<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1998
REGISTRATION NO. 333-09951
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(Amendment No. 4)
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EAGLE SUPPLY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5033 13-3889248
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
122 EAST 42ND STREET
SUITE 1116
NEW YORK, NEW YORK 10168
(212) 986-6190
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
DOUGLAS P. FIELDS
CHIEF EXECUTIVE OFFICER
EAGLE SUPPLY GROUP, INC.
122 EAST 42ND STREET
SUITE 1116
NEW YORK, NEW YORK 10168
(212) 986-6190
------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
Robert Perez, Esq. David A. Carter, P.A.
Gusrae, Kaplan & Bruno 2300 Glades Road, Suite 210W
120 Wall Street Boca Raton, Florida 33431
New York, New York 10005 Tel No. (561) 750-6999
Tel No. (212) 269-1400 Fax No. (561) 367-0960
Fax No. (212) 809-5449
</TABLE>
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) FEE(11)
<S> <C> <C> <C> <C>
Common Stock, $.0001 par value 2,875,000(2) $ 5.00 $ 14,375,000 $4,670.39
Redeemable Common Stock Purchase Warrants 2,875,000(3) $ .125 $ 359,375 $ 116.76
Common Stock, $.0001 par value(4) 2,875,000 $ 5.00 $ 14,375,000 $4,670.39
Underwriter's Stock Warrants(5) 250,000 $ .0001 $ 25 $ .01
Common Stock, $.0001 par value(6) 250,000 $ 8.25 $ 2,062,500 $ 653.04
Underwriter's Warrants(7) 250,000 $ .0001 $ 25 $ .01
Common Stock Purchase Warrants(8) 250,000 $ .20625 $ 51,563 $ 16.75
Common Stock, $.0001 par value(9) 250,000 $ 8.25 $ 2,062,500 $ 670.01
Common Stock, $.0001 par value(10) 300,000 $ 5.00 $ 1,500,000 $ 517.24
TOTALS $11,314.60*
</TABLE>
- ------------------------
* Filing Fee of $7,401.26 paid with initial filing on August 12, 1996;
additional fee of $5,283.31 paid with the filing of Amendment No. 2 on May
1, 1998 and $1,069.78 paid with filing of Amendment No. 3 on July 1, 1998.
SEE FOOTNOTES ON FOLLOWING PAGE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 375,000 shares of Common Stock subject to the Underwriter's
overallotment option and assumes the overallotment option is exercised in
full.
(3) Includes 375,000 Redeemable Common Stock Purchase Warrants subject to the
Underwriter's overallotment option and assumes the overallotment option is
exercised in full.
(4) Issuable upon exercise of the Redeemable Common Stock Purchase Warrants
referred to in the prior note.
(5) To be issued to the Underwriter, entitling the Underwriter to purchase up to
250,000 shares of Common Stock.
(6) Issuable upon the exercise of the Underwriter's Stock Warrants.
(7) To be issued to the Underwriter, entitling the Underwriter to purchase up to
250,000 Common Stock Purchase Warrants.
(8) Issuable upon the exercise of the Underwriter's Warrants.
(9) Issuable upon the exercise of the Common Stock Purchase Warrants identified
in the prior note.
(10) Issuable upon the exercise of the Redeemable Common Stock Purchase
Warrants, which shares are to be sold by the Selling Securityholders.
(11) Calculated by reference to the required filing fee at the time of the
initial registration of a security.
Pursuant to Rule 416, there are also being registered such additional but
indeterminate number of shares as may become issuable pursuant to anti-dilution
provisions of the Redeemable Common Stock Purchase Warrants and the
Underwriter's Stock Warrants and Underwriter's Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with an offering by the Company of shares of Common Stock and
Redeemable Common Stock Purchase Warrants (the "Prospectus") and one to be used
in connection with the sale of shares of the Company's Common Stock underlying
Warrants by certain selling securityholders (the "Selling Securityholders'
Prospectus"). The Prospectus and the Selling Securityholders' Prospectus will be
identical in all respects except for the alternate pages for the Selling
Securityholders' Prospectus included herein which are labeled "Alternate Page(s)
for the Selling Securityholders' Prospectus".
iii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 28, 1998
EAGLE SUPPLY GROUP, INC.
2,500,000 SHARES OF COMMON STOCK AND
2,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Eagle Supply Group, Inc. (the "Company") is offering hereby 2,500,000 shares
of Common Stock (the "Common Stock") and 2,500,000 Redeemable Common Stock
Purchase Warrants (the "Warrants") of the Company (hereinafter the "Public
Offering"). The shares of Common Stock and Warrants are being offered to the
public at the initial offering prices of $5.00 per share and $0.125 per warrant,
respectively. The Common Stock and the Warrants (collectively, the "Securities")
are being separately offered, not as units, and are separately transferable at
any time from the date of this Prospectus (the "Effective Date"). Each purchaser
of shares of the Company's Common Stock in the Public Offering will be entitled,
but not required, to purchase an equal number of Warrants. Each Warrant entitles
the registered holder thereof to purchase, at any time during the period
commencing on the Effective Date, one share of Common Stock at a price of $5.50
per share, subject to adjustment under certain circumstances, for a period of
five years from the Effective Date. The Warrants offered hereby are not
exercisable unless, at the time of exercise, the Company has a current
prospectus encompassing the shares of Common Stock issuable upon exercise of the
Warrants and such shares have been registered, qualified or deemed to be exempt
under the securities laws of the states of residence of the exercising holders
of the Warrants. Commencing after the Effective Date, the Warrants are subject
to redemption by the Company at $.25 per Warrant on 30 days' prior written
notice if the market price (as defined herein) for the Company's Common Stock,
as reported on NASDAQ SmallCap Market ("NASDAQ SmallCap") or a national or
regional securities exchange, as applicable, for 30 consecutive trading days
ending within 10 days of the notice of redemption of the Warrants averages at
least $10.00 per share. The Company is required to maintain an effective
registration statement with respect to the Common Stock underlying the Warrants
at the time of redemption of the Warrants. Prior to the first anniversary of the
Effective Date, the Warrants will not be redeemable by the Company without the
written consent of Barron Chase Securities, Inc. (the "Underwriter").
The offering price of the Common Stock and Warrants as well as the exercise
price and other terms of the Warrants have been determined by negotiation
between the Company and the Underwriter, and bear no relationship to the
Company's asset value, net worth or other established criteria of value. See
"RISK FACTORS" at page 10, and "Underwriting." After completion of the Public
Offering, the Company's current officers and directors and their affiliates will
have voting control of approximately 67% of the outstanding shares of Common
Stock. The Company has advised the Underwriter that it may purchase, and the
Underwriter has advised the Company that it will permit such, up to 100,000
shares of the Common Stock and a like number of the Warrants offered hereby. See
"Principal Stockholders" and "Underwriting."
Simultaneously with the Public Offering, 300,000 shares of Common Stock
underlying Warrants held by certain individuals (hereinafter the "Selling
Securityholders" and "Selling Securityholders' Offering") are being offered for
resale from time to time. To permit such resale, the Company has included the
said Selling Securityholders' securities in the Company in the Registration
Statement of which this Prospectus forms a part and are to be offered by the
Selling Securityholders by a separate prospectus also included therein. The
Selling Securityholders may not sell or otherwise dispose of their shares of
Common Stock underlying their Warrants for a period of fifteen months from the
Effective Date without the Underwriter's prior written consent. The Company will
not receive any proceeds from sales of the shares of the Company's Common Stock
by the Selling Securityholders. See "Selling Securityholders."
