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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 2003
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OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-25423
EAGLE SUPPLY GROUP, INC.
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(Exact name of Registrant as Specified in its Charter)
Delaware 13-3889248
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
122 East 42nd Street, Suite 1618
New York, New York 10168
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(Address of Principal Executive Offices) (Zip Code)
(212) 986-6190
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, par value $0.0001 per share Boston Stock Exchange
Redeemable Common Stock Purchase
Warrants Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark whether registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in
response 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 amendments to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated
filed (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the common equity of the registrant
held by non-affiliates as of September 22, 2003, was
approximately $8,581,092, as computed by reference to the closing
price of the common stock as quoted on the Nasdaq SmallCap Stock
Market on such date. As of September 22, 2003, the number of
issued and outstanding shares of common stock of the registrant
was 10,255,455.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of Eagle Supply Group,
Inc. for the 2003 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission no later than 120 days
after the end of the registrant's 2003 fiscal year are
incorporated by reference into Part III of this Form 10-K.
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EAGLE SUPPLY GROUP, INC.
FORM 10-K
Fiscal Year Ended June 30, 2003
Item Number in
Form 10-K Page
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PART I
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1. Business........................................... 4
2. Properties......................................... 27
3. Legal Proceedings.................................. 29
4. Submission of Matters to a Vote of
Security Holders.................................. 29
4A. Executive Officers of the Registrant............... 30
PART II
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5. Market for Registrant's Common Equity
and Related Stockholder Matters................... 32
6. Selected Finanical Data............................ 35
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 36
7A. Quantative and Qualitative Disclosure
About Market Risk................................. 47
8. Financial Statements and Supplementary
Data.............................................. 47
9. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure........................................ 48
9A. Controls and Procedures............................ 48
PART III
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10. Directors and Executive Officers of the
Registrant........................................ 49
11. Executive Compensation............................. 49
12. Security Ownership of Certain Beneficial
Owners and Management............................. 49
13. Certain Relationships and Related
Transactions...................................... 50
14. Principal Accountant Fees and Services............. 50
PART IV
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15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................... 51
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and are subject to risks, uncertainties, and other factors
which could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. See
Item 1. "Business - A Note About Forward Looking Statements" and
"-- Business Environment and Risk Factors."
PART I
ITEM 1. BUSINESS
Background
Eagle Supply Group, Inc. ("us," "our," "we" or the
"Company"), a Delaware corporation incorporated in May 1996,
believes that it is one of the largest wholesale distributors of
residential roofing and masonry supplies and related products in
the United States. The Company, with its principal executive
office located in New York City and its operations headquarters
in Mansfield, Texas, sells primarily to contractors and
subcontractors engaged in roofing repair and construction of new
residences and commercial property through our own distribution
facilities and direct sales force. Historically, approximately
70% of our revenues have been derived from sales to contractors
and subcontractors engaged in re-roofing or repair and 30% from
new construction. Additionally, approximately 86% of our revenues
are from the sale of residential building products and 14% from
the sale of commercial products. Moreover, our product mix is
heavily weighted to roofing supplies and related products, with
88% of revenues derived from roofing products and 12% from
masonry, drywall, plywood and ancillary products. We currently
operate a network of 33 distribution centers in 9 states,
including locations in Texas (13), Florida (9), Colorado (5), and
one each in Alabama, Illinois, Indiana, Mississippi, Missouri,
and Nebraska.
We are majority-owned by TDA Industries, Inc. ("TDA" or our
"Parent"), and we were organized to acquire, integrate and
operate seasoned, privately-held companies that distribute
products to or manufacture products for the building
supplies/construction industry.
On March 17, 1999, we completed the sale of 2,500,000 shares
of our Common Stock at $5.00 per share and 2,875,000 Redeemable
Common Stock Purchase Warrants (the "Warrants") at $.125 per
Warrant in connection with our initial public offering ("Initial
Public Offering"). We received net proceeds aggregating
approximately $10,206,000 from our Initial Public Offering.
Upon consummation of our Initial Public Offering, the
Company acquired all of the issued and outstanding common shares
of Eagle Supply, Inc. ("Eagle"), JEH/Eagle Supply, Inc. ("JEH
Eagle") and MSI/Eagle Supply, Inc. ("MSI Eagle") (the
"Acquisitions") from TDA for consideration consisting of, among
other things, 3,000,000 shares of the Company's Common Stock.
Upon the consummation of the Acquisitions, Eagle, JEH Eagle
and MSI Eagle became wholly-owned subsidiaries of the Company.
Effective May 31, 2000, MSI Eagle was merged with and into
JEH Eagle. As of July 1, 2000, the Texas operations of JEH Eagle
were transferred to a newly formed limited partnership entirely
owned directly and indirectly by JEH Eagle. Accordingly, the
Company's business operations are presently conducted through two
wholly-owned subsidiaries and a limited partnership.
Eagle distributes roofing supplies and related products to
contractors engaged in residential and commercial roofing repair
and the construction of new residential and commercial
properties. Through its 11 distribution centers and direct sales
force, Eagle sells to more than 4,500 customers in Florida,
Alabama and
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Mississippi. JEH Eagle operates 22 distribution centers from
which it sells roofing, masonry and drywall products to more
than 4,400 customers, primarily contractors and builders located
in Texas, Colorado, Illinois, Indiana, Missouri and Nebraska.
Our two subsidiaries and limited partnership operate
approximately 550 units of equipment including conveyor and other
delivery trucks, material handlers, and forklifts. The type of
equipment utilized differs from site to site due to the type of
delivery market and other factors. Certain markets are referred
to as "roof load" in which the supplier loads the building
materials on the roof on the job site rather than on the ground.
This roof load type of delivery requires trucks with cranes or
conveyor systems and other such equipment and, as a result, the
trucks are more expensive and the delivery method has a higher
potential for liability.
Our principal executive offices are located at 122 East 42nd
Street, Suite 1618, New York, New York 10168, and our telephone
number is (212) 986-6190. Our operations are headquartered and
located at 2500 U.S. Highway 287, Mansfield, Texas 76063. See
Item 2 "Properties."
General
We are a wholesale distributor of a complete line of roofing
supplies and related products through our own sales force
primarily to roofing and related products contractors and
subcontractors in the geographic areas where we have distribution
centers. Such contractors and subcontractors are engaged in
commercial and residential roofing repair and the construction of
new residential and commercial properties.
We also distribute sheet metal products used in the roofing
repair and construction industries. Furthermore, we distribute
drywall, plywood and related products and, solely in Colorado,
vinyl siding to the construction industry. Products distributed
by us generally include equipment, tools and accessory products
for the removal of old roofing, re-roofing and roof construction,
and related materials such as shingles, tiles, insulation, liquid
roofing materials, fasteners and ventilation materials.
In addition, we also distribute a complete line of cements
and masonry supplies and related products through our own direct
sales force primarily to building and masonry contractors and
sub-contractors in certain of the geographic areas where we have
distribution centers. In general, such products include cement,
cement mixtures and similar "bag" products (lime, sand, etc.),
angle iron, cinder blocks, cultured stone and bricks, fireplace
and pool construction materials, and equipment, tools and
accessory products for use in residential and commercial
construction.
The following chart indicates the approximate percentage of
the indicated product categories sold by us for the periods
indicated:
Approximate Percentage
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Drywall Bagged/
Fiscal Year Residential Commecial and Bulk All Other
Ended June 30, Roofing Roofing Sheet Metal Plywood Products Products
- -------------- ----------- --------- ----------- ------- -------- ---------
2001 61 18 5 10 4 2
2002 72 11 4 8 4 1
2003 74 14 2 6 3 1
Potential Expansion By Acquisition
We continually evaluate and identify markets into which we
can further expand our operations and market share. In this
regard, we seek potential acquisition candidates primarily in the
roofing supplies and related products industry throughout the
United States, with greater emphasis on the Southeastern,
Midwestern
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and Western regions and less emphasis on the Northeastern
region of the United States. However, we may consider
acquisition candidates in any region of the United States if
an appropriate opportunity arises.
In an effort to achieve our growth objectives, we seek out
prospective acquisition candidates in businesses that complement
or are otherwise related to our current businesses. We anticipate
that we will finance future acquisitions, if any, through a
combination of cash, issuances of shares of our capital stock,
and additional equity or debt financing.
Although we continually consider and evaluate potential
strategic expansion and acquisition opportunities, we do not have
any current understandings, arrangements, or agreements, whether
written or oral, with respect to any specific acquisition
prospect, and we are not currently negotiating with any party
with respect thereto. Accordingly, we can not give you any
assurance that we will be able successfully to negotiate or
consummate any future acquisitions or that we will be able to
obtain the necessary financing therefor on commercially
reasonable terms. We have not acquired any other companies since
our Initial Public Offering in 1999.
Expansion By Internal Growth
We intend to continue to pursue expansion of our operations
by adding new distribution centers and increasing the sales
revenues from our existing distribution centers. Nonetheless, in
light of economic conditions, during the fiscal year ended
June 30, 2003, we opened one new distribution center, which will
be temporary, and closed 6 distribution centers. We open
temporary distribution centers in response to storms which have
created temporary markets. These "storm" distribution centers are
supported by our contractor customers that concentrate on
repairing storm damage. After opening what we intend to be a
permanent new distribution center, our initial focus is to
develop a customer base, to develop and improve the distribution
center's market position and operational efficiency and then to
expand its customer base.
Our Business
Distribution Centers
Our typical distribution center consists of showroom space,
office space, warehouse and receiving space, secure outdoor
holding space, and receiving and shipping facilities, including
loading docks. Distribution centers range in size from
approximately 10,000 to 110,000 square feet of indoor space, with
a typical size of approximately 30,000 square feet of indoor
office and storage space and additional outdoor storage.
Currently, our largest distribution center based on sales is
located in Mansfield, Texas, and also houses our operational
headquarters.
Each distribution center location is managed by a
distribution center manager who oversees the center's employees,
including various sales and office personnel, as well as delivery
and warehouse personnel. We require that each distribution center
develop a sales strategy specific to the local market, but our
senior and regional management maintain responsibility in each
region for directing sales efforts and altering the product mix
of a given center to meet local market demands and Company
objectives. Our computer software provides data which enable our
executives to view sales, inventory and gross margins daily as
well as monthly and profitability reports for each of our
distribution centers.
We operate two types of distribution centers: "greenfield"
and "storm" distribution centers. Greenfield centers are
distribution centers which we have opened in areas where our
market analysis indicates a potential for strong and sustainable
demand for our products over the long term. The opening of a
greenfield center typically requires approximately six months of
planning and a net capital investment by the Company of
approximately $650,000 per center. The amount of this capital
investment can vary widely depending
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on many factors. Our management analyzes a greenfield
opportunity on the basis of competition, number and age of
roofs, type of market ("ground" or "roof" load) and availability
of qualified personnel, among other factors.
Our storm distribution centers are opened to service areas
recently affected by severe or catastrophic weather conditions
such as hailstorms or hurricanes. Sales of building and roofing
products generally increase dramatically during and after severe
storms, especially sizeable hurricanes and hailstorms, which can
cause significant roof damage. This sharp increase in demand
provides an opportunity for us to generate additional revenues.
New storm centers typically require a net capital investment by
the Company of approximately $750,000 or more in inventory,
equipment and other expenditures and may be staffed by personnel
from our other centers. The amount of this capital investment can
vary widely depending on many factors. After sales from
reconstruction and reroofing generated by the storm-related
demand slow down, storm centers generally are closed and the
remaining inventory returned to one of the Company's other
distribution centers. Because the opening of a storm center is in
response to the occurrence of extreme weather conditions and
other factors, we cannot anticipate how many new storm centers
will be opened, if any. On occasion, we may determine that the
market area in which a storm center is located will support a
permanent distribution center. In that event, the distribution
center is not closed but becomes part of our distribution center
network.
Principal Products
We distribute a variety of roofing supplies and related
products and accessories for use in the commercial and
residential roofing repair and construction industries. Such
products include the following:
Residential Roofing Products. Shingles (asphalt, cedar,
ceramic, slate, concrete, cement fibered, fiberglass and tile),
felt, insulation, waterproof underlayment, ventilation systems
and skylights.
Commercial Roofing Products. Asphalt, fiberglass rolls
(including fire retardant), organic rolls, insulation, cements,
tar, other coatings, single plies, modified bitumen and roll
roofing products.
Sheet Metal Products. Aluminum, copper, galvanized and
stainless sheet metal.
Drywall/Plywood Products. Sheetrock and plywood.
Slate and Antique Products. Black slate, Vermont and other
slates, historical or antique slates, antique clay tile, new clay
tile, Ludowici clay tile and antique tile.
Accessory Products. We also sell accessory products related
to each of the foregoing, including, but not limited to, roofing
equipment, power and hand tools, nails, fasteners and other
accessory products.
Principally in the Dallas/Fort Worth metropolitan area, we
distribute a variety of cement and masonry supplies and related
products and accessories for use in the residential and
commercial building and masonry industries. Such product lines
include the following:
Concrete and Masonry Products. Portland cement for use in
housing foundations, laying pavements, walkways and other similar
uses. Masonry cement for use in brick and stone masonry. Cement
is principally sold by bags of varying weight (approximately 10
pounds to 95 pounds) and is sold in a variety of mixtures such as
concrete mixes (portland cement, sand and gravel), sand mixes
(portland cement and sand), mortar mixes (masonry mortar cement
and masonry sand) and grout (cement and sand). Also sold are
sand, gravel, underwater cement, concrete and asphalt "patching"
compounds.
Angle Iron. Iron forged at a ninety-degree angle which is
cut to customer's specification for use as support above windows
and doorways.
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Bricks and Stones. Bricks, used bricks, firewall bricks,
"cultured" (man-made) stones in a variety of colors and shapes,
cinder blocks and glass blocks.
Fireplace Products. Fireboxes, dampers, flues, facings,
insulations, fireplace tools and accessories.
Swimming Pool Products. Cements and molds used in pool
construction.
Accessory Products. We also sell in that same metropolitan
area a variety of products related to the foregoing, including
cement mixers, rulers, levels, trowels and other tools, cleaning
solvents, patching compounds, supports and fasteners.
Vendors
We purchase products directly from more than 40 major
manufacturers, including GAF Materials Corporation ("GAF"), TAMKO
Roofing Products, Inc. ("TAMKO"), Atlas Roofing Corporation, Elk
Corporation ("ELK"), Owens Corning, Johns Manville Corp., and
Certainteed Corporation. Payment, discount and volume purchase
programs are negotiated directly with our major suppliers, with a
significant portion of our purchases made from suppliers offering
the most favorable programs.
During the fiscal years ended June 30, 2003, 2002 and 2001,
approximately 19%, 19%, and 18%, respectively, of our product
lines were purchased from GAF. During the fiscal years ended
June 30, 2003 and 2001, approximately 10% and 13% of our product
lines were purchased from TAMKO and ELK, respectively. No other
supplier accounted for more than ten (10%) percent of our product
lines in each of our last three fiscal years.
We have no written long-term supply agreements with any
vendors. We believe that, in the event of an interruption of
product deliveries from any suppliers, we will be able to secure
suitable replacement suppliers on acceptable terms.
Customers, Sales and Marketing
Practically all customers purchase products pursuant to
short-term credit arrangements. Sales efforts are directed
primarily through our salespersons including "inside" counter
persons who serve walk-in and call-in customers and "outside"
salespersons who call upon past, current and potential customers.
Members of our sales staff report to their local distribution
center managers and regional sales managers and are supported by
inside customer service representatives either at the
distribution center or at the main administration center in
Mansfield, Texas. Additional sales support comes from a number of
regional sales and merchandising managers who educate our sales
personnel regarding technical specifications and how to market
and sell products recently added to our product line. Our
marketing and advertising efforts, although nominal, are targeted
to local markets and generally consist of advertisements in
regional magazines. Our suppliers have a vested interest in
marketing their products to the end user; therefore, they provide
a wide variety of promotional material including instructional
videos, product and educational materials and in-store displays.
Additionally, our suppliers market their products in industry
publications, contractors' trade magazines and trade shows.
We have no written long-term sales agreements with any
customers. None of our customers accounted for 2% or greater of
sales during our fiscal year ended June 30, 2003.
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Infrastructure and Technology
We maintain our own computer system and software supplied by
J.D. Edwards for inventory, sales management, financial control
and planning. We maintain this centralized computer and data
processing system to support decision making at many levels of
operations, including checking a customer's credit, inventory
management, accounts receivable and credit and collection
management. Our executives are able to view monthly and other
periodic financial data of each distribution center.
Competition
We face substantial competition in the wholesale
distribution of roofing, drywall, cement and masonry supplies and
related products from relatively smaller distributors, retail
distribution centers and from a number of regional,
multi-regional and national wholesale distributors of building
products, including suppliers of roofing products and masonry
products which have greater financial resources and are larger
than we are, some of which include:
* American Builders & Contractors Supply Co., Inc.,
* Cameron Ashley Building Products, Inc. (owned by Guardian
Industries, Inc. since June 2000 and now part of Guardian
Building Products),
* Allied Building Products (a division of a subsidiary of CRH,
plc since 1997),
* Bradco Supply Corporation, and
* Beacon Roofing Supply, Inc.
To a lesser degree, we also compete with larger, high
volume, discount general building supply stores selling
standardized products, sometimes at lower prices than ours, but
not carrying the breadth of product lines or offering the same
service as provided by full service wholesale distributors such
as we are.
We currently compete on the basis of:
* price,
* breadth of product line and inventory,
* delivery,
* customer service, including credit and financial services,
* terms of sale, including discounts for prompt payment,
* credit extension, and
* the abilities of personnel.
We anticipate that we may experience competition from
entities and individuals (including venture capital partnerships
and corporations, equity funds, blind pool companies, operations
of competing wholesale roofing supply distribution centers, large
industrial and financial institutions, small business investment
companies and wealthy individuals) which are well-established and
have greater financial resources and more extensive experience
than we have in connection with identifying, financing and
effecting acquisitions of the type sought by us. Our financial
resources are limited in comparison to those of many of such
competitors.
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Backlog
Our business is conducted on the basis of short-term orders
and prompt delivery schedules precluding any substantial backlog.
Employees
At June 30, 2003, we employed approximately 595 full-time
employees, including 7 executives, 49 managerial employees, 115
salespersons (including 53 "inside" salespersons), 341 warehouse
persons, drivers and helpers, and 83 clerical and administrative
persons. Difficulties have been experienced on occasion in
retaining drivers and helpers because of the tight job market in
our market areas and the need for drivers to be certified by
departments of motor vehicles and to pass other testing
standards, but suitable replacements and new hires have been
found without material adverse economic impact, although there
can be no assurance that this will continue to be the case. We
are not subject to any collective bargaining agreement, and we
believe that our relationship with our employees is good.
Recent Developments
On May 15, 2002, in a private transaction, we agreed to sell
1,090,909 shares of our common stock at $2.75 per share, a
discount of approximately 8.6% below the closing bid price for
our shares of common stock on the Nasdaq SmallCap Market on May
15, 2002, and to issue warrants, without additional consideration
as part of that transaction, to purchase 218,181 shares of our
common stock exercisable at $3.50 per share for five years
("Private Placement"). The Private Placement provided for two
equal and separate tranches of common stock and warrants. The
first such tranche closed. The investors in the Private
Placement declined to make the additional investment required to
close the second tranche. Accordingly, the second tranche did
not and will not close. As of September 24, 2003, we have
entered into settlement agreements with four of the five
investors in the Private Placement pursuant to which we (a)
received $50,000 cash payment, (b) the return of 50,909 warrants
for cancellation of the 109,090 warrants which were issued
pursuant to the Private Placement, and (c) received an advance of
$20,000 to defray a portion of the legal fees we were charged in
connection with the settlement.
A Note About Forward-Looking Statements
This Annual Report on Form 10-K (including the Exhibits
hereto) contains certain "forward-looking statements" within the
meaning of the of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934,and the
Private Securities Litigation Reform Act of 1995, such as
statements relating to our financial condition, results of
operations, plans, objectives, future performance and business
operations. These statements relate to expectations concerning
matters that are not historical fact. Accordingly, statements
that are based on management's projections, estimates,
assumptions and judgments are forward-looking statements. These
forward-looking statements are typically identified by words or
phrases such as "believe," "expect," "anticipate," "plan,"
"estimate," "approximately," "intend," and other similar words
and expressions, or future or conditional verbs such as "will,"
"should," "would," "could," and "may." In addition, the Company
may from time to time make such written or oral "forward-looking
statements" in future filings with the Securities and Exchange
Commission (including exhibits thereto), in its reports to
shareholders, and in other communications made by or with the
approval of the Company.
These forward-looking statements are based largely on our
current expectations, assumptions, plans, estimates, judgments
and projections about our business and our industry, and they
involve inherent risks and uncertainties. Although we believe
that these forward-looking statements are based upon reasonable
estimates and assumptions, we can give no assurance that our
expectations will in fact occur or that our estimates or
assumptions will be correct, and we caution that actual results
may differ materially and adversely from those
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in the forward-looking statements. Forward-looking statements
involve known and unknown risks, uncertainties, contingencies
and other factors that could cause our or our industry's
actual results, level of activity, performance or achievement
to differ materially from those discussed in or implied by any
forward-looking statements made by or on behalf of us and
could cause our financial condition, results of operations or
cash flows to be materially adversely affected. Accordingly,
investors and all others are cautioned not to place undue
reliance on such forward-looking statements.
Potential risks, uncertainties, and other factors which
could cause the Company's financial performance or results of
operations to differ materially from current expectations or such
forward-looking statements include, but are not limited to:
* general economic and market conditions, either nationally or
in the markets where we conduct our business, may be less
favorable than expected;
* we may be unable to find adequate and suitable equity or
debt financing when our current loan facilities mature or when
otherwise needed on terms as favorable to us as our current
financing or on terms that are commercially reasonable to us;
* our costs of capital including interest rates and related
fees and expenses may increase;
* we may be unable to collect our accounts or notes
receivables when due, within a reasonable period of time after
they become due and payable, or at all;
* there may be significant increases in competitive pressures
in our major market areas;
* weather conditions in our market areas may adversely affect
our business;
* there may be interruptions or cancellations of sources of
supply of products that we distribute, significant increases in
the costs of such products, or changes in the terms of purchase
that may be less favorable to us;
* there may be changes in the cost or pricing of, or consumer
demand for, our or our industry's distributed products that may
adversely affect our ability to sell our products at certain
levels of markup (gross profit margin);
* there may be changes in the new housing market or the market
for construction, renovation and repair relating to the product
lines that we sell in various market areas that may adversely
affect our business;
* we may be adversely affected by changes in our costs of
doing business including costs of fuel, labor and related
benefits, occupancy, and the cost and availability of insurance;
* we may be unable to locate suitable facilities or personnel
to open or maintain distribution center locations;
* we may be unable to identify suitable acquisition candidates
or, if identified, unable to consummate any such acquisitions
and, if consummated, unable to obtain favorable results of
operations from such acquisitions;
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* the number of shares of common stock that the Company has
outstanding and the number of shares of common stock used to
calculate our basic and diluted earnings per share may increase
and adversely affect our earnings per share calculations; and
* there may be changes in accounting policies and practice
that may be adopted by regulatory agencies as well as the
Financial Accounting Standards Board.
Such forward-looking statements speak only to the date that
such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events.
Business Environment and Risk Factors
You should carefully consider the risks described below and
the other information in this Form 10-K, including our
Consolidated Financial Statements and the notes to those
statements. The risks and uncertainties described below are not
the only ones facing us, and there may be additional risks that
we do not presently know of or that we currently deem immaterial
that also could materially adversely affect our business,
financial condition, results of operations or cash flows. The
business, results of operations or financial condition of the
Company could be seriously harmed if any of these risks
materialize. The trading price of shares of the Company's common
stock may also decline due to any of these risks.
To the extent any of the information contained in this
document constitutes forward-looking information, the risk
factors set forth below are cautionary statements identifying
important factors that could cause our actual results for various
financial reporting periods to differ materially from those
expressed in any forward-looking statements made by us or on our
behalf and could materially adversely affect our financial
condition, results of operations or cash flows. See also, Item
1. "Business - A Note About Forward-Looking Statements."
Risks Relating To Our Business
The Level Of Our Business Operations, Revenues And Income Is
Directly Impacted By Weather Conditions.
Our level of business operations, revenues and operating
income is directly impacted by weather phenomena, such as
hailstorms and hurricanes, which have the result of increasing
business at the time of the event of the weather phenomena and
shortly thereafter, but have the effect frequently of resulting
in a slowdown of business thereafter. Similarly, weather
phenomena can also have a negative impact on our customers which
can cause certain of such customers to become delinquent in the
payments of their accounts.
How Unforeseen Factors May Adversely Affect Us.
Unforeseen developments, increased competition, losses
incurred by new businesses that we may acquire or distribution
centers that we may open, losses incurred in the expansion of
product lines from certain distribution centers to other
distribution centers, weather phenomena and other circumstances
may have a material adverse affect on our operations in current
market areas or areas into which we may expand by acquisition or
otherwise.
12
We Acquired Our Business Operations In Non-Arm's Length
Transactions With Affiliates And Without Independent Appraisal.
Simultaneously with the completion of our Initial Public
Offering in March 1999, we acquired our business operations from
TDA in exchange for, among other things, 3,000,000 shares of our
common stock. The determination of the number of shares paid to
TDA for the acquisitions was negotiated and evaluated based upon
the assessments made by the parties to the negotiations without
independent appraisal. Such negotiations were not conducted on an
arm's length basis. As a result of this transaction, our largest
shareholder is TDA. Douglas P. Fields and Frederick M. Friedman,
both of whom are directors and executive officers of the Company,
also are directors, officers and principal stockholders of TDA,
and John E. Smircina, Esq., a director of the Company, is a
director of TDA. Because of their positions and control
relationship with TDA, Messrs. Fields, Friedman, and Smircina
may be deemed to be in control of us. As a result, their
interests in us may conflict with their interests in TDA.
Although we believe that the terms and conditions of the
acquisitions were fair and reasonable to us, that belief must be
assessed in light of the lack of an independent appraisal and the
conflicted positions of Messrs. Fields, Friedman, and Smircina.
We can provide no assurance that we were correct in our
assessment.
We May Make Acquisitions And Open New Distribution Centers
Without Your Approval.
Although we will endeavor to evaluate the risks inherent in
any particular acquisition or the establishment of new
distribution centers, there can be no assurance that we will
properly or accurately ascertain all such risks. We will have
virtually unrestricted flexibility in identifying and selecting
prospective acquisition candidates and establishing new
distribution centers and in deciding if they should be acquired
for cash, equity or debt, and in what combination of cash, equity
and/or debt. Locations selected for expansion efforts will be
made at the discretion of management and will not be subject to
stockholder approval.
