit loan and a
$900,000 equipment loan. The initial term of the credit facility
matures on October 22, 2003. Obligations under the credit facility
are collateralized by certain current assets of Eagle (aggregating
approximately $17,474,000 at March 31, 1999).
Borrowings under the revolving credit loan are based on a formula
relating to certain levels of receivables and inventory, as defined.
Interest only is payable monthly at a floating rate equal to the
lender's prime rate, plus one-half percent, or at the London
inter-bank offered rate, plus two and one-half percent, at the
option of Eagle.
The equipment loan is payable in equal monthly installments, based
on a seventy-five month amortization schedule, each in the amount of
$11,000, with a balloon payment due on the earlier of August 1, 2004
or at 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 percent, or at the London inter-bank offered rate, plus two
and one-half percent, at the option of Eagle.
(B) In order to finance the purchase of substantially all of the assets
and business of MSI Co. and to provide for working capital needs,
MSI Eagle entered into a loan agreement for a credit facility in the
aggregate amount of $9,075,000, which is collateralized by
substantially all of the tangible and intangible assets of MSI. The
credit facility has an initial maturity of October 22, 2003 and
consists of a $3,075,000 term loan and the balance in the form of a
revolving credit loan. The term loan is payable in 83 equal monthly
installments each in the amount of
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<PAGE>
$37,000 and a final payment of the then outstanding principal
amount. The revolving credit loan bears interest at the lender's
prime rate, plus one-half percent, or at the London inter-bank
offered rate, plus two and one-half percent, at the option of MSI
Eagle. The term loan bears interest at the lender's prime rate, plus
one and one-half percent, or at the London inter-bank offered rate,
plus three and one-quarter percent, at the option of MSI Eagle. This
credit facility has been guaranteed by the Company and TDA.
(C) In order to finance the purchase of substantially all of the assets
and business of JEH Co. and to provide for working capital needs,
JEH Eagle entered into a loan agreement, last amended on December
11, 1998, for a credit facility in the aggregate amount of $20
million which is collateralized by substantially all of the tangible
and intangible assets of JEH Eagle. The credit facility has an
initial maturity of October 22, 2003 and consists of a $3,000,000
term loan, a $2,475,000 equipment loan, and the balance in the form
of a revolving credit loan. The term loan is payable in 48 equal
monthly installments, each in the amount of $62,500; the equipment
loan is payable in equal monthly installments, based on a
seventy-six month amortization schedule, each in the amount of
$26,000, 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 and revolving credit loans bear interest at the lender's
prime rate, plus one-half percent, or at the London inter-bank
offered rate, plus two and one-half percent, at the option of JEH
Eagle. The term loan bears interest at the lender's prime rate, plus
one and one-half percent, or at the London inter-bank offered rate,
plus three and one-quarter percent, at the option of JEH Eagle. This
credit facility has been guaranteed by the Company and TDA.
(D) In October 1998, in connection with the purchase of substantially
all of the assets and business of MSI Co. by MSI Eagle, TDA lent MSI
Eagle $1,000,000 pursuant to a 6% two-year note. The note is payable
in full in October 2000, and TDA has agreed to defer the interest
payable on the note until its maturity.
(E) During fiscal 1994, Eagle purchased land and a building in
Birmingham, Alabama, for $735,000, of which $550,000 was financed by
a first mortgage. The mortgage is repayable in fifty-nine equal
monthly installments of approximately $4,700 each and a balloon
payment of approximately $440,000 due in April 1999. During fiscal
1994, Eagle transferred this property, including related
improvements (at a net book value of $216,189, net of the mortgage),
to TDA in partial repayment of intercompany debt. Eagle remains the
primary obligor on this mortgage.
4. TRANSACTIONS WITH TDA AND OTHER RELATED PARTIES
The Chief Executive Officer and Chairman of the Board of Directors of the
Company is an officer and a director of TDA; the Executive Vice President,
Secretary, Treasurer and a director of the Company is also an officer and
a director of TDA; and another director of the Company is also a director
of TDA.
The Company has entered into an agreement pursuant to which TDA provides
the Company with certain services including (i) managerial, (ii) strategic
planning, (iii) banking negotiations, (iv) investor relations, and (v)
advisory services relating to acquisitions for a five-year term which
commenced in July 1997. The monthly fee, the payment of which commenced
upon the consummation of the Offering and the Acquisitions, for the
foregoing services is $3,000.
The Company also entered into an agreement pursuant to which TDA provides
the Company with office space and administrative services on a
month-to-month basis. The monthly fee, the payment
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<PAGE>
of which commenced upon the consummation of the Offering and the
Acquisitions, for the foregoing services is $3,000.
