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 March 31, 2003
----------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number: 000-25423
------------------
EAGLE SUPPLY GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3889248
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
122 East 42nd Street, Suite 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)
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of the Registrant's Common Stock, as
of May 9, 2003, was 10,255,455 shares.
EAGLE SUPPLY GROUP, INC.
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003
(Unaudited) and June 30, 2002 3
Consolidated Statements of Operations (Unaudited) for
the Three Months and Nine Months Ended March 31, 2003
and 2002 4
Consolidated Statement of Shareholders' Equity
(Unaudited) for the Nine Months Ended March 31, 2003 6
Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended March 31, 2003 and 2002 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 32
CERTIFICATIONS 33
EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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March 31, June 30,
2003 2002
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 674,558 $ 5,355,070
Accounts and notes receivable - trade
(net of allowance for doubtful accounts) 28,597,820 38,875,947
Inventories 36,005,206 32,690,546
Deferred tax asset 2,859,000 1,910,000
Assets of discontinued operation 256,580 1,722,503
Federal and state income taxes receivable 967,629 -
Other current assets 1,035,645 1,072,394
------------ -------------
Total current assets 70,396,438 81,626,460
PROPERTY AND EQUIPMENT, net 2,885,200 3,602,897
COST IN EXCESS OF NET ASSETS ACQUIRED, net 14,412,014 14,412,014
NOTES RECEIVABLE - TRADE (net of allowance
for doubtful accounts) 2,890,237 -
OTHER ASSETS 26,303 57,664
------------ -------------
$ 90,610,192 $ 99,699,035
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,250,000 $ 1,245,000
Note payable - TDA Industries, Inc. 1,000,000 1,000,000
Note payable - related party - 655,000
Accounts payable 28,962,840 27,695,079
Due to related parties 216,667 -
Accrued expenses and other current
liabilities 4,113,794 5,599,509
Federal and state income taxes payable - 222,444
------------ -------------
Total current liabilities 35,543,301 36,417,032
LONG-TERM DEBT 34,283,029 40,425,435
DEFERRED TAX LIABILITY 1,431,000 1,146,000
------------ -------------
Total liabilities 71,257,330 77,988,467
------------ -------------
SHAREHOLDERS' EQUITY:
Preferred Stock, $.0001 par value per
share, 10,000,000 shares authorized;
none issued and outstanding - -
Common Stock, $.0001 par value per share,
30,000,000 shares authorized; issued and
outstanding - March 31, 2003 - 10,055,455
shares; June 30, 2002 - 9,055,455 shares 1,005 905
Class A Non-Voting Common Stock, $.0001 par
value per share, 10,000,000 shares
authorized; none issued and outstanding - -
Additional paid-in capital 19,212,083 18,248,903
Retained earnings 139,774 3,460,760
------------ -------------
Total shareholders' equity 19,352,862 21,710,568
------------ -------------
$ 90,610,192 $ 99,699,035
============ =============
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2003 AND 2002
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THREE MONTHS NINE MONTHS
2003 2002 2003 2002
REVENUES $ 44,410,764 $ 45,034,479 $ 156,468,812 $ 169,879,986
COST OF SALES 34,288,889 33,437,562 119,259,565 127,458,949
------------ ------------ ------------- -------------
10,121,875 11,596,917 37,209,247 42,421,037
------------ ------------ ------------- -------------
OPERATING EXPENSES (including provisions
for doubtful accounts of $1,484,410,
$335,288, $2,710,247 and $1,258,615,
respectively) 13,343,141 11,285,287 39,620,392 36,692,141
DEPRECIATION AND AMORTIZATION 246,528 374,017 780,883 1,105,003
------------ ------------ ------------- -------------
13,589,669 11,659,304 40,401,275 37,797,144
------------ ------------ ------------- -------------
(LOSS) INCOME FROM
CONTINUING OPERATIONS (3,467,794) (62,387) (3,192,028) 4,623,893
------------ ------------ ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 91,712 40,565 257,489 198,984
Interest expense (340,414) (484,838) (1,282,430) (1,763,593)
------------ ------------ ------------- -------------
(248,702) (444,273) (1,024,941) (1,564,609)
------------ ------------ ------------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES (3,716,496) (506,660) (4,216,969) 3,059,284
(BENEFIT) PROVISION FOR INCOME TAXES (1,326,000) (190,000) (1,500,000) 1,069,000
------------ ------------ ------------- -------------
NET (LOSS) INCOME FROM
CONTINUING OPERATIONS (2,390,496) (316,660) (2,716,969) 1,990,284
------------ ------------ ------------- -------------
DISCONTINUED OPERATION:
Loss from discontinued operation
(including loss on disposal of