We will not seek stockholder approval for any acquisitions
or the opening of new distribution centers unless required by
applicable law and regulations. Our stockholders will not have an
opportunity to review financial and other information on
acquisition candidates or the opening of any new distribution
centers prior to consummation of any acquisitions or the opening
of any new distribution centers under most circumstances.
Investors will be relying upon our management, upon whose
judgment the investor must depend, with only limited information
concerning management's specific intentions. There can be no
assurance that any acquisitions will be consummated or new
distribution centers opened.
Our Wholesale Distribution Businesses Are Subject To
Economic And Other Changes.
The wholesale distribution of the building supply products
sold by us is seasonal, cyclical and is affected by weather as
well as by changes in general economic and market conditions
either nationally or in the markets in which we conduct our
business. Although our roofing and related supplies business is
located in various locations throughout the United States,
concentrated primarily in Texas, Florida, and Colorado, the
distribution of our other products are even more geographically
concentrated as follows and will be directly affected by the
economic and weather conditions of their related market areas:
* The cement and masonry supplies business sells its products
primarily to builders, contractors, subcontractors, and masons
serving the residential building market in the Dallas/Fort Worth
metropolitan area.
* We sell drywall primarily to contractors in Texas and vinyl
siding primarily to contractors in Colorado.
13
As a result, an economic downturn in any of those market
areas may have a material adverse effect on the sale of our
products in those markets notwithstanding the general economic
conditions prevalent nationally. Accordingly, an economic
downturn in one or more of the markets currently served or to be
served (as a result of acquisitions or expansion efforts) could
have a material adverse effect on operations.
We May Be Unable To Collect All Of Our Accounts Or Notes
Receivables In A Timely Manner.
The Company's accounts receivable over ninety days past due
as of June 30, 2003 have increased since June 30, 2002 and our
accounts receivable over ninety days past due as of June 30,
2002, significantly increased from June 30, 2001. As a result,
the Company added $250,000 and $2,200,000 to its allowance for
doubtful accounts and notes receivable, net of write-offs of
approximately $4,500,000 and $562,000, during the fiscal years
2003 and 2002, respectively. Approximately $1,800,000 and
$1,500,000 of the increase in the allowance for doubtful accounts
and notes receivable during the fiscal years ended June 30, 2003
and 2002, respectively, was attributed to amounts due from
certain customers. These customers owed the Company an aggregate
of approximately $8,300,000 and $ 5,400,000 at June 30, 2003 and
June 30, 2002, respectively, and accounted for 2.4% and 4.0% of
the Company's total revenues for the fiscal years ended June 30,
2003 and June 30, 2002.
In addition, the Company reclassified approximately $2.8
million of its current accounts and notes receivable to long-term
notes receivable during the fiscal year ended June 30, 2003, net
of allowance for doubtful accounts. The reclassifications took
place after meetings with the Company's largest customers that
had not made satisfactory payments on their accounts when due or
within a reasonable period of time after they became due. During
such meetings, management negotiated formal payment schedules on
terms that would enable the Company to begin collecting on past
due accounts and notes receivable in amounts reasonably
satisfactory to the Company. As a result, the Company accepted
notes from these customers, together with personal guarantees and
additional collateral wherever possible. These notes bear
interest at rates ranging from 6% to 18% with repayment periods
ranging between 6 months and slightly less than 10 years as of
June 30, 2003.
If our customers are unable to make payments when due or
within a reasonable period of time thereafter and the level of
our accounts receivable over ninety days past due increases, we
may have to increase our allowance for doubtful accounts and/or
write-off additional accounts. Such action could have a material
adverse affect on our financial position, results of operations,
and cash flow.
We Depend Upon Certain Vendors But We Lack Written Long-Term
Supply Agreements With Them.
We distribute products manufactured by a number of major
vendors. During the fiscal years ended June 30, 2003, 2002 and
2001, approximately 19%, 19%, and 18%, respectively, of our
product lines were purchased from one supplier, GAF. During the
fiscal years ended June 30, 2003 and 2001, 10% and 13% of our
product lines were purchased from a second supplier, TAMKO and
ELK, respectively. We do not have written long-term supply
agreements with any vendors. We believe that, in the event of any
interruption of product deliveries from any of our vendors, we
will be able to secure suitable replacement supplies on
acceptable terms. However, there can be no assurance of the
continued availability of supplies of residential and commercial
roofing, drywall and masonry materials at acceptable prices or at
all.
14
To The Extent That The Estimates, Assumptions And Judgments
Used By Us In Formulating Our Critical Accounting Policies Should
Prove To Be Incorrect, Future Financial Reports May Be Materially
And Adversely Affected.
Our discussion and analysis of financial condition and
results of operations set forth in this document and other
reports filed with the Securities and Exchange Commission ("SEC")
are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). The
preparation of these financial statements in accordance with GAAP
requires us to make estimates, assumptions and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities at the date of the financial statements. Significant
estimates in the Company's consolidated financial statements
relate to, among other things, allowances for doubtful accounts
and notes receivable, amounts reserved for obsolete and slow
moving inventories, net realizable value of inventories,
estimates of future cash flows associated with assets, asset
impairments, and useful lives for depreciation and amortization.
On an ongoing basis, we re-evaluate our estimates, assumptions
and judgments, including those related to allowances for doubtful
accounts and notes receivable, inventories, intangible assets,
investments, other receivables, expenses, income items, income
taxes and contingencies. We base our estimates on historical
experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets,
liabilities, certain receivables, allowances, income items,
expenses, and contingent assets and liabilities that are not
readily apparent from other sources. Actual results may differ
from these estimates and judgments, and there can be no assurance
that estimates, assumptions and judgments that are made will
prove to be valid in light of future conditions and developments.
If such estimates, assumptions and judgments prove to be
incorrect in the future, the Company's results of operations,
financial condition and cash flows could be materially adversely
affected.
We believe that the following critical accounting policies
are based upon our more significant judgments and estimates used
in the preparation of our consolidated financial statements:
* We maintain allowances for doubtful accounts and notes
receivable for estimated losses resulting from the failure of our
customers to make payments when due or within a reasonable period
of time thereafter. Although many factors can affect the failure
of customers to make required payments when due, one of the most
unpredictable is weather, which can have a positive as well as
negative impact on the Company's customers. For example, severe
or catastrophic weather conditions, such as hailstorms or
hurricanes, will generally increase the level of activity of our
customers, thus enhancing their ability to make required
payments. On the other hand, weather conditions such as heavy
rain or snow or ice storms will generally preclude customers from
installing the Company's products on job sites and collecting
from their own customers, which conditions could result in the
inability of the Company's customers to make payments when due.
The reserve for allowance for doubtful accounts and notes
receivable is intended to adjust the value of our accounts and
notes receivable for possible credit losses as of the balance
sheet date in accordance with generally accepted accounting
principles. Calculating such allowances involves significant
judgment. We estimate our reserves for allowance for doubtful
accounts and notes receivable by applying estimated loss
percentages against our aging of accounts receivables and based
on our estimate of the credit worthiness of the customers from
which the notes are payable. Changes to such allowances may be
required if the financial condition of our customers deteriorates
or improves or if we adjust our credit standards, thereby
resulting in reserve or write-off patterns that differ from
historical experience. Errors by the Company in estimating our
allowance for doubtful accounts and notes receivable could have a
material adverse affect on the Company's financial condition,
results of operations, and cash flow.
15
* We write down our inventories for estimated obsolete or slow-
moving inventories equal to the difference between the cost of
inventories and their estimated market value based upon assumed
market conditions. If actual market conditions are less
favorable than those assumed by management, additional inventory
write-downs may be required. If inventory write-downs are
required, the Company's financial condition, results of
operations, and cash flows could be materially adversely
affected.
* We test for impairment of the carrying value of goodwill
annually and when indicators of impairment occur. Indicators of
impairment could include, among other things, a significant
change in the business climate, including a significant sustained
decline in an entity's market value, operating performance
indicators, competition, sale or disposition of a significant
portion of the business, legal or other factors. In connection
with the annual test for impairment, management reviews various
generally accepted valuation methodologies for valuing goodwill.
Management reviewed the carrying value of the goodwill on its
balance sheet as of June 30, 2003 in light of the fact that the
Company's stock market capitalization of our outstanding equity
securities as of that date was below our total shareholders'
equity (book value). Management concluded that the market price
of the Company's common stock is not the best indication of the
fair market value of the Company. Management believes that, with
respect to the Company, the better indicator of fair market value
results from the use of the discounted estimated future cash flow
method, which includes an estimated terminal value component.
This method is based on management's estimates, which will vary
if the judgments and assumptions used to estimate the related
business's future revenues, gross profit margins, operating
expenses, interest rates, and other factors, prove to be
inaccurate. If such judgments, assumptions and estimates prove
to be incorrect, then the Company's carrying value of goodwill
may be overstated on the Company's balance sheet, and the
Company's results of operations may not reflect the impairment
charge that would have resulted if such judgments, assumptions
and estimates had been correct. Any failure to write down
goodwill for impairment correctly during any period could have a
material adverse effect on the Company's future financial
condition and results of operations, as well as cause historical
statements of operations, financial condition, and cash flows to
have been incorrectly stated in light of the failure to take any
such write downs correctly.
* In conducting the required goodwill impairment test, we
identified reporting units by determining the level at which
separate financial statements are prepared and reviewed by
management. The test was required by only one of our operating
subsidiaries. As a result of the required test, we determined
that no write down of our goodwill was required at June 30, 2003.
While we do not use our stock market capitalization to determine
the fair value of our reporting unit, we expect convergence
between our stock market value capitalization and our discounted
cash flow valuation to occur over time or from time to time. If
this does not occur, it may signal the need for impairment
charges.
* We seek revenue and income growth by expanding our existing
customer base, by opening new distribution centers, and by
pursuing strategic acquisitions that meet our various criteria.
If our evaluation of the prospects for opening a new distribution
center or of acquiring a company misjudges our estimated future
revenues or profitability, such a misjudgment could impair the
carrying value of the investment and result in operating losses
for the Company, which could materially adversely affect our
results of operations, financial condition, and cash flows.
* We file income tax returns in every jurisdiction in which we
have reason to believe we are subject to tax. Historically, we
have been subject to examination by various taxing jurisdictions.
To date, none of these examinations has resulted in any material
additional tax. Nonetheless, any tax jurisdiction may contend
that a filing position claimed by us regarding one or more of our
16
transactions is contrary to that jurisdiction's laws or
regulations. In any such event, we may incur charges to our
income statement which could materially adversely affect our net
income and may incur liabilities for taxes and related charges
which may materially adversely affect our financial condition.
We May Require Financing That May Result In Dilution To
Existing Stockholders And Restrictions On Us.
We may require additional equity or debt financing in order
to consummate an acquisition or for additional working capital if
we open new distribution centers, or if we suffer losses or
complete the acquisition of a business that subsequently suffers
losses, or for other reasons. Any additional equity financing
that may be obtained may dilute existing stockholders' voting
power and equity interests. Any additional equity or debt
financing that may be obtained may:
* impair or restrict our ability to declare dividends;
* impose financial or other restrictions on our ability to
make acquisitions or implement expansion efforts;
* cost more in interest, fees and other charges than our
current financing; and
* contain other provisions that are not beneficial to us and
may restrict our flexibility in operating the Company.
There can be no assurance that we will be able to obtain
additional financing on terms acceptable or at all. In the event
additional financing is unavailable, or is available only on
terms deemed to be onerous or unacceptable to us, we may be
materially adversely affected.
Our Business Strategy Is Unproven.
A significant element of our business strategy is to acquire
additional companies engaged in the wholesale distribution of
roofing supplies and related products industries and companies
which manufacture products for or supply products to such
industry. Our strategy is unproven and is based on unpredictable
and changing events. We believe that suitable candidates for
potential acquisition exist. There can be no assurance that any
acquisitions, if successfully completed:
* will be successfully integrated into our operations;
* will perform as expected;
* will not result in significant unexpected liabilities; or
* will ever contribute significant revenues or profits to the
Company.
If we are unable to manage growth effectively, our financial
condition, results of operations, and cash flows could be
materially adversely affected. We have not acquired any
companies since our Initial Public Offering in March 1999.
17
Risks Relating To Our Management And Affiliates
Our Executive Officers And Directors May Have Potential
Conflicts Of Interest With Us.
Certain of our principal executive officers and directors
also are principal officers, directors and the principal
stockholders of TDA, the entity that owns a majority of our
voting stock and, consequently, may be able, through TDA, to
direct the election of our directors, effect significant
corporate events and generally direct our affairs.
Through June 30, 2002, TDA provided office space for use as
our New York corporate executive offices and administrative
services to us in New York City pursuant to an administrative
services agreement that terminated as of June 30, 2002.
Commencing July 1, 2002 we began to pay TDA seventy-five (75%)
percent of the occupancy costs (approximately $4,500 per month)
for our New York corporate executive offices and seventy-five
(75%) percent of the remuneration and benefits of our New York
administrative assistant (approximately $4,500 per month), and
TDA began to pay twenty-five (25%) percent of such monthly
occupancy costs (approximately $1,500) and twenty-five (25%)
percent of the monthly remuneration and benefits of the
administrative assistant (approximately $1,500) in order to
defray any expenses that may be deemed to be attributable to TDA.
In October 2002, we entered into a new lease for our New York
corporate executive offices which provide for a base rent of
approximately $6,900 with customary additional rental charges
(i.e., proportionate share of real estate taxes, electricity,
etc.) of which TDA will continue to pay twenty-five (25%)
percent.
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% per annum
two-year note. The note was payable in full in October 2000, and
TDA had agreed to defer the interest payable on the note until
its maturity. In October 2000, interest on the note was paid in
full, and TDA and JEH Eagle (successor by merger to MSI Eagle)
agreed to refinance the $1,000,000 principal amount of the note
pursuant to a new 8.75% per annum demand promissory note.
A subsidiary of TDA and James E. Helzer, our President,
lease approximately one-half of our facilities to us.
We do not intend to enter into any material transaction with
any of our affiliates in the future unless we believe that such
transaction is fair and reasonable to us and is approved by a
majority of the independent members of our Board of Directors.
Notwithstanding the foregoing, there can be no assurance that
future transactions, if any, will not result in conflicts of
interest which will be resolved in a manner unfavorable to us.
See Item 2. "Properties - Locations Owned By and Leased from
TDA."
We Depend Upon Key Personnel.
Our success may depend upon the continued contributions of
our officers. Our business could be adversely affected by the
loss of the services of Douglas P. Fields, our Chief Executive
Officer and Chairman of our Board of Directors, Frederick M.
Friedman, our Executive Vice President, Secretary and Treasurer,
James E. Helzer, our President, and E.G. Helzer, our Senior Vice
President. Although we have "key person" life insurance on the
life of James E. Helzer in the amount of $2,000,000 and on each
of the lives of Messrs. Fields and Friedman in the amount of
$1,000,000, there can be no assurance that the foregoing amounts
will be adequate to compensate us in the event of the loss of any
of their lives.
18
Conflicts Of Interest May Arise In The Allocation Of
Management's Time
The employment agreements with Messrs. Fields and Friedman
do not require either of them to devote a specified amount of
time to our affairs. Each of Messrs. Fields, Friedman and Helzer
have significant outside business interests, including but not
limited to TDA (our controlling stockholder) and its subsidiaries
(as to Messrs. Fields and Friedman). Accordingly, Messrs. Fields,
Friedman and Helzer may have conflicts of interest in allocating
time among various business activities. There can be no assurance
that any such conflicts will be resolved in a manner favorable to
us.
We Have Entered Into Transactions With Affiliates That Have
Benefited Them.
Messrs. Fields and Friedman, two of our principal executive
officers and directors, are also principal executive officers,
directors and the principal stockholders of TDA and have and will
or may be deemed to benefit, directly or indirectly, from our
transactions with TDA. James E. Helzer, our President, previously
owned one of our acquisitions and has and will or may be deemed
to have benefited or to benefit directly from his transactions
with us.
During our fiscal year ended June 30, 1999, we made dividend
payments to TDA of approximately $1,200,000. After our Initial
Public Offering, and in connection with the Acquisitions, we
cancelled in the form of a non-cash dividend all indebtedness of
TDA to us at that date, approximately $3,067,000. To the extent
TDA's indebtedness to us was cancelled, TDA directly, and
Messrs. Fields and Friedman indirectly, derived a benefit.
In addition, through June 30, 2002, TDA provided us with
office space and administrative services in New York City for
$3,000 per month pursuant to a month-to-month administrative
services agreement. This agreement terminated on June 30, 2002.
Through June 30, 2002, TDA also provided certain other services
to us pursuant to a five-year agreement requiring payments to TDA
of $3,000 per month. This agreement expired on June 30, 2002.
On February 6, 2003, we entered into a Securities Purchase
Agreement ("Securities Purchase Agreement") with James E. Helzer,
our President, Chief Operating Officer, and Vice Chairman of the
Board of Directors, to sell in a private placement transaction
(the "Helzer Transaction"), for gross proceeds to us of $1
million (a) 1,000,000 authorized but previously unissued shares
of our common stock, and (b) warrants to purchase up to an
additional 1,000,000 authorized but previously unissued shares of
our common stock at an exercise price of $1.50 per share
exercisable for 5 years from the date of issuance (the "Helzer
Warrants"). Although the closing price for our common stock at
the close of business on the day before the Helzer Transaction
closed was $0.81 and we received two separate fairness opinions
indicating that the consideration received by the Company in the
Helzer Transaction was fair, Mr. Helzer may be able to benefit
from any appreciation in the market price of our common stock.
On September 22, 2003, the last reported sales price for our
common stock was $2.40 per share. See Item 5. "Market for
Registrant's Common Equity and Related Stockholders' Matters."
In February 2003, our Chairman and Chief Executive Officer,
Douglas P. Fields, and our Executive Vice President, Treasurer,
Secretary, and Chief Financial Officer, Frederick M. Friedman,
each agreed to accept $100,000 of their cash compensation for the
fiscal year ended June 30, 2003 in the form of 100,000 newly
issued, unregistered shares of the Company's common stock in lieu
of such cash compensation. These shares were issued April 11,
2003.
We do not intend to enter into any material transaction with
any of our affiliates in the future unless we believe that such
transaction is fair and reasonable to us and is approved by a
majority of the independent
19
members of our Board of Directors. Notwithstanding the
foregoing, there can be no assurance that future transactions,
if any, will not result in conflicts of interest which will be
resolved in a manner unfavorable to us.
See "- Our Executive Officers and Directors May Have
Potential Conflicts of Interest With Us," Item 2. "Properties -
Locations Owned By and Leased from TDA," Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Acquisitions."
We Are Controlled By TDA And Lease Several Of Our Facilities
From TDA.
TDA owns approximately 51.7% of our issued and outstanding
shares of our common stock. Douglas P. Fields, our Chief
Executive Officer and Chairman of our Board of Directors, also is
Chairman of the Board of Directors, President and the Chief
Executive Officer of TDA as well as a principal stockholder of
TDA. Frederick M. Friedman, our Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and one of our Directors
also is the Executive Vice President, Chief Financial Officer,
Treasurer and a director of TDA as well as a principal
stockholder of TDA. John E. Smircina, Esq. is one of our
Directors and a director of TDA.
Because Messrs. Fields, Friedman and Smircina may be deemed
to control TDA, they also may be deemed to control our common
stock owned by TDA. As a result, they are in a position to
control the composition of our Board of Directors, and, therefore
our business, policies, and affairs, and the outcome of issues
which may be subject to a vote of our stockholders.
A TDA subsidiary has rented to us the premises for several
distribution facilities pursuant to ten-year leases at an
approximate aggregate annual base rental of $790,000 which we
believe is fair and reasonable to us.
See "- Our Executive Officers and Directors May Have
Potential Conflicts of Interest With Us," Item 2. "Properties,"
Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Acquisitions."
Substantial Financial Benefits To Prior Owners Of
Subsidiaries.
* JEH Eagle. In July 1997, JEH Eagle acquired the business
and substantially all of the assets of JEH Company ("JEH Co."), a
Texas corporation, wholly-owned by James E. Helzer, now our
President and Vice Chairman of our Board of Directors. The
purchase price, as adjusted, including transaction expenses, was
approximately $14,768,000, consisting of a cash payment and a
note. Certain, substantial, contingent payments, as additional
consideration to JEH Co. or its designee, were paid by us that
may be deemed to have resulted in substantial financial benefits
to JEH Co. or its designee and may be deemed to have had a
material adverse effect on our financial condition, cash flows
and income. Upon completion of our Initial Public Offering, we
issued 300,000 shares of our common stock to James E. Helzer in
fulfillment of certain of such consideration. Additionally, for
the fiscal years ended June 30, 1999, 2000 and 2001,
approximately $1,773,000, $1,947,000 and $315,000, respectively,
of such additional consideration was paid to JEH Co. or its
designee. For the fiscal year ended June 30, 2002, no additional
consideration was payable to JEH Co. or its designee, and, as of
June 30, 2002, the Company had no future obligation for such
additional consideration. James E. Helzer has rented to us the
premises for several distribution facilities pursuant to
five-year leases at an approximate aggregate annual base rental
of $784,000 which we believe is fair and reasonable to us.
* MSI Eagle. In October 1998, MSI Eagle acquired
substantially all of the assets and the business of Masonry
Supply, Inc. ("MSI Co."), a Texas corporation, wholly-owned by
Gary
20
L. Howard, formerly one of our executive officers. The
purchase price, as adjusted, including transaction expenses, was
approximately $8,538,000 subject to further adjustments under
certain conditions. Certain contingent payments, as additional
consideration to MSI Co. or its designee, are to be paid by us
that may result in substantial financial benefits to MSI Co. or
its designee and may materially and adversely effect our
financial condition, cash flows and income. After completion of
our Initial Public Offering, we issued 260,000 shares of our
common stock to Gary L. Howard in fulfillment of certain of such
future consideration. Additionally, for the fiscal years ended
June 30, 2000, 2001 and 2002, approximately $216,000, $226,000,
and $260,000, respectively, of such additional consideration, was
paid to MSI Co. or its designee. For the fiscal year ended June
30, 2003, approximately $260,000 of additional consideration is
payable to MSI Co. or its designee. Gary L. Howard rents to us
the premises for certain offices and a distribution center
pursuant to a three-year lease at an approximate annual base
rental of $112,000 which we believe is fair and reasonable to us.
See Item 2. "Properties," Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Acquisitions."
Risks Relating To Our Securities
Our Securities Must Continue To Meet Qualitative And
Quantitative Listing Maintenance Criteria For The Nasdaq SmallCap
Market And The Boston Stock Exchange.
Our securities are quoted and traded on the NASDAQ SmallCap
Market and are listed on the Boston Stock Exchange ("BSE"). There
can be no assurance that we will continue to meet both the
qualitative and quantitative criteria for continued quotation and
trading of our securities on the NASDAQ SmallCap Market. That
criteria, which undergoes periodic NASDAQ review, include, among
other things, at least:
* $35,000,000 in market capitalization, $2,500,000 in
stockholders' equity or $500,000 in net income in an issuer's
last fiscal year or two of its last three fiscal years;
* a $1.00 minimum bid price;
* two market makers;
* 300 round lot shareholders; and
* 500,000 shares publicly held (excluding officers, directors
and persons owning 10% or more of the Company's issued and
outstanding shares) with $1,000,000 in market value.
The BSE also has similar continued quotation criteria. If we
are unable to meet the continued quotation criteria of the Nasdaq
SmallCap Market and the BSE and are suspended from trading on
these markets, our securities could possibly be traded in the
over-the-counter market and be quoted in the so-called "pink
sheets" or, if then available, the OTC Bulletin Board. In such
an event, an investor would likely find it more difficult to
dispose of, or even obtain accurate quotations of, our
securities. See "- We Will Also Be Required To Meet Anticipated
Nasdaq Corporate Governance Criteria."
Although we currently are in compliance with the foregoing
listing criteria, from time to time our closing stock price has
fallen below the Nasdaq minimum bid price requirements. Under
the Nasdaq rules, one prerequisite to continued listing on the
Nasdaq SmallCap Market is the maintenance of a minimum closing
bid price of $1.00 per share. If a quoted company's closing bid
price falls below $1.00 per share for thirty (30) consecutive
trading days, such company may be subject to having its shares
delisted from Nasdaq.
21
The closing bid price per share of the Company's common stock
fell below $1.00 per share for the thirty (30) consecutive
trading days prior to February 11, 2003. The Company
subsequently received a letter from Nasdaq advising the Company
that it would be required to come into compliance with
Nasdaq's minimum closing bid rules within one hundred and eighty
(180) calendar days following February 11, 2003, to avoid the
commencement of a possible delisting proceeding. In order to
come into compliance with the minimum closing price rules, the
closing bid price per share of the Company's common stock was
required to be at least $1.00 for ten (10) consecutive trading
days ("Minimum Closing Price Requirement"). If the Company were
unable to satisfy the Minimum Closing Price Requirement during
this one hundred and eighty (180) calendar day time period
(August 11, 2003), Nasdaq would determine whether the Company was
able to otherwise satisfy the criteria for initial listing for
the Nasdaq SmallCap Market. If the Company could otherwise
satisfy the initial listing criteria at that time, Nasdaq would
grant the Company an additional one hundred and eighty (180)
calendar day grace period to demonstrate compliance with the
Minimum Closing Price Requirement. The trading price of our
common stock improved subsequent to February 11, 2003, and by
letter dated May 13, 2003, Nasdaq notified us that the Minimum
Closing Price Requirement was satisfied and that we were again in
compliance with Nasdaq Marketplace Rule 4310(c)(8)(D). However,
we can not assure you that the Minimum Closing Price Requirement
or any other listing criteria will continue to be satisfied and
that the Company's securities will not become subject to
delisting from the Nasdaq SmallCap Market in the future.
We Will Be Required To Meet Anticipated Nasdaq Corporate
Governance Criteria.
Although the Nasdaq SmallCap Market has always had certain
corporate governance criteria for the listing and continued
quotation of an issuer's securities, Nasdaq has proposed a
substantially expanded corporate governance criteria for the
issuers of those securities quoted on the Nasdaq SmallCap Market.
