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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1999
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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
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Commission File Number 000-25423
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EAGLE SUPPLY GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3889248
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(State of 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
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Redeemable Common Stock Boston Stock Exchange
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Purchase Warrants
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Securities registered pursuant to Section 12(g) of the Act:
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(Title of Class)
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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
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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. / /
The aggregate market value of the common equity held by non-affiliates of the
registrant at September 21, 1999, was approximately $10,800,000 based upon the
last sale price ($4.00 per share) as reported by NASDAQ on that date.
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of the Registrant's common stock, as of
September 21, 1999, was 8,450,000 shares.
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This document includes statements that may constitute forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The Company would like to caution readers
regarding certain forward-looking statements in this document and in all of its
communications to shareholders and others, press releases, securities filings,
and all other communications. Statements that are based on management's
projections, estimates and assumptions are forward-looking statements. The words
"believe," "expect," "anticipate," "intend," and similar expressions generally
identify forward-looking statements. While the Company believes in the veracity
of all statements made herein, forward-looking statements are necessarily based
upon a number of estimates and assumptions that, while considered reasonable by
the Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown risks. Many of
the uncertainties and contingencies can affect events and the Company's actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Some of the factors that could cause actual results or future events to
differ materially include the Company's inability to find suitable acquisition
candidates or financing on terms commercially reasonable to the Company,
inability to find suitable facilities or personnel to open or maintain new
branch locations, interruptions or cancellation of existing sources of supply,
the pricing of and demand for distributed products, the presence of competitors
with greater financial resources, economic and market factors, and other
factors. Please see the "Risk Factors" in the Company's filings with the
Securities and Exchange Commission for a description of some, but not all,
risks, uncertainties and contingencies.
ITEM 1. BUSINESS
INTRODUCTION
The Registrant Eagle Supply Group, Inc. ("Group" or the "Company")
was organized to acquire, integrate and operate seasoned, privately-held
companies which distribute products to or manufacture products for the
building supplies/construction industry. Group maintains a website at
www.eaglesupplygroup.com.
On March 17, 1999, Group 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 ("Warrants") at $.125 per Warrant in connection with its initial public
offering. The net proceeds to Group aggregated approximately $10,206,000.
Simultaneously, Group 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") (collectively the "Subsidiaries") from TDA
Industries, Inc. ("TDA" or the "Parent") for consideration including 3,000,000
of Group's common shares. Upon the consummation of the acquisitions, each of
Eagle, JEH Eagle and MSI Eagle became wholly-owned subsidiaries of Group and
currently Group's business operations. Where permitted by the context of this
Report, references to Group or the Company means Group or the Company and the
Subsidiaries taken as a whole.
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Background information concerning the Subsidiaries:
- Eagle was founded in Florida in 1905 and was acquired by TDA in
1973. Eagle is a wholesale distributor of a complete line of roofing supplies
and related products through its own sales force and distribution facilities
to roofing supply and related products contractors and sub-contractors. Such
contractors and sub-contractors are engaged in commercial and residential
roofing repair and the construction of new residential and commercial
properties.
- JEH Co. was founded in 1982 and its business and substantially all
of its assets were purchased by JEH Eagle in July of 1997. Similar to Eagle,
JEH Eagle is a wholesale distributor of roofing supplies and related products
using similar sales methods. JEH Eagle also distributes drywall, plywood,
vinyl siding and similar products to contractors, builders, and developers
primarily engaged in the construction industry.
- MSI Co. was founded in 1979, and its business and substantially
all of its assets were purchased by MSI Eagle in October of 1998. MSI Eagle
is a wholesale distributor of cement, masonry supplies and related products
to building contractors and subcontractors through its own sales force and
distribution centers. Such contractors and subcontractors are engaged in
residential and commercial construction.
- - The operations of JEH Eagle and MSI Eagle are currently being merged.
POTENTIAL EXPANSION BY ACQUISITION
Group plans to seek 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, Group may
consider acquisition candidates in any of the foregoing regions of the United
States if an exceptional opportunity arises.
Group intends to seek out prospective acquisition candidates in
businesses that complement or are otherwise related to the business of the
Subsidiaries. Group anticipates that it will finance future acquisitions, if
any, through a combination of cash, issuances of shares of capital stock of
Group and additional equity or debt financing.
EXPANSION BY INTERNAL GROWTH
Management intends to continue to pursue expansion of the operations of
the Acquisitions by adding new distribution centers with the proceeds of its
public offering and by internal growth. During the fiscal year ended June 30,
1999, the Subsidiaries have opened five new distribution centers, with three
additional new distribution centers planned by the end of the fiscal year ending
June 30, 2000. Additionally, MSI Eagle and JEH Eagle have combined two
distribution centers into one distribution center.
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BUSINESS
Eagle and JEH Eagle are wholesale distributors of a complete line of
roofing supplies and related products through their own sales forces to roofing
supply and related products contractors and sub-contractors in the geographic
areas where they have distribution centers. Such contractors and sub-contractors
are engaged in commercial and residential roofing repair and the construction of
new residential and commercial properties.
Eagle also distributes sheet metal products used in the roofing repair
and construction industries. JEH Eagle also distributes drywall, plywood and
related products and, solely in Colorado, vinyl siding to the construction
industry. In general, products distributed by Eagle and JEH Eagle 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, ventilation materials, sheet
metal of the type used in the roofing industry, drywall and plywood.
The following chart indicates the approximate percentage of the
indicated product categories sold by Eagle and JEH Eagle for the periods
indicated:
<TABLE>
<CAPTION>
RESIDENTIAL COMMERCIAL DRYWALL AND
ROOFING ROOFING SHEET METAL PLYWOOD
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
EAGLE
Fiscal Year Ended June 30,
1998 60% 27% 12% 1%
1999 62% 26% 12% N/A
JEH EAGLE
Fiscal Year Ended June 30,
1998 85% 5% N/A 10%
1999 77% 5% 2% 16%
</TABLE>
MSI Eagle is a wholesale distributor of a complete line of cements and
masonry supplies and related products through its own direct sales force to
building and masonry contractors and sub-contractors in the Dallas/Fort Worth
metropolitan area. In general, products distributed by MSI Eagle 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 total
revenues that were provided by the indicated product categories sold by MSI Co.
for the periods indicated.
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<TABLE>
<CAPTION>
MSI EAGLE
BLOCKS/STONE SWIMMING POOL AND
BAGGED/BULK AND FIREPLACE ALL OTHER
PRODUCTS BRICKS ANGLE IRON PRODUCTS PRODUCTS
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<S> <C> <C> <C> <C> <C>
Fiscal Year Ended June 30,
1998 65% 12% 9% 1% 13%
1999 65% 15% 7% 3% 10%
</TABLE>
GROWTH
- Eagle has grown from nine distribution centers at June 30, 1991,
including locations in Florida (seven) and Alabama (two), to its current
level of sixteen distribution centers including locations in Florida
(eleven), Alabama (four) and Mississippi (one).
- JEH Eagle grew from six distribution centers in 1990, including
locations in Texas (five) and Colorado (one) to seventeen distribution
centers, including locations in Texas (five), Colorado (five), Kansas (one),
Indiana (two), Nebraska (one), Minnesota (one) and Virginia (two).
- MSI Eagle grew from its sole distribution center in 1979 to four
distribution centers, including two distribution centers now merged with JEH
Eagle.
Eagle has pursued its expansion activities by opening new centers. JEH
Co. in the past and JEH Eagle now, occasionally, establish temporary
distribution centers in response to storms which have created temporary markets.
After opening a new distribution center, the 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.
OPERATING STRATEGY
PURCHASING ECONOMIES
Eagle, JEH Eagle and MSI Eagle negotiate with suppliers to obtain
volume discounts and other favorable terms.
PRINCIPAL PRODUCTS
EAGLE AND JEH EAGLE
Eagle and JEH Eagle distribute a variety of roofing supplies and
related products and accessories foruse in the commercial and residential
roofing repair and construction industries.
<PAGE>
RESIDENTIAL ROOFING PRODUCTS. Shingles (asphalt, ceramic, slate,
concrete, fiberglass and fiberglass combined with asphalt), tiles, felt,
insulation, waterproof underlaying, ventilation systems and skylights.
COMMERCIAL ROOFING PRODUCTS. Asphalt, cements, tar, other coatings,
modified bitumen and roll roofings.
SHEET METAL PRODUCTS. These products are sold principally by
Eagle and include aluminum, copper, galvanized and stainless sheet metal.
DRYWALL/PLYWOOD PRODUCTS. These products are sold principally by JEH
Eagle and include sheetrock and plywood.
Eagle and JEH Eagle also sell accessory products related to each of the
foregoing, including, but not limited to, roofing equipment, power and hand
tools and fasteners.
MSI EAGLE
MSI Eagle distributes a variety of cement and masonry supplies and
related products and accessories for use in the residential and commercial
building and masonry industries.
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, glass
blocks.
FIREPLACE PRODUCTS. Fireboxes, dampers, flues, facings, insulations,
fireplace tools and accessories.
SWIMMING POOL PRODUCTS. Cements and molds used in pool construction.
MSI Eagle also sells 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
<PAGE>
Each of the Subsidiaries distribute products manufactured by a number of
major vendors.
EAGLE. GAF Corporation ("GAF") is its largest supplier, accounting for
approximately 23%, and 21% of Eagle's product lines during its fiscal years
ended June 30, 1998 and 1999, respectively. During the same periods, three other
vendors' products accounted for an aggregate of approximately 22%, and 20%,
respectively, of its product lines.
JEH EAGLE. Atlas Roofing Corp., a supplier of residential and
commercial roofing materials, is its largest supplier, accounting for
approximately 15% and 15% of JEH Eagle's product lines during its fiscal years
ended June 30, 1998 and 1999, respectively. During the foregoing periods, three
other vendors' products accounted for an aggregate of approximately 35% and 38%,
respectively, of JEH Eagle's product lines. Included within the foregoing three
vendors were GAF which accounted for approximately, 17% and 16% of JEH Eagle's
product lines during its fiscal years ended June 30, 1998 and 1999,
respectively.
MSI EAGLE. Texas Industries, Inc. ("TII") is its largest supplier,
accounting for approximately 27% and 28% of MSI Eagle's (including its
predecessor company, MSI Co.) product lines during its fiscal years ended June
30, 1998 and 1999, respectively. During the foregoing periods, Lehigh Portland
Cement ("Lehigh") accounted for approximately 17% and 18%, respectively, of MSI
Eagle's (including its predecessor company, MSI Co.)
product lines.
There are no written long-term supply agreements with any vendors.
Management believes that in the event of any interruption of product deliveries
from any suppliers, Group 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 Group's
salespersons including "inside" counter persons who serve walk-in and call-in
customers and "outside" salespersons calling upon past, current and potential
customers with MSI Eagle placing a greater emphasis on its outside sales force,
viewing selling inside its distribution centers as only incidental to the
"inside" personnel's other job responsibilities.
Group has no written long-term supply agreements with any customers. No
Group customer accounted for 5% or greater of sales during fiscal 1999.
COMPETITION
Group faces substantial competition in the wholesale distribution of
roofing, cement and masonry supplies from relatively smaller distributors,
retail distribution centers and, as to Eagle and JEH Eagle, from a number of
multi-regional and national wholesale distributors of building
<PAGE>
products, including suppliers of roofing products which have greater financial
resources and are larger than Group, including:
- - American Builders & Contractors Supply Co., Inc.,
- - Cameron Ashley Building Products, Inc.,
- - Allied Building Products, and
- - Bradco Supply Corporation.
Group currently competes in its customer business on the basis of:
- - competitive pricing,
- - breadth of product line,
- - prompt delivery,
- - customer service,
- - providing discounts for prompt payment,
- - credit extension, and
- - the abilities of its personnel.
To a substantially lesser degree, Group also competes with larger high volume
discount general building supply stores selling standardized lower priced
products, sometimes at lower prices, but not carrying the breadth of product
lines or offering the same service as provided by full service wholesale
distributors such as they are.
Group anticipates that it may experience competition from entities and
individuals (including venture capital partnerships and corporations, equity
funds, blind pool companies, 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 Group in connection with
identifying and effecting acquisitions of the type sought by Group. Group's
financial resources will be limited in comparison to those of many of such
competitors.
BACKLOG
Group's business is conducted on the basis of short-term orders and
prompt delivery schedules precluding any substantial backlog.
EMPLOYEES
At June 30, 1999, the Subsidiaries employed approximately 477 full-time
employees, including seven executives, 49 managerial employees, 108 salespersons
(including 53 "inside" salespersons), 228 warehouse persons, drivers and
helpers, and 85 clerical and administrative persons. Difficulties have been
experienced in retaining drivers and helpers because of the tight job market in
Group's market areas and the need for drivers to be certified by the departments
of motor vehicles and pass other testing standards, but suitable replacements
have been readily available
<PAGE>
without material adverse economic impact. Group is not subject to any collective
bargaining agreement, and each believes that its relationship with its employees
is good.
Group (excluding the Subsidiaries) has no employees other than its
officers. Group's management currently consists of five officers, including two
officers, Douglas P. Fields and Frederick M. Friedman, neither of whom are
required to commit a specific amount of their time to the affairs of Group.
ITEM 2. PROPERTIES
EAGLE
Eagle leases approximately 15,000 square feet of executive office
space located at 1451 Channelside Drive, Tampa, Florida 33629 from 39 Acre
Corp., a wholly-owned subsidiary of TDA, at an approximate annual rental of
$120,000. Approximately 7,500 square feet of such space is subleased by Eagle to
an unrelated third party tenant. See Item 13. "Certain Relationships and Related
Transactions."
The following tables list the locations of Eagle's showroom and
distribution centers.