$90,000) - (163,470) (306,017) (374,303)
Benefit for income taxes - (61,000) (115,000) (140,000)
------------ ------------ ------------- -------------
LOSS FROM DISCONTINUED OPERATION - (102,470) (191,017) (234,303)
------------ ------------ ------------- -------------
NET (LOSS) INCOME BEFORE EFFECT OF
ACCOUNTING CHANGE (2,390,496) (419,130) (2,907,986) 1,755,981
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAXES - - (413,000) -
------------ ------------ ------------- -------------
NET (LOSS) INCOME $ (2,390,496) $ (419,130) $ (3,320,986) $ 1,755,981
============ ============ ============= =============
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2003 AND 2002 (Cont'd)
- ----------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
2003 2002 2003 2002
BASIC AND DILUTED
NET (LOSS) INCOME PER SHARE:
Net (loss) income from continuing
operations $ (.25) $ (.04) $ (.29) $ .24
Loss from discontinued operation - (.01) (.02) (.03)
Cumulative effect of accounting
change - - (.05) -
---------- ----------- ----------- ------------
$ (.25) $ (.05) $ (.36) $ .21
========== =========== =========== ============
SHARES OF COMMON STOCK USED IN
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE 9,644,344 8,510,000 9,248,886 8,510,000
========== =========== =========== ============
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2003
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 - - - - - (3,320,986) (3,320,986)
Proceeds from private placement of
Common Stock and Warrants, net
of expenses - - 1,000,000 100 963,180 - 963,280
------- ------- ---------- ------- ------------ ----------- ------------
BALANCE, MARCH 31, 2003 - $ - 10,055,455 $ 1,005 $ 19,212,083 $ 139,774 $ 19,352,862
======= ======= ========== ======= ============ =========== ============
See notes to unaudited consolidated financial statements.
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EAGLE SUPPLY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
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2003 2002
OPERATING ACTIVITIES:
Net (loss) income from continuing
operations $ (2,716,969) $ 1,990,284
Loss from discontinued operation,
net of taxes (191,017) (234,303)
Cumulative effect of accounting change,
net of taxes (413,000) -
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization 795,937 1,134,751
Deferred income taxes (664,000) (135,013)
Increase in allowance for doubtful
accounts 2,398,319 1,090,295
Changes in assets and liabilities:
Decrease (increase) in accounts
and notes receivable 4,989,571 (70,263)
Increase in inventories (3,314,660) (4,415,083)
Decrease in assets of discontinued
operation 1,465,923 -
Decrease (increase) in other
current assets 36,749 (132,182)
Increase in accounts payable 1,267,761 799,059
Increase in due to related parties 216,667 -
Decrease in accrued expenses and
other current liabilities (1,485,715) (345,006)
(Decrease) increase in federal and
state income taxes (1,190,073) 681,059
------------- --------------
Net cash provided by operating
activities 1,195,493 363,598
------------- --------------
INVESTING ACTIVITIES:
Capital expenditures (46,879) (301,922)
Payment of contingent consideration for
the purchase of JEH Co. - (314,864)
Payment of contingent consideration for
the purchase of MSI Co. - (225,981)
------------- --------------
Net cash used in investing
activities (46,879) (842,767)
------------- --------------
FINANCING ACTIVITIES:
Principal borrowings on long-term debt 172,901,330 205,970,097
Principal reductions on long-term debt (179,693,736) (207,365,017)
Proceed from private placement, net of
related expenses 963,280 -
------------- --------------
Net cash used in financing
activities (5,829,126) (1,394,920)
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,680,512) (1,874,089)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 5,355,070 5,679,891
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 674,558 $ 3,805,802
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 1,282,430 $ 1,763,651
============= ==============
Cash paid during the period for income
taxes $ 29,548 $ 382,954
============= ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW
INFORMATION:
Reclassification of notes receivable
- trade (net of allowance for
doubtful accounts) $ 2,890,237 $ -
============= ==============
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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 and nine months ended March
31, 2003 and 2002 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 on May 1, 1996,
as a Delaware corporation, 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 - 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 shares of common stock 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 and nine months
ended March 31, 2003 and 2002, comprehensive income (loss) was
equal to net income (loss).