Although, in the past, we have been able to satisfy Nasdaq
SmallCap Market's corporate governance criteria, the new proposed
criteria is substantially more difficult to satisfy. The rules
proposed by Nasdaq in February 2003 are partly in response to the
Sarbanes Oxley Act of 2002 ("Sarbanes Oxley") and would require,
among other things
* an increase in the degree of independence of members of the
board of directors with a majority of board members to be
independent, and these independent directors are to, among other
things: (i) hold regular meetings among themselves only, and (ii)
approve related party transactions, all with a strict definition
of an independent director;
* independent director approval of: (i) director nominations
and (ii) chief executive officer compensation;
* an empowerment of audit committees of boards of directors
with, among other things: (i) sole authority to hire and fire
auditors, and (ii) authority to hire their own experts when
appropriate;
* approval by audit committees, in advance of any non-audit
services to be provided by its auditor;
* establishment of a code of conduct addressing conflicts of
interest and compliance with laws; and
* a limit on payments to independent directors and their
family members (other than for services on the board of
directors).
The proposed Nasdaq rules provide an exemption from the
requirements for a majority of independent directors on the board
of directors and from the requirement that independent directors
approve director
22
nominations and chief executive officer compensation for
companies controlled by individuals, groups, or other companies.
For purposes of this exemption, an individual, group, or other
company has such control if they own in excess of 50% of the
issuer's voting power ("Control Person"). Currently, we have a
company, TDA, which owns approximately 51.7% of our voting power
and consequently we would satisfy this exemption. However,
there is no assurance that such exemption will be approved
in the final rules or that we will continue to have a Control
Person.
Nasdaq also has proposed that each listed company modify the
composition of its board of directors to comply with these new
corporate governance rules effective immediately after the first
annual meeting of stockholders that occurs after January 1, 2004
(except that those proposals relating to the code of conduct, the
holding of regular meetings comprised solely of independent
directors, and to audit committee charters are to be effective
six months after the SEC approves the rule changes). In this
regard, the SEC is directed under Sarbanes Oxley to require
Nasdaq and other registered national securities associations and
exchanges to adopt rules relating to audit committees'
composition, duties and obligations, and other related matters
that may result in further proposed changes to the Nasdaq
corporate governance rules that may be even more difficult to
satisfy than that currently proposed.
We believe that these proposed corporate governance
requirements, including the expanded powers and responsibilities
of independent directors and a stricter definition of an
independent director, will make it more difficult to find
independent directors for our Board of Directors. Increased
competition for qualified independent directors, including those
persons with accounting experience and financial statement acumen
to serve on audit committees, can be anticipated. We believe
that compliance with Nasdaq's proposed corporate governance
requirements will be difficult and will increase our costs and
expenses as the costs of finding and compensating independent
directors escalate and the costs of administering their new
powers and responsibilities prove to be an added financial
burden. If Nasdaq's corporate governance rules are adopted and
we are unable to attract a sufficient number of independent
directors willing to take on the responsibilities imposed by such
rules on what we believe to be commercially reasonable terms, our
securities may be delisted from Nasdaq.
The Market Price Of Our Securities Has Declined
Substantially Since Our Initial Public Offering.
The initial offering prices of the shares of our common
stock and our Warrants issued pursuant to our Initial Public
Offering were $5.00 and $0.125 per share and Warrant,
respectively. On September 22, 2003, the closing prices for the
shares of our common stock and Warrants were $2.40 and $0.20,
respectively, as reported by the Nasdaq SmallCap Market on that
date. In addition to the diminution of market value, continued
market price declines could result in the delisting of our
securities from the Nasdaq SmallCap Market and the Boston Stock
Exchange ("BSE").
There Are Risks In Purchasing Low-Priced Securities.
If our securities were to be suspended or delisted from the
Nasdaq SmallCap Market, they could be subject to rules under the
Securities Exchange Act of 1934 ("Exchange Act") which impose
additional sales practice requirements on broker-dealers who sell
such securities to persons other than established clients and
"accredited investors" (i.e., individuals with a net worth in
excess of $1,000,000 or an annual income exceeding $200,000 or
$300,000 together with their spouses). For transactions covered
by such rules, a broker-dealer must make a special suitability
determination of the purchaser and have received the purchaser's
written consent to the transaction prior to the sale.
Consequently, such rules may adversely affect the ability of
broker-dealers and shareholders to sell our securities, whether
in any secondary market that may develop for such securities or
otherwise. Further, because of the limitations and requirements
imposed on the sale of securities under such circumstances, such
rules also may have an adverse effect on the prices at which our
securities may trade in any secondary market place which may
develop.
23
The SEC has enacted rules that define a "penny stock" to be
any equity security that has a price (as therein defined) of less
than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions, including securities listed
on the Nasdaq SmallCap Market or on designated exchanges. For any
transaction involving a penny stock, unless exempt, the rules
require the delivery, prior to any transaction in a penny stock,
of a disclosure statement prepared by the SEC relating to the
penny stock market. Disclosure also has to be made about the
risks of investing in penny stocks in both public offerings and
in secondary trading. In the event our securities are no longer
listed on the Nasdaq SmallCap Market or are not otherwise exempt
from the provisions of the SEC's "penny stock" rules, such rules
also may adversely affect the ability of broker-dealers and
shareholders to sell our securities which, in turn, could have an
adverse effect on the prices at which our securities may trade in
any secondary market place that may develop.
There Is No Assurance Of A Continued Public Market For Our
Securities.
We can not assure you that a trading market for any of our
securities will be sustained. Investors should be aware that
sales of our securities may have a depressive effect on the price
of our securities in any market in which our securities are
traded or which may develop for such securities.
We Have Outstanding Options, Warrants And Registration
Rights That May Limit Our Ability To Obtain Equity Financing And
Could Cause Us To Incur Expenses .
We have issued or are obligated to issue warrants:
* in our Initial Public Offering, as well as additional
warrants on identical terms to others;
* to the underwriter of our Initial Public Offering;
* in connection with a private placement offering of our
securities in May 2002 to certain private investors; and
* to Mr. Helzer in connection with the Helzer Transaction.
In accordance with the respective terms of warrants issued
to investors and any options granted and that may be granted
under our 1996 Stock Option Plan (the "Stock Option Plan") or to
future investors, the holders are given an opportunity to profit
from a rise in the market price of our common stock, with a
resulting dilution in the interests of the other stockholders. In
this regard, the Warrants issued to the underwriter of our
Initial Public Offering contain a cashless exercise provision.
The terms on which we may obtain additional financing during the
exercise periods of any outstanding warrants and options may be
adversely affected by the existence of such warrants, options and
Stock Option Plan. The holders of options or warrants may
exercise such options or warrants at a time when we might be able
to obtain additional capital through offerings of securities on
terms more favorable than those provided by such options or
warrants. In addition, the holders of the underwriter's warrants
issued in connection with our Initial Public Offering have demand
and "piggyback" registration rights with respect to their
securities, and Mr. Helzer has demand registration rights with
respect to the securities he acquired pursuant to the Helzer
Transaction. Exercise of such registration rights may involve
substantial expense to us.
We Have Sold Shares Below The Then Current Market Price And
Warrants With A Lower Exercise Price Than The Warrants.
On May 15, 2002, we agreed to sell 1,090,909 shares of our
common stock at $2.75 per share, a discount of approximately 8.6%
below the closing bid price for our shares of common stock on the
Nasdaq
24
SmallCap Market on May 15, 2002, and to issue warrants, without
additional consideration as part of that transaction, to
purchase 218,181 shares of our common stock exercisable at $3.50
per share in the Private Placement. The Private Placement
provided for two equal and separate tranches of common stock and
warrants. The first such tranche closed. The investors in the
Private Placement declined to make the additional investment
required to close the second tranche. Accordingly, the second
tranche did not and will not close. In connection with
settlements entered into with several of the investors in the
Private Placement, all but 58,181 of the warrants issued in
connection with the first tranche has been surrendered
unexercised to the Company. Settlement discussions with the
remaining investor have occured but there can be no assurance
that any settlement will be successful.
On February 6, 2003, we entered into the Helzer Transaction
pursuant to which we sold 1,000,000 shares of our common stock
and the Helzer Warrant to purchase up to an additional 1,000,000
shares of our common stock to Mr. Helzer, in exchange for gross
proceeds of $1,000,000. Although the common stock sold in that
transaction was at a price exceeding the then-current market
price for the common stock and the Helzer Warrant exercise price
also exceeded such market price, such Helzer Warrant is
exercisable at an exercise price of $1.50 per share, which
exercise price is $4.00 less than the exercise price of the
Warrants issued pursuant to our Initial Public Offering in March
1999. The exercise price and number of shares of common stock
issuable upon the exercise of the Helzer Warrant are subject to
both typical anti-dilution provisions as well as a provision
providing for an adjustment to the exercise price of the warrant
in the event that the Company enters into certain sales
transactions in which the common stock is sold at a price below
the current exercise price of the Helzer Warrant. See Item 5.
"Market for Registrant's Common Equity and Related Stockholder
Matters."
The sale of securities pursuant to these private placement
transactions and any future sales of our securities will dilute
the percentage equity ownership of then existing owners of the
shares of our common stock and may have a dilutive effect on the
market price for our outstanding shares of common stock, the
warrants issued pursuant to our Initial Public Offering, and the
value of any other of our previously issued warrants.
We Will Not Receive All The Proceeds From The Private
Placement.
As a result of the decision of the investors in our Private
Placement not to purchase the second tranche of securities as
required in our agreements with them, we did not receive the
additional $1,500,000 of gross proceeds therefrom as anticipated
although substantially all of the costs associated therewith have
already been incurred by the Company. Although we have settled
this matter with four of the five institutional investors in the
Private Placement, we are currently considering the most
appropriate course of action to take with regard to the
institutional investor which has not settled and anticipate
future negotiations with such investor to seek to resolve the
matter. We may not be able to reach a mutually agreeable
solution and may be faced with the prospect of either absorbing
some or all of the additional costs incurred without receipt of
any additional proceeds or the potential commencement of
litigation which also is likely to be costly.
Substantial Sales Of Restricted Shares Or Shares Held By Our
Officers, Directors, Or Principal Shareholders Could Adversely
Affect The Market Price Of Our Common Stock.
If our stockholders sell substantial amounts of our common
stock, including shares issued upon the exercise of outstanding
options or warrants, the market price of our common stock may
decline. Further, such sales also could make it more difficult
for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate. We are unable to
predict the effect that such sales may have on the then-
prevailing market price of our common stock. As of September 22,
2003, we had approximately 10,255,455 shares of common stock
outstanding and 5,336,781 additional shares of common stock that
may be issued upon the exercise of outstanding warrants and
options. Of these shares, approximately 65% of our common
25
stock is held by our officers, directors, and principal
stockholders ("Affiliate Stockholders"). In addition, as of
such date, approximately 1,236,364 shares of our outstanding
common stock were "restricted securities" within the meaning of
Rule 144 under the Securities Act (including 1.2 million which
are held by Affiliate Stockholders) and an additional 1,911,781
shares of common stock which would constitute "restricted
securities" are issuable upon the exercise of outstanding
options and warrants (including 1.3 million shares issuable
to Affiliate Stockholders). Shares held by Affiliate
Stockholders which are not restricted shares are referred to as
"control shares".
The restricted shares (including those issuable upon the
exercise of outstanding warrants or options) were issued and sold
in private transactions or under employee benefit plans in
reliance upon exemptions from registration under the Securities
Act. Control shares and restricted shares may be sold in the
public market only if they are registered under the Securities
Act or if they qualify for an exemption from registration, such
as the exemptions provided under Rule 144 under the Securities
Act, which is summarized below.
Holders of "restricted shares" or "control shares" are
eligible to sell shares of our common stock under Rule 144. In
general, under Rule 144 as currently in effect, a person or
persons whose shares are required to be aggregated, who holds (a)
control shares or (b) has beneficially owned restricted shares
for at least one year (including the holding period of any prior
owner except an affiliate), is entitled to sell within any three-
month period a number of shares that does not exceed the greater
of:
* one percent of the number of shares of common stock then
outstanding (which, as of September 22, 2003, would equal
approximately 102,554 shares), or
* the average weekly trading volume of our common stock during
the four calendar weeks preceding the date on which notice o
the sale is filed.
Sales under Rule 144 also are subject to certain manner of
sale provisions and notice requirements and to the availability
of current public information about us. Under Rule 144(k), a
person who is not deemed to have been an affiliate of the Company
at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner except
an affiliate), is entitled to sell the shares without complying
with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Affiliated Stockholders who hold
control shares are required to continue to comply with those
requirements until they are no longer "affiliates" (within the
meaning of Rule 144) of the Company and three months has passed
since they were last deemed to be an affiliate of the Company.
We have granted demand registration rights, rights to
participate in offerings that we initiate, and Form S-3
registration rights to Mr. Helzer and we may permit other
shareholders such as TDA to participate in any such registration.
Because the Affiliated Stockholders hold a significant
number of our common shares, most of which are not restricted
securities and those which are restricted have registration
rights, if they should decide to sell a significant number of
shares of our common stock, whether under Rule 144 or pursuant to
a registration statement, the market price of our common stock
could be significantly adversely affected by such sales.
We May Not Be Able To Make Our Required SEC Filings On Time:
In light of new rules, regulations, requirements, and
procedures created and/or imposed upon us and/or on our
independent auditors since the passage of the Sarbanes-Oxley Act
of 2002, or for other reasons, we may not be able to make all of
our required filings with the Securities and Exchange Commission
in a timely manner. A late filing of any required filing, even
if an extension is available and/or granted, may have an
26
adverse affect on our Company, the market price at which our
securities trade, and our listing on Nasdaq or whatever
marketplace on which our securities may be trading.
We Have No Plans To Pay Cash Dividends.
Except for cash dividends paid to TDA prior to the
consummation of our Initial Public Offering, we have not paid any
dividends on our common stock and our Board of Directors does not
presently intend to declare any dividends in the foreseeable
future. Instead, the Board of Directors intends to retain all
earnings, if any, for use in our business operations.
Additionally, our credit facility contains provisions that could
restrict our ability to pay dividends if we do not satisfy
certain financial requirements.
We Have Anti-Takeover Provisions That Authorize Our
Directors To Issue And Determine The Rights Of Shares
Of Preferred Stock In Our Certificate Of Incorporation.
Our Certificate of Incorporation permits our directors to
designate the terms of and issue shares of preferred stock. The
issuance of shares of preferred stock by the Board of Directors
could adversely effect the rights of holders of common stock by,
among other matters, establishing preferential dividends,
liquidation rights and voting power. Although we have no present
intention to issue shares of preferred stock, their issuance
might render it more difficult, and therefore discourage, an
unsolicited takeover proposal such as a tender offer, proxy
contest or the removal of incumbent management, even if such
actions would be in the best interest of our stockholders.
Our Certificate Of Incorporation Limits Directors'
Liability.
Our Certificate of Incorporation provides that our directors
will not be held liable to us or our stockholders for monetary
damages upon breach of a director's fiduciary duty with certain
exceptions. The exceptions include a breach of the director's
duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law,
improper declarations of dividends and transactions from which
the director derived an improper personal benefit.
ITEM 2. PROPERTIES
Locations Owned By and Leased From TDA
We lease approximately 15,000 square feet of executive
office space located at 1451 Channelside Drive, Tampa, Florida
33605 from a wholly-owned subsidiary of TDA, at an approximate
base annual rental of $120,000.
Additionally, we lease nine (9) locations from the TDA
subsidiary, two (2) in Alabama (Birmingham and Mobile) and six
(6) in Florida (Fort Myers, Holiday, Lakeland, Pensacola, St.
Petersburg and Tampa). We also lease one (1) location in
Littleton, Colorado, from an entity owned one-half by the TDA
subsidiary and one-half by James E. Helzer, our President, and
his spouse. The facilities located in Birmingham, Alabama, and
Lakeland, Florida, have been subleased to unaffiliated third
parties, and all or a portion of the Tampa, Florida, executive
office space may be subleased to third parties in the future.
The aggregate approximate square footage and aggregate
approximate base annual rental for the locations leased from the
TDA subsidiary are 250,000 square feet (exclusive of land used
for storage and other purposes) and $790,000.
27
The aggregate approximate square footage and aggregate
approximate base annual rental for the Littleton, Colorado
location leased from an entity owned one-half by the TDA
subsidiary and one-half by James E. Helzer, our President, are
7,500 square feet (exclusive of land used for storage and other
purposes) and $46,000, respectively.
In March 1999, we entered into written ten-year leases with
the TDA subsidiary providing for base annual rentals as set forth
above for the first five years of such leases with provisions for
increases in rent based upon the consumer price index at the
beginning of the sixth year of such ten-year leases and with
provisions for five-year renewal options, increases in rent based
upon the consumer price index, and lease terms, additional rental
and other charges customarily included in such leases, including
provisions requiring us to insure and maintain and pay real
estate taxes on the premises. We believe that the rent and other
terms of our lease agreements with the TDA subsidiary are on at
least as favorable terms as we would expect to negotiate with
unaffiliated third parties. Neither party is permitted to
terminate the leases before the end of their term without a
breach or default by the other party.
As part of the foregoing leasing arrangements, additional
undeveloped land is leased to us from the TDA subsidiary. That
undeveloped land is used for storage or reserved for future use.
The locations and approximate acreage of the undeveloped land are
as follows: Birmingham (one), Littleton (three), Ft. Myers (one
and a third), Holiday (three), Pensacola (two and a half), St.
Petersburg (two) and Tampa (one).
Through June 30, 2002, TDA provided office space for use as
our New York corporate executive offices pursuant to an
administrative services agreement that has been terminated.
Commencing July 1, 2002, the Company began to pay to TDA seventy-
five (75%) percent of the occupancy cost (approximately $4,500
per month) for our executive offices, and TDA began to pay twenty-
five (25%) percent of such occupancy cost (approximately $1,500
per month) in order to defray any expenses that may be deemed to
be attributable to TDA. The current lease for the Company's New
York corporate executive offices expired in October 2002 with TDA
as the named lessee. In October 2002, the Company entered into a
new lease with the landlord for these premises at a base rent of
approximately $6,900 per month with customary additional rental
charges (i.e., proportionate share of real estate taxes,
electricity, etc.), of which TDA will continue to pay twenty-five
(25%) percent. This lease expires in October 2012.
Locations Owned By and Leased From James E. Helzer
We lease approximately 8,000 square feet of executive office
space, used as our operational headquarters, located at 2500 U.S.
Highway 287, Mansfield, Texas 76063 from James E. Helzer, our
President.
We also lease seven (7) other locations from James E.
Helzer, two (2) in Colorado (Colorado Springs and Henderson) and
five (5) in Texas (Colleyville, North Fort Worth, Frisco,
Mansfield and Mesquite). One (1) additional location in
Littleton, Colorado, is leased from an entity owned one-half by
James E. Helzer and his spouse and one-half by the TDA
subsidiary.
The aggregate approximate square footage and aggregate
approximate base annual rental for the locations leased from
James E. Helzer are 254,700 square feet (exclusive of land used
for storage and other purposes) and $784,000, respectively.
The aggregate approximate square footage and aggregate
approximate base annual rental for the Littleton, Colorado
location leased from an entity owned one-half by the TDA
subsidiary and one-half by James E. Helzer, our President, are
7,500 square feet (exclusive of land used for storage and other
purposes) and $46,000, respectively.
28
The foregoing premises, except for the Frisco, Texas,
premises, are leased to us from James E. Helzer pursuant to
five-year leases expiring in June 2007 providing for base annual
rentals as set forth above with provisions for five (5%) percent
increases commencing on July 1, 2006. The Frisco, Texas,
premises is leased to us on a month-to-month basis. Additional
rental and other charges for the foregoing leases include
provision for us to insure and maintain and pay all taxes on the
premises. We also have a right of first refusal to purchase the
foregoing premises. We believe that such leases are on terms no
less favorable than we could have obtained from unaffiliated
third parties.
As part of the foregoing leases, additional undeveloped land
is leased to us from James E. Helzer. That undeveloped land is
used for storage or reserved for future use. The locations and
approximate acreage of the undeveloped land is as follows:
Colorado Springs (three), Henderson (six), Littleton (three),
Colleyville (one and a half), Frisco (two and a half), Mansfield
(twelve and a half) and Mesquite (two).
Location Owned By and Leased From Gary L. Howard
We lease approximately 30,000 square feet of office,
showroom and warehouse space, and approximately four acres of
outdoor storage space in Mansfield, Texas, from Gary L. Howard, a
former executive officer of the Company, at a base annual rental
of approximately $112,000 pursuant to a lease expiring in October
2004. We have the right to one, three-year renewal at a base
annual rental of five (5%) percent over that paid during the
current term. Additional rental and other charges for the
foregoing lease include provisions for us to insure and maintain
and pay taxes on the premises. We have a right of first refusal
to purchase the foregoing premises. We believe that the foregoing
lease is on terms no less favorable than we could have obtained
from an unaffiliated third party.
Locations Leased From Third Parties
We lease eighteen (18) locations (including a parcel of land
and property subleased to a third party) from third parties (two
(2) in Colorado (Eagle and Fort Collins), four (4) in Florida
(Clearwater, Orlando, Panama City and Tallahassee), one (1) each
in Illinois (Lake Zurich), Indiana (Indianapolis), Minnesota
(Eagan), Mississippi (Gulfport), Missouri (Hazelwood) and
Nebraska (Omaha), and six (6) in Texas (Addison, Austin, Denton,
Houston, Lubbock and Rosedale)). The aggregate approximate square
footage and base annual rentals for the locations leased from
third parties are 560,000 square feet and $1,919,000,
respectively.
As part of the foregoing leases, additional undeveloped land
is leased from third parties. That undeveloped land is used for
storage or reserved for future use. The locations and approximate
acreages of the undeveloped land is as follows: Austin (six),
Denton (six), Eagle (two), Fort Collins (one and a half),
Hazelwood (three), Houston (four), Indianapolis (two), and
Rosedale (three).
Other than two leases, which are on a month-to-month basis,
the leases with third parties expire at varying times through
October 2008, and several leases contain renewal options. These
leases generally contain provisions requiring us, among other
things, to pay various occupancy costs.
ITEM 3. LEGAL PROCEEDINGS
We are not subject to any material legal proceedings.
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's
security-holders during the fourth quarter of its fiscal year
ended June 30, 2003.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to the Instructions of Form 10-K and Item 401(b) of
Regulation S-K, the name, age, and position of each executive
officer of the Company are set forth below, together with such
officer's business experience during the past five years.
Officers are elected annually by the Board of Directors of the
Company to hold office until the earlier of their death,
resignation, or removal.
Name Age Position with Company
---- --- ---------------------
Douglas P. Fields........... 61 Chairman of the Board and
Chief Executive Officer
James E. Helzer............. 63 President and Vice Chairman of the
Board of Directors
Frederick M. Friedman....... 63 Executive Vice President, Chief
Financial Officer, Secretary,
Treasurer, and Director
E. G. Helzer................ 52 Senior Vice President -- Operations
Douglas P. Fields has been the Chairman of the Board of
Directors, Chief Executive Officer and a Director of the Company
since its inception. From the inception of the Company through
July 1996, Mr. Fields also served as the President of the
Company. For more than the past five years, Mr. Fields has been
the Chairman of the Board and Chief Executive Officer of each of
the Company's subsidiaries. Mr. Fields serves in the same
capacities for TDA and each of its subsidiaries. TDA is a
holding company that is our majority stockholder and whose
operating subsidiaries are engaged in the operation of an indoor
tennis facility and the management of real estate. Mr. Fields
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 the Executive Vice President,
Chief Financial Officer, Treasurer, Secretary and a Director of
the Company since its inception. For more than the past five
years, Mr. Friedman has been Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a Director of each of
the Company's subsidiaries. He serves in the same capacities for
TDA and each of its subsidiaries. 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 the Company since
December 1997 and our Vice Chairman of the Board of Directors
since March 1999. He was President of JEH Eagle from July 1997
through June 30, 2002 and President of Eagle from December 1997
through June 30, 2002. From 1982 until July 1997, Mr. James E.
Helzer was the owner and Chief Executive Officer of JEH Company.
E. G. Helzer has been the Senior Vice President - Operations
of the Company since December 1997. He served as Senior Vice
President - Operations for JEH Eagle from July 1997 through June
30, 2002 and has served as President of JEH Eagle since July 1,
2002. Mr. Helzer also served as Senior Vice President --
Operations for Eagle from December 1997 through June 30, 2002 and
has served as President of Eagle since July 1, 2002. From 1994
until July 1997, he was the Vice President - Operations and
30
Colorado manager of JEH Company. From 1982 until 1994, Mr.
Helzer was the Manager - Production and Service for JEH Company.
E.G. Helzer is the brother of James E. Helzer, the Company's
President and Vice Chairman of our Board of Directors.
There is no family relationship between any of the Company's
directors or executive officers, except that James E. Helzer is
the brother of E.G. Helzer, the Company's Senior Vice President -
- - Operations.
31
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Our Securities
We have two classes of securities presently registered:
common stock and Warrants. These securities are presently traded
on the NASDAQ SmallCap Market under the trading symbols "EEGL"
and "EEGLW," respectively, and on the BSE under the trading
symbols "EGL" and "EGLW," respectively, and have been since the
Initial Public Offering in March 1999. At the close of business
on September 22, 2003, there were outstanding 10,255,455 shares
of common stock which were held by approximately 19 shareholders
of record (and approximately 1,060 beneficial owners).
The high and low bid price quotations for our common stock,
as reported by NASDAQ SmallCap Market, are as follows for the
periods indicated:
High Low
---- ---
Year Ended June 30, 2002:
First Quarter..................... $ 1.38 $1.01
Second Quarter.................... $ 1.99 $0.99
Third Quarter..................... $ 3.80 $1.51
Fourth Quarter.................... $ 4.14 $2.30
Year Ended June 30, 2003:
First Quarter..................... $ 2.68 $0.01
Second Quarter.................... $ 1.18 $0.81
Third Quarter..................... $ 0.99 $0.62
Fourth Quarter.................... $ 1.79 $0.66
Year Ended June 30, 2004:
First Quarter
(through August 31, 2003)......... $ 2.00 $1.33
On September 22, 2003, the closing price of the common stock
as quoted by Nasdaq SmallCap Market was $2.40 per share.