The Company and Eagle have entered into five-year employment agreements
with the Company's Chief Executive Officer and its Executive Vice
President, Secretary and Treasurer, which became effective upon the
consummation of the Offering and the Acquisitions, at annual salaries of
$200,000 each, subject to annual increases and bonuses as may be
determined by the Board of Directors of the Company. Further, in July
1997, JEH Eagle entered into five-year employment agreements with such
officers at annual salaries of $60,000 each. The payment of such salaries
by JEH Eagle commenced upon the consummation of the Offering and the
Acquisitions. The employment agreements provide for, among other things,
continued payments of salary and benefits, under certain conditions.
Eagle is liable for certain lease payments to a subsidiary of TDA under a
lease for a former distribution center in Fort Lauderdale, Florida,
including a balloon payment due May 1, 1999 in the approximate amount of
$580,000 relating to industrial revenue bonds issued to acquire and
develop the Fort Lauderdale property. Eagle has no direct obligation on
the industrial revenue bond, which obligation is reflected in the
financial statements of a real estate subsidiary of TDA. The lease expired
on May 1, 1999. These premises have been subleased to an unrelated third
party at an annual rental in excess of Eagle's annual lease obligation.
The payments by Eagle have included a ratable share of the balloon
payment.
Eagle operates a substantial portion of its business from facilities
leased from a subsidiary of TDA pursuant to ten-year written leases at
annual rentals aggregating $790,000.
During the nine months ended March 31, 1999, a subsidiary of TDA made a
loan to a subsidiary of the Company in the amount of $400,000 as a
short-term working capital advance. Also during the nine months ended
March 31, 1999, TDA made a loan to the same subsidiary of the Company in
the amount of $1,000,000 as a short-term working capital advance. These
loans were repaid in full prior to the Offering and were non-interest
bearing.
The Due from TDA Industries, Inc. and affiliated companies account
represented a non-interest bearing advance account with TDA and certain
other subsidiaries of TDA. In connection with the Offering, Eagle
cancelled, in the form of a non-cash dividend, all of TDA's indebtedness
to Eagle, except for $486,362 relating to and offsetting a mortgage in the
same amount on property previously owned by Eagle and for which Eagle
remains the primary obligor.
In July 1997, JEH Eagle paid $150,000 to TDA for arranging the acquisition
financing to acquire JEH Co.'s business. Such amount is included in
deferred financing costs and is being amortized over the term of JEH
Eagle's credit facility.
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 annual rentals aggregating approximately $492,000.
During the nine months ended March 31, 1999, JEH Eagle made sales
aggregating approximately $270,000 to three entities owned by the son of
the President. Management believes that such sales were made on terms no
less favorable than sales made to independent third parties.
In October 1998, in connection with the purchase of substantially all of
the assets and business of MSI Co. by MSI Eagle, TDA lent MSI Eagle
$1,000,000 pursuant to a 6% two-year note. The note
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<PAGE>
is payable in full in October 2000, and TDA has agreed to defer the
interest payable on the note until its maturity.
MSI Eagle leases its corporate offices, showroom and warehouse in
Mansfield, Texas, from a vice president of the Company pursuant to a
three-year written lease at an annual rental aggregating approximately
$107,000.
5. COMMITMENTS AND CONTINGENCIES
Eagle, JEH Eagle and MSI Eagle are committed to unrelated parties for
long-term leases for property, automotive and data processing equipment.
The leases expire on various dates through 2006. Certain of the leases for
property include renewal options and provide for the payment of taxes and
other occupancy costs.
Two subsidiaries of the Company have a 401(k) plan covering eligible
employees (the "Plan"). The Plan provides for discretionary contributions.
No contributions were made to the Plan in fiscal 1999 by either of the
subsidiaries.
6. SHAREHOLDERS' EQUITY
Initial Capitalization - In May 1996, the Company issued of 2,000,000 of
its common shares to TDA (a founding shareholder) for a subscription price
of $200 and 100,000 of its common shares to another founding shareholder
and director for a subscription price of $10.
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, holders of common shares are entitled to receive dividends
when and if declared by the Board of Directors out of funds legally
available therefor and, upon the liquidation, dissolution or winding up of
the Company, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred shares, if any. Holders of common shares have
no pre-emptive rights and have no rights to convert their common shares
into any other securities.