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.
-8-
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 transfers to the customer upon delivery to the
customer's job site or upon pick up by the customer at a Company
distribution center.
Reclassifications - Certain reclassifications have been made in the
prior periods' financial statements in order to conform to the
classifications in the current periods.
2. ACCOUNTS AND NOTES RECEIVABLE - TRADE
Accounts and notes receivable - trade are as follows:
March 31, June 30,
2003 2002
(See Note)
Accounts receivable $ 33,355,887 $ 43,320,881
Notes receivable 5,082,164 106,741
------------- -------------
38,438,051 43,427,622
Allowance for doubtful accounts (6,949,994) (4,551,675)
------------- -------------
$ 31,488,057 $ 38,875,947
============= =============
Current $ 28,597,820 $ 38,875,947
Long-term 2,890,237 -
------------- -------------
$ 31,488,057 $ 38,875,947
============= =============
Note: At June 30, 2002, as originally reported, accounts and notes
receivable - trade included approximately $756,000 of
accounts receivable of a discontinued operation sold in
January, 2003.
3. NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 does
not have a material impact on the Company's financial condition or
results of operations.
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
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pronouncement does 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
Statement Nos. 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 FASB's Emerging Issues Task
Force ("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 periods
after December 15, 2002, and we have adopted those requirements for
our financial statements included in this Form 10-Q. 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,
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
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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 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. The impact of this accounting change
for the three months and nine months ended March 31, 2003 was an
increase of $405,000 and $20,000, respectively, in cost of sales.
On a comparable basis, the impact of this accounting change for the
three months and nine months ended March 31, 2002 would have been
an increase of $275,000 and a decrease of $30,000, respectively, in
cost of sales.
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.
4. LONG-TERM DEBT
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 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
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to $8 million in borrowing 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 (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 going 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.
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5. STOCK-BASED EMPLOYEE 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 income and earnings per share for the
three-month and nine-month periods ended March 31, 2003 and 2002
would have been reduced to the pro forma amounts indicated below:
THREE MONTHS NINE MONTHS
2003 2002 2003 2002
Net (loss) income $ (2,390,496) $ (419,130) $ (3,320,986) $ 1,755,981
Deduct - compensation costs,
net of taxes (32,070) (32,070) (96,211) (96,211)
------------ ------------ ------------ ------------
Proforma net (loss) income $ (2,422,566) $ (451,200) $ (3,417,197) $ 1,659,770
============ ============ ============ ============
Basic and diluted net (loss)
income per share:
As reported $ (.25) $ (.05) $ (.36) $ .21
============ ============ ============ ============
Proforma net (loss) income $ (.25) $ (.05) $ (.37) $ .20
============ ============ ============ ============
The Company used the Black-Scholes model with the following
assumptions in the calculation of fair value: risk-free interest
rate of 5.5%, an expected life of three years, expected volatility
of 19.72% and dividends of 0%.
* * * * *
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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 fact. Accordingly, statements that are based on
management's projections, estimates, assumptions and judgments are
forward-looking statements. These forward-looking statements are
typically identified by words or phrases such as "believes,"
"expects," "anticipates," "plans," "estimates," "approximately,"
"intend," and other similar words and phrases, or future or
conditional verbs such as "will," "should," "would," "could," and
"may." These forward-looking statements are based largely on our
current expectations, assumptions, plans, 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 costs and 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 locate suitable facilities or
personnel to open or maintain distribution center
locations;
* 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 identify suitable acquisition
candidates or, if identified, unable to consummate any
such acquisitions;
* there may be interruptions or cancellations of sources of
supply of products to be distributed or 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);
* weather conditions in our market areas may adversely
affect our business;
* 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;
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* 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;
* 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;
* 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.