The high and low bid price quotations for the Warrants sold
in our Initial Public Offering, as reported by NASDAQ SmallCap
Market, are as follows for the periods indicated:
High Low
--- ---
Year Ended June 30, 2002:
First Quarter.................... $ 0.14 $0.08
Second Quarter................... $ 0.24 $0.07
Third Quarter.................... $ 0.47 $0.12
Fourth Quarter................... $ 0.68 $0.20
Year Ended June 30, 2003:
First Quarter.................... $ 0.30 $0.01
Second Quarter................... $ 0.13 $0.05
Third Quarter.................... $ 0.09 $0.02
Fourth Quarter................... $ 0.17 $0.03
Year Ended June 30, 2004:
First Quarter (through
August 31,2003)................. $ 0.17 $0.07
32
On September 22, 2003, the closing price of the Warrants
sold in our Initial Public Offering as quoted by Nasdaq SmallCap
Market was $0.20 per Warrant.
We believe that the NASDAQ SmallCap Market is the principal
market for our common stock and Warrants. The over-the-counter
market quotations set forth above for both our common stock and
our Warrants reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
Dividends
Holders of our common stock are entitled to receive
dividends when and if declared by our Board of Directors out of
funds legally available therefor. Except for cash and non-cash
dividends paid to TDA from our Eagle subsidiary prior to or
simultaneously with the consummation of our Initial Public
Offering and the Acquisitions, we have not paid any dividends on
our common stock. The payment of dividends, if any, in the
future is within the discretion of the Board of Directors and is
subject to the terms of our credit facility that could restrict
our ability to pay dividends if we do not satisfy certain
financial requirements. The payment of dividends, if any, in the
future will depend upon our earnings, capital requirements,
financial condition and other relevant factors. Our Board of
Directors does not presently intend to declare any dividends in
the foreseeable future. Instead, our Board of Directors intends
to retain all earnings, if any, for use in our business
operations.
Recent Sales of Unregistered Securities
On February 6, 2003, in connection with the Helzer
Transaction, we entered into the Securities Purchase Agreement.
We received gross proceeds of $1 million in exchange for our sale
of (a) 1,000,000 shares of our common stock and (b) the Helzer
Warrant pursuant to which Mr. Helzer may purchase up to an
additional 1,000,000 shares of our common stock
The Helzer Warrant is exercisable for five years following
its issuance at an exercise price of $1.50 per share. The
exercise price and the number of shares of common stock issuable
upon the exercise of the Helzer Warrant are subject to both
typical anti-dilution provisions as well as a provision providing
for an adjustment to the exercise price of the Helzer Warrant in
the event that the Company enters into certain sales transactions
in which the common stock is sold at a price below the current
exercise price of the Helzer Warrant (a "Diluting Issuance").
Under the terms of the Helzer Warrant, Mr. Helzer is required to
seek approval of the Company's stockholders for (a) any
adjustment of the exercise price of the Helzer Warrant below
$0.875 per warrant share due to a Diluting Issuance and (b) prior
to exercising the Helzer Warrant for more than 811,090 warrant
shares ("Stockholder Approvals"). We anticipate seeking the
Stockholder Approvals at the next annual meeting of our
stockholders. TDA has agreed with Mr. Helzer and the Company to
vote all of the shares of the Company's common stock held by it
in favor of such approval.
Pursuant to the Securities Purchase Agreement, as amended,
commencing on August 6, 2003, upon Mr. Helzer's written demand,
we are obligated to file a registration statement under the
Securities Act registering the shares of common stock Mr. Helzer
acquired in the Helzer Transaction, including the shares issuable
upon the exercise of the Helzer Warrant.
33
We believe that the Helzer Transaction was exempt from the
registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the provisions of
Section 4(2) or 4(6) of the Securities Act or Rule 506 of
Regulation D promulgated by the SEC under the Securities Act.
In February 2003, our Chairman and Chief Executive Officer,
Douglas P. Fields, and our Executive Vice President, Chief
Financial Officer, Treasurer, and Secretary, Frederick M.
Friedman, each agreed to accept $100,000 of their cash
compensation for the fiscal year ended June 30, 2003 in the form
of 100,000 newly issued, unregistered shares of the Company's
common stock in lieu of such cash compensation. These shares
were issued April 11, 2003. We believe that this issuance of our
shares of common stock was exempt from the registration
requirements of the Securities Act pursuant to the provisions of
Section 4(2) or 4(6) of the Securities Act or Rule 506 of
Regulation D promulgated by the SEC under the Securities Act.
34
ITEM 6. SELECTED FINANCIAL DATA
Prior to our Initial Public Offering and the Acquisitions
described in Note 2 of the Consolidated Financial Statements, the
Company had limited operations. The historical selected financial
information included in the statement of operations data has been
prepared on a basis which combines the Company (organized on May
1, 1996), Eagle, JEH Eagle (which acquired JEH Co. as of July 1,
1997) and MSI Eagle (which acquired MSI Co. on October 22, 1998)
as four entities controlled by TDA. Information with respect to
the Company, Eagle and JEH Eagle is included for all periods
presented (including the operations of MSI Eagle from June 1,
2000), and information with respect to MSI Eagle is included from
October 22, 1998 through May 31, 2000, the effective date of its
merger with and into JEH Eagle.
The selected financial information presented below should be
read in conjunction with the consolidated financial statements,
as restated, and the notes thereto.
At and for the
Year Ended June 30 - Combined (1)
----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, except per share data)
Selected Operations Data:
Revenues........................$ 226,136 $ 230,496 $ 189,448 $ 181,197 $ 150,764
Gross profit.................... 54,916 56,554 48,260 44,486 36,398
(Loss) income from continuing
operations, net of taxes...... (1,423) 1,747 1,086 2,403 2,865
Loss from discontinued operation,
net of taxes.................. (191) (356) (238) (273) (156)
Cumulative effect of accounting
change, net of taxes.......... (413) -- -- -- --
Net income (loss)................. (2,027) 1,391 848 2,130 2,709
Consolidated Per Share Data:
Net (loss) income from
continuing operation..........$ (0.15) $ 0.20 $ 0.13 $ 0.27 $ 0.45
Loss from discontinued
operation..................... (0.02) (0.04) (0.03) (0.03) (0.02)
Cumulative effect of accounting
changes....................... (0.04) -- -- -- --
Net income (loss)............... (0.21) 0.16 0.10 0.24 0.43
Other Financial Data:
Net cash (used in) provided by
operating activities..........$ (5,330) $ (2,237) $ (4,186) $ (3,019) $ 939
Net cash used in investing
activities.................... (618) (1,127) (2,724) (2,248) (3,431)
Net cash provided by financing
activities.................... 2,099 3,040 5,424 3,914 9,326
Selected Balance Sheet Data:
Working capital.................$ 45,342 $ 45,938 $ 40,210 $ 32,637 $ 27,159
Total assets.................... 105,696 100,428 93,994 85,229 76,223
Long-term debt.................. 42,688 40,425 38,337 33,089 30,139
Total liabilities............... 84,480 78,261 74,511 66,593 60,504
Shareholders' equity............ 21,216 22,167 19,483 18,636 15,719
- -------------------------
(1) The historical financial data included in the statement of
operations data has been prepared on a basis which combines the
Company (organized May 1, 1996), Eagle, JEH Eagle (which acquired
JEH Co. on July 1, 1997), and MSI Eagle (which acquired MSI Co.
on October 22, 1998) as four entities controlled by TDA, because
the separate financial data of the Company would not be
meaningful. Information with respect to the Company, Eagle and
JEH Eagle is included for all periods presented (including the
operations of MSI Eagle from June 1, 2000), and information for
MSI Eagle is included from October 22, 1998 through May 31, 2000,
the effective date of its merger with and into JEH Eagle.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and are subject to risks, uncertainties, and other factors
which could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. For a
more detailed discussion of such forward-looking statements and
certain risk factors that should be considered by investors and
others, see Item 1. "Business - A Note About Forward Looking
Statements" and "-- Business Environment and Risk Factors."
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition
and results of operation are based on the Company's Consolidated
Financial Statements, which have been prepared in accordance with
accounting principals generally accepted in the United States of
America and which require the Company to make estimates,
assumptions and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure
and reported amounts of contingent assets and liabilities at the
dates of the financial statements. Significant estimates which
are reflected in these Consolidated Financial Statements relate
to, among other things, allowances for doubtful accounts and
notes receivable, amounts reserved for obsolete and slow-moving
inventories, net realizable value of inventories, estimates of
future cash flows associated with assets, asset impairments, and
useful lives for depreciation and amortization. On an on-going
basis, the Company evaluates its estimates, assumptions and
judgments, including those related to allowances for doubtful
accounts and notes receivable, inventories, intangible assets,
investments, other receivables, expenses, income items, income
taxes and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets, liabilities, certain receivables, allowances,
income items, expenses, and contingent assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions, and there can be no assurance that estimates,
assumptions and judgments that are made will prove to be valid in
light of future conditions and developments. If such estimates,
assumptions or judgments prove to be incorrect in the future, the
Company's financial condition, results of operations and cash
flows could be materially adversely affected.
The Company believes the following critical accounting
policies are based upon its more significant judgments and
estimates used in the preparation of its Consolidated Financial
Statements:
* We maintain allowances for doubtful accounts and notes
receivable for estimated losses resulting from the failure of our
customers to make payments when due or within a reasonable period
of time thereafter. Although many factors can affect the failure
of customers to make required payments when due, one of the most
unpredictable is weather, which can have a positive as well as
negative impact on the Company's customers. For example, severe
or catastrophic weather conditions, such as hail storms or
hurricanes, will generally increase the level of activity of our
customers, thus enhancing their ability to make required
payments. On the other hand, weather conditions such as heavy
rain or snow or ice storms will generally preclude customers from
installing the Company's products on job sites and collecting
from their own customers, which conditions could result in the
inability of the Company's customers to make payments when due.
The reserve for allowance for doubtful accounts and notes
receivable is intended to adjust the value of our accounts and
notes receivable for possible credit losses as of the balance
sheet date in accordance with generally accepted accounting
principles. Calculating such allowances involves significant
judgment. We estimate our reserves for allowance for doubtful
accounts and notes
36
receivable by applying estimated loss percentages against our
aging of accounts receivables and based on our estimate of the
credit worthiness of the customers from which the notes are
payable. Changes to such allowances may be required if the
financial condition of our customers deteriorates or improves
or if we adjust our credit standards, thereby resulting in
reserve or write-off patterns that differ from historical
experience. Errors by the Company in estimating our allowance
for doubtful accounts and notes receivable could have a material
adverse affect on the Company's financial condition, results of
operations, and cash flow.
* We write down our inventories for estimated obsolete or slow-
moving inventories equal to the difference between the cost of
inventories and their estimated market value based upon assumed
market conditions. If actual market conditions are less
favorable than those assumed by management, additional inventory
write-downs may be required. If inventory write-downs are
required, the Company's financial condition, results of
operations, and cash flows could be materially adversely
affected.
* We test for impairment of the carrying value of goodwill
annually and when indicators of impairment occur. Indicators of
impairment could include, among other things, a significant
change in the business climate, including a significant sustained
decline in an entity's market value, operating performance
indicators, competition, sale or disposition of a significant
portion of the business, legal or other factors. In connection
with the annual test for impairment, management reviews various
generally accepted valuation methodologies for valuing goodwill.
Management reviewed the carrying value of the goodwill on its
balance sheet as of June 30, 2003 in light of the fact that the
Company's stock market capitalization of our outstanding equity
securities as of that date was below our total shareholders'
equity (book value). Management concluded that the market price
of the Company's common stock is not the best indication of the
fair market value of the Company. Management believes that, with
respect to the Company, the better indicator of fair market value
results from the use of the discounted estimated future cash flow
method, which includes an estimated terminal value component.
This method is based on management's estimates, which will vary
if the judgments and assumptions used to estimate the related
business's future revenues, gross profit margins, operating
expenses, interest rates, and other factors, prove to be
inaccurate. If such judgments, assumptions and estimates prove
to be incorrect, then the Company's carrying value of goodwill
may be overstated on the Company's balance sheet, and the
Company's results of operations may not reflect the impairment
charge that would have resulted if such judgments, assumptions
and estimates had been correct. Any failure to write down
goodwill for impairment correctly during any period could have a
material adverse effect on the Company's future financial
condition and results of operations, as well as cause historical
statements of operations, financial condition, and cash flows to
have been incorrectly stated in light of the failure to take any
such write downs correctly.
* In conducting the required goodwill impairment test, we
identified reporting units by determining the level at which
separate financial statements are prepared and reviewed by
management. The test was required by only one of our operating
subsidiaries. As a result of the required test, we determined
that no write down of our goodwill was required at June 30, 2003.
While we do not use our stock market capitalization to determine
the fair value of our reporting unit, we expect convergence
between our stock market value capitalization and our discounted
cash flow valuation to occur over time or from time to time. If
this does not occur, it may signal the need for impairment
charges.
* We seek revenue and income growth by expanding our existing
customer base, by opening new distribution centers, and by
pursuing strategic acquisitions that meet our various criteria.
If our evaluation of the prospects for opening a new distribution
center or of acquiring a company
37
misjudges our estimated future revenues or profitability, such
a misjudgment could impair the carrying value of the investment
and result in operating losses for the Company, which could
materially adversely affect our results of operations, financial
condition, and cash flows.
* We file income tax returns in every jurisdiction in which we
have reason to believe we are subject to tax. Historically, we
have been subject to examination by various taxing jurisdictions.
To date, none of these examinations has resulted in any material
additional tax. Nonetheless, any tax jurisdiction may contend
that a filing position claimed by us regarding one or more of our
transactions is contrary to that jurisdiction's laws or
regulations. In any such event, we may incur charges to our
income statement which could materially adversely affect our net
income and may incur liabilities for taxes and related charges
which may materially adversely affect our financial condition.
General
This Management's Discussion and Analysis of Financial
Condition and Results of Operations presents a review of the
consolidated operating results and financial condition of the
Company for the fiscal years ended June 30, 2003, 2002 and 2001.
This discussion and analysis is intended to assist in
understanding the financial condition and results of operations
of the Company and its subsidiaries. This section should be read
in conjunction with the Consolidated Financial Statements and the
related notes and the other statistical information contained
herein.
Results Of Operations
Comparison of Fiscal Years Ended June 30, 2003 and 2002
Revenues of the Company during the fiscal year ended June
30, 2003 decreased by approximately $4.4 million (1.9%) to
approximately $226.1 million from approximately $230.5 million in
fiscal 2002. This decrease may be attributed primarily to a
decrease in revenues of approximately $27.8 million generated
from "storm" distribution centers opened for more than one year
and a decrease in revenues of approximately $1.1 million
generated from "greenfield" distribution centers closed during
fiscal 2003, offset by an increase in revenues of approximately
$3.1 million from storm centers opened in fiscal 2003 and during
the last quarter of fiscal 2002, and approximately $21.4 million
that had been generated from greenfield distribution centers
opened for more than one year. During the fourth quarter of
fiscal 2003 the Company's results of operations began to benefit
from the unusual and severe storm activity that occurred last
spring in certain of the Company's existing market areas. The
Company continues to believe that those storms have had and will
likely continue to have a positive impact on the Company's
results of operations in the 2004 fiscal year.
Cost of sales increased between the 2003 and 2002 fiscal
years at a greater rate than the decrease in revenues between
these fiscal years. Accordingly, cost of sales as a percentage
of revenues increased to 75.7% in the fiscal year ended June 30,
2003 from 75.5% in the fiscal year ended June 30, 2002, and gross
profit as a percentage of revenues decreased to 24.3% in the
fiscal year ended June 30, 2003 from 24.5% in the fiscal year
ended June 30, 2002. As stated in Note 1 to the Consolidated
Financial Statements, the Company adopted Emerging Issue Task
Force ("EITF") 02-16, effective July 1, 2002. The impact of the
accounting change resulting from the adoption of EITF 02-16 for
fiscal 2002 would have been an increase of $635,000 in cost of
sales. Had the effect of EITF 02-16 been recorded in fiscal
2002, gross profit, as a percentage of revenues would have been
24.3%.
Operating expenses (including non-cash charges for
depreciation and amortization) increased by approximately $4
million (7.6%) between the 2003 and 2002 fiscal years presented.
Of this increase, approximately $2 million may be attributed to
an increase in the provision for doubtful accounts and notes
38
receivable, approximately $1.6 million in increased payroll and
related expenses, approximately $801,000 to the operating
expenses of new distribution centers and increases in various
other operating expenses. Regarding the increase in the reserve
for doubtful accounts and notes receivable, during the fiscal
year ended June 30, 2003, the Company added approximately
$250,000, net of write-offs of approximately $4.5 million, to its
reserves for doubtful accounts and notes receivable. This
increase was attributed to the failure of the aging of the
Company's accounts receivable to improve. At June 30, 2003, the
Company's accounts receivable over 90 days past due significantly
increased. As a result of the foregoing, management concluded
that the deterioration in the aging of the Company's accounts
receivable during the fiscal year ended June 30, 2003 warranted
the increase in the reserve for doubtful accounts and notes
receivable. Approximately $1.8 million of the increase in the
reserve for doubtful accounts and notes receivable at June 30,
2003 was attributable to amounts due from certain specific
customers aggregating approximately $8.3 million. These
customers, in the aggregate, accounted for 2.4% and 4% of the
Company's total revenues for the fiscal years ended June 30, 2003
and 2002, respectively. Depreciation and amortization decreased
by an aggregate of approximately $459,000 (31%) between the 2003
and 2002 fiscal years. Operating expenses (including
depreciation and amortization) as a percentage of revenues were
24.7% in the fiscal year ended June 30, 2003 compared to 22.5% in
the fiscal year ended June 30, 2002.
Interest income was approximately the same in both the 2003
and 2002 fiscal years presented.
Interest expense decreased by approximately $627,000 (27.3%)
between the 2003 and 2002 fiscal years presented. This decrease
is due to lower rates of interest charged on borrowings under the
Company's revolving credit facility.
In January 2003, the Company sold its Birmingham, Alabama,
distribution center and realized a loss of approximately $90,000
on the sale. The operations of this distribution center have
been reclassified as discontinued in the 2002 and 2001 fiscal
years and are presented as discontinued in the 2003 fiscal year
Consolidated Financial Statements.
Comparison of Fiscal Years Ended June 30, 2002 and 2001
Revenues of the Company in fiscal year ended June 30, 2002
increased by approximately $41 million (21.7%) to $230 million
from approximately $189 million in fiscal year ended June 30,
2001. This increase may be attributed primarily to an increase
in revenues of approximately $52.7 million generated from
distribution centers opened in fiscal year ended June 30, 2002
and during the last quarter of fiscal year ended June 30, 2001
and approximately $6.1 million generated from distribution
centers opened for more than one year, offset by the loss of
revenues of approximately $17.8 million that had been generated
from distribution centers closed or consolidated during fiscal
2002. Of the approximately $41 million increase in revenues in
fiscal 2002, "greenfield" distribution centers opened in fiscal
year ended June 30, 2002 and during the last quarter of fiscal
2001, and those opened for more than one year, generated revenues
of approximately $25.9 million and $11.2 million, respectively,
offset by a decrease in revenues of approximately $9.1 million
from greenfield centers closed or consolidated during fiscal year
ended June 30, 2002; and "storm" distribution centers opened in
fiscal year ended June 30, 2002 and during fiscal year ended June
30, 2001 generated revenues of approximately $26.8 million,
offset by decreases in revenues from storm centers opened for
more than one year, and storm centers closed or consolidated
during fiscal year ended June 30, 2002, of approximately $5.1
million and $8.7 million, respectively.
Cost of sales increased between the 2002 and 2001 fiscal
years at a greater rate than the increase in revenues between
these fiscal years. Accordingly, cost of sales as a percentage
of revenues increased to 75.5% in the fiscal year ended June 30,
2002 from 74.5% in the fiscal year ended June 30, 2001, and gross
profit as a percentage of revenues decreased to 24.5% in the
fiscal year ended June 30, 2002 from 25.5% in the fiscal year
ended June 30, 2001. This decline is attributable to competitive
pricing pressures in certain market areas and a
39
product mix in certain market areas which did not yield as high
a gross profit margin as other product mixes that were achieved
in other market areas. In addition, in light of the economic
uncertainties that arose as a result of the events of September
11, 2001, certain sales and collection incentives were instituted
in October 2001 which negatively impacted gross profit margins.
These incentives cost the Company approximately $1 million in
gross profit, although they resulted in a then substantial
reduction in the Company's accounts and notes receivable and
strengthened the Company's then financial position.
Operating expenses (including non-cash charges for
depreciation and amortization) increased by approximately
$8,172,000 (18.7%) between the 2002 and 2001 fiscal years.
Approximately $8,025,000 of this increase may be attributed to
the operating expenses of the new distribution centers and
approximately $3,212,000 may be attributed to increased payroll
and related expenses, offset by decreases in operating expenses
of closed or consolidated distribution centers of approximately
$3,461,000. Additionally, in light of the softening of economic
conditions in certain of our market areas during fiscal 2002,
particularly in the fourth quarter, the Company added
approximately $1,297,000 to its provision for doubtful accounts.
Depreciation and amortization, and amortization of cost in excess
of net assets acquired (goodwill) and deferred financing costs
decreased by an aggregate of approximately $790,000 (34.7%)
between the 2002 and 2001 fiscal years. This decrease is
primarily attributable to the early adoption, effective July 1,
2001, of Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Asset, which provides that
goodwill will no longer be subject to periodic amortization. See
Notes to the Consolidated Financial Statements. Operating
expenses (including depreciation and amortization) as a
percentage of revenues were 22.5% in the fiscal year ended June
30, 2002 compared to 23.1% in the fiscal year ended June 30,
2001. During fiscal 2002, the Company added approximately $2.2
million, net of write-offs of approximately $562,000, to its
allowance for doubtful accounts. This increase was attributed to
the failure of the aging of the Company's accounts receivable to
improve during the fourth quarter of fiscal 2002, which it
typically does as weather related construction conditions improve
and customer activity levels increase. At June 30, 2002, the
Company's accounts receivable over 90 days past due significantly
increased from June 30, 2001. As a result of the foregoing,
management concluded that the deterioration in the aging of the
Company's accounts receivable during fiscal 2002 warranted the
increase in the allowance for doubtful accounts. Approximately
$1,529,000 of the increase in the allowance for doubtful accounts
at June 30, 2002 was attributed to amounts due from certain
specific customers aggregating approximately $5,464,000. These
customers accounted for 3.2% and 4.3% of the Company's total
revenues in fiscal 2002 and 2001, respectively.
In January 2003, the Company sold its Birmingham, Alabama,
distribution center and realized a loss of approximately $90,000
on the sale. The operations of this distribution center have
been reclassified as discontinued in the 2002 and 2001 fiscal
years.
Interest income decreased by approximately $141,000 (29.3%)
between the 2002 and 2001 fiscal years. This decrease is due to
lower rates of interest earned on short-term investments.
Interest expense decreased by approximately $908,000 (28.4%)
between the 2002 and 2001 fiscal years. This decrease is due to
lower rates of interest charged on borrowings under credit
facility loans.
Comparison of Fiscal Years Ended June 2001 and 2000
Revenues of the Company during the fiscal year ended June
30, 2001 increased by approximately $8,251,000 (4.6%) compared to
the 2000 fiscal year. This increase may be attributed to the
revenues generated from new distribution centers opened in fiscal
2001 and during the last quarter of fiscal 2000 (approximately
$20,480,000), offset by the loss of revenues that had been
generated from distribution centers closed (approximately
$10,267,000). Revenue growth during the twelve-month period ended
June 30, 2001 was negatively impacted by the loss of revenues
during the three-month periods ended December 31, 2000 and
40
March 31, 2001, which was caused by adverse weather conditions
in the Company's Texas, Colorado and Midwest market areas.
Cost of sales increased between the 2001 and 2000 fiscal
years at a lesser rate than the increase in revenues between
these fiscal years. Accordingly, cost of sales as a percentage of
revenues decreased to 74.5% in the fiscal year ended June 30,
2001 from 75.4% in the fiscal year ended June 30, 2000, and gross
profit as a percentage of revenues increased to 25.5% in the
fiscal year ended June 30, 2001 from 24.6% in the fiscal year
ended June 30, 2000. This increase may be attributed primarily to
an increase in out-of-warehouse sales, which carry higher gross
profit margins than direct sales.
Operating expenses of the Company (including non-cash
charges for depreciation and amortization) increased by
approximately $5,647,000 (14.8%) between the 2001 and 2000 fiscal
years. Approximately $3,539,000 of this increase may be
attributed to the operating expenses of new distribution centers
opened in fiscal 2001 and during the last quarter of fiscal 2000,
approximately $363,000 consists of corporate operating expenses,
approximately $2,042,000 is attributable to an increase in
payroll costs and delivery expenses due primarily to the need to
service the increased sales revenues, an increase in the
provision for doubtful accounts of $602,000, offset by decreases
in expenses of closed distribution centers of approximately
$1,043,000 and decreases in other expense areas. Depreciation and
amortization, and amortization of cost in excess of net assets
acquired (goodwill) and deferred financing costs increased by an
aggregate of approximately $207,000 between the 2001 and 2000
fiscal years. Approximately $10,000 of this increase is
additional depreciation, approximately $13,000 is additional
amortization of deferred financing costs and approximately
$184,000 is additional amortization of goodwill. The increase in
amortization of goodwill may be attributed primarily to the
increase in goodwill arising from the additional consideration
paid for the purchases of the businesses and substantially all of
the assets of JEH Co. and MSI Co. by JEH Eagle and MSI Eagle,
respectively. Operating expenses as a percentage of revenues were
23.1% in the 2001 fiscal year compared to 21% in the 2000 fiscal
year.
In January 2003, the Company sold its Birmingham, Alabama,
distribution center and realized a loss of approximately $90,000
on the sale. The operations of this distribution center have
been reclassified as discontinued in the 2002 and 2001 fiscal
years.
Interest income was approximately the same in both the 2002
and 2001 fiscal years presented.
Interest expense increased by approximately $132,000 (4.3%)
between the 2001 and 2000 fiscal years. This increase is due
primarily to the interest expense incurred on increased
borrowings under revolving credit loans.
Liquidity and Capital Resources
The Company's working capital was approximately $45,342,000
at June 30, 2003 compared to $45,938,000 at June 30, 2002. At
June 30, 2003, the Company's current ratio was 2.13-to-1 compared
to 2.26-to-1 at June 30, 2002.
Net cash used in operating activities for fiscal year ended
June 30, 2003 increased by approximately $3.1 million to
approximately $5.3 million from approximately $2.2 million for
the fiscal year ended June 30, 2002. This increase may be
attributed principally to decreases in net income of
approximately $3.4 million, reserve for doubtful accounts and
notes receivable of approximately $2 million, federal and state
income taxes of approximately $1.7 million and depreciation and
amortization of approximately $500,000, and an increase in
inventory of approximately $3.2 million, offset by decreases in
deferred income taxes of approximately $1 million, accounts and
notes receivable of approximately $2.3 million, assets of a
discontinued operation of
41
approximately $500,000, other current assets of approximately
$400,000, an increase in accounts payable of approximately
$3.2 million and other miscellaneous changes.