Warrants - The Company has outstanding 300,000 warrants which entitle the
registered holder to purchase one common share at an exercise price of
$5.00 per share (subject to adjustment) for three years commencing on the
date of the Offering, provided that during such time a current prospectus
relating to the common shares is then in effect and the common shares are
qualified for sale or exempt from qualification under applicable state
securities laws.
In addition, 2,875,000 warrants were sold in the Offering and are
outstanding. The warrants that were included in the Offering are
exercisable at $5.50 per share, are also transferable separately from the
common shares and are exercisable for five years from the date of the
Offering, provided that during such time a current prospectus relating to
the common shares is then in effect and the
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<PAGE>
common shares are qualified for sale or exempt from qualification under
applicable state securities laws.
In connection with the Offering, the Company granted the underwriters
warrants entitling the holders thereof to purchase an aggregate of 500,000
of the Company's common shares at an exercise price of $8.25 per share for
five years commencing on the date of the Offering.
Stock Option Plan - In August 1996, as amended in 1998, 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 1,000,000 common
shares. Upon the closing of the Offering, the Company granted options
exercisable into 878,300 common shares to several of its employees and
certain of its officers and directors. All of such options have a term of
ten years. The exercise price of these options is the same price that the
common shares offered in the Offering were sold to the public, $5.00 per
share. The options granted to employees and officers (858,300) 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) vest one year
from the date of the grant.
7. PRIVATE PLACEMENTS
In February 1998, the Company borrowed an aggregate of $300,000 pursuant
to promissory notes issued to TDA ($150,000) and two other shareholders of
the Company. The promissory notes provided for interest at the rate of 15%
per annum through June 30, 1998 and 6% per annum thereafter. The
promissory notes were repaid on March 19, 1999.
In August 1998 and January 1999, the Company borrowed $100,000 on each
occasion pursuant to promissory notes issued to TDA. These promissory
notes provided for interest at the rate of 6% per annum payable at
maturity on the earlier of twenty-four months from the date of issue or
upon the closing of the Offering. These notes were repaid on March 19,
1999.
*****
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<PAGE>
EAGLE SUPPLY GROUP, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of an
authorized executive officer constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act. Such
forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: changes in global economic conditions; risks associated with
changes in the competitive marketplace, including the introduction of new
products or pricing changes by the Company's competitors; risks related to
extending credit to customers; risks associated with dependence on one or
more significant suppliers, risks associated with consolidations,
restructuring and other ownership changes in the building
supplies/construction industry and the Company's inability to find
suitable acquisition candidates on terms commercially reasonable to the
Company. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise.
The following discussion and analysis should be read in conjunction the
with the financial statements and related notes thereto which are included
in the Company's Registration Statement on Form S-1, as amended and filed
with the Securities and Exchange Commission.
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.
On March 17, 1999, the Company completed the sale of 2,500,000 shares of
Common Stock at $5.00 per share and 2,875,000 Redeemable Common Stock
Purchase Warrants at $.125 per warrant in connection with it's initial
public offering. The net proceeds to the Company aggregated $10,358,748.
Upon consummation of the Offering, the Company acquired all of the issued
and outstanding common shares of Eagle Supply, Inc. ("Eagle"), JEH/Eagle
Supply, Inc. ("JEH Eagle") and MSI/Eagle Supply, Inc. ("MSI Eagle") (the
"Acquisitions") from TDA for consideration consisting of 3,000,000 of the
Company's common shares. The Acquisitions have been accounted for as the
combining of four entities under common control, similar to a pooling of
interests, with the net assets of Eagle, JEH Eagle and MSI Eagle recorded
at historical carryover values. The 3,000,000 common shares of the Company
issued to TDA were recorded at Eagle's, JEH Eagle's and MSI Eagle's
historical net book values at the date of acquisition. Accordingly, this
transaction did not result in any revaluation of Eagle's, JEH Eagle's or
MSI Eagle's assets or the creation of any goodwill. Upon the consummation
of the Acquisitions, Eagle, JEH Eagle and MSI Eagle became wholly-owned
subsidiaries of the Company and currently constitute the sole business
operations of the Company.
As a result of the Acquisitions, the consolidated unaudited interim
financial statements of the Company, Eagle, JEH Eagle and MSI Eagle have
been prepared as if all of the entities had operated
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as a single consolidated group for all periods presented. The unaudited
interim financial statements of Eagle and JEH Eagle have been included in
the consolidated unaudited interim financial statements for all periods
presented and the unaudited interim financial statements of MSI Eagle have
been included in the consolidated unaudited interim financial statements
for periods subsequent to the acquisition of MSI Co. by MSI Eagle on
October 22, 1998. Eagle, JEH Eagle and MSI Eagle operate in a single
industry segment and all of their revenues are derived from third party
customers in the United States.