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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 determining charges 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, tangible and 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 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 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 required payments when due. Errors by
the Company in estimating its allowances for doubtful accounts and
notes receivable could have a material adverse affect on the
Company's financial position, 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 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
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required, the Company's financial condition, results of operations
and cash flows could be materially adversely affected.
The Company tests for impairment annually and when indicators of
impairment occur. 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 sheets as of
September 30, 2002, December 31, 2002 and March 31, 2003 in light
of the fact that the Company's stock market capitalization of its
outstanding equity securities as of those dates was below its 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 correctly write down goodwill for
impairment could have a material adverse affect on the Company's
financial condition and results of operations. Management will
perform the required annual test for impairment as of June 30,
2003.
The Company identified reporting units by determining the level at
which separate financial statements are prepared and regularly
reviewed by management.
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 of America.
* * * * *
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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 March 31, 2003
Compared to the Three Months Ended March 31, 2002
Revenues of the Company during the three-month period ended March
31, 2003 decreased by approximately $600,000 (1.4%) to
approximately $44.4 million from approximately $45 million in
fiscal 2002. This decrease may be attributed primarily to a
decrease in revenues of approximately $2.3 million generated from
"storm" distribution centers opened for more than one year, offset
by an increase in revenues of approximately $800,000 from storm
centers opened in fiscal 2003 and during the last quarter of fiscal
2002, approximately $500,000 that had been generated from
"greenfield" distribution centers opened for more than one year and
approximately $400,000 from greenfield centers opened in fiscal
2003 and during the last quarter of fiscal 2002.
Cost of sales decreased between the 2003 and 2002 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 77.2% in the three-month period
ended March 31, 2003 from 74.2% in the three-month period ended
March 31, 2002, and gross profit as a percentage of revenues
decreased to 22.8% in the three-month period ended March 31, 2003
from 25.8% in the three-month period ended March 31, 2002. As
stated in Note 3 to the unaudited consolidated financial
statements, the Company adopted EITF 02-16, effective July 1, 2002.
The impact of the accounting change resulting from the adoption of
EITF 02-16 for the three-month period ended March 31, 2003 was an
increase of $405,000 in cost of sales. On a comparable basis, the
impact of this accounting change for the three-month period ended
March 31, 2002 would have been an increase of $275,000 in cost of
sales. Had the effect of EITF 02-16 been recorded in both three-
month periods presented, gross profit as a percentage of revenues
would have been 22.8% in the three-month period ended March 31,
2003 compared to 25.1% in the three-month period ended March 31,
2002.
Operating expenses (including non-cash charges for depreciation and
amortization) increased by approximately $1.9 million (16.6%)
between the 2003 and 2002 three-month periods presented. Of this
increase, approximately $1.1 million may be attributed to an
increase in the reserves for doubtful accounts and notes
receivable, approximately $300,000 in increased insurance premiums
and approximately $300,000 to the operating expenses of new
distribution centers and increases in various other operating
expenses. Regarding the increase in the reserves for doubtful
accounts, during the three-months ended March 31, 2003 the Company
added approximately $1.1 million, net of write-offs of
approximately $344,000, to its reserves for doubtful accounts.
This increase was attributed to the failure of the aging of the
Company's accounts receivable to improve. At March 31, 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 three-months ended March 31, 2003, which historically is
our slowest collection quarter, warranted the increase in the
reserves for doubtful accounts. Approximately $1 million of the
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increase in the reserves for doubtful accounts at March 31, 2003
was attributed to amounts due from certain specific customers
aggregating approximately $6.3 million. These customers accounted
for 1.6% and 3.2% of the Company's total revenues for the three-
month periods ended March 31, 2003 and 2002, respectively.
Depreciation and amortization decreased by an aggregate of
approximately $127,000 (34.1%) between the 2003 and 2002 three-
month periods. Operating expenses (including depreciation and
amortization) as a percentage of revenues were 30.6% in the three-
month period ended March 31, 2003 compared to 25.9% in the three-
month period ended March 31, 2002.
Interest income increased by approximately $51,000 (126.1%) between
the 2003 and 2002 three-month periods presented. This increase is
primarily attributable to interest of approximately $60,000 earned
and collected on notes receivable, offset by lower rates of
interest earned on short-term investments.