Net cash used in investing activities for the fiscal year
ended June 30, 2003 decreased by approximately $500,000 to
approximately $600,000 from approximately $1.1 million for the
fiscal year ended June 30, 2002. This decrease may be attributed
to a decrease in capital expenditures of approximately $200,000
and a decrease of approximately $300,000 in contingent
consideration payments for acquired companies. Management of the
Company presently anticipates capital expenditures in the next
twelve months of not less than $500,000, of which approximately
$300,000 is anticipated to be financed, for the purchase of
trucks and forklifts for the Company's currently existing
operations in anticipation of increased business and to upgrade
its vehicles and upgrade and maintain its facilities to compete
in its market areas, and $100,000 for leasehold improvements.
Net cash provided by financing activities for the fiscal
year ended June 30, 2003 decreased by approximately $900,000 to
approximately $2.1 million from approximately $3 million for the
fiscal year ended June 30, 2002. This decrease may be
attributed to the decrease in the net principal borrowings on
long-term debt of approximately $500,000 and the reduction in net
proceeds from the private placements of the Company's common
shares and warrants of approximately $400,000.
On February 6, 2003, the Company entered into a Securities
Purchase Agreement ("Securities Purchase Agreement") with James
E. Helzer, the President, Chief Operating Officer, and Vice
Chairman of the Board of Directors of the Company, to sell in a
private placement transaction (the "Helzer Transaction") for
gross proceeds to the Company of $1 million (a) 1,000,000
authorized but previously unissued common shares of the Company,
and (b) warrants to purchase up to an additional 1,000,000
authorized but previously unissued common shares of the Company
at an exercise price of $1.50 per share exercisable for 5 years
from the date of issuance (the "Helzer Warrant"). Although the
closing price for the Company's common shares at the close of
business on the day before the Helzer Transaction closed was
$0.81 and the Company received two separate fairness opinions
indicating that the consideration received by the Company in the
Helzer Transaction was fair, Mr. Helzer will be able to benefit
from any appreciation in the market price of the Company's common
shares. On September 22, 2003, the last reported sales price for
the Company's common shares was $2.40 per share.
In February 2003, the Chairman and Chief Executive Officer
of the Company, and the Executive Vice President, Secretary,
Treasurer and Chief Financial Officer of the Company, each agreed
to accept $100,000 of their cash compensation for the fiscal year
ended June 30, 2003 in the form of 100,000 newly issued,
unregistered common shares of the Company in lieu of such cash
compensation. These shares were issued April 11, 2003.
During the fiscal year ending June 30, 2004, management
intends to attempt to refinance and extend the maturity date of
the Company's existing asset based credit facility with the
objective of increasing the size of the credit facility and
extending the maturity date three to five years from the October
21, 2004 current maturity date. There is no assurance that the
Company will be successful in refinancing its credit facility,
including extending the maturity date or increasing the size of
the credit facility.
The Company believes that its available sources for
liquidity will be adequate to sustain its normal operations
during the twelve-month period beginning July 1, 2003, assuming
the Company is able to amend its credit facility to provide for
limited over advances and overlines, if required, as it has in
the past (see below).
As of June 30, 2003, our long-term debt obligations and
future minimum lease obligations under non-cancelable operating
leases are summarized as follows:
42
Payments Due by Period
----------------------
Less Than 1-3 4-5 After
Contractural Obligations Total 1 Year Years Years 5 Years
- ------------------------ --------------- -------------- -------------- -------------- --------------
Long-term debt $ 43,547,892 $ 860,000 $ 42,687,892 -- --
Operating lease obligations 21,087,000 6,467,000 12,309,000 2,311,000 --
Credit Facilities
In June 2000, and as subsequently amended, with the last
amendment dated as of May 12, 2003, the Company's credit
facilities were consolidated into an amended, restated and
consolidated loan agreement with the Company's subsidiaries and
limited partnership as borrowers (the "borrowers"). The loan
agreement increased the credit facility by $5 million, to
$44,975,000, and lowered the average interest rate by
approximately one-half of one (1/2%) percent. Furthermore, up to
$8 million in borrowing (subject to available borrowing base) was
made available for acquisitions. The credit facility bears
interest as follows (with the alternatives at the borrowers'
election):
* Equipment Term Note - Libor (as defined), plus two and one-
half (2.5%) percent, or the lender's Prime Rate (as defined),
plus one-half of one (1/2%) percent.
* Acquisition Term Note - Libor, plus two and three-fourths
(2.75%) percent, or the lender's Prime Rate, plus three-fourths
of one (__%) percent.
* Revolving Credit loans - Libor, plus two (2%) percent or the
lender's Prime Rate.
The credit facility is collateralized by substantially all
of the tangible and intangible assets of the borrowers, is
guaranteed by the Company and had an original maturity date of
October 21, 2003. The credit facility contains an evergreen
provision which provides for an automatic one-year extension of
the maturity date if neither any of the borrowers on one hand nor
the lender on the other hand notifies the other in writing of
its intention not to renew the credit facility within 180 days of
the scheduled maturity date. Since neither any of the borrowers
nor the lender provided the other with such notice, the maturity
date of the credit facility was extended to October 21, 2004.
The credit facility contained two specific financial
covenants in addition to standard affirmative and negative
covenants. The specific financial covenants required that the
borrowers (a) maintain minimum Adjusted Tangible Net Worth, as
defined, of not less than an amount equal to 80% of the actual
Net Worth, as defined, as shown on the June 30, 1999 balance
sheets of the borrowers; and (b) achieve Cash Flow, as defined,
of not less than $300,000 for the trailing 12-month periods
ending as of each calendar quarter. The borrowers were in
compliance with the Minimum Adjusted Tangible Net Worth covenant
but did not meet the Cash Flow requirement as of March 31, 2003.
By an amendment to the loan agreement dated as of May 12, 2003,
the borrowers received a waiver, and certain terms of the loan
agreement were modified. The Cash Flow financial covenant was
eliminated in its entirety and replaced with a Fixed Charge
Coverage Ratio, as defined; the Applicable Inventory Sublimit, as
defined, was increased to $22.5 million from $20 million through
July 31, 2003; the amount of aggregate Rentals, as defined, for
property and equipment under operating leases during any current
or future consecutive twelve-month period was increased to $7
million from $6 million; and certain definitions were changed.
The Company was in compliance with all such covenants at June 30,
2003.
During the fiscal year ending June 30, 2004, management
intends to attempt to refinance and extend the maturity date of
the Company's existing asset based credit facility with the
objective of increasing the size of the credit facility and
extending the maturity date three to five years from the October
21, 2004 current
43
maturity date. There is no assurance that the Company will be
successful in refinancing its credit facility including extending
the maturity date or increasing the size of the credit facility.
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% per annum
two-year note. The note was payable in full in October 2000, and
TDA had agreed to defer the interest payable on the note until
its maturity. In October 2000, interest on the note was paid in
full, and TDA and JEH Eagle (successor by merger to MSI Eagle)
agreed to refinance the $1,000,000 principal amount of the note
pursuant to a new 8.75% per annum demand promissory note.
Impact of Inflation and Changing Prices
General inflation in the economy has driven the operating
expenses of many businesses higher, and, accordingly, we have
experienced increased salaries and higher prices for supplies,
goods and services. We continuously seek methods of reducing
costs and streamlining operations while maximizing efficiency
through improved internal operating procedures and controls.
While we are subject to inflation as described above, our
management believes that inflation currently does not have a
material effect on our operating results, but there can be no
assurance that this will continue to be so in the future.
Recent Developments
During the first quarter of our current fiscal year ending
June 30, 2004, we entered into settlement agreements with four of
the five investors in the 2002 Private Placement pursuant to
which we (a) received a $50,000 cash payment, (b) the return for
cancellation of 50,909 warrants of the 109,090 warrants which
were issued pursuant to the Private Placement, and (c) received
an advance of $20,000 to defray a portion of the legal fees we
were charged in connection with the settlement.
Acquisitions
In July 1997, JEH Eagle acquired the business and
substantially all of the assets of JEH Co., a Texas corporation,
wholly-owned by James E. Helzer, now the President of the
Company. The purchase price, as adjusted, including transaction
expenses, was approximately $14,768,000, consisting of
$13,878,000 in cash, net of $250,000 due from JEH Co., and a
five-year note bearing interest at the rate of 6% per annum in
the original principal amount of $864,852. As of June 30, 2002,
the principal amount of the note was adjusted to $655,284 and is
due on October 15, 2002 with interest at the rate of 8.75% per
annum from July 1, 2002. The purchase price and the note were
subject to further adjustments under certain conditions. Certain,
substantial, contingent payments, as additional consideration to
JEH Co. or its designee, were paid by JEH Eagle. Upon
consummation of our Initial Public Offering, the Company issued
300,000 shares of its Common Stock to James E. Helzer, the
designee of JEH Co., in fulfillment of certain of such future
consideration. For the fiscal years ended June 30, 1999, 2000 and
2001, approximately $1,773,000, $1,947,000 and $315,000,
respectively, of such additional consideration was paid to JEH
Co. or its designee. As of June 30, 2002, the Company had no
future obligation for such additional consideration. All of such
additional consideration increased goodwill and, through the
fiscal year 2001, was amortized over the remaining life of the
goodwill. During the fiscal years 2003 and 2002, pursuant to SFAS
142, which the Company adopted as of July 1, 2001, the Company
did not amortize goodwill. See "- Impact of Recently Issued
Accounting Pronouncements."
In October 1998, MSI Eagle acquired the business and
substantially all of the assets of MSI Co., a Texas corporation,
wholly-owned by Gary L. Howard, a former executive officer of the
Company. The purchase price, as adjusted, including transaction
expenses, was approximately $8,538,000, consisting of $6,492,000
in cash and a five-year note bearing interest at the rate of 8%
per annum in the principal amount of $2,045,972. The purchase
price was subject to further adjustment under certain conditions.
44
Upon consummation of our Initial Public Offering, the Company
issued 50,000 shares of our common stock to Gary L. Howard, the
designee of MSI Co., in payment of $250,000 principal amount of
the note. The balance of the note was paid in full in March 1999
out of the proceeds of our Initial Public Offering. Certain,
potentially substantial, contingent payments, as additional
future consideration to MSI Co. or its designee, are to be paid
by JEH Eagle. (Effective May 31, 2000, MSI Eagle was merged with
and into JEH Eagle.) Upon consummation of our Initial Public
Offering, the Company issued 200,000 shares of its common stock,
and, as of July 1, 1999, the Company issued 60,000 shares of its
common stock, to Mr. Howard in fulfillment of certain of such
future consideration. For the fiscal years ended June 30, 2000,
2001, and 2002, approximately $216,000, $226,000, and $260,000,
respectively, of such additional consideration was paid to MSI
Co. or its designee. For the fiscal year ended June 30, 2003,
approximately $260,000 of additional consideration is payable to
MSI Co. or its designee. All of such additional consideration
increased goodwill and, through the fiscal year 2001, was
amortized over the remaining life of the goodwill. During the
fiscal years 2003 and 2002, pursuant to SFAS 142, which the
Company adopted as of July 1, 2001, the Company did not amortize
goodwill. See "- Impact of Recently Issued Accounting
Pronouncements."
Impact of Recently Issued Accounting Pronouncements
The Company adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" on July 1, 2002.
SFAS No. 144 replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" and establishes accounting and reporting standards
for long-lived assets to be disposed of by sale. SFAS No. 144
requires that those assets be measured at the lower of carrying
amount or fair value less cost to sell. SFAS No. 144 also
broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished
from the rest of the entity that will be eliminated from the
ongoing operations of the entity in a disposal transaction.
Management believes that the effect of adopting this
pronouncement does not have a material impact on the Company's
financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-
3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This
statement also established that fair value is the objective for
initial measurement of the liability. The provisions of SFAS No.
146 are effective for exit or disposal activities that are
initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements
for Guarantees Including Indirect Guarantees of Indebtedness of
Others." This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee.
The disclosure requirements of FIN 45 are effective for interim
and annual reports after December 15, 2002, and we have adopted
those requirements for our financial statements included in this
Form 10-K. The initial recognition and initial measurement
requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. The Company is not a
party to any agreement in which it is a guarantor of indebtedness
of others. Accordingly, this pronouncement currently is not
applicable to the Company.
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51." FIN 46 addresses consolidation by
business enterprises of variable interest entities (formerly
special purpose entities or SPEs). In general, a variable
interest entity is
45
a corporation, partnership , trust or any other legal structure
used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to
support its activities. The objective of FIN 46 is not to
restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable interest
entities. FIN 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN
46 apply to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in
the first fiscal year or interim period beginning after June 15,
2003. However, certain of the disclosure requirements apply to
financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. The Company
does not have any variable interest entities as defined in FIN
46. Accordingly, this pronouncement currently is not applicable
to the Company.
In March 2003, the EITF issued final transition guidance
regarding accounting for vendor allowances (EITF No. 02-16),
"Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor." The EITF decision to
allow retroactive application was made by the task force on March
20, 2003. As a result of the EITF change to its transition, the
Company has adopted the new guidance on a retroactive basis to
July 1, 2002, the beginning of its fiscal year ending June 30,
2003. In adopting the new guidance, the Company changed its
previous method of accounting, which was consistent with
generally accepted accounting principals. Under the previous
accounting method, vendor allowances were treated as a reduction
of cost of sales when such allowances were earned. Under the new
accounting guidance, vendor allowances are considered a reduction
in inventory and a subsequent reduction in cost of goods sold
when the related product is sold.
The adoption of EITF 02-16, effective July 1, 2002, resulted
in a cumulative effect of account change of $413,000, net of
$222,000 of taxes, to reflect the deferral of certain allowances
as a reduction of inventory cost.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Company has not used derivative
instruments and does not expect the adoption of this statement to
have a material effect on the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some
circumstances). It is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003. Management believes that the effect of
implementing this pronouncement will not have a material impact
on the Company's financial condition or results of operations.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
The estimated fair value of financial instruments have been
determined by the Company using available market information and
what it believes are appropriate valuations and methodologies.
However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the
estimates presented here are not necessarily indicative of the
amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
The following methods and assumptions were used to estimate
the fair value of the financial instruments:
Cash and Cash Equivalents, Accounts and Notes Receivable,
Accounts Payable and Accrued Expenses - The carrying amounts of
these items are a reasonable estimate of their fair value.
Long-Term Debt - Interest rates that are currently available
to the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value for bank
debt. The carrying amounts comprising this item are reasonable
estimates of fair value.
The fair value estimates are based on pertinent information
available to management as of June 30, 2003. Although management
is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial
statements since June 30, 2003 and current estimates of fair
value may differ significantly from the amounts presented. The
Company has not entered into, and does not expect to enter into,
financial instruments for trading or hedging purposes.
The Company is currently exposed to material future earnings
or cash flow exposures from changes in interest rates on long-
term debt obligations since the majority of the Company's long-
term debt obligations are at variable rates. The Company does not
currently anticipate entering into interest rate swaps and/or
similar instruments. Based on the amount outstanding as of June
30, 2003, a 100 basis point change in interest rates would result
in an approximate $430,000 change in the Company's annual
interest expense. For fixed rate interest rate obligations,
changes in market interest rates affect the fair market value of
such debt but do not impact the Company's earnings or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are contained on pages F-
1 through F-25 of this Report:
Report of Independent Certified Public Accountants;
Consolidated Balance Sheets - June 30, 2003 and 2002;
Consolidated Statements of Operations - Years ended June 30,
2003, 2002 and 2001;
Consolidated Statements of Shareholders' Equity - Years
ended June 30, 2003, 2002 and 2001;
Consolidated Statements of Cash Flows - Years ended June 30,
2003, 2002 and 2001; and
Notes to Consolidated Financial Statements.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act), as
of the end of the period covered by this annual report.
The Company's management, including its Chief Executive
Officer and Chief Financial Officer, does not expect that its
disclosure controls and procedures will prevent all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues, errors, and
instances of fraud, if any, within the Company have been or will
be detected. The inherent limitations include, among other
things, the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or
mistake. Controls and procedures also can be circumvented by the
individual acts of some persons, by collision of two or more
people, or by management or employee override of the controls and
procedures. The design of any system of controls and procedures
is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls and procedures may become
inadequate because of changes in conditions or deterioration in
the degree of compliance with policies or procedures. Because of
the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected. If and when management learns that any control or
procedure is not being properly implemented, (a) it immediately
reviews our controls and procedures to determine whether they are
appropriate to accomplish the control objective and, if
necessary, modifies and improves our controls and procedures to
assure compliance with our control objectives, (b) it takes
immediate action to cause our controls and procedures to be
strictly adhered to, (c) it immediately informs all relevant
managers of the requirement to adhere to such controls, as well
as all relevant personnel throughout our organization, and (d) it
implements in our training program specific emphasis on such
controls and procedures to assure compliance with such controls
and procedures. The development, modification, improvement,
implementation and evaluation of our systems of controls and
procedures is a continuous project that requires changes and
modifications to them to remedy deficiencies, to improve
training, and to improve implementation in order to assure the
achievement of our overall control objectives.
Based upon the evaluation of our disclosure controls and
procedures, our Chief Executive Officer and Chief Financial
Officer have concluded that, subject to the limitations noted
above, the Company's disclosure controls and procedures were
effective to ensure that material information relating to the
Company and the Company's consolidated subsidiaries is made known
to them by others within those entities to allow timely decisions
regarding required disclosures.
There have been no significant changes in our internal
controls, or in other factors that could significantly affect
internal controls, subsequent to the date the Chief Executive
Officer and the Chief Financial Officer completed their
evaluation, including any significant corrective actions with
regard to significant deficiencies and material weaknesses.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K with
respect to our directors and executive officers is incorporated
by reference from the information contained in the section
captioned "Election of Directors" in the Company's definitive
Proxy Statement for the 2003 Annual Meeting of Stockholders which
will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the Company's 2003 fiscal
year (the "2003 Proxy Statement"). Certain information with
respect to executive officers is included in Item 4A of this
report. The information required by Item 10 of Form 10-K with
respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference from the
information contained in the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" in our 2003 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is
incorporated by reference from the information contained in the
sections captioned "Election of Directors - Compensation of
Directors," "Compensation of Executive Officers," "Report of the
Compensation Committee of the Board of Directors on Executive
Compensation" and "Certain Relationships and Related
Transactions" in the 2003 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) The information required by Item 12 of Form 10-K is
incorporated by reference from the information contained in the
section captioned "Security Ownership of Management and Certain
Beneficial Owners" in the 2003 Proxy Statement.
(b) The following table provides information about the
Company's common stock that may be issued upon the exercise of
stock options under all of our equity compensation plans in
effect as of June 30, 2003.
Number of securities
Weighted average remaining available for
Number of securities to exercise price of future issuance under
be issued upon exercise outstanding equity compensation plan
of outstanding options options, warrants, (excluding securities
Plan category warrants, and rights and rights reflected in column (a))
- ------------- ----------------------- ------------------ ------------------------
(a) (b) (c)
Equity compensation
plan approved by
security holders 753,600 $ 4.98 446,400
Equity compensation
plan not approved by
security holders 0 $ 0.00 0 (2)
- -------------------------
(1) Based upon 15,000 options exercisable at $4.00 per share and
749,080 options exercisable at $5.00 per share.
(2) 200,000 shares of the Company's common stock were issued in
April 2003 to our Chairman and Chief Executive Officer,
Douglas P. Fields, and to our Executive Vice President,
Treasurer, Secretary, and Chief Financial Officer, Frederick
M. Friedman. In February 2003, Messrs. Fields and Friedman
each agreed to accept 100,000 unregistered shares of the
49
Company's common stock in lieu of $100,000 of their cash
compensation for the fiscal year ended June 30, 2003.
Our Stock Option Plan provides for a proportionate
adjustment to the number of shares reserved for issuance in the
event of any stock dividend, stock split, combination,
recapitalization, or similar event.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is
incorporated by reference from the information contained in the
section captioned "Certain Relationships and Related
Transactions" in the 2003 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is not
required to be included in this report in accordance with
Securities and Exchange Commission Release No. 34-47265A.
50
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Exhibits
3.1 -- Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the
Company's Form S-1 filed with the Commission on August
12, 1996.
3.2 -- Certificate of Amendment to the Certificate of
Incorporation of the Company, incorporated herein by
reference to Exhibit 3.1(A) to the Company's Form S-
1/A filed with the Commission on May 1, 1998.
3.3 -- Certificate of Amendment to the Certificate of
Incorporation of the Company, incorporated herein by
reference to Exhibit 3.1(B) to the Company's Form 8-K
filed with the Commission on December 20, 2002.
3.4 -- Bylaws, incorporated herein by reference to Exhibit
3.2 to the Company's Form S-1 filed with the
Commission on August 12, 1996.
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation, as amended and the
Bylaws of the Company defining the rights of holders
of the Company's common stock.
4.2 -- Form of Common Stock Certificate, incorporated herein
by reference to Exhibit 4.4 to the Company's Form S-1/A
filed with the Commission on October 15, 1996.
4.3 -- Form of Warrant Agreement between the Company and
Continental Stock Transfer and Trust Company,
incorporated herein by reference to Exhibit 4.7 to the
Company's Form S-1/A filed with the Commission on
October 15, 1996.
4.4 -- Form of Underwriter's Warrant Agreement by and between
the Company and Barron Chase Securities, Inc. with Form
of Warrant Certificate, incorporated herein by
reference to Exhibit 4.1 to the Company's Form S-1/A
filed on May 1, 1998.
4.5 -- Form of Redeemable Common Stock Purchase Warrant,
incorporated herein by reference to Exhibit 4.6 to the
Company's Form S-1/A filed with the Commission on July
1, 1998.
4.6 -- Form of Warrant to purchase common stock issued by the
Company to investors in the May 2002 private placement
transaction, incorporated herein by reference to
Exhibit 4.1 to the Company's Form 8-K filed with the
Commission on May 22, 2002.
4.7 -- Form of Warrant to purchase common stock issued by the
Company to vFinance Investments, Inc. as compensation
for services in the May 2002 private placement
transaction, incorporated herein by reference to
Exhibit 4.2 to the Company's Form 8-K filed with the
Commission on May 22, 2002.
4.8 -- Securities Purchase Agreement dated May 15, 2002, by
and between the Company and each of the investors in
the May 2002 private placement transaction,
incorporated herein by reference to Exhibit 4.3 to the
Company's Form 8-K filed with the Commission on May
22, 2002.
51
4.9 -- Registration Rights Agreement, dated May 15, 2002, by
and between the Company and each of the investors in
the May 2002 private placement transaction,
incorporated herein by reference to Exhibit 4.4 to the
Company's Form 8-K filed with the Commission on May
22, 2002.
4.10 -- Securities Purchase Agreement, dated February 6, 2003,
by and between the Company and James E. Helzer,
incorporated herein by reference to Exhibit 4.1 to the
Company's Form 8-K filed with the Commission on
February 7, 2003.
4.11 -- First Amendment to Securities Purchase Agreement, dated
May 5, 2003, by and between the Company, James E.
Helzer,and TDA Industries, Inc., incorporated herein
by reference to Exhibit 4.1 to the Company's Form
8-K filed with the Commission on May 12, 2003.
4.12 -- Warrant No. 001, dated February 6, 2003, issued by the
Company to James E. Helzer, incorporated herein by
reference to Exhibit 4.2 to the Company's Form 8-K
filed with the Commission on February 7, 2003.
4.13 -- First Amendment to Warrant, dated May 5, 2003, by and
between the Company and James E. Helzer, incorporated
herein by reference to Exhibit 4.2 to the Company's
Form 8-K filed with the Commission on May 12, 2003.
10.1 -- Amended, Consolidated and Restated Employment
Agreement, dated as of November 1, 2001, between
JEH/Eagle Supply, Inc. and the Company and James E
Helzer, incorporated herein by reference to Exhibit
10.46 to the Company's Form 10-Q filed with the
Commission on November 9, 2001.
10.2 -- Modification Agreement to the Employment Agreement, as
amended, with James E. Helzer, incorporated herein by
reference to Exhibit 10.55 to the Company's Form 10-Q
filed with the Commission on February 14, 2003.
10.3 -- Amended, Restated and Consolidated Employment
Agreement, dated as of November 1, 2001, between
JEH/Eagle Supply, Inc., Eagle Supply, Inc. and the
Company and Douglas P. Fields, incorporated herein by
reference to Exhibit 10.47 to the Company's Form 10-Q
filed with the Commission on November 9, 2001.
10.4 -- Modification Agreement to the Employment Agreement, as
amended, with Douglas P. Fields, incorporated herein
by reference to Exhibit 10.54 to the Company's Form 10-
Q filed with the Commission on February 14, 2003.
10.5 -- Amended, Restated and Consolidated Employment
Agreement, dated as of November 1, 2001, between
JEH/Eagle Supply, Inc., Eagle Supply, Inc. and the
Company and Frederick M. Friedman, incorporated herein
by reference to Exhibit 10.48 to the Company's Form 10-
Q filed with the Commission on November 9, 2001.
10.6 -- Modification Agreement to the Employment Agreement, as
amended, with Frederick M. Friedman, incorporated
herein by reference to Exhibit 10.56 to the Company's
Form 10-Q filed with the Commission on February 14,
2003.
10.7 -- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Henderson, Colorado,
incorporated herein by reference to Exhibit 10.18(A)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
52
10.8 -- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Colorado Springs,
Colorado, incorporated herein by reference to Exhibit
10.18(B) to the Company's Form S-1/A filed with the
Commission on May 1, 1998.
10.9 -- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Mansfield, Texas,
incorporated herein by reference to Exhibit 10.18(C)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.10-- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Colleyville, Texas,
incorporated herein by reference to Exhibit 10.18(D)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.11-- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Frisco, Texas,
incorporated herein by reference to Exhibit 10.18(E)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.12-- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Mesquite, Texas,
incorporated herein by reference to Exhibit 10.18(F)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.13-- Lease, dated October 22, 1998, by and between MSI
Eagle Supply, Inc. and Gary and Linda Howard,
incorporated herein by reference to Exhibit 10.30 to
the Company's Form S-1/A filed with the Commission on
December 28, 1998.
10.14-- Asset Purchase Agreement, dated July 8, 1997, by and between
JEH/Eagle Supply, Inc., JEH Company, and James E.