Results of Operations
Three Months Ended March 31, 1999 Compared to the Three Months Ended March
31, 1998
Revenues of the Company during the three-month period ended March 31, 1999
increased by approximately $10,292,000 (35.1%) compared to the 1998
three-month period. Approximately $3,207,000 of this increase is due to
the acquisition on October 22, 1998 of Masonry Supply, Inc. ("MSI Co.") by
MSI/Eagle Supply, Inc. ("MSI Eagle"), a wholly-owned subsidiary of the
Company. The remaining increase may be attributed to additional revenues
generated from two new distribution centers ($1,635,000) and a general
improvement in market conditions.
Cost of goods sold increased between the 1999 and 1998 three-month periods
at a slightly greater rate than the increase in revenues between these
three-month periods. Accordingly, cost of goods sold as a percentage of
revenues increased to 77.8% in the three-month period ended March 31, 1999
from 77.7% in the three-month period ended March 31, 1998, and gross
profit as a percentage of revenues decreased to 22.2% in the three-month
period ended March 31, 1999 from 22.3% in the three-month period ended
March 31, 1998. The cost of goods sold and gross profit of MSI Eagle have
not been included in calculating the percentages for the 1999 three-month
period. If MSI Eagle's cost of goods sold and gross profit were included,
cost of goods sold as a percentage of revenues would have been 76.1% and
gross profit as a percentage of revenues would have been 23.9%.
Operating expenses of the Company increased by approximately $2,185,000
(36.9%) between the 1999 and 1998 three-month periods. Approximately
$922,000 of this increase is due to the acquisition on October 22, 1998 of
MSI Co. by MSI Eagle. Excluding the operating expenses of MSI Eagle,
operating expenses of the Company would have increased by approximately
$1,263,000 (21.4%) between the 1999 and 1998 three-month periods. This
increase may be attributed to new distribution center operating expenses
of approximately $362,000, an increase in the allowance for doubtful
accounts receivable of approximately $63,000, an increase in payroll and
related costs of approximately $518,000 due primarily to the additional
manpower needed to service the increased sales out of warehouse
inventories, an increase in delivery expenses of approximately $142,000,
an increase in warehouse expenses of approximately $141,000 and an
increase in office expenses of approximately $61,000 primarily related to
the implementation and relocation of the administrative functions of the
Company to Texas, offset by reductions in other expense areas. Operating
expenses as a percentage of revenues were 20.4% in the 1999 three-month
period compared to 20.1% in the 1998 three-month period. If MSI Eagle's
operating expenses were excluded, operating expenses as a percentage of
revenues would have changed only minimally in the 1999 three-month period.
Interest expense increased by approximately $194,000 (39%) between the
1999 and 1998 three-month periods. This increase is due to interest
expense incurred by MSI Eagle (approximately $143,000) on its credit
facility used primarily to fund its acquisition of MSI Co., the increase
in interest expense on borrowings under revolving credit loans
(approximately $45,000) and short-term borrowings by the Company
(approximately $6,000).
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<PAGE>
Net income and EBITDA (earnings before interest, taxes, depreciation and
amortization) for the three-month period ended March 31, 1999 were
$451,080 and $1,771,647, respectively, compared to net income and EBITDA
of $67,344 and $919,661, respectively, for the comparable period in fiscal
1998, representing a 569.8% increase in net income and a 92.6% increase in
EBITDA.
Earnings per share for the three-month period ended March 31, 1999 were
$.08 compared to $.01 for the comparable period in fiscal 1998, an
increase of 700%. EBITDA per share for the three-month period ended March
31, 1999 were $.30 compared to $.17 for the comparable period in fiscal
1998, an increase of 76.5%.
Nine Months Ended March 31, 1999 Compared to the Nine Months Ended March
31, 1998
Revenues of the Company during the nine-month period ended March 31, 1999
increased by approximately $22,096,000 (24.1%) compared to the 1998
nine-month period. Approximately $5,366,000 of this increase is due to the
acquisition on October 22, 1998 of MSI Co. by MSI Eagle. The remaining
increase may be attributed to additional revenues generated from two new
distribution centers ($8,539,000) and a general improvement in market
conditions.
