SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
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OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number: 000-25423
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EAGLE SUPPLY GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3889248
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 East 42nd Street, Suite 1116, New York, New York 10168
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(Address of Principal Executive Offices) (Zip Code)
212-986-6190
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, as
of November 7, 2002, was 9,055,455 shares.
EAGLE SUPPLY GROUP, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
(Unaudited) and June 30, 2002 3
Consolidated Statements of Operations (Unaudited) for
the Three Months Ended September 30, 2002 and 2001 4
Consolidated Statement of Shareholders' Equity
(Unaudited) for the Three Months Ended September 30, 2002 5
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended September 30, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 15
Item 4. Controls and procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS 18
-2-
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
2002 2002
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,549,621 $ 5,355,070
Accounts and notes receivable - trade
(net of allowance for doubtful
accounts of $5,189,940 and $4,551,675,
respectively) 39,898,575 39,632,004
Inventories 32,194,579 33,635,992
Deferred tax asset 2,151,000 1,910,000
Other current assets 1,100,367 1,072,394
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Total current assets 78,894,142 81,605,460
PROPERTY AND EQUIPMENT, net 3,386,075 3,623,897
COST IN EXCESS OF NET ASSETS ACQUIRED, net 14,412,014 14,412,014
DEFERRED FINANCING COSTS, net 47,210 57,664
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$ 96,739,441 $ 99,699,035
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,388,073 $ 27,695,079
Accrued expenses and other current
liabilities 5,167,875 5,599,509
Federal and state income taxes payable 216,051 222,444
Current portion of long-term debt 2,900,000 2,900,000
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Total current liabilities 34,671,999 36,417,032
LONG-TERM DEBT 39,347,876 40,425,435
DEFERRED TAX LIABILITY 1,241,000 1,146,000
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Total liabilities 75,260,875 77,988,467
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SHAREHOLDERS' EQUITY:
Preferred shares, $.0001 par value per
share, 2,500,000 shares authorized;
none issued and outstanding - -
Common shares, $.0001 par value per
share, 25,000,000 shares authorized;
issued and outstanding - 9,055,455 shares 905 905
Additional paid-in capital 18,243,879 18,248,903
Retained earnings 3,233,782 3,460,760
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Total shareholders' equity 21,478,566 21,710,568
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$ 96,739,441 $ 99,699,035
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3
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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2002 2001
REVENUES $ 62,006,962 $ 67,613,939
COST OF SALES 47,592,803 51,351,916
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14,414,159 16,262,023
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OPERATING EXPENSES 13,970,226 13,183,915
DEPRECIATION AND AMORTIZATION 335,692 341,307
AMORTIZATION OF DEFERRED
FINANCING COSTS 10,454 25,157
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14,316,372 13,550,379
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INCOME FROM OPERATIONS 97,787 2,711,644
OTHER INCOME (EXPENSE):
Interest income 51,506 85,291
Interest expense (505,271) (709,903)
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(453,765) (624,612)
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(LOSS) INCOME BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES (355,978) 2,087,032
(BENEFIT) PROVISION FOR INCOME TAXES (129,000) 735,000
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NET (LOSS) INCOME $ (226,978) $ 1,352,032
============ ============
BASIC AND DILUTED
NET (LOSS) INCOME PER SHARE $ (.03) $ .16
============ ============
COMMON SHARES USED IN BASIC AND
DILUTED NET (LOSS) INCOME PER SHARE 9,055,455 8,510,000
============ ============
See notes to unaudited consolidated financial statements.
4
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2002
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Additional
Preferred Shares Common Shares Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
BALANCE, JULY 1, 2002 - $ - 9,055,455 $ 905 $ 18,248,903 $ 3,460,760 $ 21,710,568
Net loss - - - - - (226,978) (226,978)
Expenses relating to private
placement of Common Shares
and Warrants - - - - (5,024) - (5,024)
------ ------ --------- ------ ------------ ----------- ------------
BALANCE, SEPTEMBER 30, 2002 - $ - 9,055,455 $ 905 $ 18,243,879 $ 3,233,782 $ 21,478,566
====== ====== ========= ====== ============ ===========
See notes to unaudited consolidated financial statements.