<TABLE>
<CAPTION>
LOCATIONS OWNED BY AND LEASED FROM A WHOLLY-OWNED TDA SUBSIDIARY
<S> <C> <C>
APPROXIMATE APPROXIMATE BASE
CITY AND STATE SQUARE FOOTAGE ANNUAL RENTAL
Birmingham, Alabama...................................... 39,000 $117,000(1)
Mobile, Alabama.......................................... 24,000 $77,000
Tampa, Florida........................................... 69,000 $149,000
St. Petersburg, Florida.................................. 25,000 $73,000
Holiday, Florida......................................... 16,000 $47,000
Fort Myers, Florida...................................... 16,000 $47,000
Lakeland, Florida........................................ 20,000 $80,000
Pensacola, Florida....................................... 26,000 $80,000
</TABLE>
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(1) See Item 13. "Certain Relationships and Related Transactions."
As part of the foregoing leasing arrangements between Eagle and 39 Acre
Corp., additional undeveloped land is leased to Eagle 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), Tampa (one), St. Petersburg (two), Holiday (three), Ft. Myers
(one and a third) and Pensacola (two and a half).
<PAGE>
In March 1999, Eagle entered into written ten-year leases with 39 Acre
Corp. 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 Eagle to
insure and maintain and pay real estate taxes on the premises as is currently
required. Group believes that the rent and other terms of the lease agreements
between 39 Acre Corp. and Eagle are on at least as favorable terms as Eagle
would expect to negotiate with unaffiliated third parties. Neither Eagle nor 39
Acre Corp. will be permitted to terminate the leases before the end of their
term without a breach or default by the other party. See Item 13.
"Certain Relationships and Related Transactions."
<TABLE>
<CAPTION>
LOCATIONS LEASED FROM THIRD PARTIES
APPROXIMATE APPROXIMATE BASE
CITY AND STATE SQUARE FOOTAGE ANNUAL RENTAL
<S> <C> <C>
Decatur, Alabama............................................... 12,300 $43,000(1)
Montgomery, Alabama............................................ 24,000 $90,000(2)
Clearwater, Florida............................................ 6,000 $23,000(3)
Panama City, Florida........................................... 21,600 $63,000(4)
Fort Walton Beach, Florida..................................... 8,000 $36,000(5)
Crystal River, Florida......................................... 12,600 $42,000(6)
Tallahassee, Florida........................................... 15,000 $45,000(7)
Gulfport, Mississippi.......................................... 13,000 $32,000(8)
</TABLE>
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(1) The lease for the Decatur, Alabama, premises expires on August 31,
2000. This lease requires Eagle to maintain liability insurance on the
premises.
(2) The lease for the Montgomery, Alabama, premises expires on June 1,
2003. This lease provides for a three-year renewal option and grants
Eagle a purchase option. Pursuant to this lease, Eagle is required to
maintain liability, fire, casualty and other types of insurance
coverage on the premises.
(3) The lease for the Clearwater, Florida, premises expires on or about
June 30, 2003. Pursuant to this lease, Eagle is required to pay all
municipal, county and state taxes, maintain and carry comprehensive
public liability insurance on the premises.
(4) The lease for the Panama City, Florida, premises expires on or about
February 15, 2003 and provides for a five-year renewal option at an
increased rental based upon the CPI. Pursuant to this lease, Eagle is
required to maintain the premises and provide fire,
<PAGE>
windstorm and other insurance. Additionally, Eagle is required to pay
all sales and use taxes imposed upon the rental payments for the
premises. Eagle has the right of first refusal to purchase these
premises in certain events.
(5) The lease for the Fort Walton Beach, Florida, premises is on a
month-to-month basis. Eagle is also required to maintain liability
insurance on the premises.
(6) The lease for the Crystal River, Florida, premises expires on February
29, 2000. Eagle is also required to maintain the premises, pay certain
taxes (sales, use, rent, receipts) and pay public liability insurance
premiums.
(7) The lease for the Tallahassee, Florida, premises expires on January 31,
2001 and provides for two five-year renewal options with the base
rental escalating at the rate of three percent per year during option
years and a right of first refusal to purchase the premises. This lease
requires Eagle to pay any real estate and sales taxes, maintain the
premises and provide liability insurance.
(8) The lease for the Gulfport, Mississippi, premises expires on May 08,
2003. This lease requires Eagle to maintain liability insurance on the
premises, maintain the premises and pay any real estate and personal
property taxes.
JEH EAGLE
JEH Eagle leases approximately 8,000 and 10,000 square feet of
executive office and showroom space located at 2500 U.S. Highway 287, Mansfield,
Texas 76063 and 8221 E. 96th Avenue, Henderson, Colorado 80640, respectively,
from James E. Helzer, the President of the Group, Eagle and JEH Eagle. The
annual aggregate rental for the foregoing premises is combined with the rentals
of relevant distribution centers discussed below. See Item 13. "Certain
Relationships and Related Transactions." JEH Eagle owns the distribution center
in Littleton, Colorado (approximately 6,100 square feet and 2.5 acres of land
used for storage).
The following tables list the locations of JEH Eagle's distribution
centers.
<TABLE>
<CAPTION>
LOCATIONS OWNED BY AND LEASED FROM JAMES E. HELZER
APPROXIMATE BASE
APPROXIMATE ANNUAL RENTAL
CITY AND STATE SQUARE FOOTAGE
<S> <C> <C>
Colorado Springs, Colorado...................................... 4,000 $19,000
Henderson, Colorado............................................. 110,000 $108,000
Colleyville, Texas.............................................. 7,000 $42,000
Frisco, Texas................................................... 17,000 $60,000
Mansfield, Texas................................................ 57,700 $225,000
Mesquite, Texas................................................. 10,000 $43,000
</TABLE>
<PAGE>
The foregoing premises are leased to JEH Eagle from James E. Helzer
pursuant to five-year leases expiring in June 2002 providing the indicated base
annual rentals with provisions for five percent increases effective July 2000.
Except for the Frisco, Texas, premises, said leases grant JEH Eagle two
five-year renewal options providing for five percent increases in the base
annual rent during certain renewal years. Additional rental and other charges
for the foregoing leases include provision for JEH Eagle to insure and maintain
and pay all taxes on the premises. JEH Eagle also has a right of first refusal
to purchase the foregoing premises. Group believes that such leases are on terms
no less favorable than JEH Eagle could have obtained from independent third
parties.
As part of the foregoing leases, additional undeveloped land is leased
to JEH Eagle 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),
Colleyville (one and a half), Frisco (two and a half), Mansfield (twelve and a
half) and Mesquite (two).
<TABLE>
<CAPTION>
LOCATIONS LEASED FROM THIRD PARTIES
APPROXIMATE APPROXIMATE BASE
CITY AND STATE SQUARE FOOTAGE ANNUAL RENTAL
<S> <C> <C>
Eagle, Colorado............................................. 10,000 $72,000(1)
Fort Collins, Colorado...................................... 9,000 $32,000(2)
Indianapolis, Indiana....................................... 15,000 $66,000(3)
Burns Harbor, Indiana ................................... 6,000 $32,000(4)
Garden City, Kansas......................................... 5,200 $24,000(5)
Scotts Bluff, Nebraska ................................... 3,000 $18,000(6)
Eagan, Minnesota............................................ 31,200 $110,000(7)
Austin, Texas............................................... 56,000 $96,000(8)
Lorton, Virginia............................................ 30,000 $195,000(9)
Norfolk, Virginia........................................... 19,000 $55,000(10)
Addison, Texas.............................................. 30,000 $144,000(11)
As part of the foregoing leases, additional undeveloped land is leased
to JEH Eagle from third parties. That undeveloped land is used for storage or
reserved for future use. The location and approximate acreage of the undeveloped
land is as follows: Eagle (two), Fort Collins (one and a half), Indianapolis
(two) and Austin (six).
- -----------------------
<PAGE>
(1) The lease for the Eagle, Colorado, premises expires on June 30, 2001
but may be terminated by JEH Eagle on thirty days notice and provides
for a two-year renewal options. Pursuant to this lease, JEH Eagle is
required to pay all utility bills and assessments and maintain and
carry comprehensive public liability insurance on the premises.
(2) The lease for the Fort Collins, Colorado, premises expires on March 31,
2000. JEH Eagle is required to pay its proportionate share of taxes,
insurance and maintenance charges for these premises and maintain the
portion of the premises it occupies.
(3) The lease for the Indianapolis, Indiana, premises expires in March 2002
and requires JEH Eagle to pay real estate taxes and carry comprehensive
public liability insurance on the premises.
(4) The lease for the Burns Harbor, Indiana, premises expires in May 2001,
with a 12 month renewal option and requires JEH Eagle to carry
comprehensive public liability and other insurance on the premises.
(5) The lease for the Garden City, Kansas, premises expires on January 31,
2000 and provides for a month-to-month renewal option and requires JEH
Eagle to carry comprehensive public liability and other insurance on
the premises.
(6) The lease for the Scotts Bluff, Nebraska, premises is on a
month-to-month basis and requires JEH Eagle to maintain public
liability insurance on the premises.
(7) The lease for the Eagan, Minnesota, premises expires in June 2000 and
requires JEH Eagle to pay real estate taxes, maintenance charges and
carry comprehensive public liability and other insurance on the
premises.
(8) The lease for the Austin, Texas, premises expired and continues on a
month-to-month basis and requires JEH Eagle to pay all real estate
taxes and carry comprehensive public liability insurance on the
premises.
(9) The lease for the Lorton, Virginia, premises expires on July 31, 2000
and provides for one three-year renewal option and requires JEH Eagle
to carry comprehensive public liability and other insurance.
(10) The lease for the Norfolk, Virginia, premises expires on April 1, 2002.
JEH Eagle is also required to pay all real estate taxes and assessments
and maintain and carry comprehensive public liability insurance on the
premises.
(11) The lease for the Addison, Texas, premises expires in March 2002 and
provides for a month-to-month renewal option. JEH Eagle is also
required to pay all real and personal property taxes and to maintain
and carry property and comprehensive public liability insurance on the
premises. Adjacent to the Addison premises is an undeveloped parcel of
land of approximately two acres which is presently used for storage.
The lease on this
<PAGE>
parcel expires on May 1, 2002. JEH Eagle is also required to pay its
proportionate share of real estate taxes.
MSI EAGLE
MSI Eagle leases approximately 30,000 square feet of executive office,
showroom and warehouse space, and approximately four acres of outdoor storage
space in Mansfield, Texas from Gary L. Howard and his spouse at an annual base
rental of approximately $107,000 pursuant to a lease expiring in October 2001.
MSI Eagle has the right to two, three-year renewals at a base annual rental five
percent over the prior term. Additional rental and other charges for the
foregoing lease include provisions for MSI Eagle to insure and maintain and pay
taxes on the premises. MSI Eagle has a right of first refusal to purchase the
foregoing premises. Group believes that the foregoing lease is on terms no less
favorable than MSI Eagle could have obtained from an independent third party.
See Item 13. "Certain Relationships and Related Transactions."
The following table lists the locations of MSI Eagle's other
distribution centers, all of which are leased from independent third parties and
are located in the Dallas/Fort Worth metropolitan area of Texas.
APPROXIMATE
APPROXIMATE SQUARE BASE
CITY FOOTAGE ANNUAL RENTAL
<S> <C> <C>
Mesquite....................................................... 10,000 $30,000(1)
Southlake...................................................... 9,000 $42,000(2)
</TABLE>
- ---------------------
(1) The lease for the Mesquite premises expires in May 2000. The lease for
the Mesquite premises provides for successive three-year renewal
options. Pursuant to this lease, MSI Eagle is required to pay taxes on
the property, maintain and carry comprehensive public liability
insurance, pay all utility charges and maintain the premises.
(2) The lease for the Southlake premises expires in December 2001. Pursuant
to this lease, MSI Eagle is required to pay taxes on the property and
maintain and carry comprehensive public liability insurance and
maintain the premises.
GROUP
TDA provides office space and administrative services to Group at
its offices in New York City pursuant to a month-to-month, $3,000 per month,
administrative services agreement. See Item 13. "Certain Relationships and
Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
Group is not subject to any material legal proceedings.
<PAGE>
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.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
(a) MARKET INFORMATION
Group has two classes of securities presently registered: Common Stock and
Redeemable Common Stock Purchase Warrants (the "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" and have been since Group's initial
public offering in March 1999.
The high and low bid price quotations for Group's Common Stock, as reported by
NASDAQ, are as follows for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
From March 12 through
March 31, 1999..................................$5.03125 $4.40625
From April 1 through June 30, 1999.................$5.28125 $4.125
From July 1, 1999 through
September 23, 1999.............................$4.75 $3.50
</TABLE>
The Common Stock was held by approximately 22 holders of record as of September
21, 1999. Based upon information received from its transfer agent, following a
"broker" search, Group believes that it has approximately 900 beneficial holders
of its Common Stock.
The high and low bid price quotations for the Warrants, as reported by
NASDAQ are as follows for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
From March 12 through
March 31, 1999.................................. $1.25 $0.75
From April 1 through June 30, 1999.................. $1.875 $0.875
From July 1, 1999 through
September 23, 1999.............................. $1.625 $0.875
</TABLE>
The Warrants were held by approximately 2 holders of record, as of
September 21, 1999. Based upon information received from its transfer agent,
following a "broker" search, Group believes that it has approximately 700
beneficial holders of its Warrants.
Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessary represent
actual transactions.
<PAGE>
Group believes that NASDAQ SmallCap is the principal market for its
Common Stock and Warrants.