Interest expense decreased by approximately $144,000 (29.8%)
between the 2003 and 2002 three-month periods presented. This
decrease is due to lower rates of interest charged on borrowings
under the Company's revolving credit facility.
As reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2002, 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
2003 and 2002 three and nine-month periods presented, and,
accordingly, the previously reported results of operations for the
2002 three and nine-month periods have been restated to reflect
this reclassification of the discontinued operation.
During the three-month period ended September 30, 2002, management
commenced expense reductions that, as previously reported, were
anticipated to reduce operating expenses inclusive of payroll and
other items, when fully implemented, by approximately $2.7 million
on an annualized basis.
In order to service anticipated business resulting from storm
activity which occurred subsequent to March 31, 2003 in some of our
market areas, we have hired personnel and otherwise increased our
operating capacity, the effect of which will be to increase our
operating expenses in the fourth quarter of fiscal 2003 ending June
30, 2003, and subsequent quarters, thereby offsetting some of the
expense reductions that we previously implemented and reported.
The loss from continuing operations for the three-month period
ended March 31, 2003 was consistent with management's expectations
for the quarter.
Nine Months Ended March 31, 2003
Compared to the Nine Months Ended March 31, 2002
Revenues of the Company during the nine-month period ended March
31, 2003 decreased by approximately $13.4 million (7.9%) to
approximately $156.5 million from approximately $169.9 million in
fiscal 2002. This decrease may be attributed primarily to
decreases in revenues of approximately $23.8 million generated from
storm centers opened for more than one year and from storm centers
and greenfield centers closed during fiscal 2003 or during the last
quarter of fiscal 2002 of approximately $200,000 and $1 million,
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respectively, offset by an increase in revenues from storm centers
and greenfield centers opened in fiscal 2003 and during the last
quarter of fiscal 2002 of approximately $3.1 million and $1.1
million, respectively, and approximately $7.5 million that had been
generated from greenfield centers opened for more than one year.
Cost of sales decreased between the 2003 and 2002 nine-month
periods at a lesser rate than the decrease in revenues between
these nine-month periods. Accordingly, cost of sales as a
percentage of revenues increased to 76.2% in the nine-month period
ended March 31, 2003 from 75% in the nine-month period ended March
31, 2002, and gross profit as a percentage of revenues decreased to
23.8% in the nine-month period ended March 31, 2003 from 25% in the
nine-month period ended March 31, 2002. As stated in Note 3 to the
unaudited consolidated financial statements, the Company adopted
EITF 02-16, effective July 1, 2002. The impact of the accounting
change resulting from the adoption of EITF 02-16 for the nine-month
period ended March 31, 2003 was an increase of $20,000 in cost of
sales. On a comparable basis, the impact of this accounting change
for the nine-month period ended March 31, 2002 would have been a
decrease of $30,000 in cost of sales. Had the effect of EITF 02-16
been recorded in both nine-month periods presented, gross profit as
a percentage of revenues would have been 23.8% in the nine-month
period ended March 31, 2003 compared to 25% in the nine-month
period ended March 31, 2002.
Operating expenses (including non-cash charges for depreciation and
amortization) increased by approximately $2.6 million (6.9%)
between the 2003 and 2002 nine-month periods presented. This
increase may be attributed to an increase in the reserves for
doubtful accounts and notes receivable of approximately $1.5
million, approximately $700,000 in increased insurance premiums and
approximately $900,000 to the operating expenses of new
distribution centers, offset by decreases in various other
operating expenses. Depreciation and amortization decreased by an
aggregate of approximately $324,000 (29.3%) between the 2003 and
2002 nine-month periods. Operating expenses (including
depreciation and amortization) as a percentage of revenues were
25.8% in the nine-month period ended March 31, 2003 compared to
22.2% in the nine-month period ended March 31, 2002.
Interest income increased by approximately $58,000 (29.4%) between
the 2003 and 2002 nine-month periods presented. This increase is
primarily attributable to interest of approximately $125,000 earned
and collected on notes receivable, offset by lower rates of
interest earned on short-term investments of approximately $67,000.