5
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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2002 2001
OPERATING ACTIVITIES:
Net (loss) income $ (226,978) $ 1,352,032
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 346,146 366,464
Deferred income taxes (146,000) (83,515)
Increase in allowance for doubtful accounts 638,265 464,775
Changes in assets and liabilities:
Increase in accounts and notes receivable (904,836) (6,593,230)
Decrease (increase) in inventories 1,441,413 (4,024,551)
(Increase) decrease in other current assets (27,973) (133,643)
(Decrease) increase in accounts payable (1,307,006) 5,231,998
(Decrease) increase in accrued expenses
and other current liabilities (431,634) 1,195,346
(Decrease) increase in federal and state
income taxes (6,393) 913,223
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Net cash used in operating activities (624,996) (1,311,101)
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INVESTING ACTIVITIES:
Capital expenditures (97,870) (284,490)
Payment of contingent consideration for
the purchase of JEH Co. - (314,864)
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Net cash used in investing activities (97,870) (599,354)
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FINANCING ACTIVITIES:
Principal borrowings on long-term debt 65,310,151 68,100,027
Principal reductions on long-term debt (66,387,710) (67,014,787)
Increase in additional paid-in capital (5,024) -
------------ ------------
Net cash (used in) provided by financing
activities (1,082,583) 1,085,240
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,805,449) (825,215)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,355,070 5,679,891
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,549,621 $ 4,854,676
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 505,271 $ 709,903
============ ============
Cash paid during the period for income taxes $ 23,393 $ 5,292
============ ============
See notes to unaudited consolidated financial statements.
6
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated interim financial
statements of Eagle Supply Group, Inc. and its subsidiaries and
limited partnership (the "Company") have been prepared in
accordance with accounting principles generally accepted in the
United States of America for interim financial information and in a
manner consistent with that used in the preparation of the annual
consolidated financial statements of the Company at June 30, 2002.
In the opinion of management, the accompanying unaudited
consolidated interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of
operations and cash flows for the periods presented.
Operating results for the three months ended September 30, 2002 and
2001 are not necessarily indicative of the results that may be
expected for a full year. In addition, the unaudited consolidated
interim financial statements do not include all information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America. These unaudited
consolidated interim financial statements should be read in
conjunction with the consolidated financial statements and related
notes thereto which are included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2002 filed with the
Securities and Exchange Commission.
Business Description - The Company is a majority-owned subsidiary
of TDA Industries, Inc. ("TDA") and was organized to acquire,
integrate and operate seasoned, privately-held companies which
distribute products to or manufacture products for the building
supplies/construction industry.
Basis of Presentation - All of the operations of the Company have
been included in the unaudited consolidated interim financial
statements. The Company operates in a single industry segment and
all of its revenues are derived from sales to third party customers
in the United States.
Basic Net Income (Loss) Per Share - Basic net income (loss) per
share was calculated by dividing net income (loss) by the weighted
average number of common shares outstanding during the periods
presented and excludes any potential dilution. Diluted net income
(loss) per share was calculated similarly and would generally
include potential dilution from the exercise of stock options and
warrants. There were no such dilutive options or warrants for the
periods presented.
Comprehensive Income (Loss) - For the three months ended September
30, 2002 and 2001, comprehensive income (loss) was equal to net
income (loss).
* * * * *
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This document contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, such as statements
relating to our financial condition, results of operations, plans,
objectives, future performance and business operations. These
statements relate to expectations concerning matters that are not
historical facts. Accordingly, statements that are based on
management's projections, estimates, assumptions and judgments are
forward-looking statements. These forward-looking statements are
typically identified by words or phrases such as "believes,"
"expects," "anticipates," "plans," "estimates," "approximately,"
"intend," and other similar words and phrases, or future or
conditional verbs such as "will," "should," "would," "could," and
"may." These forward-looking statements are based largely on our
current expectations, assumptions, estimates, judgments and
projections about our business and our industry, and they involve
inherent risks and uncertainties. Although we believe our
expectations are based on reasonable assumptions, judgments and
estimates, forward-looking statements involve known and unknown
risks, uncertainties, contingencies, and other factors that could
cause our or our industry's actual results, level of activity,
performance or achievement to differ materially from those
discussed in or implied by any forward-looking statements made by
or on behalf of us and could cause our financial condition, results
of operations or cash flows to be materially adversely affected.