Dividend Policy. Group has not paid dividends to date. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors. The payment of dividends, if any, in the future will depend upon
Group's earnings, capital requirements and financial conditions and other
relevant factors. Group's Board of Directors does not presently intend to
declare any dividends in the foreseeable future but instead intends to retain
all earnings, if any, for use in Group's, Eagle's, JEH Eagle's and MSI Eagle's
business operations.
(b) USE OF PROCEEDS
On March 12, 1999, Group's Registration Statement filed with the
Securities and Exchange Commission (the "Commission") became effective under the
Securities Act of 1933 for an offering of 2,500,000 Shares and 2,500,000
Warrants exclusive of an additional 375,000 Shares and 375,000 Warrants
registered to cover an overallotment option granted to Barron Chase Securities,
Inc. ("Barron"). The offering was commenced by Barron 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 approximately
$12,859,000. Barron received a 9% commission and a 3% non-accountable expense
allowance of the gross proceeds, or an aggregate of approximately $1,543,000.
Additional offering expenses were approximately $1,110,000 resulting in net
proceeds to Group of $10,206,000. The following expenditures have been made from
the net proceeds.
- - $534,907 to repay principal and interest on borrowings of $500,000
made by Group pursuant to promissory notes issued to stockholders
of Group, including $369,755 to TDA.
- - $1,474,478 in principal and interest to Gary L. Howard, designee
and owner of Masonry Supply, Inc. ("MSI Co.") and a senior vice
president of the Group, pursuant to a five-year promissory note
issued by one of the Subsidiaries in connection with the acquisition
of the business and substantially all of the assets of MSI Co.
- - $2,624,000 to reduce outstanding balances of credit facilities of two
of the Subsidiaries.
- - 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 Group, or their associates; (b) persons owning 10% or more of
Group's shares; or (c) any affiliate of Group.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Prior to the initial public offering and the acquisitions described in
Note 2 of the consolidated financial statements, the Company has had limited
operations. The historical selected financial information included in the
statement of operations has been prepared on a basis which combines the Company
(organized on May 1, 1996), Eagle Supply, Inc. ("Eagle"), JEH/Eagle Supply, Inc.
("JEH Eagle") (acquired on July 1, 1997) and MSI/Eagle Supply, Inc. ("MSI
Eagle") (acquired on October 22, 1998) as four entities controlled by TDA
Industries, Inc. ("TDA"). Information with respect to the Company is included
from May 1, 1996 (inception), information for Eagle is included for all periods
presented, information with respect to JEH Eagle is included from July 1, 1997
and information with respect to MSI Eagle is included from October 22, 1998.
The selected financial information presented below should be read in
conjunction with the consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
YEAR ENDED JUNE 30,
COMBINED(1)
1995 1996 1997(3) 1998 1999
---- ---- ------ ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
REVENUE $50,483,469 $59,262,226 $57,575,712 $129,502,812 $159,844,520
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
GROSS PROFIT 12,576,870 11,471,124 27,975,391 37,706,722
9,739,568
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
Income From Operations 2,689,290 907,970 3,016,155 6,743,995
833,114
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
Net Income (Loss) 1,315,035 (179,252) 756,884 2,703,352
352,589
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
Other Financial Data:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
EBITDA (2) $ 1,355,082 $ 3,151,388 $ 1,133,554 $ 4,171,186 $ 8,195,013
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
Net Cash Provided by 2,538,838 (766,978) (258,827) 938,846
(Used In) Operating 165,963
Activities
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
Net Cash Used In (240,755) (863,448) (215,640) (3,704,624) (3,431,929)
Investing Activities
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
Net Cash (Used In) (1,931,121) 1,575,357 4,614,314 9,326,486
Provided By Financing 315,284
Activities
- ----------------------- ------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30
COMBINED(1)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Working Capital $ 5,450,306 $ 4,527,568 $ 6,232,891 $17,081,190 $ 26,593,105
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total Assets 14,709,463 15,778,742 15,853,837 49,471,412 75,692,955
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Long Term Debt 6,290,453 5,678,243 7,195,163 25,294,523 30,139,072
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total Liabilities 14,552,647 15,586,657 15,832,712 49,611,968 60,305,160
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Shareholders' 156,816 192,085 21,125 (140,556) 15,387,795
Equity
(Deficiency)
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
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 Supply, Inc.("Eagle"), JEH/Eagle Supply, Inc. ("JEH Eagle") (acquired on
July 1, 1997) and MSI/Eagle Supply, Inc. ("MSI Eagle") (acquired on October 22,
1998) as four entities controlled by TDA Industries, Inc. ("TDA"), because the
separate financial data of the Company would not be meaningful. Information with
respect to the Company is included from May 1, 1996 (inception), information for
Eagle in included for all periods presented, information with respect to JEH
Eagle is included from July 1, 1997 and information for MSI Eagle is included
from October 22, 1998.
2. As used herein, EBITDA reflects net income (loss) 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 of 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.
3. The loss for the year ended June 30, 1997 includes a write-off of
registration costs of $370,353 for an offering which was not consummated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This document includes statements that may constitute forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company would like to caution readers regarding certain
forward-looking statements in this document and in all of its communications to
shareholders and others, press releases, securities filings, and all other
communications. Statements that are based on management's projections,
<PAGE>
estimates and assumptions are forward-looking statements. The words "believe,"
"expect," "anticipate," "intend," and similar expressions generally identify
forward-looking statements. While the Company believes in the veracity of all
statements made herein, forward-looking statements are necessarily based upon a
number of estimates and assumptions that, while considered reasonable by the
Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown risks. Many of
the uncertainties and contingencies can affect events and the Company's actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Some of the factors that could cause actual results or future events to
differ materially include the Company's inability to find suitable acquisition
candidates or financing on terms commercially reasonable to the Company,
inability to find suitable facilities or personnel to open or maintain new
branch locations, interruptions or cancellation of existing sources of supply,
the pricing of and demand for distributed products, the presence of competitors
with greater financial resources, economic and market factors, and other
factors. Please see the "Risk Factors" in the Company's filings with the
Securities and Exchange Commission for a description of some, but not all,
risks, uncertainties and contingencies.
The following discussion and analysis should be read in conjunction with the
financial statements and related notes thereto which are included elsewhere
herein.
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
"Offering). The net proceeds to the Company aggregated approximately
$10,206,000.
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 the Acquisitions. 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 financial statements of the
Company, Eagle, JEH Eagle and MSI Eagle have been prepared as if all of the
entities had operated as a single
<PAGE>
consolidated group for all periods subsequent to each entity's respective date
of acquisition by TDA. Eagle is included in the consolidated financial
statements for all periods presented. JEH Eagle is included in the consolidated
financial statements from July 1, 1997 and MSI Eagle is included in the
consolidated financial statements from October 22, 1998, the dates that JEH
Eagle and MSI Eagle, respectively, were acquired by TDA. 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.
Results of Operations
Fiscal Year Ended June 30, 1999 Compared to the Fiscal Year Ended June 30, 1998
Revenues of the Company during the fiscal year ended June 30, 1999 increased by
approximately $30,342,000 (23.4%) compared to the 1998 fiscal year.
Approximately $9,018,000 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 4 new distribution centers ($16,077,000) and
a general improvement in market conditions.
Cost of goods sold increased between the 1999 and 1998 fiscal years at a lesser
rate than the increase in revenues between these fiscal years. Accordingly, cost
of goods sold as a percentage of revenues decreased to 77.6% in the fiscal year
ended June 30, 1999 from 78.4% in the fiscal year ended June 30, 1998, and gross
profit as a percentage of revenues increased to 22.4% in the fiscal year ended
June 30, 1999 from 21.6% in the fiscal year ended June 30, 1998. The cost of
goods sold and gross profit of MSI Eagle have not been included in calculating
the percentages for the 1999 fiscal year. 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 76.4% and gross profit as a percentage of revenues would have been
23.6%.
Operating expenses of the Company increased by approximately $6,004,000 (24.1%)
between the 1999 and 1998 fiscal years. Approximately $2,506,000 of this
increase may be attributed to the acquisition of MSI Co. by MSI Eagle and
includes approximately $113,000 of amortization of excess cost of investments
over net assets acquired (goodwill) and approximately $15,000 of amortization of
deferred financing costs attributable to the acquisition. Excluding the
operating expenses of MSI Eagle, operating expenses of the Company would have
increased by approximately $3,498,000 (14%) between the 1999 and 1998 fiscal
years. This increase may be attributed to new distribution center operating
expenses of approximately $2,040,000, an increase in the allowance for doubtful
accounts of approximately $135,000, an increase in payroll costs of
approximately $829,000, an increase in depreciation of $170,000, an increase in
warehouse and delivery expenses of approximately $125,000, an increase in office
expenses of approximately $146,000 primarily related to the implementation and
relocation of the administrative functions of the Company to Texas and an
increase in amortization of goodwill of approximately $53,000, offset by
reductions in other expense areas. Operating expenses as a percentage of
revenues were 18.9% in the 1999 fiscal year compared to 19.3% in the 1998 fiscal
year. If MSI Eagle's operating expenses were included, operating expenses as a
percentage of revenues would have changed only minimally in the 1999 fiscal
year.
<PAGE>
Interest expense increased by approximately $639,000 (34.3%) between the 1999
and 1998 fiscal years. This increase is due to the interest expense incurred by
MSI Eagle (approximately $322,000) on its credit facility and other indebtedness
used primarily to fund its acquisition of MSI Co., the increase in interest
expense on borrowings under revolving credit loans (approximately $300,000), and
short-term borrowings by the Company (approximately $17,000).
Net income and EBITDA (earnings before interest, taxes, depreciation and
amortization) for the fiscal year ended June 30, 1999 were approximately
$2,703,000 and $8,195,000, respectively, compared to net income and EBITDA of
approximately $757,000 and $4,171,000, respectively, for fiscal 1998,
representing a 257.2% increase in net income and a 96.5% increase in EBITDA.
Earnings per share for the fiscal year ended June 30, 1999 were $.43 compared to
$.14 for fiscal 1998, an increase of 207.1%. EBITDA per share for the fiscal
year ended June 30, 1999 was $1.30 compared to $.77 for fiscal 1998, an increase
of 68.8%.
Fiscal Year Ended June 30, 1998 Compared to the Fiscal Year Ended June 30, 1997
Revenues of the Company during the fiscal year ended June 30, 1998 increased by
approximately $71,927,000 (124.9%) compared to the 1997 fiscal year. This
increase was due almost entirely to the acquisition of JEH Co. in July 1997 by
JEH Eagle. Sales of JEH Eagle during the fiscal year ended June 30, 1998 were
approximately $71,006,000. Excluding the sales of JEH Eagle, revenues of the
Company would have been approximately $58,497,000 in the fiscal year ended June
30, 1998, an increase of approximately $921,000 (1.6%) from the comparable 1997
fiscal year. This increase was comprised of an increase of approximately
$3,195,000 in sales to customers out of warehouse inventory offset by a decrease
in direct sales shipments to customers from vendors of approximately $2,274,000.
Sales of both Eagle and JEH Eagle during the fiscal year ended June 30, 1998
were adversely effected by the "El Nino" weather patterns. Unusually heavy and
record rainfall in the southeast and the paucity of hail storms in the southwest
negatively impacted sales of Eagle and JEH Eagle, respectively, whereas
hurricanes and intense rainstorms accompanied by strong winds, which can cause
significant roof damage, did not occur in any significant amount in the
Company's market areas.
Cost of goods sold increased between the fiscal years 1998 and 1997 at a lesser
rate than the increase in revenues between these fiscal years. Accordingly, cost
of goods sold as a percentage of revenues decreased to 78.4% in the fiscal year
1998 from 80.1% in the fiscal year 1997, and gross profit as a percentage of
revenues increased to 21.6% in the fiscal year 1998 from 19.9% in the fiscal
year 1997. This increase in gross profit margin may be attributed primarily to
the relative increase in fiscal year 1998 sales to customers out of warehouse
inventory which carry a higher gross profit margin than direct sales shipments
to customers from vendors. Whereas a significant amount of the sales to Eagle's
customers are direct shipments from vendors, almost all of the sales to
customers of JEH Eagle are out of warehouse inventory.
<PAGE>
Operating expenses of the Company increased by approximately $14,396,000
(136.3%) between the fiscal years 1998 and 1997. This increase was due almost
entirely to the acquisition of JEH Co. by JEH Eagle. Operating expenses of JEH
Eagle during the fiscal year 1998 were approximately $13,720,000, including
approximately $172,000 of amortization of excess cost of investments over net
assets acquired (goodwill) and approximately $58,000 of amortization of deferred
financing costs attributable to the acquisition. During the fiscal year 1998,
management of JEH Eagle evaluated its accounts receivable and determined that no
further deterioration of the customer accounts specifically reserved in 1997 had
occurred, and, accordingly, no specific increase in the provision for doubtful
accounts was required beyond the normal level which has ranged between .8% and
1.4% of sales. During fiscal 1998, collections of customer accounts receivable
specifically reserved in fiscal 1997 were not material. Excluding the operating
expenses of JEH Eagle, operating expenses of the Company would have been
approximately $11,239,000 in the fiscal year 1998, an increase of approximately
$676,000 (6.4%) from the fiscal year 1997. This increase was due primarily to
the increase in data processing expenses of approximately $251,000 due to an
upgrading, in March 1997, of Eagle's data processing hardware and software, and
an increase in payroll costs of approximately $441,000 due primarily to the
additional manpower needed to service the increased sales out of warehouse
inventory. Operating expenses as a percentage of revenues were 19.3% in the
fiscal year 1998 compared to 18.3% in the fiscal year 1997.