Interest expense decreased by approximately $481,000 (27.3%)
between the 2003 and 2002 nine-month periods presented. This
decrease is due to lower rates of interest charged on borrowings
under the Company's revolving credit facility.
As reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2002, 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
2003 and 2002 three and nine-month periods presented, and,
accordingly, the previously reported results of operations for the
2002 three and nine-month periods have been restated to reflect
this reclassification of the discontinued operation.
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During the three-month period ended September 30, 2002, management
commenced expense reductions that, as previously reported, were
anticipated to reduce operating expenses inclusive of payroll and
other items, when fully implemented, by approximately $2.7 million
on an annualized basis.
In order to service anticipated business resulting from storm
activity which occurred subsequent to March 31, 2003 in some of our
market areas, we have hired personnel and otherwise increased our
operating capacity, the effect of which will be to increase our
operating expenses in the fourth quarter of fiscal 2003 ending June
30, 2003, and subsequent quarters, thereby offsetting some of the
expense reductions that we previously implemented and reported.
The loss from continuing operations for the nine-month period ended
March 31, 2003 was consistent with management's expectations.
Liquidity and Capital Resources
The Company's working capital was approximately $34,853,000 and
$45,209,000 at March 31, 2003 and June 30, 2002, respectively. At
March 31, 2003, the Company's current ratio was 1.98 to 1 compared
to 2.24 to 1 at June 30, 2002.
Net cash provided by operating activities for the nine months ended
March 31, 2003 increased by approximately $800,000 to approximately
$1.2 million from approximately $360,000 for the nine months ended
March 31, 2002. This increase was attributed principally to
increases in reserves for doubtful accounts of approximately $1.3
million attributed to the deterioration in the aging of the
Company's accounts and notes receivable and decreases in accounts
and notes receivable of approximately $5.1 million, assets of a
discontinued operation of approximately $1.5 million, inventories
of $1.1 million, and increases in accounts payable of approximately
$500,000 and due to related parties of approximately $200,000,
offset by a decreases in net income of approximately $5 million,
depreciation and amortization of approximately $300,000, accrued
expenses and other current liabilities of approximately $1.1
million and federal and state income taxes of approximately $1.9
million and an increase in deferred income taxes of approximately
$500,000.
Net cash used in investing activities for the nine months ended
March 31, 2003 decreased by approximately $800,000 to approximately
$50,000 from approximately $850,000 for the nine months ended March
31, 2002. This decrease may be attributed to a decrease in capital
expenditures of approximately $250,000 and a decrease of
approximately $550,000 in contingent consideration payments of
acquired companies. Management of the Company presently anticipates
capital expenditures in the next twelve months of not less than
$400,000, of which approximately $100,000 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.
Net cash used in financing activities for the nine months ended
March 31, 2003 increased by approximately $4.4 million to
approximately $5.8 million from approximately $1.4 million for the
nine months ended March 31, 2002. This increase may be attributed
to an increase in principal repayments of long-term debt of
approximately $5.4 million, offset by the net proceeds from the
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private placement of common of stock and warrants of approximately
$968,000.
In February 2003, the Company's President, James E. Helzer,
invested $1,000,000 in cash in the Company by purchasing one
million newly issued, unregistered shares of the Company's common
stock and a newly issued, unregistered common stock purchase
warrant to purchase an additional one million shares of the
Company's common stock at an exercise price of $1.50 per share for
five years from the date of issuance. Pursuant to the terms of his
investment, the exercise price of the warrant is subject to 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 transactions in which the Company
issues and sells its common stock at a price below the then-current
exercise price of the warrant (a "Diluting Issuance"). Under the
terms of the warrant, Mr. Helzer is required to seek approval of
the Company's stockholders for (a) any adjustment of the exercise
price of the warrant below $0.875 per warrant share due to a
Diluting Issuance and (b) prior to exercising the warrant for more
than 811,090 warrant shares. The Company anticipates holding a
stockholder vote on these matters during the fiscal quarter ending
June 30, 2003. In addition, commencing on August 6, 2003, Mr.
Helzer is entitled to demand the filing of a Form S-3 Registration
Statement with the Securities and Exchange Commission to register
the shares of common stock that he purchased in the transaction, as
well as the shares issuable upon exercise of the warrant.