Helzer, incorporated herein by reference to Exhibit
10.11 to the Company's Form S-1/A filed with the
Commission on May 1, 1998.
10.15-- Asset Purchase Agreement, dated October 22, 1998, by and
among MSI/Eagle Supply, Inc., Masonry Supply, Inc.,
and Gary L. Howard, incorporated herein by reference
to Exhibit 10.19 to the Company's Form S-1/A filed
with the Commission on December 28, 1998.
10.16-- Letter Amendment, dated April 30, 1999, amending the
Asset Purchase Agreement, dated October 22, 1998, by
and among MSI/Eagle Supply, Inc., Masonry Supply,
Inc., and Gary L. Howard, incorporated herein by
reference to Exhibit 10.35 to the Company's Form 10-K
filed with the Commission on September 28, 1999.
10.17-- Purchase and Non-Competition Agreement, dated October
22, 1998, by and among TUSA, Inc., Gary L. Howard,
Patty L. Howard, and MSI/Eagle Supply, Inc.,
incorporated herein by reference to Exhibit 10.21 to
the Company's Form S-1/A filed with the Commission on
December 28, 1998.
53
10.18-- Subordinate Security Agreement, dated October 22,
1998, by and between Masonry Supply, Inc. and
MSI/Eagle Supply, Inc., incorporated herein by
reference to Exhibit 10.22 to the Company's Form S-1/A
filed with the Commission on December 28, 1998.
10.19-- Promissory Note, dated October 22,1998, issued by
MSI/Eagle Supply, Inc. by TDA Industries, Inc.,
incorporated herein by reference to Exhibit 10.23 to
the Company's Form S-1/A filed with the Commission on
December 28, 1998.
10.20-- Letter Agreement, dated September 21, 1999, by and
between the Company and George Skakel III,
incorporated herein by reference to Exhibit 10.36 to
the Company's Form 10-K filed with the Commission on
September 28, 1999.
10.21-- Amended, Restated and Consolidated Loan and Security
Agreement, dated June 20, 2000, by and between
JEH/Eagle Supply, Inc. and Eagle Supply, Inc., as
Borrowers, and Fleet Capital Corporation, as Lenders,
incorporated herein by reference to Exhibit 10.37 to
the Company's Form 8-K filed with the Commission on
July 10, 2000.
10.22-- Amended, Restated and Consolidated Revolving Credit
Note, dated June 20, 2000, by and between JEH/Eagle
Supply, Inc. and Eagle Supply, Inc., as Borrowers, and
Fleet Capital Corporation, as Lenders, incorporated
herein by reference to Exhibit 10.38 to the Company's
Form 8-K filed with the Commission on July 10, 2000.
10.23-- Amended, Restated and Consolidated Equipment Term
Note, dated June 20, 2000, by and between JEH/Eagle
Supply, Inc. and Eagle Supply, Inc., as Borrowers, and
Fleet Capital Corporation, as Lenders, incorporated
herein by reference to Exhibit 10.39 to the Company's
Form 8-K filed with the Commission on July 10, 2000.
10.24-- Amended, Restated and Consolidated Acquisition Term
Note, dated June 20, 2000, by and between JEH/Eagle
Supply, Inc. and Eagle Supply, Inc., as Borrowers, and
Fleet Capital Corporation, as Lenders, incorporated
herein by reference to Exhibit 10.40 to the Company's
Form 8-K filed with the Commission on July 10, 2000.
10.25-- First Amendment to Amended, Restated and Consolidated Loan
and Security Agreement; and Subordination Agreement,
dated February 14, 2001, by and between JEH/Eagle
Supply, Inc., Eagle Supply, Inc., JEH/Eagle, L.P., and
Fleet Capital Corporation, incorporated herein by
reference to Exhibit 10.45 to the Company's Form 10-Q
filed with the Commission on February 14, 2001.
10.26-- Fifth Amendment to Amended, Restated and Consolidated Loan
and Security Agreement and First Amendment to
Subordination Agreement, dated May 12, 2003, by and
among JEH/Eagle Supply, Inc., Eagle Supply, Inc.,
JEH/Eagle, L.P., Eagle Supply Group, Inc., and Fleet
Capital Corporation, incorporated herein by reference
to Exhibit 10.57 to the Company's Form 10-Q filed with
the Commission on May 15, 2003.
10.27-- Stock Option Plan of the Company, incorporated herein by
reference to Exhibit 10.9 to the Company's Form S-1/A
filed with the Commission on December 28, 1998.
10.28-- Termination and Mutual Release, dated August 28, 2003,
by and between the Company and Alpha Capital AG.*
10.29-- Termination and Mutual Release, dated August 28, 2003,
by and between the Company and Bristol Investment
Fund, Ltd.*
54
10.30-- Termination and Mutual Release, dated August 28, 2003,
by and between the Company and Stonestreet LP.*
10.31-- Termination and Mutual Release, dated September 23,
2003, by and between the Company and Seaway Holdings,
Ltd.*
18.1 -- Letter, dated September 29, 2003, from Deloitte &
Touche LLP regarding change in accounting principle.*
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Deloitte & Touche LLP.*
31.1 -- Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-
14(a)).*
31.2 -- Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule
13a-14(a)).*
32.1 -- Certificate of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Rule 13a-14(b)).*
32.2 -- Certificate of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Rule 13a-14(b)).*
- -----------------------------
* Exhibit filed herewith.
(b) Reports on Form 8-K
During the last quarter of the fiscal period covered by this
Report, the Registrant filed the following Reports on Form 8-K:
On April 11, 2003, the Company filed a Current Report on
Form 8-K under Item 9 to disclose recent developments that the
Company believed may affect its future operating results.
On May 12, 2003, the Company filed a Current Report on Form
8-K under Items 5 and 7 to disclose the revisions made to
documents entered into in connection with the Helzer Transaction
described in Item 5(c) "Market For Registrant's Common Equity and
Related Stockholder Matters - Recent Sales of Unregistered
Securities" of this Report. The First Amendment to Securities
Purchase Agreement and First Amendment to Warrant were filed
therewith as Exhibits 4.1 and 4.2.
On May 15, 2003, the Company filed a Current Report on Form
8-K under Item 9 to disclose that the certificates required by 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, were submitted to the Securities and Exchange
Commission in connection and simultaneously with the filing of
the Company's Form 10-Q for the fiscal quarter ended March 31,
2003. The certificates of the Chief Executive Officer and Chief
Financial Officer were filed therewith as Exhibits 99.1 and 99.2.
With the exception of the information expressly
incorporated herein by reference, the Company's 2003 Proxy
Statement is not to be deemed filed as part of this Annual Report
on Form 10-K.
55
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
EAGLE SUPPLY GROUP, INC.
Date: September 29, 2003 By:/s/Douglas P. Fields
---------------------------
Douglas P. Fields
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Douglas P. Fields Chairman of the Board and Chief September 29, 2003
--------------------------- Executive Officer (Principal
Douglas P. Fields Executive Officer)
/s/ James E. Helzer President and Director September 29, 2003
- ----------------------------
James E. Helzer
/s/ Frederick M. Friedman Director and Chief Financial September 29, 2003
- ---------------------------- Officer (Principal Financial
Frederick M. Friedman Officer)
/s/ Steven R. Andrews Director September 29, 2003
- ----------------------------
Steven R. Andrews, Esq.
/s/ Paul D. Finkelstein Director September 29, 2003
- ----------------------------
Paul D. Finkelstein
/s/ George Skakel III Director September 29, 2003
- ----------------------------
George Skakel III
/s/ John E. Smircina Director September 29, 2003
- ----------------------------
John E. Smircina, Esq.
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description of Exhibits Numbered Pages
- ------- ----------------------- --------------
3.1 -- Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the
Company's Form S-1 filed with the Commission on August
12, 1996.
3.2 -- Certificate of Amendment to the Certificate of
Incorporation of the Company, incorporated herein by
reference to Exhibit 3.1(A) to the Company's Form S-
1/A filed with the Commission on May 1, 1998.
3.3 -- Certificate of Amendment to the Certificate of
Incorporation of the Company, incorporated herein by
reference to Exhibit 3.1(B) to the Company's Form 8-K
filed with the Commission on December 20, 2002.
3.4 -- Bylaws, incorporated herein by reference to Exhibit
3.2 to the Company's Form S-1 filed with the
Commission on August 12, 1996.
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation, as amended and the
Bylaws of the Company defining the rights of holders
of the Company's common stock.
4.2 -- Form of Common Stock Certificate, incorporated herein
by reference to Exhibit 4.4 to the Company's Form S-1/A
filed with the Commission on October 15, 1996.
4.3 -- Form of Warrant Agreement between the Company and
Continental Stock Transfer and Trust Company,
incorporated herein by reference to Exhibit 4.7 to the
Company's Form S-1/A filed with the Commission on
October 15, 1996.
4.4 -- Form of Underwriter's Warrant Agreement by and between
the Company and Barron Chase Securities, Inc. with Form
of Warrant Certificate, incorporated herein by
reference to Exhibit 4.1 to the Company's Form S-1/A
filed on May 1, 1998.
4.5 -- Form of Redeemable Common Stock Purchase Warrant,
incorporated herein by reference to Exhibit 4.6 to the
Company's Form S-1/A filed with the Commission on July
1, 1998.
4.6 -- Form of Warrant to purchase common stock issued by the
Company to investors in the May 2002 private placement
transaction, incorporated herein by reference to
Exhibit 4.1 to the Company's Form 8-K filed with the
Commission on May 22, 2002.
4.7 -- Form of Warrant to purchase common stock issued by the
Company to vFinance Investments, Inc. as compensation
for services in the May 2002 private placement
transaction, incorporated herein by reference to
Exhibit 4.2 to the Company's Form 8-K filed with the
Commission on May 22, 2002.
4.8 -- Securities Purchase Agreement dated May 15, 2002, by
and between the Company and each of the investors in
the May 2002 private placement transaction,
incorporated herein by reference to Exhibit 4.3 to the
Company's Form 8-K filed with the Commission on May
22, 2002.
51
4.9 -- Registration Rights Agreement, dated May 15, 2002, by
and between the Company and each of the investors in
the May 2002 private placement transaction,
incorporated herein by reference to Exhibit 4.4 to the
Company's Form 8-K filed with the Commission on May
22, 2002.
4.10 -- Securities Purchase Agreement, dated February 6, 2003,
by and between the Company and James E. Helzer,
incorporated herein by reference to Exhibit 4.1 to the
Company's Form 8-K filed with the Commission on
February 7, 2003.
4.11 -- First Amendment to Securities Purchase Agreement, dated
May 5, 2003, by and between the Company, James E.
Helzer,and TDA Industries, Inc., incorporated herein
by reference to Exhibit 4.1 to the Company's Form
8-K filed with the Commission on May 12, 2003.
4.12 -- Warrant No. 001, dated February 6, 2003, issued by the
Company to James E. Helzer, incorporated herein by
reference to Exhibit 4.2 to the Company's Form 8-K
filed with the Commission on February 7, 2003.
4.13 -- First Amendment to Warrant, dated May 5, 2003, by and
between the Company and James E. Helzer, incorporated
herein by reference to Exhibit 4.2 to the Company's
Form 8-K filed with the Commission on May 12, 2003.
10.1 -- Amended, Consolidated and Restated Employment
Agreement, dated as of November 1, 2001, between
JEH/Eagle Supply, Inc. and the Company and James E
Helzer, incorporated herein by reference to Exhibit
10.46 to the Company's Form 10-Q filed with the
Commission on November 9, 2001.
10.2 -- Modification Agreement to the Employment Agreement, as
amended, with James E. Helzer, incorporated herein by
reference to Exhibit 10.55 to the Company's Form 10-Q
filed with the Commission on February 14, 2003.
10.3 -- Amended, Restated and Consolidated Employment
Agreement, dated as of November 1, 2001, between
JEH/Eagle Supply, Inc., Eagle Supply, Inc. and the
Company and Douglas P. Fields, incorporated herein by
reference to Exhibit 10.47 to the Company's Form 10-Q
filed with the Commission on November 9, 2001.
10.4 -- Modification Agreement to the Employment Agreement, as
amended, with Douglas P. Fields, incorporated herein
by reference to Exhibit 10.54 to the Company's Form 10-
Q filed with the Commission on February 14, 2003.
10.5 -- Amended, Restated and Consolidated Employment
Agreement, dated as of November 1, 2001, between
JEH/Eagle Supply, Inc., Eagle Supply, Inc. and the
Company and Frederick M. Friedman, incorporated herein
by reference to Exhibit 10.48 to the Company's Form 10-
Q filed with the Commission on November 9, 2001.
10.6 -- Modification Agreement to the Employment Agreement, as
amended, with Frederick M. Friedman, incorporated
herein by reference to Exhibit 10.56 to the Company's
Form 10-Q filed with the Commission on February 14,
2003.
10.7 -- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Henderson, Colorado,
incorporated herein by reference to Exhibit 10.18(A)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
52
10.8 -- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Colorado Springs,
Colorado, incorporated herein by reference to Exhibit
10.18(B) to the Company's Form S-1/A filed with the
Commission on May 1, 1998.
10.9 -- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Mansfield, Texas,
incorporated herein by reference to Exhibit 10.18(C)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.10-- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Colleyville, Texas,
incorporated herein by reference to Exhibit 10.18(D)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.11-- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Frisco, Texas,
incorporated herein by reference to Exhibit 10.18(E)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.12-- Lease, dated July 1, 1997, by and between James E.
Helzer and JEH/Eagle Supply, Inc., for the lease of
office and warehouse space in Mesquite, Texas,
incorporated herein by reference to Exhibit 10.18(F)
to the Company's Form S-1/A filed with the Commission
on May 1, 1998.
10.13-- Lease, dated October 22, 1998, by and between MSI
Eagle Supply, Inc. and Gary and Linda Howard,
incorporated herein by reference to Exhibit 10.30 to
the Company's Form S-1/A filed with the Commission on
December 28, 1998.
10.14-- Asset Purchase Agreement, dated July 8, 1997, by and between
JEH/Eagle Supply, Inc., JEH Company, and James E.
Helzer, incorporated herein by reference to Exhibit
10.11 to the Company's Form S-1/A filed with the
Commission on May 1, 1998.
10.15-- Asset Purchase Agreement, dated October 22, 1998, by and
among MSI/Eagle Supply, Inc., Masonry Supply, Inc.,
and Gary L. Howard, incorporated herein by reference
to Exhibit 10.19 to the Company's Form S-1/A filed
with the Commission on December 28, 1998.
10.16-- Letter Amendment, dated April 30, 1999, amending the
Asset Purchase Agreement, dated October 22, 1998, by
and among MSI/Eagle Supply, Inc., Masonry Supply,
Inc., and Gary L. Howard, incorporated herein by
reference to Exhibit 10.35 to the Company's Form 10-K
filed with the Commission on September 28, 1999.
10.17-- Purchase and Non-Competition Agreement, dated October
22, 1998, by and among TUSA, Inc., Gary L. Howard,
Patty L. Howard, and MSI/Eagle Supply, Inc.,
incorporated herein by reference to Exhibit 10.21 to
the Company's Form S-1/A filed with the Commission on
December 28, 1998.
10.18-- Subordinate Security Agreement, dated October 22,
1998, by and between Masonry Supply, Inc. and
MSI/Eagle Supply, Inc., incorporated herein by
reference to Exhibit 10.22 to the Company's Form S-1/A
filed with the Commission on December 28, 1998.
10.19-- Promissory Note, dated October 22,1998, issued by
MSI/Eagle Supply, Inc. by TDA Industries, Inc.,
incorporated herein by reference to Exhibit 10.23 to
the Company's Form S-1/A filed with the Commission on
December 28, 1998.
10.20-- Letter Agreement, dated September 21, 1999, by and
between the Company and George Skakel III,
incorporated herein by reference to Exhibit 10.36 to
the Company's Form 10-K filed with the Commission on
September 28, 1999.
10.21-- Amended, Restated and Consolidated Loan and Security
Agreement, dated June 20, 2000, by and between
JEH/Eagle Supply, Inc. and Eagle Supply, Inc., as
Borrowers, and Fleet Capital Corporation, as Lenders,
incorporated herein by reference to Exhibit 10.37 to
the Company's Form 8-K filed with the Commission on
July 10, 2000.
10.22-- Amended, Restated and Consolidated Revolving Credit
Note, dated June 20, 2000, by and between JEH/Eagle
Supply, Inc. and Eagle Supply, Inc., as Borrowers, and
Fleet Capital Corporation, as Lenders, incorporated
herein by reference to Exhibit 10.38 to the Company's
Form 8-K filed with the Commission on July 10, 2000.
10.23-- Amended, Restated and Consolidated Equipment Term
Note, dated June 20, 2000, by and between JEH/Eagle
Supply, Inc. and Eagle Supply, Inc., as Borrowers, and
Fleet Capital Corporation, as Lenders, incorporated
herein by reference to Exhibit 10.39 to the Company's
Form 8-K filed with the Commission on July 10, 2000.
10.24-- Amended, Restated and Consolidated Acquisition Term
Note, dated June 20, 2000, by and between JEH/Eagle
Supply, Inc. and Eagle Supply, Inc., as Borrowers, and
Fleet Capital Corporation, as Lenders, incorporated
herein by reference to Exhibit 10.40 to the Company's
Form 8-K filed with the Commission on July 10, 2000.
10.25-- First Amendment to Amended, Restated and Consolidated Loan
and Security Agreement; and Subordination Agreement,
dated February 14, 2001, by and between JEH/Eagle
Supply, Inc., Eagle Supply, Inc., JEH/Eagle, L.P., and
Fleet Capital Corporation, incorporated herein by
reference to Exhibit 10.45 to the Company's Form 10-Q
filed with the Commission on February 14, 2001.
10.26-- Fifth Amendment to Amended, Restated and Consolidated Loan
and Security Agreement and First Amendment to
Subordination Agreement, dated May 12, 2003, by and
among JEH/Eagle Supply, Inc., Eagle Supply, Inc.,
JEH/Eagle, L.P., Eagle Supply Group, Inc., and Fleet
Capital Corporation, incorporated herein by reference
to Exhibit 10.57 to the Company's Form 10-Q filed with
the Commission on May 15, 2003.
10.27-- Stock Option Plan of the Company, incorporated herein by
reference to Exhibit 10.9 to the Company's Form S-1/A
filed with the Commission on December 28, 1998.
10.28-- Termination and Mutual Release, dated August 28, 2003,
by and between the Company and Alpha Capital AG.*
10.29-- Termination and Mutual Release, dated August 28, 2003,
by and between the Company and Bristol Investment
Fund, Ltd.*
10.30-- Termination and Mutual Release, dated August 28, 2003,
by and between the Company and Stonestreet LP.*
10.31-- Termination and Mutual Release, dated September 23,
2003, by and between the Company and Seaway Holdings,
Ltd.*
18.1 -- Letter, dated September 29, 2003, from Deloitte &
Touche LLP regarding change in accounting principle.*
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Deloitte & Touche LLP.*
31.1 -- Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-
14(a)).*
31.2 -- Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule
13a-14(a)).*
32.1 -- Certificate of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Rule 13a-14(b)).*
32.2 -- Certificate of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Rule 13a-14(b)).*
- ----------------------------
* Exhibit filed herewith.
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, 2003 and 2002, and the related consolidated statements
of operations, shareholders' equity and cash flows for the three
years ended June 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Eagle
Supply Group, Inc. and subsidiaries as of June 30, 2003 and 2002,
and the results of their operations and their cash flows for the
three years ended June 30, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 1 to the consolidated financial statements,
effective July 1, 2001, in connection with the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Intangible Other Assets, the Company ceased
amortization of goodwill.
As described in Note 1 to the consolidated financial statements,
effective July 1, 2002, the Company adopted Emerging Issues Task
Force ("EITF") Issue No. 02-16, Accounting by a Customer
(including a Reseller) for Certain Consideration Received from a
Vendor.
As described in Note 3 to the consolidated financial statements ,
the consolidated balance sheet of the Company and subsidiaries as
of June 30, 2002, and the related consolidated statements of
operations, shareholders' equity and cash flows for the two years
ended June 30, 2002 have been restated for the change during the
fourth quarter of 2003 in the method of inventory costing from
last-in-first-out ("LIFO") to the average cost method for the
inventories not previously accounted for on the average cost
method.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Fort Worth, Texas
September 29, 2003
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
- -----------------------------------------------------------------------------
2003 2002
(Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,505,408 $ 5,355,070
Accounts and notes receivable - trade (net of allowance
for doubtful accounts of $2,582,597 and $4,551,675,
respectively) 40,176,822 38,875,947
Inventories 39,962,678 33,419,546
Deferred tax asset 1,871,000 1,910,000
Federal and state income taxes receivable 771,095 -
Assets of discontinued operation 157,724 1,722,503
Other current assets 881,716 1,072,394
------------ ------------
Total current assets 85,326,443 82,355,460
PROPERTY AND EQUIPMENT, Net 2,964,635 3,602,897
COST IN EXCESS OF NET ASSETS ACQUIRED
(net of accumulated amortization of $1,936,216) 14,581,358 14,412,014
NOTES RECEIVABLE (net of allowance for doubtful
accounts) 2,807,588 -
DEFERRED FINANCING COSTS 15,850 57,664
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 860,000 $ 1,245,000
Note payable - TDA Industries, Inc. 1,000,000 1,000,000
Note payable - related party - 655,000
Accounts payable 31,876,367 27,695,079
Due to related party 259,778 314,722
Accrued expenses and other current liabilities 5,988,543 5,284,787
Federal and state income taxes payable - 222,444
------------ ------------
Total current liabilities 39,984,688 36,417,032
LONG-TERM DEBT 42,687,892 40,425,435
DEFERRED TAX LIABILITY 1,807,000 1,419,000
------------ ------------
Total liabilities 84,479,580 78,261,467
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 8, 9 and 10)
SHAREHOLDERS' EQUITY:
Preferred Shares, $.0001 par value per share,
10,000,000 shares authorized; none issued and
outstanding - -
Common Shares, $.0001 par value per share,
30,000,000 shares authorized; issued and
outstanding - 2003 - 10,255,455 shares;
2002 - 9,055,455 shares 1,025 905
Class A Non-Voting Common Shares, $.0001 par value per
share, 10,000,000 shares authorized; none issued
and outstanding - -
Additional paid-in capital 19,325,064 18,248,903
------------ ------------
Retained earnings 1,890,205 3,916,760
------------ ------------
Total shareholders' equity 21,216,294 22,166,568
------------ ------------
$105,695,874 $100,428,035
============ ============
See notes to consolidated financial statements.
F-2
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------
2003 2002 2001
(Restated) (Restated)
REVENUES $ 226,135,623 $ 230,495,559 $ 189,448,149
COST OF SALES 171,220,095 173,941,915 141,187,673
------------- ------------- -------------
54,915,528 56,553,644 48,260,476
------------- ------------- -------------
OPERATING EXPENSES (including provisions
for doubtful accounts of $4,675,262,
$2,710,741 and $1,413,507, respectively) 54,840,570 50,423,015 41,461,802
DEPRECIATION AND AMORTIZATION 1,022,952 1,482,208 2,271,827
------------- ------------- -------------
55,863,522 51,905,223 43,733,629
------------- ------------- -------------
(LOSS) INCOME FROM
CONTINUING OPERATIONS (947,994) 4,648,421 4,526,847
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Investment and other income 336,785 340,512 481,896
Interest expense (1,666,329) (2,293,445) (3,201,013)
------------- ------------- -------------
(1,329,544) (1,952,933) (2,719,117)
------------- ------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES (2,277,538) 2,695,488 1,807,730
(BENEFIT) PROVISION FOR INCOME TAXES (855,000) 948,000 722,000
------------- ------------- -------------
NET (LOSS) INCOME FROM
CONTINUING OPERATIONS (1,422,538) 1,747,488 1,085,730
------------- ------------- -------------
DISCONTINUED OPERATION:
Loss from discontinued operation
(including loss on disposal of
$90,000 in 2003) (306,017) (570,324) (379,888)
Benefit for income taxes (115,000) (214,000) (142,000)
------------- ------------- -------------
LOSS FROM DISCONTINUED OPERATION (191,017) (356,324) (237,888)
------------- ------------- -------------
NET (LOSS) INCOME BEFORE EFFECT OF
ACCOUNTING CHANGE (1,613,555) 1,391,164 847,842
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAXES (413,000) - -
------------- ------------- -------------
NET (LOSS) INCOME $ (2,026,555) $ 1,391,164 $ 847,842
============= ============= =============
See notes to consolidated financial statements.
F-3
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------
2003 2002 2001
(Restated) (Restated)
BASIC AND DILUTED
NET (LOSS) INCOME PER SHARE:
Net (loss) income from continuing
operations $ (.15) $ .20 $ .13
Loss from discontinued operation (.02) (.04) (.03)
Cumulative effect of accounting
change (.04) - -
------------- ------------- -------------
$ (.21) $ .16 $ .10
============= ============= =============
COMMON SHARES USED IN BASIC
AND DILUTED NET (LOSS)
INCOME PER SHARE 9,494,359 8,578,742 8,510,000
============= ============= =============
See notes to consolidated financial statements.
F-4
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------
Class A Non-Voting Additional
Preferred Shares Common Shares Common Shares Paid-In Retained
Shares Amount Shares Amount Shares Amount Capital Earnings Total
BALANCE, JULY 1, 2000, as previously
reported - $ - - $ - 8,510,000 $ 851 $16,958,141 $1,226,754 $18,185,746
Change in accounting method, net
of taxes (Note 3) - - - - - - - 451,000 451,000
------ ------ ------ ------- ---------- ------ ----------- ---------- -----------
BALANCE, JULY 1, 2000 - - - - 8,510,000 851 16,958,141 1,677,754 18,636,746
Net income, as restated - - - - - - - 847,842 847,842
------ ------ ------ ------- ---------- ------ ----------- ---------- -----------
BALANCE, JUNE 30, 2001 - - - - 8,510,000 851 16,958,141 2,525,596 19,484,588
Net income, as restated - - - - - - - 1,391,164 1,391,164
Proceeds from private placement of
common shares and warrants
- net (Note 10) - - - - 545,455 54 1,290,762 - 1,290,816
BALANCE, JUNE 30, 2002 - - - - 9,055,455 905 18,248,903 3,916,760 22,166,568
------ ------ ------ ------- ---------- ------ ----------- ---------- -----------
Net loss - - - - - - - (2,026,555) (2,026,555)
Proceeds from private placements
of common shares and warrants
- net (Note 10) - - - - 1,200,000 120 1,076,161 - 1,076,281
------ ------ ------ ------- ---------- ------ ----------- ---------- -----------
BALANCE, JUNE 30, 2003 - $ - - $ - 10,255,455 $1,025 $19,325,064 $1,890,205 $21,216,294
====== ====== ====== ======= ========== ====== =========== ========== ===========
See notes to consolidated financial statements.