Interest expense increased by approximately $1,262,000 (210.7%) between the
fiscal years 1998 and 1997. This increase was due principally to the interest
expense incurred by JEH Eagle (approximately $1,250,000) on its credit facility
used primarily to fund its acquisition of JEH Co. Excluding the interest expense
of JEH Eagle, interest expense of the Company would have been approximately
$612,000 in fiscal 1998, an increase of approximately $13,000 (2.2%) from fiscal
1997. This increase was due to the increase in interest expense on short-term
borrowings by the Company (approximately $18,000), offset by the reduction in
interest expense on borrowings under Eagle's credit facility (approximately
$5,000).
Net income for the fiscal year ended June 30, 1998 was approximately $757,000
compared to a net loss of approximately $(179,000) for fiscal 1997. EBITDA
(earnings before interest, taxes, depreciation and amortization) for the fiscal
year ended June 30, 1998 was approximately $4,171,000 compared to approximately
$1,134,000 for fiscal 1997, a 268% increase in EBITDA.
Earnings per share for the fiscal year ended June 30, 1998 were $.14 compared to
a loss of $(.03) for fiscal 1997. EBITDA per share for the fiscal year ended
June 30, 1998 was $.77 compared to $.21 for fiscal 1997 a 266.7% increase in
EBITDA per share.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1996
Revenues of the Company during the fiscal year ended June 30, 1997 decreased by
approximately $1,687,000 (2.8%) compared to the 1996 fiscal year. This decrease
was primarily due to the decrease in revenues derived from storm related
business in fiscal 1996 from Hurricane Opal (approximately $6,495,000) and a
decrease in revenues from distribution centers that did not benefit from
Hurricane Opal (approximately $578,000). That decrease in revenues was the
result
<PAGE>
of a decline in general business conditions. This decrease in revenues was
partially offset by additional revenues generated in fiscal 1997 from
distribution centers opened in fiscal 1996 (approximately $5,386,000).
Cost of goods sold decreased between the fiscal years 1997 and 1996 at a lesser
rate than the decrease in revenues between these fiscal years. Accordingly, cost
of goods sold as a percentage of revenues increased to 80.1% in the fiscal year
1997 from 78.8% in the fiscal year 1996, and gross profit as a percentage of
revenues decreased to 19.9% in the fiscal year 1997 from 21.2% in the fiscal
year 1996. This decrease in gross profit margin may be attributed primarily to
the decrease in fiscal 1997 in sales generated at distribution centers which
benefited from storm related business and sales to customers out of warehouse
inventory which carry a higher gross profit margin than direct sales shipments
to customers from vendors.
Operating expenses increased by approximately $675,000 (6.8%) between the fiscal
years 1997 and 1996. Operating expenses in fiscal 1997 includes approximately
$546,000 of operating expenses attributable to distribution centers opened in
fiscal 1996. Operating expenses as a percentage of revenues were 18.3% in the
fiscal year 1997 compared to 16.7% in the fiscal year 1996.
Other expenses of approximately $370,000 in fiscal 1997 represents registration
costs and expenses incurred by the Company in connection with the filing in 1996
of its registration statement for an initial public offering of its securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company initially funded itself since inception 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 approximately $10,206,000
in the Offering.
The Company's working capital was approximately $26,593,000 at June 30, 1999
compared to approximately $17,081,000 at June 30, 1998. At June 30, 1999, the
Company's current ratio was 1.88 to 1 compared to 1.71 to 1 at June 30, 1998.
Cash provided by operating activities for the fiscal year ended June 30, 1999
was approximately $939,000. Such amount consisted primarily of net income of
$2,703,000, depreciation and amortization of $1,622,000, allowance for doubtful
accounts of $623,000, increased levels of accounts payable of $930,000, accrued
expenses and other current liabilities of $488,000, federal and state income
taxes due to TDA of $118,000,federal and state income taxes of $608,000, offset
by increased levels of accounts and notes receivable of $3,258,000, inventories
of $2,394,000 other current assets of $239,000, and deferred income taxes of
$261,000.
<PAGE>
Cash used in investing activities for the fiscal year ended June 30, 1999 was
approximately $3,432,000. Such amount consisted primarily of capital
expenditures of $1,983,000 and payment for the purchase of the business and
substantially all of the net assets of MSI Co. of $1,520,000.
Capital expenditures were approximately $1,983,000 for the fiscal year ended
June 30, 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 decided.
Cash provided by financing activities for the fiscal year ended June 30, 1999
was approximately $9,326,000. Such amount consisted primarily of principal
borrowings on long-term debt of $170,481,000, 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 the Offering for net
proceeds of approximately $10,206,000, a 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 $170,931,000, repayment of notes
payable-shareholders of $500,000 and cash dividends paid to TDA of $1,200,000.
During the fiscal year ended June 30, 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 the fiscal year ended June 30, 1999, through the date of the Offering,
Eagle and JEH Eagle made cash dividend payments to TDA of $450,000 and
$750,000,respectively, and, in connection with the Offering, Eagle cancelled, in
the form of a non-cash dividend of $3,067,002, all of TDA's indebtedness to
Eagle, except for $487,205 relating to and offsetting a mortgage in the same
amount on property previously owned by Eagle and for which Eagle had been the
primary obligor.
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 principal amount of $864,652. 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, the designee of JEH Co., in fulfillment of certain of such future
consideration (see Note 2 to the consolidated financial statements). For the
fiscal year ended June 30, 1999, approximately $1,773,000 of additional
consideration is payable to JEH Co. All of
<PAGE>
such additional consideration increased goodwill and is being amortized over the
remaining life of the goodwill. No additional consideration was payable to JEH
Co. for fiscal 1998.
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 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 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 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 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 financial statements). Such consideration
increased goodwill and is being amortized over the remaining life of the
goodwill. No additional consideration is payable to MSI Co. for fiscal 1999.
CREDIT FACILITIES
Eagle is a party to a loan agreement (last amended December 11, 1998) which
provides for a credit facility in the aggregate amount of $10,900,000. 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. Certain current assets and automotive equipment of Eagle (aggregating
approximately $16,968,000 at June 30, 1999) collateralize the obligations under
the credit facility. The revolving credit and equipment 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 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. This credit facility is 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 initial term of the credit
facility matures on 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
<PAGE>
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 is guaranteed by the Company and TDA.
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 equal monthly installments,
based on an eighty-three month amortization schedule, 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 is 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.
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, JEH Eagle's and MSI
<PAGE>
Eagle's administrative functions, including data processing. As their hardware
and software vendors have certified that their products are Y2K compliant,
management of the Company has determined that the Y2K compliance issue will not
pose significant operational problems for its 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 Company 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 will 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 third quarter of calendar 1999,
all other testing will be completed in October 1999. However, there can be no
assurances that customers, suppliers and/or service providers on whom the
Company relies will resolve their Y2K issues accurately, thoroughly and/or on
time. Contingency plans were considered and will be in place by the end of Y2K
testing, which will be completed in October 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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
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, 2001 and retroactive
application is not permitted. Management does not believe that this Statement
will have a significant impact on the Company.
<PAGE>
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 Company's first quarter of the
fiscal year ending June 30, 2000. Management does not believe that this
Statement will have a significant impact on the Company.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements annexed to this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of Group are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Douglas P. Fields(1) 57 Chairman of the Board and Chief Executive Officer
James E. Helzer(1) 59 President, Vice Chairman of the Board of Directors
Frederick M. Friedman(1) 59 Executive Vice President, Treasurer, Secretary and a Director
E.G. Helzer 48 Senior Vice President-Operations
Gary L. Howard 44 Senior Vice President-Operations
Steven R. Andrews(2) 44 Vice President-Legal and a Director
Paul D. Finkelstein(2)(3) 57 Director
George Skakel III(2)(3) 48 Director
John E. Smircina(1)(3) 66 Director
</TABLE>
Group's Management believes that Messrs. Andrews, Finkelstein, Smircina
and Skakel may be considered to be independent directors.
- -----------------------
(1) Members of the Executive Committee of Group's Board of Directors.
(2) Members of the Audit Committee of Group's Board of Directors. Mr.
Finkelstein is Chairman of the Audit Committee.
(3) Members of the Compensation Committee of Group's 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 the Chairman of the Board of Directors,
Chief Executive Officer and a Director of Group since inception. From Group's
inception until July 1996, Mr. Fields also served as its 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, including Eagle, Cooper
Flooring International, Inc. ("CFI") (which was a subsidiary of TDA until it was
sold by TDA on June 12,
<PAGE>
1998) and Northeastern Plastics, Inc. ("NPI") (which was a subsidiary of TDA
until August 1996 when it was acquired by Acqueren, Inc. ("AI") of which Mr.
Fields was Chief Executive Officer until TDA sold its interest in AI in August
1998). Since July 1997 and October 1998, Mr. Fields has held the positions of
Chairman of the Board and Chief Executive Officer of JEH Eagle and MSI Eagle,
respectively. TDA is a holding company that is the majority stockholder of
Registrant 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 Group's affairs than he deems reasonably necessary to discharge his
duties to Group. 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 Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a Director of Group 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, including Eagle, CFI (which was a subsidiary of TDA
until it was sold by TDA on June 12, 1998) and NPI (which was a subsidiary of
TDA until August 1996 when it was acquired by AI in which Mr. Friedman held
similar positions until TDA's interest in AI was sold in August 1998). Since
July 1997 and October 1998, Mr. Friedman has held the same positions with JEH
Eagle and MSI Eagle, respectively. Mr. Friedman devotes no less time to Group's
affairs than he deems reasonably necessary to discharge his duties to Group. 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 the President of JEH Eagle since July 1997,
President of Group and Eagle since December 1997 and Vice Chairman of Group's
Board of Directors since March 1999. From 1982 until July 1997, Mr. James E.
Helzer was the owner and Chief Executive Officer of JEH Co.
E.G. Helzer has been the Senior Vice President-Operations of JEH
Eagle, Eagle and Group since July 1997, December 1997 and December 1997,
respectively. From 1994 until July 1997, Mr. E.G. Helzer was the Vice President
of 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.
Gary L. Howard has been the Senior Vice President-Operations of Group
and JEH Eagle since July 1999, had been Vice President-Masonry Products of Group
from December 1998 to July 1999 and has been President of MSI Eagle since
October 1998. From at least 1994 until October 1998, Gary L. Howard was the
owner and chief executive officer of MSI Co.
Steven R. Andrews, Esq. has been a Director of Group since May 1996 and
Vice President-Legal of Group since March 1999. 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. In his capacity as
Group's Vice President-Legal, Mr. Andrews has entered into an agreement with
Group
<PAGE>
requiring him to review Group's and its 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 Group's Board of
Directors. Group's agreement with Mr. Andrews does not require him to devote any
minimum amount of time to the foregoing obligations and provides him with
compensation of $1,000 per month.
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 Director of Group 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 Director of Group 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.
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, and he was a director of AI from February
1996 until TDA sold its interest in AI in August 1998. Mr. Smircina became a
Director of Group 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.
Group's Directors serve until the next annual meeting of stockholders
of Group and until their successors are elected and duly qualified. Officers of
Group are elected annually by the Board of Directors and serve at the discretion
of the Board of Directors. Group's 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 necessary.
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. The Board of Directors of Group 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 the business and affairs of Group.
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
<PAGE>
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.
In order to secure the NASDAQ listing of Group's securities, Group
agreed with NASDAQ:
- - to establish Audit and Compensation Committees, each with a majority of
independent directors;
- - to have independent director oversight of materially related party
transactions including potential conflicts of interest and to have
independent directors determine when stockholder approval is to be
obtained for any such transactions;
- - that neither Messrs. Fields, Friedman nor TDA will (a) receive
finders fees in connection with any acquisition by Group or (b)
dispose of any of Group's shares of Common Stock for a two-year
period from NASDAQ listing;
- - to create the position of "Vice President-Legal" who will report to
Group's Audit Committee and who will be removed or re-elected only by
the vote of Group's stockholders;
- - that purchasers of shares of Group's Common Stock in Group's IPO
would be entitled, but not required, to purchase an equal number
of warrants;
- - to repeat the information set forth in the immediately preceding
paragraph in Group's first five annual reports; and
- - that two years after Group's securities are listed on NASDAQ, the
Audit Committee is to certify that the foregoing requirements have
been complied with.
KEY PERSON LIFE INSURANCE
JEH Eagle maintains a "key person" life insurance policy in the amount
of $2,000,000 on the life of James E. Helzer, naming JEH Eagle beneficiary of
such policy. MSI Eagle has "key person" life insurance on the life of Gary L.
Howard, in the amount of $2,000,000 naming MSI
<PAGE>
Eagle beneficiary of such policy. Group maintains "key person" life insurance
policies in the amount of $1,000,000 on each of the lives of Douglas P. Fields
and Frederick M. Friedman.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect
to the compensation paid by Group or the Subsidiaries for services rendered in
all capacities during each of the Subsidiaries last two fiscal years by those
persons indicated. Neither Group, Eagle, nor any of the Subsidiaries have had
any other executive officer whose total annual salary and bonus exceeded
$100,000 for either of said fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
NAME AND PRINCIPAL POSITION JUNE 30, SALARY BONUS
<S> <C> <C> <C>
Douglas P. Fields 1999 $75,833 $0
Chief Executive Officer of Group, Eagle, JEH Eagle and MSI Eagle 1998 $ 0 $0
James E. Helzer 1999 $300,000 $0
President of Group, Eagle and JEH Eagle 1998 $275,000 $0
E.G. Helzer 1999 $150,000 $0
Senior Vice President of Group, Eagle and JEH Eagle 1998 $137,500 $0
Gary L. Howard 1999 $226,200 $0
Vice President-Masonry Products 1998 N/A N/A
and President of MSI Eagle
</TABLE>
Employment Agreements and Arrangements
Group, Eagle, JEH Eagle and MSI Eagle have entered into agreements with
five executive officers who are anticipated to receive cash compensation in
excess of $100,000 per year.