In evaluating these statements, some of the factors that you should
consider include the following:
* 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 suitable equity or debt financing
when needed on terms commercially reasonable to us;
* 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, an inability to consummate
any such acquisitions;
* there may be interruptions or cancellation of sources of
supply of products to be distributed or significant
increases in the costs of such products;
* there may be changes in the cost or pricing of, or
consumer demand for, our or our industry's distributed
products;
* we may be unable to collect our accounts or notes
receivables when due or within a reasonable period of time
after they become due and payable;
* there may be a significant increase in competitive
pressures; and
* there may be changes in accounting policies and practices,
as may be adopted by regulatory agencies as well as the
Financial Accounting Standards Board.
Many of these factors are beyond our control and you should read
carefully the factors described in "Risk Factors" in the Company's
filings (including its Forms 10-K and registration statements) with
the Securities and Exchange Commission for a description of some,
but not all, risks, uncertainties and contingencies. These
forward-looking statements speak only as of the date of this
document. We do not undertake any obligation to update or revise
any of these forward-looking statements to reflect events or
circumstances occurring after the date of this document or to
reflect the occurrence of unanticipated events.
8
Critical Accounting Policies and Estimates
The preparation of these unaudited financial statements in
conformity with generally accepted accounting principles requires
the Company to make estimates, assumptions and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosures of contingent assets and liabilities at
the dates of the financial statements. Significant estimates which
are reflected in these consolidated financial statements relate to,
among other things, allowances for doubtful accounts and notes
receivable, amounts reserved for obsolete and slow-moving
inventories, net realizable value of inventories, estimates of
future cash flows associated with assets, asset impairments, and
useful lives for depreciation and amortization. On an on-going
basis, the Company evaluates its estimates, assumptions and
judgments, including those related to accounts and notes
receivable, inventories, intangible assets, investments, other
receivables, expenses, income items, income taxes and
contingencies. The Company bases its estimates on an assessment of
contractual obligations, historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets, liabilities, certain
receivables, allowances, income items and expenses that are not
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions, and
there can be no assurance that estimates, assumptions and judgments
that are made will prove to be valid in light of future conditions
and developments. If such estimates, assumptions or judgments
prove to be incorrect in the future, the Company's financial
condition, results of operations and cash flows could be materially
adversely affected.
The Company believes the following critical accounting policies are
based upon its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
The Company maintains allowances for doubtful accounts and notes
receivable for estimated losses resulting from the inability of its
customers to make payments when due or within a reasonable period
of time thereafter. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make required payments, additional allowances may be
required. Conversely, if the financial condition of the Company's
customers is stronger than that estimated by the Company, then the
Company's estimates of allowances for doubtful accounts and notes
receivable may prove to be too large and reductions in its
allowances for doubtful accounts and notes receivable may be
required. If additions are required to allowances for doubtful
accounts and notes receivable, the Company's financial condition,
results of operations and cash flows could be materially adversely
affected.
The Company writes down its inventories for estimated obsolete or
slow-moving inventories equal to the difference between the cost of
inventories and the estimated market value based upon assumed
market conditions. If actual market conditions are or become less
favorable than those assumed by management, additional inventory
write-downs may be required. If inventory write-downs are
required, the Company's financial condition, results of operations
and cash flows could be materially adversely affected.
9
The Company maintains accounts for goodwill and other intangible
assets in its financial statements. In conformity with accounting
principals generally accepted in the United States of America,
since goodwill and intangible assets with indeterminate lives are
not currently being amortized but are tested for impairment
annually, except in certain circumstances and whenever there is an
impairment, there is a possibility that, as a result of an annual
test for impairment or as the result of the occurrence of certain
circumstances or an impairment, the value of goodwill or intangible
assets with indeterminate lives may be written down or may be
written off either in one write-down or in a number of write-downs,
either at a fiscal year end or at any time during the fiscal year.
The Company analyzes the value of goodwill using the estimated
related future cash flows of the related business, the total market
capitalization of the Company, and other factors, and recognizes
any adjustment that may be required to the asset's carrying value.