Prior to the Public Offering, there has been no public market for the Common
Stock or the Warrants. The Company's Common Stock and the Warrants have been
approved for quotation under the symbols " " and " ", respectively, on
NASDAQ SmallCap. There can be no assurance that a trading market in the
Company's Common Stock or Warrants will develop or if it does develop that it
will be sustained. The closing of the Public Offering is subject to the
simultaneous acquisition by the Company of Eagle Supply, Inc., JEH/Eagle Supply,
Inc. and MSI/Eagle Supply, Inc.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK, IMMEDIATE AND SUBSTANTIAL
DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF
THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE 10 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO PUBLIC DISCOUNT(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Share............................................ $5.00 $0.50 $4.50
Per Warrant.......................................... $0.125 $0.0125 $0.1125
Total(3)............................................. $12,812,500.00 $1,281,250.00 $11,531,250.00
</TABLE>
(footnotes on following page)
[LOGO]
The date of this Prospectus is , 1999
<PAGE>
(1) Does not include additional compensation in the form of (i) a
non-accountable expense allowance of $384,375 ($442,031 if the Underwriter's
overallotment option is exercised in full); (ii) warrants to purchase up to
250,000 shares of Common Stock and 250,000 warrants at an exercise price
equal to 165% of the initial public offering prices of the Common Stock and
Warrants, during the five year period commencing on the Effective Date (the
"Underwriter's Warrants"); and (iii) a financial advisory agreement for the
Underwriter to act as an investment banker for the Company at a fee of
$108,000 payable at the closing of the Public Offering. In addition, the
Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses of this offering payable by the Company estimated
at $796,000 (approximately 6.2% of the gross proceeds of the Public
Offering), excluding the Underwriter's non-accountable expense allowance.
(3) The Company has granted to the Underwriter an option, exercisable within
forty-five (45) days of the Effective Date, to purchase up to 375,000
additional shares of Common Stock and 375,000 additional Warrants on the
same terms and conditions as set forth above to cover overallotments, if any
(the "Overallotment Option"). If all such additional Securities are
purchased, the Price to Public, Underwriting Discount and Proceeds to
Company will be increased to $14,734,375, $1,473,438 and $13,260,937,
respectively. See "Underwriting."
The Securities are offered subject to prior sale, when, as and if delivered
to and accepted by the Underwriter and subject to the approval of certain legal
matters by counsel and certain other conditions. It is expected that delivery of
certificates representing the Securities sold in the Public Offering will be
made at the offices of Barron Chase Securities, Inc., 7700 W. Camino Real, Boca
Raton, Florida 33433-5541, on or about , 1999.
The Company is not presently required to file, and has not filed, periodic
reports with the Securities and Exchange Commission (the "Commission").
Following consummation of the Public Offering, the Company intends to furnish to
its stockholders annual reports containing financial statements audited and
reported on by independent auditors and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
Stockholders will be able to obtain the most recent such reports by making
written request therefor to the Company's stockholder relations officer at the
Company's principal executive offices located at 122 East 42nd Street, Suite
1116, New York, New York 10168.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICES OF THE SHARES AND THE
WARRANTS, INCLUDING PURCHASES OF SHARES, WARRANTS, OR BOTH TO STABILIZE THEIR
RESPECTIVE MARKET PRICES, PURCHASES OF THE SHARES AND THE WARRANTS TO COVER SOME
OR ALL OF A SHORT POSITION THEREIN MAINTAINED BY THE UNDERWRITER, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN
ITS ENTIRETY. EXCEPT AS OTHERWISE INDICATED HEREIN, THE INFORMATION CONTAINED IN
THIS PROSPECTUS GIVES NO EFFECT TO THE EXERCISE OF (I) THE OVERALLOTMENT OPTION,
(II) THE UNDERWRITER'S WARRANTS, (III) ALL OTHER WARRANTS ISSUED AND OUTSTANDING
ON THE DATE OF THIS PROSPECTUS OR (IV) OPTIONS GRANTED OR TO BE GRANTED UNDER
THE COMPANY'S STOCK OPTION PLAN.
THE COMPANY WOULD LIKE TO CAUTION READERS REGARDING CERTAIN FORWARD-LOOKING
STATEMENTS IN THE PROSPECTUS AND THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART. STATEMENTS THAT ARE BASED ON MANAGEMENT'S PROJECTIONS,
ESTIMATES AND ASSUMPTIONS ARE FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVE,"
"EXPECT," "ANTICIPATE," AND SIMILAR EXPRESSIONS GENERALLY IDENTIFY
FORWARD-LOOKING STATEMENTS. WHILE THE COMPANY BELIEVES IN THE VERACITY OF ALL
STATEMENTS MADE HEREIN, FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED UPON A
NUMBER OF ESTIMATES AND ASSUMPTIONS THAT, WHILE CONSIDERED REASONABLE BY THE
COMPANY, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES. MANY OF THESE UNCERTAINTIES AND
CONTINGENCIES CAN AFFECT THE COMPANY'S ACTUAL RESULTS AND COULD CAUSE ITS ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY, OR ON BEHALF OF, THE COMPANY. SOME OF THE FACTORS THAT COULD
CAUSE ACTUAL RESULTS OR FUTURE EVENTS TO DIFFER MATERIALLY INCLUDE THE COMPANY'S
INABILITY TO FIND SUITABLE ACQUISITION CANDIDATES ON TERMS COMMERCIALLY
REASONABLE TO THE COMPANY, INTERRUPTION OR CANCELLATION OF EXISTING SOURCES OF
SUPPLY, THE PRICING OF AND DEMAND FOR DISTRIBUTED PRODUCTS AND THE PRESENCE OF
COMPETITORS WITH GREATER FINANCIAL RESOURCES. PLEASE SEE "RISK FACTORS" FOR A
DESCRIPTION OF SOME, BUT NOT ALL, OF THESE UNCERTAINTIES AND CONTINGENCIES.
THE COMPANY
The Company was organized to raise capital and acquire, own, integrate and
operate seasoned, privately-held companies engaged in the wholesale distribution
of roofing supplies and related products industry and companies which
manufacture products for or supply products to such industry. Simultaneously
with the closing of the Public Offering, the Company will acquire all of the
issued and outstanding equity securities of Eagle Supply, Inc. ("Eagle"),
JEH/Eagle Supply, Inc. ("JEH Eagle") and MSI/Eagle Supply, Inc. ("MSI Eagle")
(the "Acquisitions") from TDA Industries, Inc. ("TDA"), the Company's current
majority stockholder.
Eagle was acquired by TDA in 1973, and JEH Eagle was established by TDA to
acquire the business and substantially all of the assets of JEH Company, Inc.
("JEH Co."). That acquisition was consummated by TDA and JEH Eagle in July 1997.
The product lines, types of customers, vendors, business philosophies, internal
and external expansion plans, and experience of management of Eagle and JEH
Eagle are generally, substantially similar. Together, Eagle and JEH Eagle
operate a network of twenty-eight branches in eight states extending from
Florida to Colorado and back to Minnesota, Indiana and Virginia, specializing in
the wholesale distribution of roofing supplies and related products. MSI Eagle
was established by TDA to acquire the business and substantially all of the
assets of Masonry Supply, Inc. ("MSI Co."). That acquisition was consummated by
TDA and MSI Eagle in October 1998. The business philosophies, internal and
external expansion plans, and experience of management of MSI Eagle are
substantially similar to those of Eagle and JEH Eagle. MSI Eagle distributes
building supplies for residential development. The Company's management believes
that MSI Eagle's product lines are compatible with those of Eagle and JEH Eagle
as all three companies sell from their own warehouses via their own salesmen
with deliveries made by their own drivers and vehicles to the residential
construction industry. All three companies use warehouses and delivery vehicles
which are similar, and all sell to contractors and subcontractors as their
primary customers. Management also believes that the potential exists for the
enhancement of Eagle's and JEH Eagle's product lines by the addition of MSI
Eagle's product lines in certain locations currently being investigated by
management but which have yet to be
3
<PAGE>
decided upon. MSI Eagle's four current distribution centers are located in the
Dallas/Fort Worth metropolitan area.