Group and Eagle have entered into employment agreements with Messrs.
Fields and Friedman pursuant to which they act as Chairman of the Board and
Chief Executive Officer, and Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and a Director of Group and Eagle, respectively, for a
five-year period commencing in March 1999, at annual salaries of $200,000 each,
subject to annual increases or bonuses as may be determined by the Board of
Directors.
<PAGE>
JEH Eagle has entered into agreements with Messrs. Fields and Friedman
pursuant to which they act as Chairman of the Board of Directors and Chief
Executive Officer, and Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and a Director of JEH Eagle, respectively, for a five-year
period which commenced in July 1997, at annual salaries of $60,000 each, subject
to annual increases and bonuses as may be determined by JEH Eagle's Board of
Directors. The compensation payable to Messrs. Fields and Friedman under these
employment agreements commenced in March 1999.
Pursuant to the foregoing employment agreements, Messrs. Fields' and
Friedman's written consent is required if they are to be employed other than in
proximity to their residences. Messrs. Fields and Friedman reside in Connecticut
and New York, respectively. The agreements require Eagle and JEH Eagle to
provide their beneficiaries and each of them, respectively, with twelve months
salary in the event of death or disability and indemnify Messrs. Fields and
Friedman to the full extent permitted under the Delaware General Corporation
Law. Their agreements do not require either Messrs. Fields or Friedman to commit
a specific amount of their time to the affairs of Group, Eagle or JEH Eagle.
Messrs. Fields and Friedman will devote no less time than they deem reasonably
necessary to carry out their duties to Group, Eagle, JEH Eagle and MSI Eagle.
Group's and JEH Eagle's agreements with Messrs. Fields and Friedman
contain provisions for payments of salary and benefits following a change of
control (as defined) of Group or JEH Eagle, the failure to reappoint either of
them to his position, a salary reduction or Group's or JEH Eagle's failure to
perform its obligations under their respective agreements. In general, under
such circumstances, each of Messrs. Fields and Friedman would be entitled to a
cash payment equivalent to his salary for the remaining term of his agreement,
and continued life, health and disability insurance benefits for a period of two
years.
JEH Eagle has also entered into agreements with Messrs. James E. Helzer
and E.G. Helzer pursuant to which they serve as President and Senior Vice
President-Operations, respectively, of JEH Eagle for terms of five and three
years, respectively, which commenced in July 1997, at compensation rates of
$250,000 and $125,000 per year, respectively, subject to annual review by JEH
Eagle's Board of Directors. Additionally, in December 1997, James E. Helzer
accepted the positions of President of Group and Eagle, and E.G. Helzer accepted
the positions of Senior Vice President-Operations of Group and Eagle. As a
result, James E. Helzer's rate of compensation was increased by $50,000 to
$300,000 per year and he is required to devote approximately 80% of his working
time to Group, Eagle and JEH Eagle; and 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. Additionally, James E. Helzer
and E.G. Helzer are entitled to receive 20% and 6%, respectively, of Eagle's
earnings before taxes in excess of $600,000 per year. James E. Helzer and E.G.
Helzer are employed as President and Senior Vice President-Operations,
respectively, of Group and Eagle pursuant to oral agreements that can be
terminated by either party without notice or penalty.
MSI Eagle has entered into an agreement with Gary L. Howard pursuant to
which he serves as an executive officer of MSI Eagle, currently President, for a
term ending on June 30, 2003, at an annual salary of $260,000, subject to annual
review by MSI Eagle's Board of Directors.
<PAGE>
Additionally, as of November 1998, Gary L. Howard has accepted the position of
Vice President-Masonry Products of Group and as of July 1999 as Senior Vice
President-Operations of Group and JEH Eagle. Gary L. Howard, as the sole
shareholder and chief executive officer of MSI Co., received compensation from
MSI Co. of approximately $725,000 for MSI Co.'s fiscal year ended June 30, 1998.
Steven R. Andrews, Esq. serves as Group's Vice President-Legal, and
he is compensated at the rate of $1,000 per month. Group's agreement with Mr.
Andrews is oral and can be terminated by either party without notice or penalty.
Group has granted to each of Messrs. James H. Helzer, E.G. Helzer,
Steven R. Andrews and Gary L. Howard options exercisable to purchase 120,000,
60,000, 100,000, 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% 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 they are employees of Group on such dates.
Messrs. Fields, Friedman, Helzer, Howard and Andrews hold the
positions set forth opposite their names for the corporations indicated below:
<TABLE>
<CAPTION>
NAME GROUP EAGLE JEH EAGLE MSI EAGLE
<S> <C> <C> <C> <C>
Douglas P. Fields Chairman of the Chairman of the Chairman of the Chairman of the
Board and Chief Board and Chief Board and Chief Board and Chief
Executive Officer Executive Officer Executive Officer Executive Officer
James E. Helzer President and Vice President and President and Director
Chairman of the Director Director
Board of Directors
Frederick M. Executive Vice Executive Vice Executive Vice Executive Vice
Friedman President, Treasurer, President, Treasurer, President, Treasurer, President,Treasurer,
Secretary and Secretary and Secretary and Secretary and
Director Director Director Director
E.G. Helzer Senior Vice Senior Vice Senior Vice
President-Operations President-Operations President-Operations
Gary L. Howard Senior Vice Senior Vice President
President-Operations President-Operations
Steven R. Andrews Vice President-
Legal and Director
</TABLE>
<PAGE>
AGREEMENT WITH MR. SKAKEL
Group and Mr. Skakel have entered in to an agreement for a
term of six months pursuant to which Mr. Skakel has agreed to introduce Group to
potential financing sources and, in the event Group successfully concludes
certain financing arrangements, with sources introduced by Mr. Skakel, Mr.
Skakel will be entitled to receive a fee of 7% or 4% of any equity or certain
debt financing, respectively.
COMPENSATION OF DIRECTORS
Group's Directors not receive compensation for their services as
directors; however, the Board of Directors may authorize the payment of
compensation to directors for their attendance at regular and special meetings
of the Board and for attendance at meetings of committees of the Board as is
customary for similar companies. Directors are reimbursed for their reasonable
out-of-pocket expenses incurred in connection with their duties to Group.
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. Group's Certificate of Incorporation
exonerates its directors from monetary liability to the extent permitted by this
statutory provision. Group has 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, Group's 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 Group), directors and consultants.
The total number of shares of Common Stock for which options may be granted
under the Stock Option Plan is 1,000,000 shares. Options exercisable into
878,300 shares of Common Stock to various of Group's employees, including
options to purchase an aggregate of 380,000 shares issued to Messrs. James E.
Helzer, E.G. Helzer, Gary L. Howard and Steven R. Andrews, Esq. have been
granted at a $5.00 per share exercise price.
<PAGE>
Messrs. Finkelstein and Skakel have each been granted options to
purchase 10,000 shares of Common Stock pursuant to Group's Stock Option Plan.
Such options have a term of ten years and will be exercisable at $5.00 per share
and vest on March 17, 2000.
The Stock Option Plan is administered by the Board of Directors and can
be administered by a committee appointed by the Board of Directors which will
determine 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 Group's 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 Group's 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 EXECUTIVE OFFICERS AND
DIRECTORS OF GROUP
The table below shows, as to each of the executive officers and
directors of Group and as to all executive officers and directors of Group as a
whole, the following information with respect to stock options granted under the
Stock Option Plan: (i) the aggregate amounts of shares of Common Stock subject
to options to be granted; and (ii) the price or range per share option exercise
price for options granted.
<PAGE>
<TABLE>
<CAPTION>
NAMES OF EXECUTIVE OFFICERS, SHARES SUBJECT PER SHARE
DIRECTORS AND DIRECTOR NOMINEES TO OPTIONS EXERCISE PRICE
<S> <C> <C>
James E. Helzer(1) 120,000 $5.00
E.G. Helzer(1) 60,000 $5.00
Gary L. Howard 10,000 $5.00
Steven R. Andrews(1) 100,000 $5.00
Paul D. Finkelstein(2) 10,000 $5.00
George Skakel III(2) 10,000 $5.00
All Executive Officers and Directors as a group (9 persons) 400,000 $5.00
</TABLE>
- ------------------
(1) All of the options granted to Messrs. James E. Helzer, E.G. Helzer, Gary L.
Howard and Steven R. Andrews vest at a rate of 20% per year from March 17, 1999
with the initial 20% vesting on March 17, 2000, 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) The options granted to Messrs. Finkelstein and Skakel will vest on March 17,
2000.
OTHER COMPENSATION
Eagle, JEH Eagle and MSI Eagle provide basic health, major medical and
life insurance for its employees, including its 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 by Group, Eagle, JEH Eagle or MSI Eagle. These and other
benefits may be adopted by Group for its employees or the employees of its
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
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
<PAGE>
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.
No contributions were made to the 401(k) Plan by Eagle or JEH Eagle
during the fiscal years ended June 30, 1998 and 1999. Amounts to be contributed
in the future are at the discretion of Eagle's and JEH Eagle's Boards of
Directors. 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.
The trustees under the 401(k) Plan are Robert L. Noojin and Steven R. Skrotsky.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1999, certain
information concerning beneficial ownership of shares of Common Stock with
respect to (i) each person known to Group to own 5% or more of the outstanding
shares of Common Stock, (ii) each executive officer and director of Group, and
(iii) all officers and directors of Group as a whole:
<TABLE>
<CAPTION>
AMOUNT AND APPROXIMATE
NATURE PERCENTAGE OF
OF BENEFICIAL COMMON STOCK
IDENTITY OWNERSHIP OWNED
<S> <C> <C>
TDA Industries, Inc.(1) 5,100,000(2) 60.3%
Douglas P. Fields(1) 5,100,000(2) 60.3%
Frederick M. Friedman(1) 5,100,000(2) 60.3%
James E. Helzer(1) 300,000(3) 3.6%
Gary L. Howard (1) 250,000(3) 3.0%
E.G. Helzer(1) 0(3) 0%
Steven R. Andrews(1) 100,000(3) 1.2%
Paul D. Finkelstein(1) 0(3) 0%
John E. Smircina(1) 5,100,000(2) 60.3%
George Skakel III(1) 0(3) 0%
All executive officers and directors 5,750,000(2)(3) 68.1%
as a group (9 persons)
</TABLE>
- -------------------
The addresses for the foregoing entity 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. Helzer, 2500 U.S. Highway 287, Mansfield, Texas 76063.
- - Mr. Howard, 2090 Highway 157 N., Mansfield, Texas 76063.
- - Mr. Andrews, 822 North Monroe Street, Tallahassee, Florida 32303.
- - Mr. Finkelstein, c/o Regis Corp., 7201 Metro Boulevard, Minneapolis, MN
55439-2130.
<PAGE>
- - Mr. Smircina, 616 N. Washington Street, Alexandria, Virginia 22314.
- - Mr. Skakel, 333 Ludlow Street, Stamford, Connecticut 06902.
(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 securities of Group 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 Group's Stock Option Plan. See Item
10. "Directors and Executive Officers of Registrant."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JEH EAGLE
In July 1997, JEH Eagle acquired the business and substantially all of
the assets of JEH Co., which is wholly-owned by James E. Helzer, now the
President of Group, Eagle and JEH Eagle. See "- The Subsidiaries - The 1997
Acquisition of JEH Co."
In order to pay a substantial portion of the purchase price for the
acquisition of JEH Co.'s business and to provide working capital to JEH Eagle,
JEH Eagle in July 1997 entered into a loan agreement for a credit facility of up
to $20,000,000 (the "JEH Facility") guaranteed by Group and TDA and
collateralized by substantially all of the assets of JEH Eagle. Of the
$13,878,000 initial cash payment portion of the $14,768,000 JEH Co. tentative
purchase price, including transaction expenses, approximately $12,500,000 was
supplied pursuant to the JEH Facility and approximately $1,350,000 was
contributed to JEH Eagle by TDA as equity capital. In connection with the
acquisition of JEH Co., JEH Eagle paid TDA a financing fee of $150,000. See
Item. 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
James E. Helzer had rented to JEH Co. and continues to rent to JEH
Eagle, pursuant to five-year written leases, the premises for several of JEH
Eagle's distribution centers and JEH Eagle's executive offices. Rental payments
to Mr. Helzer for the several distribution facilities he leases to JEH Eagle
aggregated $498,000 during Fiscal 1999. See Item. 2. "Properties."
JEH Co. had substantial indebtedness to James E. Helzer for funds
advanced by him to JEH Co. As part of JEH Eagle's purchase of the business and
substantially all of the assets of JEH Co., JEH Eagle did not assume this
liability to Mr. Helzer.
During its fiscal year ended June 30, 1999 JEH Eagle made sales
aggregating approximately $546,000, respectively, to Classic Roofs and Indy
Roofing, respectively, two entities owned by Jay James Helzer, the son of James
E. Helzer.
Pursuant to an agreement, TDA provides JEH Eagle with certain services
including: (i) managerial, (ii) strategic planning, (iii) banking negotiation,
(iv) investor relations, and (v)
<PAGE>
advisory services relating to acquisitions for a five-year term which commenced
in July 1997. A $3,000 monthly fee commenced in March 1999.
MSI EAGLE
In October 1998, MSI Eagle acquired the business and substantially all
of the assets of MSI Co., which is wholly-owned by Gary L. Howard, now a Senior
Vice President-Operations of Group and JEH Eagle and President of MSI Eagle. See
" - The Subsidiaries - The 1998 Acquisition of MSI Co."