Any such write-down or series of write-downs could be substantial
and could have a material adverse effect on the Company's reported
results of operations, and any such impairment could occur in
connection with a material adverse event or development and have a
material adverse impact on the Company's financial condition,
results of operations and cash flows.
The Company seeks revenue and income growth by expanding its
existing customer base, by opening new distribution centers and by
pursuing strategic acquisitions that meet the Company's various
criteria. If the Company's evaluation of the prospects for opening
a new distribution center or of acquiring an acquired company
misjudges its estimated future revenues or profitability, such a
misjudgment could impair the carrying value of the investment and
result in operating losses for the Company, which could materially
adversely affect the Company's profitability, financial condition
and cash flows.
The Company files income tax returns in every jurisdiction in which
it has reason to believe it is subject to tax. Historically, the
Company has been subject to examination by various taxing
jurisdictions. To date, none of these examinations has resulted in
any material additional tax. Nonetheless, any tax jurisdiction may
contend that a filing position claimed by the Company regarding one
or more of its transactions is contrary to that jurisdiction's laws
or regulations. In such an event, the Company may incur charges
which would adversely affect its net income and may incur
liabilities for taxes and related charges which may adversely
affect its financial condition.
The Company's discussion and analysis of financial condition and
results of operation are based upon the Company's unaudited
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States.
* * * * *
10
The following discussion and analysis should be read in conjunction
with the financial statements and related notes thereto which are
included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002 filed with the Securities and Exchange
Commission.
Results of Operations
Three Months Ended September 30, 2002
Compared to the Three Months Ended September 30, 2001
Revenues of the Company during the three-month period ended
September 30, 2002 decreased by approximately $5,607,000 (8.3%)
compared to the 2001 three-month period. This decrease may be
attributed primarily to a loss of revenues in certain of the
Company's market areas (approximately $15,334,000) and by the loss
of revenues that had been generated from distribution centers
closed or consolidated (approximately $1,542,000), offset by a
general improvement in market conditions in certain of the
Company's other market areas (approximately $10,404,000) and to
revenues generated by new distribution centers opened since
September 2001 (approximately $865,000).
Cost of sales decreased between the 2002 and 2001 three-month
periods at a lesser rate than the decrease in revenues between
these three-month periods. Accordingly, cost of sales as a
percentage of revenues increased to 76.8% in the three-month period
ended September 30, 2002 from 75.9% in the three-month period ended
September 30, 2001 and gross profit as a percentage of revenues
decreased to 23.2% in the three-month period ended September 30,
2002 from 24.1% in the three-month period ended September 30, 2001.
Operating expenses (including non-cash charges for depreciation and
amortization) increased by approximately $766,000 (5.7%) between
the 2002 and 2001 three-month periods presented. Of this increase,
approximately $322,000 may be attributed to the operating expenses
of new distribution centers, increased payroll and related expenses
of approximately $447,000 and an increase in the reserve for
doubtful accounts of approximately $157,000, offset by reductions
of various other operating expenses. During the current three-
month period ended September 30, 2002, management commenced expense
reductions that are currently anticipated to reduce operating
expenses inclusive of payroll and other items, when fully
implemented, by approximately $2.7 million on an annualized basis.
Depreciation and amortization and amortization of deferred
financing costs decreased by an aggregate of approximately $20,000
(5.5%) between the 2002 and 2001 three-month periods. Operating
expenses as a percentage of revenues were 23.1% in the three-month
period ended September 30, 2002 compared to 20% in the three-month
period ended September 30, 2001.
Interest income decreased by approximately $34,000 (39.6%) between
the 2002 and 2001 three-month periods presented. This decrease is
due to lower rates of interest earned on short-term investments.
Interest expense decreased by approximately $205,000 (28.8%)
between the 2002 and 2001 three-month periods presented. This
decrease is due to lower rates of interest charged on borrowings
under the Company's revolving credit facility.
11
Liquidity and Capital Resources
The Company's working capital was approximately $44,222,000 and
$45,188,000 at September 30, 2002 and June 30, 2002, respectively.