Eagle, which was founded in Florida in 1905, distributes roofing supplies
and related products to contractors and subcontractors engaged in commercial and
residential roofing repair and the construction of new residential and
commercial properties. Eagle sells to more than 2,400 customers in Florida,
Alabama and the southern portions of Georgia and Mississippi, through its own
distribution facilities and direct sales force. Products distributed by Eagle
include equipment, tools and accessory products for the removal of old roofing,
re-roofing and roof construction, and related materials such as insulation,
shingles, tiles, liquid roofing materials, fasteners, ventilation materials and
sheet metal of the type used in the roofing industry. JEH Eagle sells to more
than 2,700 customers in Texas, Colorado, Indiana, Minnesota and Virginia through
its own distribution facilities and direct sales force. Products distributed by
JEH Eagle also include dry wall, plywood, vinyl siding and similar products used
in the roofing repair and construction industries. JEH Eagle has, on occasion,
established temporary distribution centers in response to storms which have
created a temporary market. MSI Eagle sells to more than 1,700 customers in the
Dallas/Fort Worth metropolitan area though its own distribution facilities and
direct sales force. Products distributed by MSI Eagle include cements, fireplace
components, certain block and brick, angle iron and related materials such as
insulation, solvents, fasteners, tools and equipment used in the residential
construction industry. Upon consummation of the Acquisitions, Eagle, JEH Eagle
and MSI Eagle will become wholly-owned subsidiaries of the Company and will
constitute the business operations of the Company until and unless the Company
consummates additional acquisitions. See "Risk Factors" and "Business."
During Eagle's fiscal years ended June 30, 1997 and 1998 and four-month
period ended October 31, 1998, Eagle had revenues of approximately $57,576,000,
$58,497,000 and $19,102,000, respectively, and net income (loss) of
approximately $192,000, $160,000 and $(143,000), respectively. During JEH Co.'s
fiscal year ended December 31, 1996, six month period ended June 30, 1997 and
fiscal year ended June 30, 1997 , JEH Co. had revenues of approximately
$74,893,000, $28,979,000 and $70,516,000, respectively, and net income (loss) of
approximately $171,000, ($1,179,000) and $(1,815,000), respectively. JEH Eagle,
during its fiscal year ended June 30, 1998 and four-month period ended October
31, 1998, had revenues of approximately $71,006,000 and $31,682,000,
respectively, and net income of approximately $608,000 and $1,306,000,
respectively. During MSI Co.'s fiscal years ended June 30, 1997 and 1998 and
four-month period ended October 31, 1998, MSI Co. had revenues of approximately
$9,101,000, $11,960,000 and $4,341,000, respectively, and net income of
approximately $487,000, $963,000 and $641,000, respectively. There can be no
assurance Eagle's, JEH Eagle's or MSI Eagle's revenues and net income will
continue to be achieved in the future and that they will not sustain losses. See
"Risk Factors" and "Business."
Based upon its management's experience in the industry, the Company believes
that the roofing supply, cement and masonry supply and related products
distribution industries are fragmented and have the potential for consolidation
in response to the competitive disadvantages faced by smaller distributors. The
Company believes that these industries are characterized by a large number of
relatively small local distribution companies, with the roofing supply and
related products industry having a few very large, multi-center and
multi-regional distributors and a large national multi-center distributor.
Distributors of the foregoing products are overwhelmingly privately owned,
relationship-based companies that emphasize service, delivery and reliability as
well as competitive pricing and breadth of product line to their customers. The
Company believes that the competitive environment faced by small distributors,
coupled with the desire of many owners of such distributors for liquidity, has
prompted a trend toward industry consolidation that offers significant
opportunities for expansion oriented distributors. The Company believes that
there are opportunities for a company which has the capability to source and
distribute products effectively to serve the roofing supply, cement and masonry
supply and related products markets and to effect cost savings and increased
profit opportunities through efficiencies of scale which can be applied to
companies that may be acquired in the foregoing industries. The Company intends
to provide
4
<PAGE>
expansion capital, if necessary, and administrative and management services to
acquired companies. See "Risk Factors" and "Business."
Although the Company does not currently have any agreements, arrangements or
commitments with respect to any proposed acquisition, other than the
Acquisitions, based upon its management's experience in these industries, the
Company believes that there are a number of suitable acquisition candidates that
may meet its criteria. The Company intends to seek out prospective acquisition
candidates in businesses that complement or are otherwise related to the
businesses of Eagle, JEH Eagle and MSI Eagle. Although the primary focus of the
Company's expansion and acquisition program will be on seeking suitable
acquisition candidates which are engaged in the wholesale distribution of
roofing supplies and related products, the Company will consider the purchase of
manufacturers or vendors of products which may be distributed through its
wholesale distribution business. The Company anticipates that it will finance
future acquisitions, if any, through a combination of cash (including
approximately 24% of the net proceeds of the Public Offering), issuances of
shares of capital stock of the Company, and additional equity or debt financing.
There can be no assurance that the Company will be able to consummate the
acquisition of any companies, other than the Acquisitions, or additional equity
or debt financing on terms acceptable to the Company or at all.
Management intends to pursue expansion of Eagle's, JEH Eagle's and MSI
Eagle's operations by adding new distribution centers by internal growth. During
JEH Co.'s fiscal year ended December 31, 1996 and Eagle's, JEH Co.'s, JEH
Eagle's, MSI Co.'s and MSI Eagle's fiscal years ended June 30, 1997 and 1998 and
four-month period ended October 31, 1998, JEH Co., MSI Co., Eagle, JEH Eagle and
MSI Eagle opened four new distribution centers and are currently exploring the
possibility of opening several more distribution centers in current market areas
and in market areas adjacent to their existing distribution centers.
TDA is a holding company which operates four business enterprises, including
Eagle, JEH Eagle and MSI Eagle, and real estate investment companies. At the
current time, Eagle, JEH Eagle and MSI Eagle are wholly-owned by TDA, and their
revenues constitute a majority of TDA's consolidated revenues. After the
completion of the Public Offering and consummation of the Acquisitions, TDA will
own approximately 59% of the Company's Common Stock. Certain of the Company's
officers and directors are also officers and directors of TDA (or affiliates of
TDA), Eagle, JEH Eagle and/or MSI Eagle. See "Management," "Principal
Stockholders," "The Acquisitions" and "Certain Transactions."
In connection with the Acquisitions, TDA will be issued 3,000,000 shares of
the Company's Common Stock. As part of the Acquisitions, Eagle, JEH Eagle and
MSI Eagle combined will have a book value of no less than $1,000,000 and Eagle
will cancel, in the form of a non-cash dividend, all indebtedness of TDA to
Eagle, except for an approximately $495,000 receivable from TDA relating to and
offsetting a mortgage in the same amount on property previously owned by Eagle
and for which Eagle remains the primary obligor, with TDA contributing
sufficient cash to Eagle, JEH Eagle or MSI Eagle, within forty-five days after
the closing of the Public Offering and consummation of the Acquisitions, to
achieve that book value in the event of a deficiency. At October 31, 1998, TDA's
indebtedness to Eagle, excluding the foregoing receivable offsetting such
mortgage, was approximately $3,070,000. It is anticipated that no such
contribution will be required by TDA. The number of shares of the Company's
Common Stock to be issued to TDA in connection with the Acquisitions was
determined by negotiations among the Company, TDA and the Underwriter. Factors
considered in such negotiations included but were not limited to (a) the
historical results of the Combined Entities, (b) their future business
prospects, (c) their industry position, principally on a combined basis, (d)
their product line breadth, (e) their customer bases, (f) the experience of
their management and personnel, (g) the locations of their distribution
facilities, and (h) their net worth. Pursuant to the agreements by which JEH
Eagle and MSI Eagle acquired all of the business and substantially all of the
assets of JEH Co. and MSI Co., 300,000 and 250,000 shares of the Company's
Common Stock will be issued to James E. Helzer, the owner of JEH Co. and the
President of the Company, Eagle and JEH Eagle, and Gary L. Howard, the owner of
MSI Co. and a Vice President of the
5
<PAGE>
Company, respectively. The number of shares to be issued to Messrs. Helzer and
Howard was determined by negotiations between the respective parties at the
times of the acquisitions of all of the business and substantially all of the
assets of JEH Co. by JEH Eagle and of MSI Co. by MSI Eagle, respectively. The
consideration to be paid by the Company to TDA for the Acquisitions was
determined by negotiations among the Company, TDA and the Underwriter without
independent appraisal. The Company, TDA, Eagle, JEH Eagle and MSI Eagle have
made no allocation of the consideration to be paid by the Company for each of
Eagle, JEH Eagle and MSI Eagle.