F-5
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------
2003 2002 2001
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from continuing operations $ (1,422,538) $ 1,747,488 $ 1,085,730
Loss from discontinued operation, net of taxes (191,017) (356,324) (237,888)
Cumulative effect of accounting change, net of
taxes (413,000) - -
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,038,006 1,516,007 2,303,247
Issuance of common shares for employment
services 200,000 - -
Deferred income taxes 427,000 (597,903) (28,883)
Increase (decrease) in allowance for
doubtful accounts 247,414 2,199,184 856,491
Loss (gain) on sale of equipment 596 55,888 (15,413)
Changes in operating assets and liabilities:
Increase in accounts and notes receivable (4,355,877) (6,657,641) (6,570,229)
Increase in inventories (6,543,132) (3,357,877) (4,074,108)
Decrease (increase) in assets of
discontinued operation 1,564,779 1,039,262 (935,529)
Decrease (increase) in other current assets 190,678 (215,443) 265,480
Increase in accounts payable 4,181,288 1,024,519 4,165,667
Increase in accrued expenses and other
current liabilities 794,190 790,838 959,839
(Decrease) increase in due to related parties (54,944) (96,039) 51,891
Decrease in income taxes due to TDA
Industries, Inc. - - (1,143,537)
(Decrease) increase in federal and state
income taxes (993,539) 670,960 (869,231)
------------ ------------- -------------
Net cash used in operating activities (5,330,096) (2,237,081) (4,186,473)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (566,658) (771,430) (592,045)
Proceeds from sale of fixed assets 208,132 184,926 225,411
Payment of contingent consideration for the
purchase of JEH Co. - (314,864) (2,141,454)
Payment of contingent consideration for the
purchase of MSI Co. (259,778) (225,981) (215,650)
------------ ------------- -------------
Net cash used in investing activities (618,304) (1,127,349) (2,723,738)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placements, net of
related expenses 876,281 1,290,816 -
Principal borrowings on long-term debt 242,382,495 270,234,853 217,424,596
Principal reductions on long-term debt (241,160,038) (268,486,060) (211,937,408)
Increase in deferred financing costs - - (62,964)
------------ ------------- -------------
Net cash provided by financing activities 2,098,738 3,039,609 5,424,224
------------ ------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,849,662) (324,821) (1,485,987)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,355,070 5,679,891 7,165,878
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,505,408 $ 5,355,070 $ 5,679,891
============ ============= =============
See notes to consolidated financial statements.
F-6
EAGLE SUPPLY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------
2003 2002 2001
(Restated) (Restated)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 1,666,329 $ 2,293,445 $ 3,201,013
============ ============= =============
Cash paid for income taxes $ 29,863 $ 660,943 $ 1,478,114
============ ============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Non-cash dividend to TDA Industries, Inc. - net $ - $ - $ 3,067,002
============ ============= =============
Additional consideration pursuant to the
acquisition of JEH Co. $ - $ - $ 314,864
============ ============= =============
Additional consideration pursuant to the
acquisition of MSI Co. $ 169,344 $ 314,722 $ 270,123
============ ============= =============
Common shares issued in lieu of cash compensation $ 200,000 $ - $ -
============ ============= =============
See notes to consolidated financial statements.
F-7
EAGLE SUPPLY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
1. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Business Description - Eagle Supply Group, Inc. (the
----------------------
"Company") is a majority-owned subsidiary of TDA Industries,
Inc. ("TDA" or the "Parent") and was organized to acquire,
integrate and operate seasoned, privately-held companies
which distribute products to or manufacture products for the
building supplies/construction industry.
Initial Public Offering - On March 17, 1999, the Company
-------------------------
completed the sale of 2,500,000 of its common shares at $5.00
per share and 2,875,000 Redeemable Common Stock Purchase
Warrants at $.125 per warrant in connection with its initial
public offering (the "Offering"). The net proceeds to the
Company aggregated approximately $10,206,000.
Acquisitions and Basis of Presentation - Upon consummation of
--------------------------------------
the Offering, the Company acquired all of the issued and
outstanding common shares of Eagle Supply, Inc. ("Eagle"),
JEH/Eagle Supply, Inc. ("JEH Eagle") and MSI/Eagle Supply,
Inc. ("MSI Eagle") (the "Acquisitions") from TDA for
consideration consisting of 3,000,000 of the Company's common
shares. The Acquisitions have been accounted for as the
combining of four entities under common control, similar to a
pooling of interests, with the net assets of Eagle, JEH Eagle
and MSI Eagle recorded at historical carryover values. The
3,000,000 common shares of the Company issued to TDA were
recorded at Eagle'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. Effective May 31, 2000, MSI
Eagle was merged with and into JEH Eagle. As of July 1,
2000, the Texas operations of JEH Eagle were transferred to a
newly formed limited partnership owned directly and
indirectly by JEH Eagle. Accordingly, the Company's business
operations are presently conducted through two wholly-owned
subsidiaries and a limited partnership. Eagle, JEH Eagle and
MSI Eagle operate in a single industry segment and all of
their revenues are derived from sales to third party
customers in the United States.
Inventories - Inventories are valued at the lower of cost or
-----------
market. Cost is determined by using the average cost method.
During the fourth quarter of its fiscal year ended June 30,
2003, the Company changed its method of inventory costing
from LIFO to the average cost method for all inventories not
previously accounted for on the average cost method (see Note
3).
Depreciation and Amortization - Depreciation and amortization
------------------------------
of property and equipment are provided principally by
straight-line methods at various rates calculated to
extinguish the carrying values of the respective assets over
their estimated useful lives.
Cost in Excess of Net Assets Acquired - Prior to the fiscal
year ending June 30, 2002, cost in excess of net assets
acquired ("goodwill") had been amortized on a straight-line
method over 15 to 40 years.
Effective July 1, 2001, in connection with the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Intangible Assets, the Company ceased
amortization of goodwill.
Since goodwill and intangible assets with indeterminate lives
are not currently being amortized but are tested for
impairment annually, except in certain circumstances and
whenever there is an impairment, there is a possibility that,
as a result of an annual test for impairment or as the result
of the occurrence of certain circumstances or an impairment,
the value of goodwill or intangible assets with indeterminate
lives may be written down or may be written off either in one
write-down or in a number of write-downs, either at a fiscal
year end or at any time during the fiscal year. The Company
analyzes the value of goodwill using the related future cash
flows of the related business, the total market
capitalization of the Company, and other factors, and
recognizes any adjustment that may be required to the asset's
carrying value. Any such write-down or series of write-downs
could be substantial and could have a material adverse effect
on the Company's reported results of operations, and any such
F-8
impairment could occur in connection with a material adverse
event or development or in connection with the Company's
annual test for impairment and could have a material adverse
impact on the Company's financial condition and results of
operations.
Management has concluded that no impairment of the recorded
goodwill existed at June 30, 2003. Subsequent impairment
losses, if any, will be reflected in operating income or loss
in the consolidated statement of operations for the period in
which such loss is identified.
Had the Company been accounting for goodwill under SFAS No.
142 for the fiscal year ended June 30, 2001 the Company's net
income and basic and diluted net income per share would have
been as follows:
Net income, as restated $ 847,842
Add: amortization of cost in excess
of net assets acquired, net of tax 531,758
-------------
Pro forma adjusted net income, as restated $ 1,379,600
=============
Basic and diluted net income per share:
Net income, as restated $.10
Amortization of cost in excess of
net assets acquired, net of tax .06
-------------
Pro forma basic and diluted
net income per share, as restated $ .16
=============
Deferred Financing Costs - Deferred financing costs are
--------------------------
related to the financing obtained in connection with the
Acquisitions described in Note 2 and in connection with the
Company's subsequent financing under its credit facility
described in Note 7 and are being amortized on a straight-
line method over the term of the related debt obligations.
Income Taxes - Prior to the completion of the Offering, the
-------------
Company was included in the consolidated federal and state
income tax returns of its Parent. Income taxes were
calculated on a separate return filing basis. Subsequent to
the Offering, the Company files a consolidated federal income
tax return with its subsidiaries. The Company uses the
liability method of computing deferred income taxes on all
material temporary differences. Temporary differences are
the differences between current taxes payable versus taxes
that may be payable in the future arising as a result of
differences between the reported amounts of assets and
liabilities and their tax bases.
Net Income Per Share - Basic net income (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 but would
generally include potential dilution from the exercise of
stock options and warrants (see Note 10). The dilutive
effect of options and warrants to purchase common shares are
excluded from the computation of diluted income (loss) per
share if their effect is anti-dilutive. At June 30, 2003,
394,521 warrants to purchase common shares have been excluded
from the diluted income (loss) per share calculation as their
effect would have been anti-dilutive. In 2003, 2002 and
2001, 5,336,781, 4,398,170 and 4,287,040, respectively, of
options and warrants have been excluded from the calculation
of diluted net income (loss) per share. Both basic and
diluted net income (loss) per share includes, for all periods
presented, the 3,000,000 common shares of the Company issued
to TDA in connection with the Acquisitions.
Long-Lived Assets - Long-lived assets are stated at the lower
-----------------
of the expected net realizable value or cost. The carrying
value of long-lived assets is periodically reviewed to
determine whether impairment exists. The review is based on
comparing the carrying amount of the asset to the
undiscounted estimated cash flows over the remaining useful
life. No impairment is indicated as of June 30, 2003.
Fair Value of Financial Instruments - The estimated fair
--------------------------------------
value of financial instruments has been determined by the
Company using certain market information and valuation
methodologies considered to be reasonable by the Company.
However, considerable judgment is required in interpreting
market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could
F-9
realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and Cash Equivalents, Accounts and Notes Receivable,
Accounts Payable and Accrued Expenses - The carrying amounts
of these items are a reasonable estimate of their fair value.
Long-Term Debt - Interest rates that are currently available
to the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value for bank
and other debt. The carrying amounts comprising this item
are reasonable estimates of fair value.
The fair value estimates are based on information available
to management as of June 30, 2003 that the Company believes
to be relevant. Although management is not aware of any
factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since
that date and current estimates of fair value may differ
significantly from the amounts presented.
Concentration of Credit Risk - The financial instruments,
-------------------------------
which potentially subject the Company to concentration of
credit risk, consist principally of commercial paper which is
included in cash and cash equivalents and accounts and notes
receivable. The Company grants credit to customers based on
an evaluation of the customer's financial condition and in
certain instances obtains collateral in the form of liens on
both business and personal assets of its customers. Exposure
to losses on receivables is principally dependent on each
customer's financial condition. Collection of receivables is
dependent upon many factors beyond the control of the Company
and, in some cases, beyond the control of the Company's
customers, such as the strength of the economy and many other
factors. The Company controls its exposure to credit risks
through credit approvals, credit limits and monitoring
procedures and establishes allowances for anticipated losses.
There can be no assurance the actual future losses will be in
amounts greater or less than amounts that have been provided
in the financial statements. If actual future losses occur
in amounts greater than established allowances, such losses
could have a material adverse impact on the Company's
financial condition, results of operations and cash flows.
Estimates - The preparation of these financial statements in
---------
conformity with generally accepted accounting principles
requires the Company to make estimates, assumptions and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure and
reported amounts of contingent assets and liabilities at the
dates of these financial statements. Significant estimates
which are reflected in these Consolidated Financial
Statements relate to, among other things, allowances for
doubtful accounts and notes receivable, amounts reserved for
obsolete and slow-moving inventories, net realizable value of
inventories, estimates of future cash flows associated with
assets, asset impairments, and useful lives for depreciation
and amortization. On an on-going basis, the Company
evaluates its estimates, assumptions and judgments, including
those related to allowances for doubtful accounts and notes
receivable, inventories, intangible assets, investments,
other receivables, expenses, income items, income taxes and
contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets, liabilities, certain receivables,
allowances, income items, expenses, and contingent assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under
different assumptions or conditions, and there can be no
assurance that estimates, assumptions and judgments that are
made will prove to be valid in light of future conditions and
developments. If such estimates, assumptions or judgments
prove to be incorrect in the future, the Company's financial
condition, results of operations and cash flows could be
materially adversely affected.
The Company believes the following critical accounting
policies are based upon its more significant judgments and
estimates used in the preparation of its Consolidated
Financial Statements:
The Company maintains allowances for doubtful accounts and
notes receivable for estimated losses resulting from the
failure of its customers to make payments when due or within
a reasonable period of time thereafter. Although many
factors can affect the failure of customers to make required
payments when due, one of the most unpredictable is weather,
which can have a positive as well as negative impact on the
Company's customers. For example, severe or catastrophic
weather conditions, such as hailstorms or hurricanes, will
generally increase the level of activity of the Company's
customers, thus enhancing their ability to make required
payments. On the other hand, weather conditions such as
heavy rain or snow or ice storms will generally preclude
F-10
customers from installing the Company's products on job sites
and collecting from their own customers, which conditions
could result in the inability of the Company's customers to
make payments when due. The reserve for allowance for
doubtful accounts and notes receivable is intended to adjust
the value of the Company's accounts and notes receivable for
possible credit losses as of the balance sheet date in
accordance with generally accepted accounting principles.
Calculating such allowances involves significant judgment.
The Company estimates its reserves for allowance for doubtful
accounts and notes receivable by applying estimated loss
percentages against the Company's aging of accounts
receivables and against its notes receivable based on the
Company's estimate of the credit worthiness of the customer
from which the note is payable. Changes to such allowances
may be required if the financial condition of the Company's
customers deteriorates or improves or if the Company adjusts
its credit standards, thereby resulting in reserve or write-
off patterns that differ from historical experience. Errors
by the Company in estimating its allowance for doubtful
accounts and notes receivable could have a material adverse
affect on the Company's financial condition, results of
operations, and cash flows.
The Company writes down its inventories for estimated
obsolete or slow-moving inventories equal to the difference
between the cost of inventories and their estimated market
value based upon assumed market conditions. If actual market
conditions are less favorable than those assumed by
management, additional inventory write-downs may be required.
If inventory write-downs are required, the Company's
financial condition, results of operations, and cash flows
could be materially adversely affected.
The Company tests for impairment of the carrying value of
goodwill annually and when indicators of impairment occur.
Indicators of impairment could include, among other things, a
significant change in the business climate, including a
significant sustained decline in an entity's market value,
operating performance indicators, competition, sale or
disposition of a significant portion of the business, legal
or other factors. In connection with the annual test for
impairment, management reviews various generally accepted
valuation methodologies for valuing goodwill. Management
reviewed the carrying value of the goodwill on its balance
sheet as of June 30, 2003 in light of the fact that the
Company's stock market capitalization of its outstanding
equity securities as of that date was below its total
shareholders' equity (book value). Management concluded that
the market price of the Company's common shares is not the
best indication of the fair market value of the Company.
Management believes that, with respect to the Company, the
better indicator of fair market value results from the use of
the discounted estimated future cash flow method, which
includes an estimated terminal value component. This method
is based on management's estimates, which will vary if the
judgments and assumptions used to estimate the related
business's future revenues, gross profit margins, operating
expenses, interest rates, and other factors, prove to be
inaccurate. If such judgments, assumptions and estimates
prove to be incorrect, then the Company's carrying value of
goodwill may be overstated on the Company's balance sheet,
and the Company's results of operations may not reflect the
impairment charge that would have resulted if such judgments,
assumptions and estimates had been correct. Any failure
correctly to write down goodwill for impairment during any
period could have a material adverse effect on the Company's
future financial condition and results of operations, as well
as cause historical statements of operations, financial
condition, and cash flows to have been incorrectly stated in
light of the failure correctly to take any such write downs.
In conducting the required goodwill impairment test as of
June 30, 2003, management identified reporting units by
determining the units to which the goodwill applied. The
test was required by only one of the Company's operating
subsidiaries. As a result of the required test, the Company
determined that no write down of its goodwill was required at
June 30, 2003. While the Company does not use its stock
market capitalization to determine the fair value of its
reporting unit, the Company expects convergence between its
stock market value capitalization and its discounted cash
flow valuation to occur over time or from time to time. If
this does not occur, it may signal the need for impairment
charges.
The Company seeks revenue and income growth by expanding its
existing customer base, by opening new distribution centers,
and by pursuing strategic acquisitions that meet its various
criteria. If the Company's evaluation of the prospects for
opening a new distribution center or of acquiring a company
misjudges its estimated future revenues or profitability,
such a misjudgment could impair the carrying value of the
investment and result in operating losses for the Company,
which could materially adversely affect the Company's results
of operations, financial condition, and cash flows.
F-11
The Company files income tax returns in every jurisdiction in
which the Company has reason to believe it is subject to tax.
Historically, the Company has been subject to examination by
various taxing jurisdictions. To date, none of these
examinations has resulted in any material additional tax.
Nonetheless, any tax jurisdiction may contend that a filing
position claimed by the Company regarding one or more of its
transactions is contrary to that jurisdiction's laws or
regulations. In any such event, the Company may incur
charges to its income statement which could materially
adversely affect its net income and may incur liabilities for
taxes and related charges which may materially adversely
affect its financial condition.
Shipping and Handling Fees and Costs - The Company includes
--------------------------------------
shipping and handling charges billed to customers in
revenues. The related costs associated with shipping and
handling are included as a component of cost of sales.
Advertising Costs - The Company expenses advertising costs as
-----------------
incurred. The Company's advertising expenses are net of the
portion of advertising costs shared with manufacturers.
Revenue Recognition - The Company recognizes revenues when
--------------------
the earnings process is complete, title is transferred to the
customer, and when collectability of the fixed sales price is
reasonably assured. Title to material sold to a customer
transfers to the customer upon delivery to the customer's job
site or upon pick up by the customer at a Company
distribution center.
Stock-based Compensation - The Company applies Accounting
-------------------------
Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations in accounting for
its Stock Option Plan. Accordingly, no compensation expense
has been recognized for the Company's Stock Option Plan,
since the exercise price of the Company's stock option grants
was the fair market value of the underlying stock on the
dates of the grants. Had compensation costs for the
Company's Stock Option Plan been determined based on the fair
value at the grant dates consistent with the method of SFAS
No. 123, Accounting for Stock-Based Compensation, and SFAS
No. 148, Accounting for Stock-Based Compensation -Transition
and Disclosure, the Company's net (loss) income and basic and
diluted net (loss) income per share would have been reduced
to the pro forma amounts indicated below:
Year Ended June 30,
2003 2002 2001
Net (loss) income:
As restated $ (2,026,555) $ 1,391,164 $ 847,842
Compensation costs (103,394) (103,394) (93,489)
------------ ----------- -----------
Proforma $ (2,129,949) $ 1,287,770 $ 754,353
============ =========== ===========
Basic and diluted net (loss)
income per share:
As restated $ (.21) $ .16 $ .10
Compensation costs (.01) (.01) (.01)
============ =========== ===========
Proforma $ (.22) $ .15 $ .09
============ =========== ===========
The Company used the Black-Scholes model with the following
assumptions in the calculation of fair value: risk-free
interest rate of 5.5%, expected life of three years, expected
volatility of 19.72% and a dividend yield of 0%.
Reclassifications and Restatements - Certain
------------------------------------------
reclassifications have been made in the prior periods'
financial statements in order to conform to the
classifications in the current periods. The consolidated
balance sheet of the Company and subsidiaries as of June 30,
2002, and the related consolidated statements of operations,
shareholders' equity and cash flows for the two years ended
June 30, 2002 have been restated for the change during the
fourth quarter of 2003 in the method of inventory costing
from LIFO to the average cost method for the inventories not
previously accounted for on the average cost method.
Comprehensive Income - The Company has no components of
---------------------
comprehensive income except for net income.
F-12
Significant Vendors - During the fiscal years ended June 30,
-------------------
2003, 2002 and 2001 the Company purchased approximately 19%,
19% and 18%, respectively, of its product lines from one
supplier, approximately 10% of its product lines from a
second supplier in fiscal 2003, and 13% of its product lines
from a third supplier in fiscal 2001. Since similar products
are currently available from other suppliers, the Company
believes that the loss of these suppliers would not have a
long-term material adverse effect on the Company's business.
Cash and Cash Equivalents - The Company considers any highly
--------------------------
liquid investments with an original maturity of three months
or less at date of acquisition to be cash equivalents. Cash
equivalents amounted to approximately $250,000 and $4,255,000
at June 30, 2003 and 2002, respectively.
Risks - The Company purchases the products that it sells from
-----
many vendors and sells those products to many thousands of
customers, primarily building contractors and subcontractors,
as well as builders. In doing so, the Company maintains
large inventories of products and carries substantial
accounts and notes receivable from its customers. The
Company has also built its business through acquisitions and
has substantial amounts of goodwill listed as an asset on its
financial statements. The nature of the Company's business
is seasonal, and, to some degree, it is weather related. The
Company carries insurance to insure against certain risks.
The Company's business is subject to many risks, including,
but not limited to: changes in the cost or pricing of, or
demand for, the Company's or the Company's industry's
distributed products; the inability to collect accounts and
notes receivables when due or within a reasonable period of
time after they become due or ever; increases in competitive
pressures in some or all of the Company's markets; misjudging
the future profitability of an acquired company or new
distribution center; changes in accounting policies and
principles, or other laws or rules, as may be adopted by
regulatory agencies or by the Financial Accounting Standards
Board; general economic and market conditions, either
nationally or in the markets in which the Company conducts
its business, may be less favorable than expected; changes in
terms of purchase of products from the Company's vendors;
interruptions or cancellations of the supply or availability
of products or significant increases in the cost of such
products; reductions in the value of the Company's inventory;
impairment of the value of the Company's goodwill and other
intangible assets; fluctuations in the Company's financial
results due to the seasonal nature of the Company's business;
unsatisfactory performance of acquired companies which could
lead to impairment of the Company's goodwill; the ability to
find and maintain equity and debt financing when needed on
terms commercially reasonable to the Company; a loss that is
not covered by the Company's insurance or that is in excess
of the Company's insurance coverage; changes in the Company's
cost of doing business, including costs of fuel, labor and
related benefits, occupancy, and the cost and availability of
insurance; and the number of common shares that the Company
has outstanding and the number of shares used to calculate
its basic and diluted earnings per share which may increase
and adversely affect its earnings per share calculation. The
occurrence of any one of these and other risks could have a
material adverse impact on the Company's financial condition,
results of operations and cash flows.
Recently Issued Accounting Pronouncements - The Company
--------------------------------------------
adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, on July 1, 2002. SFAS No. 144
replaces SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of, and
establishes accounting and reporting standards for long-lived
assets to be disposed of by sale. SFAS No. 144 requires that
those assets be measured at the lower of carrying amount or
fair value less cost to sell. SFAS No. 144 also broadens the
reporting of discontinued operations to include all
components of an entity with operations that can be
distinguished from the rest of the entity that will be
eliminated from the ongoing operations of the entity in a
disposal transaction. Management has made the required
disclosures for its discontinued operation and believes that
the effect of adopting this pronouncement does not otherwise
have a material impact on the Company's financial condition,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No.
146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
FASB's EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be
recognized when the liability is incurred. This statement
also established that fair value is the objective for initial
measurement of the liability. The provisions of SFAS No. 146
are effective for exit or disposal activities that are
initiated after December 31, 2002.
F-13
In November 2002, the FASB issued Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This interpretation elaborates on the disclosures to
be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45
are effective for interim and annual periods after
December 15, 2002, and the Company has adopted those
requirements for its financial statements. The initial
recognition and initial measurement requirements of FIN 45
were effective prospectively for guarantees issued or
modified after December 31, 2002. The Company is not a party
to any agreement in which it is a guarantor of indebtedness
of others. Accordingly, this pronouncement currently is not
applicable to the Company.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51 ("FIN 46"). FIN 46 addresses
consolidation by business enterprises of variable interest
entities (formerly special purpose entities or SPEs). In
general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that
do not provide sufficient financial resources for the entity
to support its activities. The objective of FIN 46 is not to
restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable
interest entities. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply to variable
interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15,
2003. However, certain of the disclosure requirements apply
to financial statements issued after January 31, 2003,
regardless of when the variable interest entity was
established. The Company does not have any variable interest
entities as defined in FIN 46. Accordingly, this
pronouncement currently is not applicable to the Company.
In March 2003, the EITF issued final transition guidance
regarding accounting for vendor allowances EITF No. 02-16.
The EITF decision to allow retroactive application was made
by the task force on March 20, 2003. As a result of the EITF
change to its transition, the Company has adopted the new
guidance on a retroactive basis to July 1, 2002, the
beginning of its fiscal year ending June 30, 2003.
In adopting the new guidance, the Company changed its
previous method of accounting, which was consistent with
generally accepted accounting principles. Under the previous
accounting method, vendor allowances were treated as a
reduction of cost of sales when such allowances were earned.
Under the new accounting guidance, vendor allowances are
considered a reduction in inventory and a subsequent
reduction in cost of goods sold when the related product is
sold.
The adoption of EITF 02-16, effective July 1, 2002, resulted
in a cumulative effect of accounting change of $413,000, net
of $222,000 of taxes, to reflect the deferral of certain
allowances as a reduction of inventory cost.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for
hedging activities under SFAS Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. The
Company has not used derivative instruments and does not
expect the adoption of this statement to have a material
effect on the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an
asset in some circumstances). It is effective at the
beginning of the first interim period beginning after June
15, 2003. Management believes that the effect of
implementing this pronouncement will not have a material
impact on the Company's financial condition, results of
operations or cash flows.
F-14
2. ACQUISITIONS
On July 8, 1997, effective as of July 1, 1997, JEH Eagle
acquired the business and substantially all of the assets of
JEH Company, Inc. ("JEH Co."), engaged in the wholesale
distribution of roofing supplies and related products
utilized primarily in the construction industry. The
purchase price, as adjusted, including transaction expenses,
was $14,767,852 consisting of $13,878,000 in cash, net of
$250,000 due from JEH Co., and a five-year, 6% per annum note
in the original principal amount of $864,852. As of June 30,
2002, the principal amount of the note was adjusted to
$655,284 to reflect an offset of certain related party
transactions and was due and paid on October 15, 2002 with
interest at the rate of 8.75% per annum from July 1, 2002
(Note 9). The purchase price and the note were subject to
further adjustment under certain conditions. Further, JEH
Eagle was obligated for substantial additional payments if,
among other factors, the business acquired attained certain
levels of income, as defined, during the five-year period
ended June 30, 2002. Upon consummation of the Offering, the
Company issued 300,000 of its common shares to James E.