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, was 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. The balance of the
initial purchase price in the amount of $655,284 was paid in cash
on October 15, 2002.
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
$260,000 was payable to MSI Co. or its designee as of March 31,
2003, which was paid in May 2003. All of such additional
consideration increased goodwill.
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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.
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 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 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 (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 going 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.
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
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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.
Recent Developments
During the nine-month period ended March 31, 2003, the Company
reclassified approximately $2.9 million, net of allowance for
doubtful accounts, 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 payment 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 11 months and
slightly longer than 7 years as of March 31, 2003. Those notes
receivable with maturity dates longer than 12 months are those that
were reclassified to long-term. Given the uncertainty associated
with these past due accounts, the Company is recognizing interest
income on these notes on a cash basis.
In February 2003, the Company's Chairman and Chief Executive
Officer, Douglas P. Fields, and its Executive Vice President and
Chief Financial Officer, Frederick M. Friedman, have each agreed to
accept $100,000 of their cash compensation for the Company's
current fiscal year ending 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.
During the three-month period ended September 30, 2002, management
commenced expense reductions that, as previously reported, were
anticipated to reduce operating expenses inclusive of payroll and
other items, when fully implemented, by approximately $2.7 million
on an annualized basis.
In order to service anticipated business resulting from storm
activity which occurred subsequent to March 31, 2003 in some of our
market areas, we have hired personnel and otherwise increased our
operating capacity, the effect of which will be to increase our
operating expenses in the fourth quarter of fiscal 2003 ending June
30, 2003, and subsequent quarters, thereby offsetting some of the
expense reductions that we previously implemented and reported.
The loss from continuing operations for the nine-month period ended
March 31, 2003 was consistent with management's expectations.
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. 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 received a letter from Nasdaq which noted the failure to
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satisfy the minimum closing price rule and advised the Company that
Nasdaq would not commence any delisting action at that time. In
its letter, Nasdaq further advised the Company that if it can come
into compliance with its minimum closing bid rules at any time
during the one hundred and eighty (180) calendar days following
February 11, 2003, no delisting proceedings would be commenced. In
order to come into compliance with the minimum closing price rules,
the closing bid price per share of the Company's common stock must
be at least $1.00 for ten (10) consecutive trading days ("Minimum
Closing Price Requirement"). If the Company did not meet 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 is able to satisfy otherwise
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. As of the
date hereof, the Company believes that is has met the Minimum
Closing Price Requirement but has not been so notified by NASDAQ.
There can be no assurance that the Company may not become subject
to delisting from the Nasdaq SmallCap Market in the future.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 does
not have a material impact on the Company's financial condition or
results of operations.
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 April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statement Nos. 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
-25-
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 FASB's Emerging Issues Task
Force ("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 periods
after December 15, 2002, and we have adopted those requirements for
our financial statements included in this Form 10-Q. 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,
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
-26-
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 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. The impact of this accounting change
for the three months and nine months ended March 31, 2003 was an
increase of $405,000 and $20,000, respectively, in cost of sales.
On a comparable basis, the impact of this accounting change for the
three months and nine months ended March 31, 2002 would have been
an increase of $275,000 and a decrease of $30,000, respectively, in
cost of sales.
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.
-27-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's carrying value of cash and cash equivalents, trade
accounts and notes receivable, inventories, deferred tax asset,
income taxes receivable, goodwill, accounts payable, accrued
expenses, deferred tax liability 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. Based on the amount outstanding
as of March 31, 2003, a 100 basis point change in interest rates
would result in an approximate $335,000 charge to the Company's
annual interest expense. 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, customers' inability to make required
payments, changes in political climate, differing tax structures,
changes in accounting rules and requirements, 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.)
There have been no material changes in the Company's market risk
since June 30, 2002. For information regarding the Company's
market risk, please refer to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2002.
Item 4. Controls and Procedures
In meeting our responsibility for the reliability of our financial
statements, the Company maintains a system of internal controls.
This system is designed to provide management with reasonable
assurance that assets are safeguarded and transactions are executed
in accordance with the appropriate corporate authorization and
recorded properly to permit the preparation of the financial
statements in accordance with accounting principles generally
accepted in the United States of America. The concept of
reasonable assurance recognizes that the design, monitoring and
revision of internal accounting and other controls involve, among
other considerations, management's judgments with respect to the
relative costs and expected benefits of specific control measures.