In the past, a subsidiary of TDA, 39 Acre Corp., has leased to Eagle several
of Eagle's distribution centers on a month-to-month basis pursuant to oral
agreements. Rent expense for these distribution centers was approximately
$782,000 and $279,000 for Eagle's fiscal year ended June 30, 1998 and four-month
period ended October 31, 1998, respectively. Upon completion of the Public
Offering and consummation of the Acquisitions, Eagle will enter into ten-year
leases for said distribution centers. Although the written leases are to be on
substantially similar economic terms as the past oral agreements, Eagle will
then be committed to pay rent for these distribution centers for ten years. The
Company believes that the rent and other terms of the written lease agreements
to be entered into between 39 Acre Corp. and Eagle are on at least as favorable
terms as Eagle would expect to negotiate with unaffiliated third parties.
Neither Eagle nor 39 Acre Corp. will be permitted to terminate the leases before
the end of their term without a breach or default by the other party. JEH Eagle
leases several of its distribution centers from James E. Helzer pursuant to
five-year leases expiring on June 30, 2002. Rent expense for these distribution
centers was approximately $492,000 and $162,000 for JEH Eagle's fiscal year
ended June 30, 1998 and four-month period ended October 31, 1998, respectively.
James E. Helzer currently has a five-year employment agreement with JEH Eagle
which provides him with annual compensation of $250,000. James E. Helzer and
E.G. Helzer serve as Eagle's President and Senior Vice President-Operations,
respectively, and are compensated at the rates of $50,000 and $25,000 per year,
respectively. Pursuant to their arrangements with Eagle, James E. Helzer and
E.G. Helzer are also entitled to receive 20% and 6%, respectively, of Eagle's
income before taxes in excess of $600,000 per year. Messrs. Helzers' agreements
with Eagle are oral and can be terminated by either party without notice or
penalty. MSI Eagle leases its executive offices and principal distribution
center from Gary L. Howard pursuant to a three-year lease expiring on October
22, 2001 at an annual base rental of approximately $107,000. Rent expense for
this office and distribution center was approximately $192,000 and $64,000 for
MSI Co.'s fiscal year ended June 30, 1998 and four-month period ended October
31, 1998, respectively. Gary L. Howard currently has a five-year employment
agreement with MSI Eagle which provides him with an annual salary of $260,000
and pursuant to which he serves as MSI Eagle's President. Mr. Howard also is a
Vice President of the Company. Upon completion of the Public Offering and
consummation of the Acquisitions, the Company will enter into (a) five-year
employment agreements with its Chairman of the Board and Chief Executive
Officer, Douglas P. Fields, and its Executive Vice President, Treasurer and
Secretary, Frederick M. Friedman, pursuant to which each of such persons, who
are also executive officers and directors of TDA, will receive a salary of
$200,000 per year plus substantial additional benefits, although neither of them
have committed any specified amount of time to the Company's affairs; and (b) a
month to month administrative services agreement with TDA requiring a $3,000
monthly payment to TDA. Similar agreements have already been entered into
between JEH Eagle and each of Messrs. Fields and Friedman providing annual base
salaries of $60,000 to each of Messrs. Fields and Friedman, and JEH Eagle and
TDA have already entered into an agreement pursuant to which TDA provides
certain services to JEH Eagle for a five-year term expiring in June 2002
requiring a $3,000 monthly payment to TDA. The payments by JEH Eagle to Messrs.
Fields and Friedman and TDA shall commence upon completion of the Public
Offering and consummation of the Acquisitions. Furthermore, as part of the
Acquisitions, TDA will indemnify Eagle for any payments that Eagle is required
to make which are in excess of Eagle's obligations under Eagle's leases for its
Birmingham, Alabama, distribution center and its former Fort Lauderdale,
Florida, distribution center and relate to the mortgage or the industrial
revenue bonds for the Birmingham, Alabama, and Fort
6
<PAGE>
Lauderdale, Florida, properties, respectively. See "Risk Factors--Transactions
With And for the Benefit of Affiliates" and "Certain Transactions."
From time to time throughout this Prospectus Eagle, JEH Eagle and MSI Eagle
are collectively referred to as the "Combined Entities."
The Company was incorporated under the laws of the State of Delaware on May
1, 1996, and its operations to date have included, among other things: raising
capital, negotiation of the Acquisitions and establishing a management team for
the Company. Certain administrative services are provided to the Company by TDA.
The Company has funded itself since inception by initial minimal borrowing from
TDA, selling an aggregate of 300,000 shares of its Common Stock and 300,000
Warrants to twelve investors in June and July 1996 for aggregate gross proceeds
to the Company of $300,000 in a private offering of the Company's securities
(the "Private Placement"), borrowings from TDA ($150,000) and two other private
investors, Hi-Tel Group, Inc. ($100,000) and Paul Schmidt ($50,000) which are
also stockholders of the Company in February 1998, and borrowings of $100,000
from TDA in August 1998. The Company's executive office is located at 122 East
42nd Street, Suite 1116, New York, New York 10168, and its telephone number is
(212) 986-6190. See "Business" and "Certain Transactions."
As used herein, the term EBITDA generally reflects net income (loss)
increased by the effects of interest expense, federal income tax provisions,
depreciation and amortization expense. EBITDA can be used by management, along
with other measures of performance, to assess the Company's financial
performance. EBITDA should not be considered in isolation or as an alternative
to measures of operating performance or cash flows pursuant to generally
accepted accounting principles. EBITDA may not be comparable to similar measures
reported by other companies. See "Summary Financial Data."
7
<PAGE>
THE PUBLIC OFFERING
<TABLE>
<S> <C>
Securities Offered................ 2,500,000 shares of Common Stock and 2,500,000 Warrants.
Each Warrant entitles the holder to purchase one share
of Common Stock at a price of $5.50 during the five-year
period commencing on the Effective Date. The exercise
price and the number of shares issuable upon exercise of
the Warrants are subject to adjustment in certain
circumstances. See "Description of Securities."
Common Stock Outstanding
Before Offering................. 5,950,000 shares(1)
After Offering.................... 8,450,000 shares(1)(2)
Use of Proceeds................... Repayment of indebtedness, finance acquisitions of
companies operating primarily in the roofing supplies
and related products industry, expand Eagle's, JEH
Eagle's and MSI Eagle's operations, and for working
capital purposes, including general corporate purposes
of the Company, Eagle, JEH Eagle and MSI Eagle. See "Use
of Proceeds," "Capitalization" and "Certain
Transactions."
Risk Factors...................... Investment in the Securities offered hereby involves a
high degree of risk and immediate substantial dilution.
See "Risk Factors" and "Dilution."
Proposed NASDAQ SmallCap Symbols:
(3)
Common Stock....................