Cost of goods sold increased between the 1999 and 1998 nine-month periods
at a lesser rate than the increase in revenues between these nine-month
periods. Accordingly, cost of goods sold as a percentage of revenues
decreased to 77.4% in the nine-month period ended March 31, 1999 from 78%
in the nine-month period ended March 31, 1998, and gross profit as a
percentage of revenues increased to 22.6% in the nine-month period ended
March 31, 1999 from 22% in the nine-month period ended March 31, 1998. The
cost of goods sold and gross profit of MSI Eagle have not been included in
calculating the percentages for the 1999 nine-month period. If MSI Eagle's
cost of goods sold and gross profit were included, cost of goods sold as a
percentage of revenues would have been 76.5% and gross profit as a
percentage of revenues would have been 23.5%.
Operating expenses of the Company increased by approximately $3,628,000
(20%) between the 1999 and 1998 nine-month periods. Approximately
$1,532,000 of this increase is due to the acquisition on October 22, 1998
of MSI Co. by MSI Eagle. Excluding the operating expenses of MSI Eagle,
operating expenses of the Company would have increased by approximately
$2,096,000 (11.5%) between the 1999 and 1998 nine-month periods. This
increase may be attributed to new distribution center operating expenses
of approximately $1,021,000, an increase in the allowance for doubtful
accounts receivable of approximately $76,000, an increase in payroll and
related costs of approximately $937,000 due primarily to the additional
manpower needed to service the increased sales out of warehouse
inventories, an increase in warehouse expenses of approximately $166,000
and an increase in office expenses of approximately $48,000 primarily
related to the implementation and relocation of the administrative
functions of the Company to Texas, offset by reductions in other expense
areas. Operating expenses as a percentage of revenues were 19.1% in the
1999 nine-month period compared to 19.8% in the 1998 nine-month period. If
MSI Eagle's operating expenses were excluded, operating expenses as a
percentage of revenues would have changed only minimally in the 1999
nine-month period.
Interest expense increased by approximately $579,000 (45.6%) between the
1999 and 1998 nine-month periods. This increase is due to interest expense
incurred by MSI Eagle (approximately $212,000) on its credit facility used
primarily to fund its acquisition of MSI Co., the increase in interest
expense on borrowings under revolving credit loans (approximately
$350,000) and short-term borrowings by the Company (approximately
$17,000).
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<PAGE>
Net income and EBITDA (earnings before interest, taxes, depreciation and
amortization) for the nine-month period ended March 31, 1999 were
$1,977,340 and $6,057,639, respectively, compared to net income and EBITDA
of $501,676 and $2,828,589, respectively, for the comparable period in
fiscal 1998, representing a 294.1% increase in net income and a 114.2%
increase in EBITDA.
Earnings per share for the nine-month period ended March 31, 1999 were
$.36 compared to $.09 for the comparable period in fiscal 1998, an
increase of 300%. EBITDA per share for the nine-month period ended March
31, 1999 were $1.09 compared to $.52 for the comparable period in fiscal
1998, an increase of 109.6%.
Liquidity and Capital Resources
The Company initially funded itself by raising $300,000 in a private
placement; issuing an aggregate of $500,000 of notes to TDA and other
shareholders; incidental other borrowings from TDA or affiliates of TDA;
and, on March 17, 1999, by issuing 2,500,000 shares of its Common Stock
and 2,875,000 Redeemable Stock Purchase Warrants for net proceeds of
$10,358,748 in an initial public offering.
The Company's working capital was approximately $27,200,000 at March 31,
1999 compared to $13,316,000 at March 31, 1998 and $17,081,000 at June 30,
1998. At March 31, 1999, the Company current ratio was 1.99 to 1 compared
to 1.57 to 1 at March 31, 1998 and 1.71 to 1 at June 30, 1998.
Cash used in operating activities for the nine months ended March 31, 1999
was approximately $813,000. Such amount consisted primarily of net income
of $1,977,000, depreciation and amortization of $1,101,000, allowance for
doubtful accounts of $688,000, increased levels of accounts payable of
$72,000, accrued expenses and other current liabilities of $254,000,
federal and state taxes payable of $73,000 and federal and state taxes
payable due to TDA of $118,000, a decreased level of other current assets
of $400,000, offset by increased levels of accounts and notes receivable
of $4,131,000, inventories of $1,102,000 and deferred income taxes of
$263,000.
Cash used in investing activities for the nine months ended March 31, 1999
was approximately $2,821,000. Such amount consisted primarily of capital
expenditures of $1,301,000 and payment for the purchase of the business
and substantially all of the net assets of MSI Co. of $1,520,000.