An effective system of internal controls, no matter how well
designed, has inherent limitations and may not prevent or detect a
material misstatement in published financial statements.
Nevertheless, management believes that its system of internal
controls provides reasonable assurance with respect to the
reliability of its consolidated financial statements.
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
-28-
Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material
information relating to us, including our consolidated
subsidiaries, that is required to be included in our reports filed
or submitted under the Exchange Act. 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.
* * * * *
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this Report:
Exhibit Description
- ------- -----------
10.57 Fifth Amendment to Amended, Restated and Consolidated Loan
and Security Agreement and First Amendment to Subordination
Agreement.
(b) Reports on Form 8-K:
On February 7, 2003, the Company filed a Current Report on Form
8-K under Item 5 to (i) disclose that the Company had entered
into a Securities Purchase Agreement ("Securities Purchase
Agreement") with James E. Helzer to sell shares of the Company's
newly issued common stock, and a warrant to purchase additional
shares of newly issued common stock (the "Warrant") in a private
placement transaction for gross proceeds to the Company, prior
to the deduction of fees and expenses, of $1,000,000 and to
include the press release issued by the Company announcing the
consummation of the private placement offering and other
matters. A copy of the Securities Purchase Agreement, the
Warrant, the related fairness opinions and the press release
were filed therewith as Exhibit 4.1, Exhibit 4.2, Exhibit 99.1,
Exhibit 99.2 and Exhibit 99.3, respectively.
On February 14, 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. Section 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 quarter ended December
31, 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.
On February 18, 2003, the Company filed a Current Report on Form
8-K and a Form 8-K/A (which included certain corrections to the
Form 8-K) under Item 9 reporting that the Company had issued a
press release on February 14, 2003 announcing its earnings for
the quarter ended December 31, 2002, certain business plans and
objectives, and consummation of a private placement transaction
with the Company's President and Chief Operating Officer, a copy
of which was filed therewith as Exhibit 99.1. The press release
included Condensed Statements of Operations of the Company for
the second quarters ended December 31, 2002 and 2001, as well as
selected balance sheet data for December 31, 2002 and the fiscal
year ended June 30, 2002.
On February 26, 2003, the Company filed a Current Report on Form
8-K under Item 9 regarding the Company's projected revenues, net
income, and earnings per share for the fourth quarter of the
current fiscal year ending June 30, 2003, and for our 2004
fiscal year ending June 30, 2004.
On April 11, 2003, the Company filed a Current Report on Form 8-
K under Item 9 reporting that (i) unusual and severe storm
activity recently has taken place in certain of the Company's
existing market areas and the potential impact thereof on and
(ii) it anticipated that it would report a loss for the quarter
-30-
ended March 31, 2003, which will be announced in the middle of
May 2003.
On May 12, 2003, the Company filed a Current Report on Form 8-K
under Item 5 to disclose that after discussions with Nasdaq, the
Company had entered into a First Amendment to Securities
Purchase Agreement, dated May 5, 2003, with James E. Helzer and
TDA Industries, Inc., and a First Amendment to Warrant, dated
May 5, 2003, to include changes requiring certain stockholder
approvals prior to the exercise of the warrants under certain
circumstances. A copy of the First Amendment to Securities
Purchase Agreement and the First Amendment to Warrant were filed
therewith as Exhibit 4.1 and Exhibit 4.2, respectively.
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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: May 14, 2003 By: /s/ Douglas P. Fields
-------------------------------
Douglas P. Fields, Chairman
of the Board of Directors,
Chief Executive Officer and a
Director (Principal Executive
Officer)
Dated: May 14, 2003 By: /s/ Frederick M. Friedman
--------------------------------
Frederick M. Friedman, Executive
Vice President, Treasurer,
Secretary and a Director
(Principal Financial and
Accounting Officer)
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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 the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/Douglas P. Fields
----------------------------------
Douglas P. Fields
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
-33-
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 the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Frederick M. Friedman
-------------------------------
Frederick M. Friedman
Chief Financial Officer
(Principal Financial Officer)
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