Warrants........................ W
</TABLE>
- ------------------------
(1) Includes 3,000,000, 300,000 and 250,000 shares of Common Stock to be issued
to TDA, James E. Helzer and Gary L. Howard, respectively. See "The
Acquisitions" and "Certain Transactions."
(2) Includes the 2,500,000 shares of Common Stock to be issued in the Public
Offering but does not include (i) 375,000 shares of Common Stock, 375,000
Warrants and 375,000 shares of Common Stock underlying such Warrants subject
to the Underwriter's Overallotment Options; (ii) 2,500,000 shares of Common
Stock issuable upon the exercise of the Warrants; (iii) 300,000 shares of
Common Stock issuable upon the exercise of the Company's outstanding
Warrants; (iv) 500,000 shares of Common Stock issuable upon the exercise of
warrants to be issued to the Underwriter; and (v) 1,000,000 shares of Common
Stock reserved for issuance pursuant to the Company's stock option plan of
which 900,000 shares of Common Stock are reserved for options to be granted
upon completion of the Public Offering. See "Management," "Certain
Transactions," "The Acquisitions," "Description of Securities,"
"Underwriting" and "Selling Securityholders."
(3) The proposed trading symbols do not imply that a liquid and active market
will be developed or sustained for the Company's Securities. See "Risk
Factors--Possible Suspension of the Company's Securities from NASDAQ
SmallCap."
8
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
COMBINED(1)
-------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------
1994 1995 1996 1997(7) 1998
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $ 53,925,373 $ 50,483,469 $ 59,262,226 $ 57,575,712 $ 129,502,812
Gross Profit...................................... 10,658,013 9,739,568 12,576,870 11,471,124 27,975,391
Income from Operations............................ 743,378 833,114 2,689,290 907,970 3,016,155
Net Income (Loss)................................. 464,270 352,589 1,315,035 (179,252) 756,884
Basic Net Income Per Share........................
Diluted Net Income Per Share......................
Basic and Dilutive Weighted Average Number of
Shares Outstanding (2)..........................
OTHER FINANCIAL DATA:
EBITDA (3)........................................ $ 1,453,702 $ 1,388,531 $ 3,251,371 $ 1,153,554 $ 4,256,186
Net Cash Provided by (Used In) Operating
Activities...................................... $ 1,278,228 $ 165,963 $ 2,538,838 $ (766,978) $ (258,827)
Net Cash Used In Investing Activities............. $ (509,645) $ (240,755) $ (863,448) $ (215,640) $ (3,704,624)
Net Cash (Used In ) Provided By Financing
Activities...................................... $ (742,450) $ 315,284 $ (1,931,121) $ 1,575,357 $ 4,614,314
<CAPTION>
AS ADJUSTED/COMBINED(5)(6)
FOUR MONTHS -------------------------------
ENDED FOUR MONTHS
OCTOBER 31, YEAR ENDED ENDED
----------------------------- JUNE 30, OCTOBER 31,
1997 1998 1998 1998
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $ 44,205,473 $ 51,148,653 $ 141,462,904 $ 55,125,447
Gross Profit...................................... 9,836,370 11,711,073 32,561,164 13,312,047
Income from Operations............................ 1,581,092 2,648,684 3,638,525 3,076,073
Net Income (Loss)................................. 637,749 1,196,558 1,044,201 1,442,318
Basic Net Income Per Share........................ $ 0.14 $ 0.19
-------------- --------------
-------------- --------------
Diluted Net Income Per Share...................... $ 0.14 $ 0.19
-------------- --------------
-------------- --------------
Basic and Dilutive Weighted Average Number of
Shares Outstanding (2).......................... 7,409,203 7,431,594
-------------- --------------
-------------- --------------
OTHER FINANCIAL DATA:
EBITDA (3)........................................ $ 1,949,273 $ 3,114,584 $ 5,287,113 $ 3,654,052
Net Cash Provided by (Used In) Operating
Activities...................................... $ 1,491,223 $ 582,501
Net Cash Used In Investing Activities............. $ (2,114,267) $ (1,805,369)
Net Cash (Used In ) Provided By Financing
Activities...................................... $ (25,938) $ (127,541)
</TABLE>
<TABLE>
<CAPTION>
COMBINED(1) THE COMPANY
---------------------------------------------------------- OCTOBER 31,
1998
JUNE 30 -----------
----------------------------------------------------------
1994 1995 1996 1997 1998 HISTORICAL
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficiency).................... $4,511,035 $5,450,306 $4,527,568 $6,232,891 $17,081,190 $ (93,335)
Total Assets.................................... 12,947,453 14,709,463 15,778,742 15,853,837 49,478,412 395,559
Long Term Debt.................................. -- 6,290,453 5,678,243 7,195,163 25,294,523 --
Total Liabilities............................... 9,659,216 14,552,647 15,586,657 15,832,712 49,618,968 488,894
Shareholders' Equity (Deficiency)............... 3,562,237 156,816 192,085 21,125 (140,556) (93,335)
<CAPTION>
AS ADJUSTED/
COMBINED(4) COMBINED(5)
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficiency).................... $15,742,624 $21,993,624
Total Assets.................................... 60,047,395 65,873,395
Long Term Debt.................................. 27,574,887 23,224,887
Total Liabilities............................... 55,433,255 50,658,255
Shareholders' Equity (Deficiency)............... 4,614,140 15,215,140
</TABLE>
9
<PAGE>
- ------------------------
(1) Prior to the contemplated Acquisitions, the Company has had limited
operations. The historical financial data included in the statement of
operations data has been prepared on a basis which combines the Company
(organized May 1, 1996), Eagle Supply, Inc. ("Eagle"), and JEH/Eagle Supply,
Inc. ("JEH Eagle") (acquired on July 1, 1997) and MSI/Eagle Supply, Inc.
("MSI Eagle") (acquired on October 22, 1998) as four entities controlled by
TDA Industries, Inc. ("TDA"), because the separate financial data of the
Company would not be meaningful. Information with respect to the Company is
included from May 1, 1996 (inception), information for Eagle is included for
all periods presented, information with respect to JEH Eagle is included
from July 1, 1997 and information for MSI Eagle is included from October 22,
1998.
(2) Basic and Dilutive Net Income (loss) per Share is based on the weighted
average number of shares outstanding and includes 2,100,000 shares issued in
connection with the Company's initial capitalization, 300,000 shares issued
as part of the Company's Private Placement, 3,000,000, 300,000 and 200,000
shares to be issued to TDA, James E. Helzer and Gary L. Howard,
respectively, in connection with the Acquisitions, 50,000 shares relating to
a $250,000 portion of a note in the principal amount of $2,046,000 that MSI
Co. has advised the Company it intends to exchange for shares of the Company
at the initial Public Offering price of $5.00 per share and transfer to Gary
L. Howard and 1,481,594 and 1,459,203 shares ("Additional Shares") in the
four months ended October 31, 1998 and year ended June 30, 1998,
respectively, for the shares assumed to be issued in the Public Offering,
the proceeds of which would be used to retire $4,525,000 of debt and replace
the capital in excess of the respective period's earnings which is
represented by the non-cash dividend to TDA from Eagle. The computation
excludes shares to be issued in connection with the Public Offering in
excess of the Additional Shares. The Underwriter's Warrant and options to be
granted upon the closing of the Public Offering pursuant to the Company's
Stock Option Plan are not dilutive and have not been included. See "Risk
Factors," "The Acquisitions," "Certain Transactions," and the Financial
Statements and the Notes thereto.