In order to pay a substantial portion of the purchase price for the
acquisition of MSI Co.'s business and assets and to provide working capital to
MSI Eagle, MSI Eagle in October 1998 entered into a loan agreement for a credit
facility of up to $9,075,000 (the "MSI Facility") guaranteed by Group and TDA
and collateralized by substantially all of the assets of MSI Eagle. Of the
$6,492,000 cash payment portion of the approximate $8,538,000 tentative purchase
price for the business and substantially all of the assets of MSI Co., including
transaction expenses, approximately $4,250,000 was supplied pursuant to the MSI
Facility, $1,000,000 was invested by TDA into MSI Eagle as an equity investment
and $1,000,000 was lent to MSI Eagle by TDA pursuant to a six percent two-year
note in that principal amount payable in full in October 2000. TDA has agreed
with MSI Eagle's credit facility lending institution to defer the interest
payable on such note until its maturity.
TDA-EAGLE
TDA is a holding company which operated several business enterprises
that included Eagle, JEH Eagle and MSI Eagle until their acquisition by Group in
March 1999. For TDA's fiscal year ended June 30, 1999, the revenues of the
Subsidiaries constituted a majority of TDA's revenues. During its fiscal year
ended June 30, 1999, Eagle and JEH Eagle made cash dividend payments to TDA of
$450,000 and $750,000, respectively. See " - The Subsidiaries - In General" for
a discussion of a non-cash dividend paid by Eagle to TDA. Since the acquisition
of the Subsidiaries, all dividends ceased and accounting and auditing fees have
been incurred directly by Eagle. See the Financial Statements and the Notes
thereto.
Eagle is party to a loan agreement which provides for a credit facility
in the amount of $10,900,000 (the "Eagle Facility") and is due in October 2003
and is guaranteed by Group and TDA. Eagle's obligations under the Eagle Facility
are collateralized by certain tangible and intangible current assets and certain
automotive equipment of Eagle with borrowings under the revolving credit loan of
the Eagle Facility based on a formula relating to certain levels of receivables
and inventory, as defined therein. During Eagle's fiscal year ended June 30,
1995, Eagle had used its borrowings under the Eagle Facility to repay $2,325,533
of its indebtedness to TDA and to advance $3,308,681 to TDA. At June 30, 1999,
Eagle's borrowings under the Eagle Facility were $9,425,117. See Item. 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<PAGE>
In October 1998, Eagle Holding, Inc. ("Holding") lent Eagle $400,000
repayable on demand but without interest. Also in October 1998, TDA lent Eagle
$1,000,000 repayable on demand without interest. The loans were made to enhance
Eagle's working capital. These loans were paid in full prior to the closing of
Group's initial public offering and the acquisition of the Subsidiaries.
See "- The Subsidiaries - Eagle Related Party Transactions" for further
information concerning transactions among Eagle and its affiliates.
In February of 1998, Group sold an aggregate of $300,000 in principal
amount of its promissory notes to three of its stockholders, including $150,000
in principal to TDA, for aggregate gross proceeds of $300,000. The notes bore
15% interest per year through June 30, 1998 and 6% per year after that date. In
August 1998 and January 1999, TDA lent Group an aggregate of $200,000 pursuant
to two-year 6% notes. Group paid the notes in full from the net proceeds of
Group's initial public offering by the payment of $534,907 in principal and
interest in March 1999.
TDA provides office space and administrative services to Group at TDA's
offices in New York City pursuant to a month-to-month administrative services
agreement requiring a $3,000 monthly payment to TDA. Prior to March 1999, Group
utilized office space and administrative services provided by TDA without
charge. At June 30, 1999, TDA had been paid $10,500 pursuant to this agreement.
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, Group's Chief Executive
Officer and Chairman of its Board of Directors and Executive Vice President,
Chief Financial Officer, Treasurer, Secretary, and a Director of Group,
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 Group's, Eagle's, JEH Eagle's and MSI Eagle's transactions with
TDA. TDA and/or certain of its subsidiaries derive funds from the operation of
an indoor tennis facility, commercial realty and lease payments from Eagle.
These sources pay TDA's operating expenses, including the payment of salaries
and benefits to Messrs. Fields and Friedman. See Item. 11. "Executive
Compensation."
Messrs. Fields and Friedman are also officers, directors and principal
stockholders of TDA, and Mr. Smircina is a director of TDA, and, consequently,
they will be able, through TDA, to direct the election of Group's directors,
effect significant corporate events and generally direct the affairs of Group.
Group does not intend to enter into any material transactions, loans or
forgiveness of loans with any affiliates, except as contemplated or disclosed in
this Report, unless such transaction is fair and reasonable to Group and is on
terms no less favorable than could be obtained from unaffiliated third parties.
Additionally, any such event must be approved by a majority of Group's directors
who do not have an interest in such a transaction and who have had access, at
Group's expense, to independent legal counsel.
<PAGE>
FAIRNESS
The foregoing transactions that Eagle and JEH Eagle 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 the President of Group, Eagle
and JEH Eagle.
The foregoing transactions that MSI Eagle have engaged in with Gary L.
Howard have benefited or may be deemed to have benefited Mr. Howard. Mr. Howard
is a Senior Vice President-Operations of Group and JEH Eagle and the President
of MSI Eagle.
Group's management believes that the foregoing transactions are fair
and reasonable to Group and were made on terms no less favorable to Group,
Eagle, JEH Eagle and MSI Eagle, as the case may be, than on terms and conditions
that could have been entered into with independent third parties.
Each of TDA and Messrs. Fields and Friedman may be deemed to be a
"promoter" of Group as such term is defined under the federal securities laws.
THE SUBSIDIARIES
IN GENERAL
Simultaneously with the closing of Group's IPO, Group acquired Eagle,
JEH Eagle and MSI Eagle from TDA, and TDA received 3,000,000 shares of Group's
Common Stock. TDA also purchased 100,000 shares of Group's Common Stock offered
in the IPO at $5.00 per share.
Additionally, as part of the acquisition of the Subsidiaries, TDA had
guaranteed that the Subsidiaries would have a book value of no less than
$1,000,000 after Eagle cancelled, in the form of a non-cash dividend, all
indebtedness of TDA to Eagle, except for an approximately $486,000 receivable
from TDA relating to and offsetting a mortgage in the same amount on property
previously owned by Eagle. At March 17, 1999, the combined book value of the
Subsidiaries was approximately $2,180,000, which exceeded the required
$1,000,000 combined book value by approximately $1,180,000 after assuming
cancellation by Eagle, in the form of a non-cash dividend, of all indebtedness
of TDA to Eagle, at that date, excluding the foregoing receivable offsetting
such mortgage. At June 30, 1999, TDA's indebtedness to Eagle, excluding the
foregoing receivable offsetting such mortgage, was approximately $3,070,000.
As a result of the IPO, 300,000 and 200,000 shares of Group's Common
Stock were issued to Messrs. Helzer and Howard, respectively, as additional
consideration in connection with JEH Eagle's acquisition of JEH Co. and MSI
Eagle's acquisition of MSI Co..
EAGLE RELATED PARTY TRANSACTIONS
TDA, through a wholly-owned subsidiary, 39 Acre Corp., had rented to
Eagle on a month-to-month basis without formal written leases the premises for
several of Eagle's distribution
<PAGE>
facilities and Eagle's executive offices at aggregate annual rentals of
approximately $790,000 during its fiscal year ended June 30, 1998. Upon
completion of Group's IPO, Eagle and TDA entered into ten-year leases for said
premises on economic terms substantially similar to prior arrangements.
Eagle had purchased the premises for a former distribution center from
an unrelated third party several years ago, with the purchase price financed
with a purchase money mortgage and a promissory note in the principal amount of
$550,000 to be paid in fifty-nine equal monthly installments of approximately
$4,700 and a "balloon" payment of approximately $440,000 that was paid on
September 2, 1999. Eagle's rental payments to 39 Acre Corp. for the property
have exceeded the mortgage payments for this property and Eagle has not been
required to pay any sums in excess of its rental payments.
Eagle was responsible to Holding under a lease, for a former Eagle
distribution cemter, that expired on May 1, 1999. The annual rental payments,
approximately $240,000, included a ratable share of a $580,000 "balloon" payment
due under an industrial revenue bond for the premises. Eagle has no further
material obligations with respect to these premises.
THE 1997 ACQUISITION OF JEH CO.
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 Group. 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 principal amount of $864,652. 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 IPO, Group issued 300,000 of its common shares to James E. Helzer, the
designee of JEH Co., in fulfillment of certain of such future consideration.
(See Note 2 to the consolidated financial statements.) For the fiscal year ended
June 30, 1999, approximately $1,773,000 of additional consideration is payable
to JEH Co. All of such additional consideration increased goodwill and is being
amortized over the remaining life of the goodwill. No additional consideration
was payable to JEH Co. for fiscal 1998.
THE 1998 ACQUISITION OF MSI CO
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 Group. 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 and the note are subject to
further adjustments under certain conditions. Upon the consummation of the IPO,
Group issued 50,000 of its common shares 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
<PAGE>
March 1999 out of the proceeds of the IPO. 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 IPO, Group
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 financial
statements.) Such consideration increased goodwill and is being amortized
over the remaining life of the goodwill. No additional consideration is payable
to MSI Co. for fiscal 1999.
OTHER RELATED PARTY TRANSACTIONS
For details concerning the employment agreements and arrangements
with Messrs. Fields, Friedman, Helzers, and Howard, see Item. 11 "Executive
Compensation."
For details concerning the rental of facilities from Messrs. Helzer
and Howard, and from TDA. See Item 2. "Properties."
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
10.35 Letter Amendment to Asset Purchase Agreement among MSI/Eagle Supply,
Inc., Masonry Supply, Inc., Gary L. Howard and others.(1)
10.36 Letter Agreement between Registrant and George Skakel III.(1)
27. Financial Data Schedule
(b)
All other schedules are omitted, as the required information is either
inapplicable or presented in the financial statements or related notes.
- ----------------
(1) Filed herewith.
<PAGE>
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 28th day of September, 1999.
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ Douglas P. Fields Chairman of the Board September 28, 1999
- ---------------------
Douglas P. Fields of Directors and Chief
Executive Officer
(Principal Executive Officer)
/S/ Frederick M. Friedman Executive Vice President, September 28, 1999
- -------------------------
Frederick M. Friedman Treasurer, Secretary and Director
(Principal Financial and
Accounting Officer)
/S/ James E. Helzer Vice Chairman of the Board September 28,1999
- -------------------------
James E. Helzer of Directors
/S/ Paul D. Finkelstein Director September 28, 1999
- ------------------------
Paul D. Finkelstein
/S/ George Skakel III
- ------------------------ Director September 28, 1999
George Skakel III
/S/ John E. Smircina Director September 28, 1999
- --------------------
John E. Smircina
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED JUNE 30, 1999, 1998 AND 1997,
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
EAGLE SUPPLY GROUP, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED JUNE 30, 1999, 1998 AND 1997:
Balance Sheets 2
Statements of Operations 3
Statements of Shareholders' Equity 4
Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-20
<PAGE>
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, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended June 30, 1999, 1998 and 1997. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of their operations
and their cash flows for the years ended June 30, 1999, 1998 and 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Fort Worth, Texas
September 22, 1999
<PAGE>
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,519,406 $ 1,686,003
Accounts and notes receivable - trade (net of allowance
for doubtful accounts of $1,600,000 and $977,000, respectively)
(Notes 5 and 10) 27,172,426 23,023,389
Inventories (Note 5) 18,972,548 15,176,215
Deferred tax asset (Note 4) 654,474 401,434
Due from related party (Note 2) 250,000 250,000
Other current assets 1,092,827 756,482
------------ ------------
Total current assets 56,661,681 41,293,523
PROPERTY AND EQUIPMENT, Net (Note 3) 6,617,261 5,240,338
EXCESS COST OF INVESTMENTS OVER NET ASSETS
ACQUIRED (net of accumulated amortization of $508,957 and
$171,829, respectively) (Note 2) 12,147,824 2,705,305
DEFERRED FINANCING COSTS 266,189 232,246
------------ ------------
$ 75,692,955 $ 49,471,412
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 2,523,843 $ 1,750,098
Accounts payable 20,138,146 18,481,620
Notes payable - shareholders -- 300,000
Due to related party (Note 2) 1,923,658 143,197
Accrued expenses and other current liabilities 3,731,232 2,745,118
Income taxes due to TDA Industries, Inc. 1,143,537 792,300
Federal and state income taxes payable 608,160 --
------------ ------------
Total current liabilities 30,068,576 24,212,333
LONG-TERM DEBT (Note 5) 30,139,072 25,294,523
DEFERRED TAX LIABILITY (Note 4) 97,512 105,112
------------ ------------
Total liabilities 60,305,160 49,611,968
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8)
SHAREHOLDERS' EQUITY (DEFICIENCY) (Notes 2 and 8):
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 -
1999 - 8,450,000 shares; 1998 - 5,400,000 shares 845 540
Additional paid-in capital 16,658,147 2,702,865
Retained (deficit) earnings (783,992) 779,658
------------ ------------
15,875,000 3,483,063
Less: Due from TDA Industries, Inc. and affiliated companies (487,205) (3,623,619)
------------ ------------
Total shareholders' equity (deficiency) 15,387,795 (140,556)
------------ ------------
$ 75,692,955 $ 49,471,412
============ ============
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES $ 159,844,520 $ 129,502,812 $ 57,575,712
COST OF SALES 122,137,798 101,527,421 46,104,588
------------- ------------- -------------
37,706,722 27,975,391 11,471,124
------------- ------------- -------------
OPERATING EXPENSES (including a provision
for doubtful accounts of $1,348,860, $1,212,112
and $299,433, respectively) 29,340,721 23,770,419 9,969,434
DEPRECIATION 1,212,046 958,926 593,720
AMORTIZATION OF EXCESS COST OF
INVESTMENTS OVER NET ASSETS
ACQUIRED 337,128 171,829 --
AMORTIZATION OF DEFERRED
FINANCING COSTS 72,832 58,062 --
------------- ------------- -------------
30,962,727 24,959,236 10,563,154
------------- ------------- -------------
INCOME FROM OPERATIONS 6,743,995 3,016,155 907,970
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Investment and other income 125,012 51,214 22,217
Registration expenses -- -- (370,353)
Interest expense (2,500,655) (1,861,485) (599,086)
------------- ------------- -------------
(2,375,643) (1,810,271) (947,222)
------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 4,368,352 1,205,884 (39,252)
PROVISION FOR INCOME TAXES 1,665,000 449,000 140,000
------------- ------------- -------------
NET INCOME (LOSS) $ 2,703,352 $ 756,884 $ (179,252)
============= ============= =============
BASIC AND DILUTED NET INCOME (LOSS)
PER SHARE $ .43 $ .14 $ (.03)
============= ============= =============
COMMON SHARES USED IN BASIC AND
DILUTED NET INCOME (LOSS) PER SHARE 6,285,753 5,400,000 5,400,000
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Preferred Shares Common Shares Paid-In
Shares Amount Shares Amount Capital
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1996 - $ -- 5,400,000 $ 540 $ 1,352,865
Net loss - -- -- -- --
Cash dividends paid to TDA Industries, Inc. - -- -- -- --
Net change in Due from TDA Industries, Inc.