Helzer, the owner of JEH Co. and President of the Company, in
fulfillment of certain of such future additional
consideration. For the fiscal years ended June 30, 2001 and
2000, approximately $315,000 and $1,947,000, respectively, of
additional consideration was paid to JEH Co. or its designee.
All of such additional consideration increased goodwill. No
additional consideration was payable to JEH Co. or its
designee for fiscal 2002, and the Company had no future
obligation for such additional consideration as of June 30,
2002.
On October 22, 1998, MSI Eagle acquired the business and
substantially all of the assets of Masonry Supply, Inc. ("MSI
Co."), engaged in the wholesale distribution of masonry
supplies and related products utilized primarily in the
construction industry. The purchase price, as adjusted,
including transaction expenses, was $8,537,972 consisting of
$6,492,000 in cash and a five-year, 8% per annum note in the
principal amount of $2,045,972. The purchase price and the
note were 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 was
obligated for potentially substantial additional payments if,
among other factors, the business acquired attained certain
levels of income, as defined, during the five-year period
ended June 30, 2003. Upon the consummation of the Offering,
the Company issued 200,000 of its common shares, and, as of
July 1, 1999, the Company issued 60,000 of its common shares
to Gary L. Howard, the designee and owner of MSI Co. and a
former executive officer of the Company, in fulfillment of
certain of such future additional consideration. For the
fiscal years ended June 30, 2002 and 2001, approximately
$260,000 and $226,000, respectively, of additional
consideration was paid to MSI Co. or its designee. For the
fiscal year ended June 30, 2003, approximately $260,000 of
additional consideration is payable to MSI Co. or its
designee. All of such additional consideration increased
goodwill.
F-15
3. CHANGE IN ACCOUNTING METHOD
During the fourth quarter of its fiscal year ended June 30,
2003, the Company changed its method of inventory costing
from LIFO to the average cost method for all inventories not
previously accounted for on the average cost method. Results
of continuing operations and discontinued operation for prior
periods have been restated to reflect this change. The new
method was adopted to provide a better measure of the current
value of inventory, a more accurate reflection of the
Company's financial and liquidity positions, and a better
matching of costs with revenues. The balances of retained
earnings as of June 30, 2000, 2001 and 2002 have been
restated for the effect of applying retroactively the new
method of accounting. This change in method of inventory
costing increased retained earnings as of July 1, 2000 by
$451,000, net of taxes. If the Company had continued to
apply LIFO in fiscal 2003, the impact on net income would
have been immaterial. The following table presents the
effect of the change on previously reported net income and
basic and diluted net income per share for the fiscal years
ended June 30, 2002 and 2001:
Year Ended June 30,
2002 2001
Net income, as previously reported $ 1,385,164 $ 848,842
Change in accounting method, net of taxes 6,000 (1,000)
----------- -----------
Net income, as restated $ 1,391,164 $ 847,842
=========== ===========
Basic and diluted net income per share,
as previously reported $ .16 $ .10
Change in accounting method - -
----------- -----------
Basic and diluted net income per share,
as restated $ .16 $ .10
=========== ===========
4. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
June 30, Estimated
2003 2002 Useful Lives
Furniture, fixtures and equipment $ 1,973,644 $ 2,037,906 5 years
Automotive equipment 4,505,564 4,840,314 5-7 years
Leasehold improvements 2,149,442 2,060,037 10 years
Assets acquired under capitalized leases 692,890 700,267 1 year
----------- -----------
9,321,540 9,638,524
Less: Accumulated depreciation and
amortization 6,356,905 6,035,627
----------- -----------
$ 2,964,635 $ 3,602,897
=========== ===========
5. ACCOUNTS AND NOTES RECEIVABLE - TRADE
Accounts and notes receivable - trade are as follows:
F-16
June 30,
2003 2002
Accounts receivable $ 41,597,677 $ 43,320,881
Notes receivable 6,185,822 106,741
------------ ------------
47,783,499 43,427,622
Allowance for doubtful accounts (4,799,089 (4,551,675)
------------ ------------
$ 42,984,410 $ 38,875,947
============ ============
Current $ 40,176,822 $ 38,875,947
Long-term 2,807,588 -
------------ ------------
$ 42,984,410 $ 38,875,947
============ ============
During fiscal 2003, the Company reclassified approximately
$2.8 million, net of allowance for doubtful accounts and
notes receivable, from current accounts and notes receivable
to long-term notes receivable. Management met with the
Company's largest customers which were unable to make
sufficient payments on their accounts when due or within a
reasonable period of time after they became due to negotiate
a formal payment schedule on terms that would enable the
Company to begin collecting on past due accounts and notes
receivable in amounts reasonably satisfactory to the Company.
As a result, the Company accepted notes from these customers,
with personal guarantees and additional collateral wherever
possible. These notes bear interest at rates ranging from 6%
to 18% with repayment periods ranging between 6 months and
slightly less than 10 years as of June 30, 2003. Those notes
receivable with maturity dates longer than 12 months were
reclassified to long-term. Given the uncertainty associated
with these notes receivable, the Company is recognizing
interest income on these notes on a cash basis.
6. INCOME TAXES
Components of the (benefit) provision for income taxes are as
follows:
Year Ended June 30,
2003 2002 2001
Current:
Federal $ (871,000) $ 1,406,903 $ 637,883
State and local (19,000) 135,000 113,000
Deferred 35,000 (593,903) (28,883)
----------- ------------ ------------
$ (855,000) $ 948,000 $ 722,000
=========== ============ ============
A reconciliation of income taxes at the federal statutory
rate and the amounts provided, is as follows:
Year Ended June 30,
2003 2002 2001
Tax using the statutory rate $ (774,000) $ 916,000 $ 615,000
State and local income taxes (13,000) 90,000 74,000
Other (68,000) (58,000) 33,000
----------- ------------ ------------
$ (855,000) $ 948,000 $ 722,000
=========== ============ ============
Temporary differences which give rise to a net deferred tax
asset are as follows:
F-17
June 30,
2003 2002
Deferred tax assets:
Provision for doubtful accounts $ 1,824,000 $ 1,730,000
Inventory capitalization - 180,000
Other 47,000 -
------------ ------------
1,871,000 1,910,000
------------ ------------
Deferred tax liability:
Goodwill (998,000) (676,000)
Depreciation (270,000) (470,000)
Inventory valuation allowance (251,000) -
Inventory method change (205,000) (273,000)
Other (83,000) -
------------ ------------
(1,807,000) (1,419,000)
------------ ------------
Net deferred tax asset $ 64,000 $ 491,000
============ ============
F-18
Management believes that no valuation allowance against the
net deferred tax asset is necessary. The 2002 deferred tax
liability has been restated to reflect the cumulative effect
of the change in the method of inventory costing from LIFO to
average cost. The Company has a net operating loss of
approximately $2.1 million for 2003 which can be offset
against prior years' income taxes, resulting in current year
federal and state tax refunds aggregating approximately
$770,000.
7. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
2003 2002
Variable rate collateralized revolving credit note (A) $ 41,796,137 $ 38,641,438
Variable rate collateralized equipment note (A) 323,654 804,654
Variable rate collateralized term note (A) 1,036,900 1,480,900
Capitalized equipment lease obligations, at
various rates, for various terms through 2003 - 125,540
8.50% equipment loan, payable in monthly
installments through February 13, 2003 - 32,346
8.50% equipment loan, payable in monthly
installments through April 23, 2003 - 15,668
8.50% equipment loan, payable in monthly
installments through April 27, 2003 - 7,740
9.25% equipment loan, payable in monthly
installments through November 6, 2004, paid
in full in August 2002 - 8,429
9.25% equipment loan, payable in monthly
installments through September 4, 2004 6,584 11,691
8.25% equipment loan, payable in monthly
installments through July 1, 2003 662 8,260
8.25% equipment loan, payable in monthly
installments through August 1, 2003 2,408 16,177
8.226% equipment loan, payable in monthly
installments through August 1, 2003 4,844 61,173
6.50% equipment loan, payable in monthly
installments through September 4, 2006 27,830 35,274
7.25% equipment loan, payable in monthly
installments through May 2, 2007 11,234 13,627
Variable rate equipment loan, payable in monthly
installments through May 2, 2007 (4.25% at
June 30, 2003) 337,639 407,518
------------ ------------
43,547,892 41,670,435
Less: Current portion of long-term debt 860,000 1,245,000
------------ ------------
$ 42,687,892 $ 40,425,435
============ ============
(A) In June 2000, and as subsequently amended, with the last
amendment dated as of May 12, 2003, the Company's credit
facilities were consolidated into an amended, restated and
consolidated loan agreement with the Company's subsidiaries and
limited partnership as borrowers. The loan agreement provides a
credit facility of $44,975,000, including up to $8 million in
borrowing available for acquisitions (subject to an adequate
borrowing base and other conditions). The credit facility bears
interest as follows (with the alternatives at the borrowers'
election):
F-19
* Equipment Term Note - Libor (as defined), plus two and one-
half (2.5%) percent, or the lender's Prime Rate (as defined),
plus one-half of one (1/2%) percent.
* Acquisition Term Note - Libor, plus two and three-fourths
(2.75%) percent, or the lender's Prime Rate, plus three-
fourths of one (3/4%) percent.
* Revolving Credit Loans - Libor, plus two (2%) percent or the
lender's Prime Rate.
The credit facility is collateralized by substantially
all of the tangible and intangible assets of the
borrowers, is guaranteed by the Company and originally
was to mature on October 21, 2003. The credit
facility contains an evergreen provision which
provides for an automatic one-year extension of the
maturity date provided either the borrowers or the
lender does not notify the other in writing of its
intention not to renew within 180 days of the
scheduled maturity date. Since neither the borrowers
nor the lender provided the other with the required
notice, the maturity date of the credit facility has
been extended to October 21, 2004.
The credit facility contained two specific
financial covenants in addition to standard
affirmative and negative covenants. The specific
financial covenants required that the borrowers (a)
maintain minimum Adjusted Tangible Net Worth, as
defined, of not less than an amount equal to 80% of
the actual Net Worth, as defined, as shown on the June
30, 1999 balance sheets of the borrowers; and (b)
achieve Cash Flow, as defined, of not less than
$300,000 for the trailing 12-month periods ending as
of each calendar quarter. The borrowers were in
compliance with the Minimum Adjusted Tangible Net
Worth covenant but did not meet the Cash Flow
requirement as of March 31, 2003. By an amendment to
the loan agreement dated as of May 12, 2003, the
borrowers received a waiver, and certain terms of the
loan agreement were modified. The Cash Flow financial
covenant was eliminated in its entirety and replaced
with a Fixed Charge Coverage Ratio, as defined; the
Applicable Inventory Sublimit, as defined, was
increased to $22.5 million from $20 million through
July 31, 2003; the amount of aggregate Rentals, as
defined, for property and equipment under operating
leases during any current or future consecutive twelve-
month period was increased to $7 million from $6
million; and certain definitions were changed. The
Company was in compliance with all such covenants at
June 30, 2003.
The term loan is payable in equal monthly
installments, each in the amount of $42,000, with a
balloon payment due on the earlier of November 1, 2005
or the end of the loan agreement's initial or renewal
term.
The equipment loan is payable in equal monthly
installments, each in the amount of $37,000, with a
balloon payment due on the earlier of August 1, 2004
or the end of the loan agreement's initial or renewal
term.
The aggregate future maturities of long-term debt are
as follows:
Year Ending
June 30, Amount
2004 $ 860,000
2005 42,530,000
2006 120,000
2007 37,892
------------
$ 43,547,892
============
8. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries have entered into various
written employment agreements which expire at various times
through June 2006. Pursuant to such agreements, the annual base
compensation payable aggregates approximately $1,875,000.
b. The Company's subsidiaries have a defined contribution
retirement plan covering eligible employees. The plan provides
for contributions at the discretion of the subsidiaries.
Contributions in the amounts of approximately $159,000, $126,000
and $102,000 were made for fiscal years 2003, 2002 and 2001,
respectively.
F-20
c. At June 30, 2001, the Company and its subsidiaries were
liable under various long-term leases for property and automotive
and other equipment (including leases with related parties) which
expire on various dates through 2009. Certain of the leases
include options to renew. In addition, real property leases
generally provide for payment of taxes and other occupancy costs
and may provide for the payment of costs of maintenance and
repairs. Rent expense charged to operations in fiscal years
2003, 2002 and 2001 was approximately $6,995,000, $6,013,000 and
$5,099,000, respectively, which includes taxes and various
occupancy costs, as well as rent for equipment under short-term
leases (less than one year).
The approximate future minimum rental commitments under
all of the above leases are as follows:
Year Ending
June 30, Amount
2004 $ 6,467,000
2005 5,425,000
2006 4,120,000
2007 2,764,000
2008 1,395,000
Thereafter 916,000
------------
Total future minimum rental
commitments $ 21,087,000
============
See Note 9 for information on lease obligations with
related parties.
d. The Company is involved in certain litigation arising in the
ordinary course of business. Management believes that the
ultimate resolution of such litigation will not have a
significant impact on the Company's financial condition and
results of operations.
9. TRANSACTIONS WITH THE COMPANY AND OTHER RELATED PARTIES
The Chief Executive Officer and Chairman of the Board of
Directors of the Company is an officer and a director of TDA;
the Executive Vice President, Secretary, Treasurer, Chief
Financial Officer and a director of the Company is also an
officer and a director of TDA; and another director of the
Company is also a director of TDA.
The Company had entered into an agreement pursuant to which
TDA provided the Company with certain services including (i)
managerial, (ii) strategic planning, (iii) banking
negotiations, (iv) investor relations, and (v) advisory
services relating to acquisitions for a five-year term which
commenced in July 1997. The monthly fee, the payment of
which commenced upon the consummation of the Offering and the
Acquisitions, for the foregoing services was $3,000. This
agreement expired on June 30, 2002.
The Company also entered into an agreement pursuant to which
TDA provided the Company with office space and administrative
services on a month-to-month basis. The monthly fee, the
payment of which commenced upon the consummation of the
Offering and the Acquisitions, for the foregoing services was
$3,000. This agreement was terminated on June 30, 2002.
Commencing July 1, 2002, the Company began to pay to TDA
seventy-five (75%) percent of the occupancy cost
(approximately $4,500 per month) for its New York corporate
executive offices, and seventy-five (75%) percent of the
remuneration and benefits of its New York administrative
assistant (approximately $4,500 per month), and TDA began to
pay twenty-five (25%) percent of such occupancy cost
(approximately $1,500 per month), and twenty-five (25%)
percent of the remuneration and benefits of its New York
administrative assistant (approximately $1,500 per month) in
order to defray any expenses that may be deemed to be
attributable to TDA. The current lease for the Company's New
York corporate executive offices expired in October 2002 with
TDA as the named lessee. A new lease was entered into by and
between the Company and the landlord for these premises at a
base rental of approximately $6,900 per month with customary
additional rental charges (proportionate share of real estate
taxes, electricity, etc.), of which TDA will continue to pay
twenty-five (25%) percent.
JEH Eagle leases several of its distribution center
facilities and its executive offices from the President of
the Company pursuant to five-year written leases at base
annual rentals aggregating approximately $784,000.
F-21
Eagle operates a substantial portion of its business from
facilities leased from a subsidiary of TDA pursuant to ten-
year written leases at base annual rentals aggregating
approximately $790,000.
JEH Eagle leases offices, showroom, warehouse and storage
space from a former executive officer of the Company and his
spouse pursuant to a three-year written lease at a base
annual rental aggregating approximately $112,000.
JEH Eagle leases a distribution center from a limited
liability company fifty (50%) percent owned by a wholly-owned
subsidiary of TDA and fifty (50%) owned by the President of
the Company and his spouse pursuant to a five-year written
lease at a base annual rental aggregating approximately
$46,000.
During the fiscal year ended June 30, 2003, JEH Eagle made
sales aggregating approximately $767,000 to entities owned by
members of the family of the President of the Company.
Management believes that such sales were made on terms no
less favorable than sales made to independent third parties.
As of June 30, 2003, approximately $340,000 of such sales
were owed to JEH Eagle.
In October 1998, in connection with the purchase of
substantially all of the assets and business of MSI Co. by
MSI Eagle, TDA lent MSI Eagle $1,000,000 pursuant to a 6% two-
year note that was due in October 2000. In October 2000, the
note was converted into a $1,000,000 8.75% demand note. TDA
had agreed to defer the interest payable on the old note
until its maturity. In October 2000, interest on that note
was paid in full. Interest on the demand note is payable
monthly.
On February 6, 2003, the Company entered into a Securities
Purchase Agreement ("Securities Purchase Agreement") with
James E. Helzer, the President, Chief Operating Officer, and
Vice Chairman of the Board of Directors of the Company, to
sell in a private placement transaction (the "Helzer
Transaction"), for gross proceeds to the Company of $1
million (a) 1,000,000 authorized but previously unissued
common shares of the Company, and (b) warrants to purchase up
to an additional 1,000,000 authorized but previously unissued
common shares of the Company at an exercise price of $1.50
per share exercisable for 5 years from the date of issuance
(the "Helzer Warrant"). Although the closing price for the
Company's common shares at the close of business on the day
before the Helzer Transaction closed was $0.81 and the
Company received two separate fairness opinions indicating
that the consideration received by the Company in the Helzer
Transaction was fair, Mr. Helzer will be able to benefit from
any appreciation in the market price of the Company's common
shares. On September 22, 2003, the last reported sales price
for the Company's common shares was $2.40 per share.
In February 2003, the Chairman and Chief Executive Officer of
the Company, and the Executive Vice President, Secretary,
Treasurer and Chief Financial Officer of the Company, each
agreed to accept $100,000 of their cash compensation for the
fiscal year ended June 30, 2003 in the form of 100,000 newly
issued, unregistered common shares of the Company in lieu of
such cash compensation. These shares were issued April 11,
2003.
10. SHAREHOLDERS' EQUITY
Preferred Shares - The preferred shares may be issued in one
----------------
or more series, the terms of which may be determined at the
time of issuance by the Board of Directors of the Company,
without further action by shareholders, and may include
voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and
liquidation, conversion and redemption rights and sinking
fund provisions.
Common Shares - Holders of common shares are entitled to one
--------------
vote for each share held of record on each matter submitted
to a vote of shareholders. There is no cumulative voting for
election of directors. Subject to the prior rights of any
series of preferred shares which may from time to time be
outstanding and to limitations imposed by any credit
agreements to which the Company is a party, holders of common
shares are entitled to receive dividends when and if declared
by the Board of Directors out of funds legally available
therefor and, upon the liquidation, dissolution or winding up
of the Company, are entitled to share ratably in all assets
remaining after payment of liabilities and payment of accrued
dividends and liquidation preferences on the preferred
shares, if any. Holders of common shares have no pre-emptive
rights and have no rights to convert their common shares into
any other securities.
Class A Non-Voting Common Shares - Holders of Class A Non-
----------------------------------
Voting Common Shares are not entitled to vote on matters
submitted to a vote of shareholders. Except for the lack of
voting rights, holders of the Class A Non-Voting Common
Shares have the same rights as holders of common shares.
Without limiting the generality of the foregoing, subject to
F-22
the prior rights of any series of preferred shares which may
from time to time be outstanding and to limitations imposed
by any credit agreements to which the Company is a party,
holders of Class A Non-Voting 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 voluntary or involuntary liquidation, dissolution or
winding up of the Company or upon distribution of the assets
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 Class A Non-Voting Common Shares
have no pre-emptive rights and have no rights to convert
their shares into any other securities.
Private Placement - On May 15, 2002, the Company entered into
-----------------
a Securities Purchase Agreement ("Securities Purchase
Agreement") with certain accredited investors to sell
1,090,909 common shares and warrants to purchase up to
109,090 common shares at $3.50 per share (the "Purchaser
Warrants") in a private placement transaction ("Private
Placement") for gross proceeds of $3,000,000.
The Securities Purchase Agreement provided for the issuance
and sale of the common shares and Purchaser Warrants in two
equal and separate tranches. The first tranche closed on May
16, 2002 and consisted of 545,455 common shares and 54,545
Purchaser Warrants. The Company received net proceeds of
approximately $1,291,000 from the first tranche. In addition
to the payment of the expenses of the first tranche, the
Company issued warrants ("Finder Warrants") to purchase
54,545 common shares at $3.50 per share. The second tranche
was to close September 11, 2002. The investors, however,
declined to fund the second tranche. Accordingly, the second
tranche has not closed and will not close. The Company,
subsequent to June 30, 2003, reached settlement with four of
the five institutional investors in the Private Placement and
has obtained the return of 50,090 Purchaser Warrants and the
payment of $50,000, exclusive of legal fees paid by the
investors.
Warrants - The Company has outstanding 3,025,000 warrants
--------
which are exercisable at $5.50 per share through March 12,
2004, provided that during such time a current prospectus
relating to the common shares is then in effect and the
common shares are qualified for sale or exempt from
qualification under applicable securities laws.
In connection with the Offering, the Company granted the
underwriters warrants entitling the holders thereof to
purchase an aggregate of 500,000 of the Company's common
shares at an exercise price of $8.25 per share for five years
commencing on the date of the Offering.
The aggregate of the 109,090 Purchaser Warrants and Finder
Warrants outstanding as of June 30, 2003 are exercisable at
$3.50 per share through May 15, 2007, provided that during
such time a current prospectus relating to the common shares
is then in effect and the common shares are qualified for
sale or exempt from qualification under applicable securities
laws. Subsequent to June 30, 2003, 50,909 of such warrants
were returned to the Company.
In connection with the Helzer Transaction, the Company
granted James E. Helzer the Helzer Warrant entitling him to
purchase up to an additional 1,000,000 authorized but
previously unissued common shares of the Company at an
exercise price of $1.50 per share exercisable for 5 years
from the date of issuance.
All warrants are subject to customary anti-dilutive
provisions, and the Helzer Warrant provides for an adjustment
to the exercise price in the event that the Company enters
into certain sales transactions in which common shares are
sold at a price below the current exercise price of the
Helzer Warrant.
Stock Option Plan - In August 1996, last amended in 2000, the
-----------------
Board of Directors adopted and shareholders approved the
Company's Stock Option Plan (the "Stock Option Plan"). The
Stock Option Plan provides for the grant of options that are
intended to qualify as incentive stock options ("Incentive
Stock Options") within the meaning of Section 422A of the
Internal Revenue Code, as amended (the "Code"), to certain
employees, officers and directors. The total number of
common shares for which options may be granted under the
Stock Option Plan is 1,200,000 common shares. Options to
purchase 753,600 common shares have been granted to various
employees and certain officers and directors, 740,600 at a
$5.00 per share exercise price and 13,000 at a $4.00 per
share exercise price. All of such options have a term of ten
years. The options granted to employees and officers
(733,600) vest at a rate of 20% per year commencing on the
first anniversary of the date of grant, and the options
granted to two directors (20,000) fully vested one year from
the date of the grant.
F-23
Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
Outstanding, July 1, 2000 842,540 $ 5.00 $ 5.00
Granted 15,000 4.00 4.00
Exercised - - -
Forfeited (70,500) 5.00 5.00
Expired - - -
---------- ----------
Outstanding, June 30, 2001 787,040 4.98
Granted - - -
Exercised - - -
Forfeited (22,960) 5.00 5.00
Expired - - -
---------- ----------
Outstanding, June 30, 2002 764,080 4.98
Granted - - -
Exercised - - -
Forfeited (2,000) 4.00 4.00
Forfeited (8,480) 5.00 5.00
Expired - - -
---------- ----------
Outstanding, June 30, 2003 753,600 $ 4.98
========== ==========
At June 30, 2003, 605,200 options were vested and were
exercisable at $5.00 per share and 7,000 options were vested
and were exercisable at $4.00 per share.
11. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts for the
fiscal years ended June 30, 2003, 2002 and 2001 is as
follows:
Balance at
Year Ending Beginning Balance at
June 30, of Year Provision Writeoffs End of Year
2001 $ 1,496,000 $ 1,464,418 $ (607,927) $ 2,352,491
=========== =========== =========== ===========
2002 $ 2,352,491 $ 2,761,007 $ (561,823) $ 4,551,675
=========== =========== =========== ===========
2003 $ 4,551,675 $ 4,707,366 $(4,459,952) $ 4,799,089
=========== =========== =========== ===========
F-24
12. QUARTERLY INFORMATION (UNAUDITED)
Selected unaudited quarterly financial data, as restated, is
as follows (in thousands, except per share amounts):
Fiscal 2003 Quarter Ended
Sept. 30 Dec. 31 Mar. 31 June 30
Revenues $ 60,390 $ 51,668 $ 44,411 $ 69,667
Gross profit 14,314 12,774 10,122 17,706
Net (loss) income from continuing operations (72) (255) (2,390) 1,295
Loss from discontinued operation,
net of taxes (77) (114) - -
Cumulative effect of accounting change, net
of taxes (413) - - -
----------- ----------- ----------- -----------
Net (loss) income $ (562) $ (369) $ (2,390) $ 1,295
=========== =========== =========== ===========
Basic and diluted net income (loss) per share:
Net (loss) income from continuing operations $ (0.01) $ (0.03) $ (0.25) $ .13
Loss from discontinued operation (0.01) (0.01)
Cumulative effect of accounting change (0.04) - - -
----------- ----------- ----------- -----------
$ (0.06) $ (0.04) $ (0.25) $ .13
=========== =========== =========== ===========
Common shares used in basic and
diluted net income (loss) per share 9,055 9,055 9,644 10,233
=========== =========== =========== ===========
Fiscal 2002 Quarter Ended
Sept. 30 Dec. 31 Mar. 31 June 30
Revenues $ 65,513 $ 59,333 $ 45,034 $ 60,616
Gross profit 15,906 14,918 11,597 14,133
Net (loss) income from continuing operations 1,396 911 (317) (243)
Loss from discontinued operation,
net of taxes (44) (88) (102) (122)
----------- ----------- ----------- -----------
Net (loss) income $ 1,352 $ 823 $ (419) $ (365)
=========== =========== =========== ===========
Basic and diluted net (loss) income per share:
Net (loss) income from continuing operations $ .16 $ .11 $ (0.04) $ (0.03)
Loss from discontinued operation (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
$ .15 $ .10 $ (0.05) $ (0.04)
=========== =========== =========== ===========
Common shares used in basic and
diluted net (loss) income per share 8,510 8,510 8,510 8,786
=========== =========== =========== ===========
* * * * * *
F-25