The following is a summary of shares included in Basic and Diluted Net
Income per Share:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
OCTOBER 31, YEAR ENDED
1998 JUNE 30, 1998
--------------- -------------
<S> <C> <C>
Initial capitalization:
Founders shares issued to TDA................................................... 2,000,000 2,000,000
Founders shares issued to Mr. Andrews........................................... 100,000 100,000
Private Placement shares issued to private investors.............................. 300,000 300,000
Acquisition shares to be issued to TDA............................................ 3,000,000 3,000,000
Acquisition shares to be issued to James E. Helzer................................ 300,000 300,000
Acquisition shares to be issued to Gary L. Howard................................. 200,000 200,000
Conversion of MSI Co. note into shares of the Company............................. 50,000 50,000
Additional Shares................................................................. 1,481,594 1,459,203
--------------- -------------
7,431,594 7,409,203
--------------- -------------
--------------- -------------
</TABLE>
(3) As used herein, EBITDA reflects net income (loss) increased by the effects
of interest expense, income tax provisions, depreciation and amortization
expense. EBITDA is used by management, along with other measures of
performance, to assess the Company's financial performance. EBITDA should
not be considered in isolation or as an alternative to measures of operating
performance or cash flows pursuant to generally accepted accounting
principles. In addition, this measure of EBITDA may not be comparable to
similar measures reported by other companies.
(4) Reflects the consumation of the Acquisitions. See the Unaudited Pro Forma
Condensed Consolidated Balance Sheet, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Certain Transactions"
and the Financial Statements and the Notes thereto.
(5) Reflects the Public Offering of 2,500,000 shares of Common Stock and
2,500,000 Warrants at initial public offering prices of $5.00 per share of
Common Stock and $.125 per Warrant, the application of the net proceeds
therefrom, 50,000 shares relating to a $250,000 portion of a note in the
principal amount of $2,046,000 that MSI Co. has advised the Company it
intends to exchange for shares of Common Stock of the Company and the
consummation of the Acquisitions. See the Unaudited Pro Forma Condensed
Consolidated Balance Sheet, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Certain Transactions" and
the Financial Statements and the Notes thereto.
(6) See "Unaudited Pro Forma Condensed Consolidated Statements of Operations".
(7) The loss for the year ended June 30, 1997 includes a write-off of
registration costs of $370,353 for an offering which was not consummated.
10
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD NOT BE MADE BY ANY INVESTOR WHO CANNOT
AFFORD THE LOSS OF HIS ENTIRE INVESTMENT. EACH PROSPECTIVE PURCHASER SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FACTORS ASSOCIATED WITH
THIS OFFERING, AS WELL AS OTHER FACTORS DESCRIBED ELSEWHERE IN THIS PROSPECTUS,
BEFORE MAKING AN INVESTMENT.
NO ASSURANCE OF PROFITABLE OPERATIONS. Eagle has experienced substantial
revenue fluctuations in the past. For Eagle's fiscal years ended June 30, 1995,
1996, 1997 and 1998 and four-month periods ended October 31, 1997 and 1998, its
revenues were approximately $50,483,000, $59,262,000, $57,576,000, $58,498,000,
$17,391,000 and $19,102,000, respectively, and its net income (loss) for those
fiscal years and four-month periods were approximately $353,000, $1,315,000,
$192,000, $160,000, $3,000 and $(143,000), respectively. During Eagle's fiscal
year ended June 30, 1995, Eagle's Jacksonville, Florida, distribution center was
sold as a result of increased competition in that market area. Also, Eagle
closed its distribution center in Fort Pierce, Florida, immediately after it was
opened in 1996, as operating prospects for that center were not anticipated to
be satisfactory to management. Furthermore, during Eagle's fiscal year ended
June 30, 1996, the damage caused by hurricanes increased business for Eagle's
distribution centers located in the Florida panhandle and in Alabama. Eagle's
revenues and net income decreased during Eagle's fiscal year ended June 30, 1997
from Eagle's fiscal year ended June 30, 1996 as a result of a decrease in
storm-related business; an increase in operating expenses as a percentage of
revenues because of the decline in revenues; and expenses related to new
distribution centers, among other factors. Eagle's loss in the four-month period
ended October 31, 1998 is as a result of increased operating expenses during
that period, principally payroll and related costs resulting from the hiring of
additional personnel needed to support increased sales from warehouse inventory.
Similarly, during JEH Co.'s fiscal year ended December 31, 1995, JEH Co.
sustained a net loss of approximately $123,000, while during JEH Co.'s fiscal
year ended December 31, 1996, JEH Co. reported net income of approximately
$171,000 upon revenues that were fairly constant in both said fiscal years.
These results are after payment of compensation to JEH Co.'s owner of
approximately $3,988,000 and $2,330,000 during JEH Co.'s fiscal years ended
December 31, 1995 and 1996, respectively. During JEH Co.'s six month period
ended June 30, 1997, JEH Co. had revenues and a loss of approximately
$28,979,000 and $1,179,000, respectively. JEH Co. and JEH Eagle had revenues of
approximately $71,006,000, $26,814,000 and $31,682,000 during JEH Eagle's fiscal
year ended June 30, 1998 and their four-month periods ended October 31, 1997 and
1998, respectively, and net income for that fiscal year and those four-month
periods were approximately $608,000, $635,000 and $1,306,000, respectively. The
increase in JEH Eagle's revenues and net income in the four-month period ended
October 31, 1998 is as a result of the storm-related business generated by JEH
Eagle's new distribution center in Minnesota which was opened in July 1998.
Revenues and operating income of both Eagle and JEH Eagle are impacted by
weather phenomena, such as hailstorms and hurricanes, which have the result of
increasing business at the time of the event of the weather phenomena and
shortly thereafter but have the effect frequently of resulting in a slowdown of
business thereafter. Similarly, weather phenomena can also have a negative
impact on Eagle's and JEH Eagle's customers which can cause certain of such
customers to become delinquent in their payments of their accounts with Eagle or
JEH Eagle. In the past, this has occurred with certain of JEH Co.'s customers.
See the Financial Statements of JEH Company, Inc. as of and at June 30, 1997,
Note K-Allowance for Doubtful Accounts at pages F-63 and F-64. JEH Co.'s
revenues have fluctuated more than Eagle's as a result of a conceptual
difference in strategy regarding the establishment of distribution centers. JEH
Co. entered into new markets following storms which had the tendency to show
more immediate growth in revenues that would help to defray start-up costs.
Eagle has historically entered new or existing markets based upon management's
evaluation of expected long term growth and, when a roofing distributor was
already operating in an existing market, if the area could support a new
distributor. Similarly, MSI Co. had
11
<PAGE>
expanded its operations by entering new market areas within the Dallas/Fort
Worth metropolitan area based upon management's evaluation of expected long-term
growth.
During the fiscal year ended June 30, 1997, the Company incurred a loss of
approximately $371,000, principally as a result of having no revenues or income
while incurring approximately $370,000 in registration expenses. During the
Company's fiscal year ended June 30, 1998, it had a net loss of approximately
$11,000.
There can be no assurance that, in the future, unforeseen developments,
increased competition, losses incurred by new businesses that may be acquired or
branches that may be opened, weather phenomena and other circumstances may not
have a material adverse affect on Eagle's and/or JEH Eagle's operations in their
current market areas of operations or areas into which Eagle's, JEH Eagle's or
the Company's operations may be expanded by acquisition or otherwise.
Additionally, there can be no assurance that in the future, unforeseen
developments, increased competition, losses incurred by new businesses that may
be acquired or centers that may be opened, losses incurred in the expansion of
MSI Eagle's product lines into certain of Eagle's and/or JEH Eagle's
distribution centers and other circumstances may not have a material adverse
effect on MSI Eagle's operations in the Dallas/Fort Worth metropolitan area or
areas into which MSI Eagle's operations may be expanded by acquisition or
otherwise. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business".