and affiliated companies - -- -- -- --
- ----- ------------ ------------ ------------
BALANCE, JUNE 30, 1997 - -- 5,400,000 540 1,352,865
Net income - -- -- -- --
Cash dividends paid to TDA Industries, Inc. - -- -- -- --
Capital contribution from TDA Industries, Inc. - -- -- -- 1,350,000
Net change in Due from TDA Industries, Inc.
and affiliated companies - -- -- -- --
- ----- ------------ ------------ ------------
BALANCE, JUNE 30, 1998 - -- 5,400,000 540 2,702,865
Net income - -- -- -- --
Proceeds from initial public offering of
Common Shares and Warrants - net - -- 2,500,000 250 10,205,337
Shares issued in connection with the acquisition
of JEH Co. - -- 300,000 30 1,499,970
Shares issued in connection with the acquisition
of MSI Co. - -- 200,000 20 999,980
Shares issued as a principal payment of a note
payable - -- 50,000 5 249,995
Cash dividends paid to TDA Industries, Inc. - -- -- -- --
Capital contribution from TDA Industries, Inc. - -- -- -- 1,000,000
Net change in Due from TDA Industries, Inc.
and affiliated companies - -- -- -- --
Non-cash dividend to TDA Industries, Inc. - net - -- -- -- --
- ----- ------------ ------------ ------------
BALANCE, JUNE 30, 1999 - $ -- 8,450,000 $ 845 $ 16,658,147
= ===== ============ ============ ============
<CAPTION>
Due from TDA
Retained & Affiliated
Earnings Companies Total
<S> <C> <C> <C>
BALANCE, JULY 1, 1996 $ 2,652,026 $ (3,813,346) $ 192,085
Net loss (179,252) -- (179,252)
Cash dividends paid to TDA Industries, Inc. (1,250,000) -- (1,250,000)
Net change in Due from TDA Industries, Inc.
and affiliated companies -- 1,258,292 1,258,292
------------ ------------ ------------
BALANCE, JUNE 30, 1997 1,222,774 (2,555,054) 21,125
Net income 756,884 -- 756,884
Cash dividends paid to TDA Industries, Inc. (1,200,000) -- (1,200,000)
Capital contribution from TDA Industries, Inc. -- -- 1,350,000
Net change in Due from TDA Industries, Inc.
and affiliated companies -- (1,068,565) (1,068,565)
------------ ------------ ------------
BALANCE, JUNE 30, 1998 779,658 (3,623,619) (140,556)
Net income 2,703,352 -- 2,703,352
Proceeds from initial public offering of
Common Shares and Warrants - net -- -- 10,205,587
Shares issued in connection with the acquisition
of JEH Co. -- -- 1,500,000
Shares issued in connection with the acquisition
of MSI Co. -- -- 1,000,000
Shares issued as a principal payment of a note
payable -- -- 250,000
Cash dividends paid to TDA Industries, Inc. (1,200,000) -- (1,200,000)
Capital contribution from TDA Industries, Inc. -- -- 1,000,000
Net change in Due from TDA Industries, Inc.
and affiliated companies -- 69,412 69,412
Non-cash dividend to TDA Industries, Inc. - net (3,067,002) 3,067,002 --
------------ ------------ ------------
BALANCE, JUNE 30, 1999 $ (783,992) $ (487,205) $ 15,387,795
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,703,352 $ 756,884 $ (179,252)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,622,006 1,188,817 593,720
Deferred income taxes (260,640) (178,676) (14,457)
Increase (decrease) in allowance for doubtful accounts 622,595 527,794 (15,550)
(Gain) loss on sale of equipment (9,472) (26,161) 710
Changes in operating assets and liabilities:
Increase in accounts and notes receivable (3,257,580) (6,754,467) (223,219)
(Increase) decrease in inventories (2,393,992) (1,261,379) 320,368
(Increase) decrease in other current assets (238,908) 842,645 (3,965)
Increase (decrease) in accounts payable 929,926 3,241,273 (430,033)
Increase (decrease) in accrued expenses and
other current liabilities 488,231 608,946 (162,300)
Increase in due from related party 7,249 143,197 --
Increase (decrease) in income taxes due to
TDA Industries, Inc. 117,919 652,300 (653,000)
Increase in federal and state income taxes payable 608,160 -- --
------------- ------------- -------------
Net cash provided by (used in) operating activities 938,846 (258,827) (766,978)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,982,860) (2,122,397) (296,071)
Proceeds from sale of equipment 70,771 76,786 80,431
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 (3,431,929) (3,704,624) (215,640)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of related expenses 10,205,587 (223,488) --
Principal borrowings on long-term debt 170,481,066 139,493,028 64,165,367
Principal reductions on long-term debt (170,930,422) (134,036,661) (62,648,447)
Proceeds from issuance of notes payable - shareholders 200,000 300,000 --
Repayments of notes payable - shareholders (500,000) -- (6,105)
Capital contributions from TDA Industries, Inc. 1,000,000 1,350,000 --
Decrease in stock subscriptions receivable -- -- 56,250
Cash dividends to TDA Industries, Inc. (1,200,000) (1,200,000) (1,250,000)
Increase (decrease) in amounts due to TDA Industries, Inc.
and affiliated companies 70,255 (1,068,565) 1,258,292
------------- ------------- -------------
Net cash provided by financing activities 9,326,486 4,614,314 1,575,357
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,833,403 650,863 592,739
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,686,003 1,035,140 442,401
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,519,406 $ 1,686,003 $ 1,035,140
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 2,500,655 $ 1,861,485 $ 599,086
============ ============ ============
Cash paid during the period for income taxes $ 966,243 $ -- $ --
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Non-cash dividend to TDA Industries, Inc. - net $ 3,067,002 $ -- $ --
============ ============ ============
300,000 Common Shares issued in connection with the
acquisition of JEH Co. $ 1,500,000 $ -- $ --
============ ============ ============
200,000 Common Shares issued in connection with the
acquisition of MSI Co. $ 1,000,000 $ -- $ --
============ ============ ============
50,000 Common Shares issued as a principal payment
of a note payable $ 250,000 $ -- $ --
============ ============ ============
Additional consideration pursuant to the acquisition
of JEH Co. $ 1,773,212 $ -- $ --
============ ============ ============
<CAPTION>
Acquisitions of MSI Co. and JEH Co.:
MSI Co. JEH Co.
<S> <C> <C>
Fair value of assets acquired $ 9,284,007 $ 23,734,747
Liabilities assumed (1,359,698) (8,960,882)
Notes issued to sellers (2,045,972) (864,852)
Due to related party (250,000) --
Due from related party -- 250,000
Bank debt incurred (4,108,497) (12,500,000)
------------ ------------
Cash paid $ 1,519,840 $ 1,659,013
============ ============
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
EAGLE SUPPLY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
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 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 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'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 financial statements of
the Company, Eagle, JEH Eagle and MSI Eagle have been prepared as if all
of the entities had operated as a single consolidated group for all
periods subsequent to each entity's respective date of acquisition by TDA.
Eagle is included in the consolidated financial statements for all periods
presented. JEH Eagle is included in the consolidated financial statements
from July 1, 1997 and MSI Eagle is included in the consolidated financial
statements from October 22, 1998, the dates that JEH Eagle and MSI Eagle,
respectively, were acquired by TDA. 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 $6,033,000, $6,210,000 and $4,506,000 at June 30, 1999,
1998 and 1997, respectively) had been valued at the lower of FIFO cost or
market, inventories would be higher by approximately $530,000, $520,000
and $511,000 for fiscal 1999, 1998 and 1997, respectively, and income
before provision for income taxes would have increased by approximately
$10,000, $9,000 and $1,000 in fiscal 1999, 1998 and 1997, respectively.
- 7 -
<PAGE>
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.
EXCESS COST OF INVESTMENTS OVER NET ASSETS ACQUIRED -- Excess cost of
investments 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 recoverability 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 (LOSS) PER SHARE -- Basic net income (loss) per share was
calculated by dividing net income (loss) by the weighted average number of
shares outstanding during the periods presented and excluded any potential
dilution. Diluted net income (loss) 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 (loss) per
share includes, for all periods presented, the 3,000,000 shares issued to
TDA in connection with the Acquisitions.
LONG-LIVED ASSETS -- Financial Accounting Standards Board Statement Number
121, "ACCOUNTING FOR THe IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF" requires that they be 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, 1999.
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 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.
- 8 -
<PAGE>
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
6% note due in October 2000 and a 6% note due in July 2002. Such notes
have carrying values of $1,000,000 and $864,852, respectively, and
estimated fair market values of $950,000 and $775,000, respectively.
The fair value estimates are based on pertinent information available to
management as of June 30, 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
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 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.
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 amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
SIGNIFICANT VENDOR -- During the fiscal years ended June 30, 1999 and
1998, Eagle and JEH Eagle purchased approximately 19% and 18%,
respectively of their product lines from one supplier. Since similar
products are available to the subsidiaries from other suppliers, the loss
of this supplier would not have a material adverse effect on the business
of these subsidiaries. During the fiscal year ended June 30, 1997, Eagle
purchased approximately 23% of its product line from the same supplier.
STATEMENTS OF CASH FLOWS -- The Company considers money market accounts
and commercial paper to be cash equivalents for the purpose of these
financial statements. Cash equivalents amounted to $5,699,953 at June 30,
1999.
RECENTLY ISSUED PRONOUNCEMENTS -- 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, 2001 and
retroactive application is not
- 9 -
<PAGE>
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 Company's first quarter of the fiscal year ending June 30, 2000.
Management does not believe that this Statement will have a significant
impact on the Company.
RECLASSIFICATIONS -- Certain reclassifications have been made in the prior
years' financial statements in order to conform to the classification used
in the current year.
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 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. For the
fiscal year ended June 30, 1999, approximately $1,773,000 of additional
consideration is payable to JEH Co.
- 10 -
<PAGE>
All of such additional consideration increased goodwill and is being
amortized over the remaining life of the goodwill. No additional
consideration was payable to JEH Co. for fiscal 1998.
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 statements of operations from the effective date of the
acquisition. This transaction originally gave rise to approximately
$4,377,000 of goodwill, which is being amortized over a fifteen-year
period. Any additional payments to which JEH Co. or its designee will be
entitled will be accounted for as additional goodwill.
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. 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
during the five-year period (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 and owner of MSI Co. and a vice president of the Company, in
fulfillment of the obligation set forth in the immediately preceding
sentence. Such consideration increased goodwill and is being amortized
over the remaining life of the goodwill. No additional consideration is
payable to MSI Co. for fiscal 1999.
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 statements 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.
The following pro forma information represents the consolidated results of
operations of the Company as if the MSI Co. acquisition had been
consummated as of July 1, 1997:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998
<S> <C> <C>
Revenues $163,821,000 $141,463,000
============ ============
Net income $ 2,949,000 $ 1,044,000
============ ============
</TABLE>
- 11 -
<PAGE>
The pro forma information is not necessarily indicative of the operating
results that would have occurred if the MSI Co. acquisition had been
consummated as of July 1 of each respective period, nor is it necessarily
indicative of future operating results. The actual results of operations
of MSI Co. are included in the Company's consolidated financial statements
only from the date of acquisition.
3. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
June 30, Estimated
1999 1998 Useful Lives
<S> <C> <C> <C>
Land $ 100,000 $ --
Buildings and improvements 292,535 -- 25 years
Furniture, fixtures and equipment 3,000,569 1,976,187 5 years
Automotive equipment 4,853,812 4,713,209 5-7 years
Leasehold improvements 1,379,900 1,041,784 10 years
Assets acquired under capitalized leases 1,017,239 1,017,239 2-6 years
----------- -----------
10,644,055 8,748,419
Less: Accumulated depreciation and amortization 4,026,794 3,508,081
----------- -----------
$ 6,617,261 $ 5,240,338
=========== ===========
</TABLE>
4. INCOME TAXES
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 1,629,640 $ 542,676 $ 134,457
State and local 296,000 85,000 20,000
Deferred (260,640) (178,676) (14,457)
----------- ----------- -----------
$ 1,665,000 $ 449,000 $ 140,000
=========== =========== ===========
</TABLE>
- 12 -
<PAGE>
A reconciliation of income taxes at the Federal statutory rate and the
amounts provided, is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
<S> <C> <C> <C>
Tax using the statutory rate $ 1,485,000 $ 410,000 $ 112,804
State and local income taxes 195,000 56,000 13,000
Other (15,000) (17,000) 14,196
----------- ----------- -----------
$ 1,665,000 $ 449,000 $ 140,000
=========== =========== ===========
</TABLE>
Temporary differences which give rise to a net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
June 30,
1999 1998
<S> <C> <C>
Deferred tax assets:
Provision for doubtful accounts $ 620,654 $ 371,414
Inventory capitalization 33,820 30,020
--------- ---------
654,474 401,434
Deferred tax liability:
Depreciation (97,512) (105,112)
--------- ---------
Net deferred tax asset $ 556,962 $ 296,322
========= =========
</TABLE>
Management believes that no valuation allowance against the net deferred
tax asset is necessary.