At September 30, 2002, the Company's current ratio was 2.28 to 1
compared to 2.24 to 1 at June 30, 2002.
Cash used in operating activities for the three months ended
September 30, 2002 was approximately $625,000. Such amount
consisted primarily of a net loss of $227,000, increased levels of
accounts and notes receivable of $905,000, deferred income taxes of
$146,000 and other current assets of $28,000, decreased levels of
accounts payable of $1,307,000, accrued expenses and other current
liabilities of $431,000 and federal and state income taxes of
$6,000, offset by depreciation and amortization of $346,000, and
increased levels of allowance for doubtful accounts of $638,000 and
inventories of $1,441,000.
Cash used in investing activities during the three months ended
September 30, 2002 was approximately $98,000 for capital
expenditures. Management of the Company presently anticipates
capital expenditures in the next twelve months of not less than
$650,000, of which approximately $400,000 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 better in its market areas.
Cash used in financing activities during the three months ended
September 30, 2002 was approximately $1,083,000. Such amount
consisted primarily of a net decrease in principal borrowings on
long-term debt of $1,078,000 and an increase in additional paid-in
capital of $5,000.
Acquisitions
In July 1997, JEH/Eagle Supply, Inc. ("JEH Eagle"), currently a
wholly-owned subsidiary of the Company, acquired the business and
substantially all of the assets of JEH Company ("JEH Co."), a Texas
corporation, wholly-owned by the current President of the Company.
In addition to the initial purchase price, certain, potentially
substantial, contingent payments, as additional future
consideration to JEH Co. or its designee, were to be paid by JEH
Eagle. For the fiscal year ended June 30, 2001, additional
consideration of approximately $315,000 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. As of September 30,
2002, the balance of the initial purchase price in the amount of
$655,284 was payable on October 15, 2002, and such amount was paid
on that date.
In October 1998, MSI Eagle Supply, Inc. ("MSI Eagle"), then a
wholly-owned subsidiary of TDA and later of the Company (see below)
which subsequently merged with and into JEH Eagle, acquired the
business and substantially all of the assets of Masonry Supply,
Inc. ("MSI Co."), a Texas corporation. In addition to the initial
purchase price, 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.) For the fiscal year
ended June 30, 2001, additional consideration of approximately
$226,000 was paid to MSI Co. or its designee. For the fiscal year
ended June 30, 2002, additional consideration of approximately
$315,000 is payable to MSI Co. or its designee. All of such
additional consideration increased goodwill.
JEH Eagle and MSI Eagle were originally wholly-owned subsidiaries
of TDA which were acquired by the Company simultaneously with the
consummation of our initial public offering in March 1999.
12
Credit Facilities
In June 2000, and as subsequently amended, 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 increased the
Company's 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 was
made available for acquisitions. This credit facility bears
interest as follows (with the alternatives at the Company's
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 (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 and is guaranteed
by the Company.
In October 1998, in connection with the purchase of substantially
all of the assets and business of MSI Co. by MSI Eagle, TDA lent
MSI Eagle $1,000,000 pursuant to a 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
General inflation in the economy has driven the operating expenses
of many businesses higher, and, accordingly, the Company has
experienced increased salaries and higher prices for supplies,
goods and services. The Company continuously seeks methods of
reducing costs and streamlining operations while maximizing
efficiency through improved internal operating procedures and
controls. While the Company is subject to inflation as described
above, management believes that inflation currently does not have a
material effect on operating results, but there can be no assurance
that this will continue to be so in the future.
Recent Developments
On November 13, 2002, senior management of the Company received
information that certain sales at two of its distribution centers
were not fully recorded in a timely manner. Management is
currently reviewing the matter, but, based on the information
presently available, the sums involved do not appear substantial in
relation to the total sales of the distribution centers or the
Company.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, Accounting for Asset Retirement Obligations.
SFAS No. 143 addresses financial accounting and reporting for
obligations and costs associated with the retirement of tangible
long-lived assets. The Company implemented SFAS No. 143 on July 1,
2002. Management believes that the effect of implementing this
pronouncement did not have a material impact on the Company's
financial condition or results of operations.