Capital expenditures was approximately $1,301,000 for the nine-months
ended March 31, 1999. Management of the Company presently anticipates such
expenditures in the next twelve months of not less than $750,000, of which
approximately $500,000 will be financed and used for the purchase of
trucks and forklifts for the Company's currently existing operations in
anticipation of increased business and to upgrade its vehicles to compete
better in its market areas. Management's anticipation of increased
business is based on sales to be generated by the opening of new
distribution centers, the location of some of which have not yet been
determined.
Cash provided by financing activities was approximately $9,643,000. Such
amount consisted primarily of principal borrowings on long-term debt of
$121,815,000, issuance of notes payable - shareholder of $200,000, the
sale of 2,500,000 shares of Common Stock and 2,875,000 Redeemable Common
Stock Purchase Warrants in an initial public offering for net proceeds of
$10,359,000, capital contribution from TDA of $1,000,000 and a change in
the intercompany account of $70,000, offset by principal reductions of
long-term debt of $122,101,000, repayment of notes payable shareholders of
$500,000 and dividends paid to TDA of $1,200,000.
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During the nine-month period ended March 31, 1999, TDA and a subsidiary of
TDA made loans to Eagle in the amount of $1,400,000 as short-term working
capital advances. These loans were repaid in full prior to the
consummation of the Offering and they were non-interest bearing.
During Eagle's fiscal year ended June 30, 1998, Eagle made dividend
payments of $1,200,000 to TDA. JEH Eagle did not make any dividend
payments to TDA during fiscal year ended June 30, 1998. During the
nine-month period ended March 31, 1999, Eagle and JEH Eagle made dividend
payments to TDA of $450,000 and $750,000, and, in connection with the
Offering, Eagle cancelled, in the form of a non-cash dividend, all of
TDA's indebtedness to Eagle, except for $486,362 relating to and
offsetting a mortgage in the same amount on property previously owned by
Eagle and for which Eagle remains the primary obligor. MSI Eagle is
precluded from making dividend payments and certain other distributions to
TDA pursuant to the terms of its credit facility.
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 $14,767,852, consisting of $13,878,000
in cash, net of $250,000 due from JEH Co., and a five-year $864,652
principal amount note bearing interest at the rate of 6% per year. The
purchase price and the note are subject to further adjustments under
certain conditions. Certain, potentially substantial, contingent payments,
as additional future consideration to JEH Co., or its designee are to be
paid by JEH Eagle. Upon consummation of the Offering, the Company issued
300,000 of its common shares to James E. Helzer in fulfillment of certain
of such future consideration (See Note 2 to the consolidated unaudited
financial statements).
In October 1998, MSI Eagle acquired the business and substantially all of
the assets of MSI Co., a Texas corporation, wholly-owned by Gary L.
Howard, now a Vice President of the Company. The purchase price, as
adjusted, including transaction expenses, was $8,537,972, 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 and
the note are subject to further adjustments under certain conditions. Upon
the consummation of the Offering, the Company issued 50,000 of its common
shares to Gary L. Howard, the designee and owner of MSI Co. and a vice
president of the Company, in payment of $250,000 principal amount of the
note. The balance of the note was paid in full in March 1999 out of the
proceeds of the Offering. Certain, potentially substantial, contingent
payments, as additional future consideration to MSI Co., or its designee
are to be paid by MSI Eagle. Upon consummation of the Offering, the
Company issued 200,000 of its common shares to Gary L. Howard in
fulfillment of certain of such future consideration (See Note 2 to the
consolidated unaudited financial statements).
Credit Facilities
The Company is a guarantor of a loan agreement (last amended December 11,
1998) which provides for a credit facility in the aggregate amount of
$10,900,000, guaranteed by TDA. The credit facility consists of a $10
million revolving credit loan and a $900,000 equipment loan. The initial
term of the credit facility matures on October 22, 2003. Obligations under
the credit facility are collateralized by certain current assets of Eagle
(aggregating approximately $17,474,000 at March 31, 1999). Borrowings
under the revolving credit loan are based on a formula relating to certain
levels of receivables and inventory, as defined. Interest only is payable
monthly at a floating rate equal to the lender's prime rate, plus one-half
percent, or at the London inter-bank offered rate, plus two and one-half
percent, at the option of Eagle. The equipment loan is payable in equal
monthly installments, based on a seventy-five month amortization schedule,
each in the amount of $11,000,
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with a balloon payment due on the earlier of August 1, 2004 or at 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 percent, or at the
London inter-bank offered rate, plus two and one-half percent, at the
option of Eagle.