AMORTIZATION OF GOODWILL. The Company's balance sheet immediately following
the consummation of the Public Offering and the Acquisitions will include an
amount designated as "goodwill" ("Excess Cost of Investment Over New Assets
Acquired") that represents approximately 16% of assets and approximately 70% of
shareholders' equity. Goodwill arises when an acquirer pays more for a business
than the fair value of the tangible and separately measurable intangible net
assets. Generally accepted accounting principles ("GAAP") require that this and
all other intangible assets be amortized over the period benefited. Management
of the Company has determined that period to be no less than forty (40) years.
If management were not to give proper effect to a shorter benefit period for the
factors giving rise to a material portion of goodwill, earnings of the Company
reported in periods immediately following the consummation of the Acquisitions
would be overstated. In later years, the Company would be burdened by a
continuing charge against earnings from amortization of goodwill without the
associated benefit to income valued by management in arriving at the amount of
consideration paid for the acquisition of a business. If the Company were to
assign a shorter life to the goodwill, earnings reported in periods immediately
following the consummation of the Acquisitions would be reduced. Earnings in
later years, in any event, could be significantly affected if management were to
determine then that the remaining balance of goodwill was impaired.
Although no goodwill will arise as the result of the consummation of the
Acquisitions by the Company, goodwill did arise upon the consummation of the
acquisition of JEH Co. by JEH Eagle on July 1, 1997 and the acquisition of MSI
Co. by MSI Eagle on October 22, 1998. Management of the Company and each of JEH
Eagle and MSI Eagle has reviewed with its independent accountants the factors
and related future cash flows which it considered in arriving at the amount of
goodwill incurred by JEH Eagle and MSI Eagle in their acquisitions of JEH Co.
and MSI Co., respectively. Management of the Company and each of JEH Eagle and
MSI Eagle has concluded that the anticipated future cash flows associated with
the goodwill recognized in the acquisitions of JEH Co. by JEH Eagle and of MSI
Co. by MSI Eagle, respectively, will continue indefinitely and that there is no
persuasive evidence that any material portion of such goodwill will dissipate
over a period shorter than forty (40) years. There can be no assurance that this
will continue to be so.
In concluding that a forty (40) year life for the amortization of the
goodwill associated with the acquisitions of JEH Co. by JEH Eagle and of MSI Co.
by MSI Eagle, respectively, was reasonable, management of the Company
considered: a) the amount of goodwill in relation to historical and pro forma
historical cash flows (EBITDA); b) the historical growth of each business
acquired; c) the business strategy
12
<PAGE>
of each business; d) the potential benefits to each business of combining into a
larger wholesale building supply enterprise including potential benefits in
negotiating with vendors, providing customer service, attracting personnel,
obtaining financing, supporting costs of introducing new technology and
attracting acquisition candidates; e) the potential strategic use of this
combined larger wholesale building supply enterprise as a platform from which to
implement a strategy of internal expansion and additional acquisitions; f) the
experience of management in the wholesale distribution of roofing supplies and
related products industry since 1973; g) the goodwill amortization policies of
other companies in the industry; h) the depth and experience of management of
the Company and the Combined Entities; i) the business strategy of the Company;
and j) the affect of all of the above on potential future cash flows of the
Company. Management is not able to quantify the effect of any individual factor
it considered.
Management routinely evaluates the recoverability of goodwill based upon
expectations of future non-discounted cash flows. During the year ended June 30,
1998, management of JEH Eagle re-evaluated the remaining useful life of goodwill
of JEH Eagle in light of anticipated future operations, including all of the
factors listed above, and determined that a forty (40) year useful life was more
appropriate than the fifteen (15) year useful life initially established on the
date of acquisition of JEH Co. by JEH Eagle on July 1, 1997. This change has
been accounted for prospectively beginning on May 1, 1998.
Management of the Company anticipates that, after the consummation of the
Acquisitions, it will routinely evaluate the recoverability of goodwill in light
of the expectations of future non-discounted cash flows including consideration
of the factors listed above and any additional factors which may seem relevant
to management at such future date in light of the business of the Company at
such future date. If management of the Company concludes at such future date
that a portion or all of the goodwill is not recoverable, it will write-down and
charge earnings with any amount determined to be unrecoverable and/ or will take
other action consistent with GAAP. Management is unable to determine or to place
a weighting or numerical value on what factors would be relevant in its future
evaluation of goodwill for the purpose of determining or valuing the amount of
any such potential future write-down of goodwill, although the factors listed
above would all be considered as well as any others required by GAAP. Management
of the Company would consult with its independent accountants if it believes
that there has been a change in its evaluation of the recoverability of
goodwill. There can be no assurance that there will not be a change in
management's evaluation of the recoverability of goodwill in light of future
business events or conditions. See "Business--Strategy," Unaudited Pro Forma
Condensed Consolidated Balance Sheet and notes thereto, and the Financial
Statements and notes thereto.
REPAYMENT OF INDEBTEDNESS; SUCH FUNDS WILL NOT BE AVAILABLE FOR USE IN
BUSINESS OPERATIONS. Approximately $4,100,000 and $425,000 of the net proceeds
of this Public Offering, representing approximately 43.7% of such net proceeds,
will be used to reduce Eagle's, JEH Eagle's and MSI Eagle's borrowings under
their revolving credit facilities and to repay interim financial indebtedness,
including MSI Eagle's purchase money indebtedness, and interest thereon of the
Combined Entities and the Company, respectively. As a result, said net proceeds
will not be available for use in the business operations of the Company, Eagle,
JEH Eagle or MSI Eagle. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BROAD DISCRETION IN USE OF PROCEEDS; UNKNOWN ACQUISITIONS. The Company has
broad discretion with respect to the specific allocation of a substantial
portion of the net proceeds. Such net proceeds are intended to be applied toward
consummating acquisitions in accordance with the Company's business strategy, to
support Eagle's, JEH Eagle's and MSI Eagle's expansion efforts by the
establishment of additional distribution centers and for working capital
purposes. Although management of the Company will endeavor to evaluate the risks
inherent in any particular acquisition or the establishment of new distribution
centers for Eagle, JEH Eagle and MSI Eagle, there can be no assurance that the
Company will properly or accurately ascertain all such risks. Management of the
Company will have virtually unrestricted flexibility in identifying and
selecting prospective acquisition candidates and establishing new distribution
centers. Locations selected for expansion efforts will be made at the discretion
of management and will not
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be subject to stockholder approval. Additionally, the Company does not intend to
seek stockholder approval for any acquisitions unless required by applicable law
and regulations, and stockholders will most likely not have an opportunity to
review financial information on an acquisition candidate prior to consummation
of an acquisition. Thus, purchasers of the Securities offered hereby will be
entrusting their funds to the Company's management, upon whose judgment the
investor must depend, with only limited information concerning management's
specific intentions. Except for the Acquisitions, the Company does not currently
have any agreements, commitments or arrangements with respect to any proposed
acquisitions, and there can be no assurance that any such acquisitions will be
consummated. See "Use of Proceeds."
THE WHOLESALE DISTRIBUTION OF ROOFING SUPPLIES BUSINESS SUBJECT TO ECONOMIC
AND OTHER CHANGES. The wholesale distribution of roofing supplies industry is
cyclical and is affected by weather and changes in general economic conditions.
An economic downturn in one or more of the markets currently served by Eagle
and/or JEH Eagle or to be served by the Company, Eagle and/or JEH Eagle as a
result of acquisitions or expansion efforts could have a material adverse effect
on the operations of the Company, Eagle and/or JEH Eagle.
THE WHOLESALE DISTRIBUTION OF CEMENT AND MASONRY SUPPLIES BUSINESS IS
SUBJECT TO ECONOMIC AND OTHER CHANGES. MSI Eagle has, during its several fiscal
years, experienced growth in revenues and has had net income. As MSI Eagle sells
principally to contractors, subcontractors and masons serving the residential
building market in the Dallas/Fort Worth metropolitan area, an economic downturn
in that market or in any additional markets in which it may operate in the
future as a result of expansion or acquisition could have a material adverse
effect on the operations of the Company and/or MSI Eagle.