- 13 -
<PAGE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
1999 1998
<S> <C> <C>
Variable rate collateralized revolving credit note (A) $ 8,746,117 $ 9,012,417
Variable rate collateralized equipment note (A) 679,000 710,000
Variable rate collateralized revolving credit note (B) 829,895 --
Variable rate collateralized term note (B) 2,816,400 --
Note payable - TDA Industries, Inc. (C) 1,000,000 --
Variable rate collateralized revolving credit note (D) 13,007,944 10,785,793
Variable rate collateralized equipment note (D) 1,598,500 1,899,500
Variable rate collateralized term note (D) 1,562,500 2,312,500
6% promissory note, due July 2002 (Note 2) 864,852 864,852
Capitalized equipment lease obligations, at various rates, for
various terms through 2003 (E) 780,136 959,494
Variable rate mortgage (7-3/4% at June 30, 1999),
paid in full on September 2, 1999 (Note 7) 487,205 500,065
8.50% equipment loan, payable in monthly
installments through February 13, 2003 181,195 --
8.50% equipment loan, payable in monthly
installments through April 23, 2003 63,816 --
8.50% equipment loan, payable in monthly
installments through April 27, 2003 31,242 --
7.99% equipment loan, payable in monthly
installments through August 31, 2000 14,113 --
----------- -----------
32,662,915 27,044,621
Less: Current portion of long-term debt 2,523,843 1,750,098
----------- -----------
$30,139,072 $25,294,523
=========== ===========
</TABLE>
(A) Eagle is a party to a loan agreement, last amended December 11,
1998, which provides for a credit facility in the aggregate amount
of $10,900,000 and is guaranteed by the Company and TDA. The credit
facility consists of a $10 million revolving credit loan and a
$900,000 equipment loan. The credit facility has an initial maturity
of October 22, 2003. Obligations under the credit facility are
collateralized by certain current assets and
- 14 -
<PAGE>
automotive equipment of Eagle aggregating approximately $16,178,000
and $790,000, respectively, at June 30, 1999.
The revolving credit loan bears interest at the lender's prime rate,
plus one-half percent, or at the London interbank offered rate, plus
two and one-half percent, at the option of the 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 interbank offered rate, plus two
and one-half percent, at the option of the 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 equal monthly
installments, based on an eighty-three month amortization schedule,
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.
(C) 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.
(D) 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 and is guaranteed by the
Company and TDA. 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.
- 15 -
<PAGE>
The equipment and revolving credit loans bear interest at the
lender's prime rate, plus one-half percent, or at the London
interbank 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 interbank
offered rate, plus three and one-quarter percent, at the option of
JEH Eagle.
E) Future minimum lease payments for capitalized equipment lease
obligations at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
<S> <C>
2000 $ 359,832
2001 223,418
2002 187,394
2003 131,178
---------
901,822
Less: Interest 121,686
---------
Present value of net minimum payments $ 780,136
=========
</TABLE>
The aggregate future maturities of long-term debt, excluding
capitalized equipment lease obligations, are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
<S> <C>
2000 $ 2,227,205
2001 2,730,113
2002 1,040,500
2003 1,759,105
2004 23,529,456
Thereafter 596,400
-----------
$31,882,779
===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries have entered into various
employment agreements which expire at various times through March
2004. Pursuant to such agreements, the annual base compensation
payable aggregates approximately $1,155,000. The aggregate base
compensation incurred in fiscal 1999 aggregated approximately
$753,000. The Company has no obligation for additional amounts due
for fiscal 1999.
b. Certain of the Company's subsidiaries have defined contribution
retirement plans covering eligible employees. These plans provide
for contributions at the discretion of the subsidiaries. No
contributions were made to these plans in fiscal 1999 or 1998. A
Company contribution in the amount of $9,000 was made in fiscal
1997.
- 16 -
<PAGE>
c. At June 30, 1999, the Company and its subsidiaries were liable under
various long-term leases for property and automotive and other
equipment 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 1999, 1998 and 1997 was
approximately $3,560,000, $2,023,000 and $853,000, 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:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
<S> <C>
2000 $ 3,821,000
2001 3,140,000
2002 2,430,000
2003 1,484,000
2004 1,424,000
Thereafter 4,400,000
Total future minimum rental commitments $16,699,000
</TABLE>
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 be significant to the
Company.
7. TRANSACTIONS WITH 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 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 commenced 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.
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.
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)
- 17 -
<PAGE>
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 of which commenced upon
the consummation of the Offering and the Acquisitions, for the foregoing
services is $3,000.
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 $498,000.
During the fiscal year ended June 30, 1999, JEH Eagle made sales
aggregating approximately $546,000 to two 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.
Eagle had been 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 which was 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 bonds, which obligation is reflected
in the financial statements of TDA. 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 included a ratable share of the
balloon payment. The lease expired on May 1, 1999.
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 $930,000.
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 of $3,067,002, all of TDA's
indebtedness to Eagle, except for $487,205 relating to and offsetting a
mortgage in the same amount on property previously owned by Eagle and for
which Eagle had been the primary obligor. On September 2, 1999, this
mortgage was paid in full and Eagle was relieved of any and all
obligations thereunder.
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 a base annual rental aggregating approximately
$107,000.
8. SHAREHOLDERS' EQUITY (DEFICIENCY)
INITIAL CAPITALIZATION -- In May 1996, the Company issued 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. In June 1996, the Company sold
an aggregate of 300,000 common shares and 300,000 warrants to private
investors for aggregate gross proceeds of $300,000.
- 18 -
<PAGE>
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 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.
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
- 19 -
<PAGE>
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 COMPENSATON", the Company's net income for fiscal 1999
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. 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.
10. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance at
Year Ending Beginning Balance at
June 30, of Year Provision Writeoffs End of Year
<S> <C> <C> <C> <C>
1997 $ 465,161 $ 299,433 $ (314,983) $ 449,611
1998 $ 449,611 $ 1,212,112 $ (684,723) $ 977,000
1999 $ 977,000 $ 1,348,860 $ (725,860) $ 1,600,000
</TABLE>
******
- 20 -
<PAGE>
Exhibit 10.35
[LETTERHEAD]
April 30, 1999 (Revised)
MSI/Eagle
P.O. Box 638
Mansfield, TX 76063
Attn: Gary Howard
Re: Letter dated April 12, 1999
Confirming our meeting April 16, 1999 we agreed on the following:
1. MSI/Eagle would adopt all JEH/Eagle policies, procedures and benefits.
2. MSI/Eagle-Health Insurance Benefit package would be the same as JEH/ESI
effective July 1, 1999 or as mutually agreed-but no later than January 1,
2000. JEH/ESI benefit package only pays for 60% of the employee's premium.
There may be different options for Gary Howard and Mike Ward.
3. MSI/Eagle-Retirement package effectively terminated October 1998. MSI/Eagle
employees can participate in the ESI and JEH/ESI 401K plan as all other
employees and on an identical basis starting July 1, 1999. Gary Howard and
Mike Ward may be subject to different options.
4. Payroll for MSI/Eagle would become part of JEH/ESI effective June 1, 1999.
5. Labor grade classifications and pay scales for JEH/ESI and MSI/Eagle would
be standardized. Pay increases for MSI/Eagle employees would be made
effective June 1, 1999 commensurate with the labor grade or job description.
6. Computer integration would be effective June 1, 1999.
7. Branch and Corporate merger would start May 1, 1999.
8. Insurances other than Health for MSI/Eagle would remain in place until their
expiration date and then they would be merged into JEH/ESI.
9. JEH/ESI and MSI/Eagle logos would be displayed on all signage until well
into the future.
PO Box 463 - Mansfield TX 76063 - 800-365-9462 - FAX 817-483-9861
<PAGE>
10. Specific branch integration and mergers would be as agreed between J.E.
Helzer and G. Howard.
11. MSI/Eagle's line of credit would be transferred to JEH/ESI June 1, 1999.
12. Bank accounts would be reconciled and merged as of June 1, 1999.
13. Specific relocation and assignment of personnel would be accomplished on an
agreed basis.
14. G. Howard would become Sr. Vice President of Operations of all Texas
Branches and Masonry sales. Ken Alexander will be Vice President of Sales
for Roofing, Drywall and Siding sales.
15. All branches would remain open on Saturday mornings.
16. Gary Howard's earn out will be based on:
a. Actual Masonry Sales as accumulated by documentation type in the
computer.
b. Actual Masonry Gross Profits as accumulated by the computer.
c. S G & A calculated @
22.5% for FY 2000
22.3% for FY 2001
22.1% for FY 2002
21.9% for FY 2003
The earn out basis would be previously agreed only calculated on the above
criteria to yield the pre-tax profit and thence the formula of 25% over 2M and
35% over 2.75M. The EBITA number is no longer a factor for FY 2000 thru FY 2003.
17. FY 1999 earn out will be based on eleven (11) month actuals, and annualized.
Then the earn out will be calculated on EBITA.
18. Gary Howard would be pre-paid 60,000 shares with a value of $5.00 per share.
However, 40,000 shares of the pre-payment would be deducted at the end of
each FY at a rate of 10,000 shares ($50,000.00 per year $5.00 per share) of
stock for the next four years starting FY 2000. The remaining earn out (if
earned) would be paid 40% in stock based on a value of $5.00 per share and
60% in cash. Payment would be made 30 days after completion of the audit
report.
19. Additionally, G. Howard would receive a bonus of .75% of 1% of EBITAD of all
Texas branches starting with Fiscal Year 2000.
<PAGE>
20. The original Purchase Agreement between TDA and MSI will be amended to
reflect these agreed changes relative to the earnout.
Regards,
/s/J.E. Helzer
- ---------------
J.E. Helzer
President
Agreed:
/s/Gary Howard 4-30-99
- ---------------------------------
Signature Date
cc: Fred Friedman
Doug Fields
Steve Skrotsky
<PAGE>
Exhibit 10.36
GEORGE SKAKEL III
115 Maple Ave.
Greenwich, Connecticut 06830
September 21, 1999
Douglas P. Fields
Chief Executive Officer
EAGLE SUPPLY GROUP, INC.
122 East 42nd Street Suite 1116
New York, NY 10168
Dear Mr. Fields:
This letter confirms the agreement of Eagle Supply Group, Inc. (Nasdaq:
"EEGL") (the "Company") to retain George Skakel III ("GS III") as its
non-exclusive financial advisor to introduce to the Company a limited number
of accredited institutional investors (the "Funding Source(s)") as potential
investors in a private placement (the "Placement") of the Company's common
stock equity securities (the "Securities") or deeply subordinated debt
securities (the "Sub Debt"), on the terms and conditions set forth below. The
Placement is sometimes referred to herein as the "Transaction."
1. Definitive terms of the Transaction will be agreed upon between the
Company and the Funding Source(s) and will be set forth in the final
documentation agreed to by the Company upon the closing ("Closing")
of the Transaction on the closing date (the "Closing Date").
2. GS III's non-exclusive engagement shall be for the period (the
"Engagement Period") commencing on the date hereof and ending six
months hereafter, provided, however, that GS III's engagement shall
automatically extend for a reasonable number of days beyond said date
in order to consummate the Closing of the Transaction if negotiations
with potential Funding Sources are in progress.
3. GS III will provide the Company with the names of the potential
Funding Sources that GS III intends to contact and introduce to the
Company with respect to the Transaction so that the Company can
promptly advise GS III that it is not already in contact with those
Funding Sources.
4. The Company agrees to pay GS III a fee (the "Fee") for acting as
its non-exclusive financial advisor in connection with the
Transaction in an amount equal to 7.0% of the net proceeds of the
Placement of Securities (i.e., common stock of the Company) and 4%
of the net proceeds of the Placement of Sub Debt (i.e., deeply
subordinated debt of the Company) agreed upon and consummated by the
Company. At the Closing, the Fees will be deducted from the proceeds
from the Placement and paid to GS III. If there is no Closing, no Fee
will be payable.
5. The Fee of 7% or 4%, respectively, is intended to pay all fees of
GS III in connection with the Transaction and of all other
intermediaries, etc., that may claim or be entitled to a fee in
connection with the Transaction as a result of any actions by GS III.
<PAGE>
Eagle Supply Group, Inc.
September 21, 1999
Page 2
6. The Company will not be obligated to accept the terms of any
proposed Transaction. The Closing of any Transaction is subject to
the approval of the Board of Directors of the Company.
7. The Company will pay the Fee to GS III if the Company closes a
transaction with any of the financing sources that GS III introduces
the Company to within a year of the introduction date.
8. If the foregoing is in accord with the Company's understanding of
our agreement, please sign in the space provided below and return a
signed copy to GS III.
Sincerely,
George Skakel III
AGREED AND ACCEPTED:
Eagle Supply Group, Inc.
/s/ Douglas P. Fields, CEO 9/22/99
Douglas P. Fields
Chief Executive Officer
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