In order to finance the purchase of substantially all of the assets and
business of MSI Co. and to provide for working capital needs, MSI Eagle
entered into a loan agreement for a credit facility in the aggregate
amount of $9,075,000, which is collateralized by substantially all of the
tangible and intangible assets of MSI. The credit facility has an initial
maturity of October 22, 2003 and consists of a $3,075,000 term loan and
the balance in the form of a revolving credit loan. The term loan is
payable in 83 equal monthly installments each in the amount of $37,000 and
a final payment of the then outstanding principal amount. The revolving
credit loan bears interest at the lender's prime rate, plus one-half
percent, or at the London inter-bank offered rate, plus two and one-half
percent, at the option of MSI Eagle. The term loan bears interest at the
lender's prime rate, plus one and one-half percent, or at the London
inter-bank offered rate, plus three and one-quarter percent, at the option
of MSI Eagle. This credit facility has been guaranteed by the Company and
TDA.
In order to finance the purchase of substantially all of the assets and
business of JEH Co. and to provide for working capital needs, JEH Eagle
entered into a loan agreement, last amended on December 11, 1998, for a
credit facility in the aggregate amount of $20 million which is
collateralized by substantially all of the tangible and intangible assets
of JEH Eagle. The credit facility has an initial maturity of October 22,
2003 and consists of a $3,000,000 term loan, a $2,475,000 equipment loan,
and the balance in the form of a revolving credit loan. The term loan is
payable in 48 equal monthly installments, each in the amount of $62,500;
the equipment loan is payable in equal monthly installments, based on a
seventy-six month amortization schedule, each in the amount of $26,000,
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 and revolving
credit loans bear interest at the lender's prime rate, plus one-half
percent, or at the London inter-bank offered rate, plus two and one-half
percent, at the option of JEH Eagle. The term loan bears interest at the
lender's prime rate, plus one and one-half percent, or at the London
inter-bank offered rate, plus three and one-quarter percent, at the option
of JEH Eagle. This credit facility has been guaranteed by the Company and
TDA.
In October 1998, in connection with the purchase of substantially all of
the assets and business of MSI Co. by MSI Eagle, TDA lent MSI Eagle
$1,000,000 pursuant to a 6% two-year note. The note is payable in full in
October 2000, and TDA has agreed to defer the interest payable on the note
until its maturity.
Impact of Inflation
General inflation in the economy has driven the operating expenses of many
businesses higher, and, accordingly, the Company has experienced increased
salaries and bears higher prices for supplies, goods and services. The
Company continuously seeks methods of reducing costs and streamlining
operations while maximizing efficiency through improved internal operating
procedures and controls. While the Company is subject to inflation as
described above, the Company's management believes that inflation
currently does not have a material effect on its operating results, but
there can be no assurance that this will continue to be so in the future.
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Year 2000 Compliance
The Year 2000 ("Y2K") compliance issue is the result of computer programs
being written using two digits rather than four to define the applicable
year. Computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900, rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities.
In 1997, systems were identified and purchased that would meet, at that
time, Eagle's requirements and be Y2K compliant in regard to the
maintenance and management of its operating system and distribution
software package. Eagle then commenced the upgrade of its hardware and the
conversion to new software programs that are Y2K compliant. Additionally,
the Company's management has started to integrate and centralize certain
of Eagle's and JEH Eagle's administrative functions, including data
processing, and it is anticipated that MSI Eagle's administrative
functions, including data processing, also will be integrated and
centralized with the administrative functions of Eagle and JEH Eagle.
Additionally, JEH Eagle and MSI Eagle will be utilizing and adopting
Eagle's upgraded data processing equipment and new software programs. As
their hardware and software vendors have certified that their products are
Y2K compliant, management of the Company have determined that the Y2K
compliance issue will not pose significant operational problems for their
computer systems. The Company's desktop systems are running products which
management believes are compliant except for minor issues.
The Company has initiated formal communications with all of their
significant suppliers and large customers to determine the extent to which
the Combined Entities may be vulnerable to those third parties' failure to
remediate their own Y2K compliance issues. There can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's
systems.
Management of the Company believes that all significant testing for all
potential Y2K issues will be completed in the second quarter of 1999.
However, there can be no assurances that customers, suppliers and/or
service providers on which the Company relies will resolve their Y2K
issues accurately, thoroughly and/or on time. Contingency plans are being
considered and will be in place by the third quarter of 1999 in the event
that the Company is at risk in regard to suppliers, customers or their own
internal hardware and software.