13
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 did not have a material impact on the Company's
financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. This statement rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishments of Debt, and an
amendment of that statement, SFAS No. 64, Extinguishment of Debt
Made to Satisfy Sinking-Fund Requirements. This statement also
rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. This statement amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under
changed conditions. The provisions of this statement are effective
for transactions occurring, and financial statements issued, on or
after May 15, 2002. The Company adopted the provisions of SFAS No.
145 upon the relative effective dates and does not expect it to
have a material effect on the Company's 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. The Company
is currently evaluating the impact of SFAS No. 146 on its financial
condition and results of operations.
14
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's carrying value of cash, trade accounts receivable,
notes receivable, inventories, goodwill, accounts payable, accrued
expenses, taxes payable and its existing line of credit facility are
a reasonable approximation of their fair value.
The Company has not entered into, and does not expect to enter into,
financial instruments for trading or hedging purposes.
The Company is currently exposed to material future earnings or cash
flow fluctuations from changes in interest rates on long-term debt
obligations since the majority of the Company's long-term debt
obligations are at variable rates. The Company does not currently
anticipate entering into interest rate swaps and/or other similar
instruments.
The Company's business is subject to certain risks, including, but
not limited to, differing economic conditions, competition, loss of
significant customers or customers' inability to make required
payments, changes in political climate, differing tax structures and
other governmental regulations and restrictions. The Company's
future results could be materially and adversely impacted by changes
in these or other factors. (See also "Risk Factors" in the
Company's filings with the Securities and Exchange Commission
(including its Forms 10-K and registration statements) for a
description of some, but not all, risks, uncertainties and
contingencies.)
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Our Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of our disclosure controls
and procedures, as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as of a date within 90
days prior to the filing date of this quarterly report
(the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective in
relating to us, including our consolidated subsidiaries,
that is required to be included in our reports filed or
submitted under the Exchange Act.
(b) Changes in Internal Controls
----------------------------
Since the Evaluation Date, there have not been any
significant changes in our internal controls or in other
factors that could significantly affect such controls.
* * * * *
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this Report:
None
(b) Reports on Form 8-K:
On September 13, 2002, the Company filed a Current Report
on Form 8-K under Item 5. relating to the failure to close
the second tranche of the May 2002 private placement
transaction for the sale of Company's common stock and
warrants, and reporting that the Company had issued a press
release relating to the failure to close the second tranche.
A copy of the press release was filed therewith as Exhibit
99.1.
On September 30, 2002, the Company filed a Current Report on
Form 8-K under Item 9 reporting that the Company had issued
a press release relating to its fourth quarter and fiscal
year end results (June 30, 2002), a copy of which was filed
therewith as Exhibit 99.1. The press release included
Condensed Statements of Operations of the Company for the
fiscal years ended June 30, 2002 and 2001 and for the fourth
quarters ended June 30, 2002 and 2001, as well as selected
balance sheet data for the fiscal years ended June 30, 2002
and 2001.
On September 30, 2002, the Company filed a Current Report on
Form 8-K under Item 9 to disclose that the certificates
required by 18 U.S.C. Sec. 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-K for
the fiscal year ended June 30, 2002. The Chief Executive
Officer's certificate was filed therewith as Exhibit 99.1 and
the Chief Financial Officer's certificate was filed therewith
as Exhibit 99.2.
16
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EAGLE SUPPLY GROUP, INC.
Dated: November 14, 2002 By: /s/ Douglas P. Fields
----------------------------------
Douglas P. Fields, Chairman of the
Board of Directors, Chief Executive
Officer and a Director (Principal
Executive Officer)
Dated: November 14, 2002 By: /s/ Frederick M. Friedman
----------------------------------
Frederick M. Friedman, Executive
Vice President, Treasurer,
Secretary and a Director (Principal
Financial and Accounting Officer)
17
CERTIFICATIONS
--------------
I, Douglas P. Fields, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle
Supply Group, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing of this quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to that date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/Douglas P. Fields
----------------------------------
Douglas P. Fields
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
18
CERTIFICATIONS
--------------
I, Frederick M. Friedman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle
Supply Group, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing of this quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to that date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Frederick M. Friedman
---------------------------------
Frederick M. Friedman
Chief Financial Officer
(Principal Financial Officer)
19