Based on management's assessment of the cost of addressing Y2K compliance
issues, such cost is not currently expected to have a material adverse
impact on the Company's financial position. The total cost of the project
is estimated at $300,000 and is being expensed over the three-year term of
the operating lease for the equipment and software. The estimated cost of
the project and the date on which the Company believes it will complete
the Year 2000 modifications and testing processes are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no assurance that these estimates will be achieved,
and actual results could differ materially from those anticipated. Failure
to complete the Y2K project by the year 2000 could have a material adverse
affect on future operating results and the financial condition of the
Company.
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Impact of New Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This Statement
establishes standards for reporting selected financial data and
descriptive information about an enterprise's reportable operating
segments (as defined). This Statement also requires the reconciliation of
total segment information presented to the corresponding amounts in the
general-purpose financial statements. Additionally, SFAS No. 131
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company operates in a single
industry segment and all of its revenues are derived from third party
customers in the United States. Other required disclosures will be
presented in the Company's Annual Report on Form 10-K for the fiscal year
ending June 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
It requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and measurement of
those instruments at fair value. The accounting for changes in the fair
value of a derivative is dependent upon the intended use of the
derivative. SFAS No. 133 will be effective in the Company's first quarter
of the fiscal year ending June 30, 2000 and retroactive application is not
permitted. Management does not believe that this Statement will have a
significant impact on the Company.
In April 1998, the American Institute of Certified Public Accountants'
("AICPA") Accounting Standards Executive Committee issued Statement of
Position No. 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that costs of start-up activities, including
organization costs, be expensed as incurred. SOP 98-5 will be effective in
the first quarter of the Company's fiscal year ending June 30, 2000.
Management does not believe that this Statement will have a significant
impact on the Company.
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Item 2. Changes in Securities and Uses of proceeds
On March 12, 1999, the Company's Registration Statement, Securities and
Exchange Commission ("SEC") File No. 333-09951, became effective under the
Securities Act of 1933 for an offering of 2,500,000 shares of the
Company's Common Stock ("Shares") and 2,500,000 Redeemable Common Stock
Purchase Warrants ("Warrants") exclusive of an additional 375,000 Shares
and Warrants registered to cover an overallotment option granted to Barron
Chase Securities, Inc. ("Underwriter"). The offering was commenced by the
Underwriter on the date of the effectiveness and a closing of the offering
of 2,500,000 Shares and 2,875,000 Warrants was held on March 17, 1999. The
initial offering price was $5.00 per Share and $.125 per Warrant,
resulting in gross proceeds of $12,859,375. The Underwriter received a 9%
commission and a 3% non-accountable expense allowance of the gross
proceeds, or an aggregate of $1,543,125. Additional offering expenses were
approximately $957,202 resulting in net proceeds to the Company of
$10,358,748. The following expenditures have been made from the net
proceeds.
o $534,907 to repay principal and interest on borrowings of $500,000
made by the Company pursuant to promissory notes issued to
shareholders of the Company, including $369,755 to TDA Industries,
inc. ("TDA"), the Company's majority shareholder.
o $1,474,478 in principal and interest to Gary L. Howard, designee and
owner of Masonry Supply, Inc. ("MSI Co.") and a vice president of
the Company, pursuant to a five-year promissory note issued by one
of the Company's subsidiaries in connection with the acquisition of
the business and substantially all of the assets of MSI Co.
o $2,624,000 to reduce outstanding balances of credit facilities of
two of the Company's subsidiaries.
o The balance has been invested in high grade, short-term interest
bearing investments.
Except for the foregoing payments to TDA and Gary L. Howard, no part of
the offering expenses or net proceeds was directly paid to (a) directors
or officers of the Company, or their associates; (b) persons owning 10% or
more of the Company's Shares; or (c) any affiliate of the Company.
As part of SEC File 333-09951, the Company also registered 2,875,000
Shares underlying the Warrants, Common Stock Underwriters Warrants
entitling the Underwriter to purchase an aggregate of 500,000 Shares
("Underwriters Warrants"), 500,000 Shares underlying the foregoing
Underwriters Warrants and 300,000 Shares underlying the Warrants
previously issued to certain Selling Securityholders. Neither the
Underwriter nor the Selling Securityholders are believed to have publicly
sold any of their registered securities of the Company.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
therunto duly authorized.
EAGLE SUPPLY GROUP, INC.
Dated: May 13, 1999 By: /s/ Douglas P. Fields
------------------------------------
Douglas P. Fields, Chairman of the Board
of Directors, Chief Executive Officer
and Director (Principal Executive
Officer)
Dated: May 13, 1999 By: /s/ Frederick M. Friedman
------------------------------------
Frederick M. Friedman, Executive Vice
President, Treasurer, Secretary and
Director (Principal Financial and
Accounting Officer)
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