DEPENDENCE UPON CERTAIN VENDORS; LACK OF WRITTEN LONG-TERM SUPPLY AGREEMENTS
WITH VENDORS. Eagle, JEH Eagle and MSI Eagle distribute products manufactured
by a number of major vendors. GAF Corporation ("GAF"), a supplier of residential
and commercial roofing materials, is Eagle's largest supplier, accounting for
approximately 23%, 23% and 18% of Eagle's product lines during Eagle's fiscal
years ended June 30, 1997 and 1998 and four-month period ended October 31, 1998,
respectively. During Eagle's fiscal years ended June 30, 1997 and 1998 and
four-month period ended October 31, 1998, three other vendors' products
accounted for an aggregate of approximately 32%, 22% and 21%, respectively, of
Eagle's product lines. Similarly, Atlas Roofing Corp., a supplier of roofing
materials, is JEH Eagle's largest supplier, accounting for approximately 22%,
15%, 15% and 14% of JEH Co.'s product lines during JEH Co.'s fiscal years ended
December 31, 1995, 1996, JEH Eagle's fiscal year ended June 30, 1998 and four-
month period ended October 31, 1998, respectively. During JEH Co.'s fiscal years
ended December 31, 1995 and 1996 and JEH Eagle's fiscal year ended June 30,
1998, three other vendors' products accounted for an aggregate of approximately
31%, 34% and 38%, respectively, of JEH Co.'s and JEH Eagle's product lines.
Included within the foregoing three vendors were GAF and Elk Roofing Products
("Elk") which accounted for approximately 15% and 10% and 16% and 10% of JEH
Co.'s product lines during its fiscal years ended December 31, 1995 and 1996 and
16% and 13% and 17% and 13% of JEH Eagle's product lines during its fiscal year
ended June 30, 1998 and four-month period ended October 31, 1998, respectively.
Management of the Company does not believe that any supplier of products sold by
MSI Eagle accounted for 5% or greater of its product lines during any of its
last three fiscal years or its four-month period ended October 31, 1998. Eagle,
JEH Eagle and MSI Eagle have no written long-term supply agreements with any of
their vendors. Management believes that in the event of any interruption of
product deliveries from any of their vendors, Eagle, JEH Eagle and MSI Eagle
will be able to secure suitable replacement supplies on acceptable terms.
However, there can be no assurance of the continued availability of supplies of
residential and commercial roofing supply and masonry materials at acceptable
prices or at all. See "Business."
COMPETITION IN THE WHOLESALE DISTRIBUTION OF ROOFING SUPPLIES AND RELATED
PRODUCTS INDUSTRY. Eagle and JEH Eagle currently face substantial competition
in the wholesale distribution of roofing supplies
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from relatively smaller distributors but also face competition from retail
distribution centers and from a number of multi-regional and a national
wholesale distributor of building products including suppliers which are larger
than Eagle and JEH Eagle combined and have greater financial resources than
Eagle and JEH Eagle combined. Eagle and JEH Eagle combined currently compete in
the wholesale distribution of roofing supplies on the basis of competitive
pricing, service, breadth of product line, prompt delivery, providing discounts
for prompt payment and on the abilities of its personnel. There can be no
assurance that Eagle or JEH Eagle will be able to continue to compete
effectively with such competitors. During Eagle's last three fiscal years Eagle
has closed and/or sold certain distribution centers as a result of such
competition. To a substantially lesser degree, Eagle and JEH Eagle also compete
with larger, higher volume, discount general building supply stores selling
standardized products, sometimes at lower prices. See "--No Assurance of
Profitable Operations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION FOR POTENTIAL ACQUISITIONS. The Company anticipates that it may
experience competition from entities and individuals (including venture capital
partnerships and corporations, equity funds, blind pool companies, competing
wholesale roofing supply or other building materials distribution companies,
large industrial and financial institutions, small business investment companies
and wealthy individuals) which are well-established and have greater financial
resources and more extensive experience than the Company and the Combined
Entities in connection with identifying and effecting acquisitions of the type
sought by the Company. Many of such competitors possess greater financial,
technical, personnel and other resources than the Company and the Combined
Entities, and there can be no assurance that the Company will be able to compete
successfully in connection with identifying and effecting acquisitions of the
type sought by the Company. The financial resources of the Combined Entities
will be limited in comparison to those of many of such competitors. Such
competition could result in the loss of an acquisition candidate or an increase
in the price the Company would be required to pay for such acquisitions. See
"Business."
NEED FOR ADDITIONAL FUTURE FINANCING; POSSIBLE ADDITIONAL DILUTION AND/OR
FINANCIAL RESTRICTIONS. The Company may require additional equity or debt
financing in order to consummate an acquisition or for additional working
capital if any of the Combined Entities suffer losses or if the Company
completes the acquisition of a business that subsequently suffers losses. Any
additional equity financing that may be obtained may dilute the voting power and
equity interests of the Company's stockholders. Any additional debt financing
that may be obtained may impair or restrict the Company's ability to declare
dividends or may impose financial restrictions on the Company's ability to make
acquisitions or implement the expansion efforts of the Combined Entities. There
can be no assurance that the Company will be able to obtain additional financing
on terms acceptable to the Company or at all. In the event additional financing
is unavailable to the Company, the Company may be materially adversely affected.
See "Use of Proceeds."
UNPROVEN BUSINESS STRATEGY OF THE COMPANY; ACQUISITIONS UNKNOWN. A
significant element of the Company's business strategy is to acquire additional
companies engaged in the wholesale distribution of roofing supplies and related
products industries and companies which manufacture products for or supply
products to such industry. The Company's strategy is unproven and based on
unpredictable and changing events. Although the Company believes that suitable
candidates for potential acquisition exist, other than the Acquisitions, there
can be no assurance that any acquisitions, if successfully consummated, will be
successfully integrated into the operations of the Combined Entities, will
perform as expected, will not result in significant unexpected liabilities or
will ever contribute significant revenues or profits to any of the Combined
Entities. In addition, if the Company is unable to manage growth effectively,
the Company's operating results could be materially adversely effected. See
"Business."
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF MSI EAGLE'S PRODUCT LINES INTO
EAGLE AND/OR JEH EAGLE. Management currently intends to offer MSI Eagle's
product lines through certain of the distribution facilities of Eagle and JEH
Eagle as the latter two entities have showroom, warehouse facilities, direct
sales
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forces and delivery equipment that are compatible with MSI Eagle's product
offerings, and all three entities sell supplies to residential and commercial
contractors and subcontractors. However, there is no assurance that such an
integration can be accomplished successfully or provide a financial benefit to
the Combined Entities or to the Company.
CONTROL BY MANAGEMENT AND TDA. Upon closing of the Public Offering and
consummation of the Acquisitions, TDA will own approximately 59% of the issued
and outstanding Common Stock of the Company. Douglas P. Fields, the Company's
Chief Executive Officer and Chairman of the Company's Board of Directors, is
also Chairman of the Board of Directors, President and the Chief Executive
Officer of TDA as well as a principal stockholder of TDA. Frederick M. Friedman,
the Executive Vice President, Treasurer, Secretary and a Director of the Company
is also the Executive Vice President, Chief Financial Officer, Treasurer and a
Director of TDA as well as a principal stockholder of TDA. John E. Smircina is a
Director Nominee of the Company and a director of TDA. Accordingly, Messrs.
Fields, Friedman and Smircina will control approximately 59% of the issued and
outstanding shares of Common Stock of the Company after the closing of the
Public Offering and consummation of the Acquisitions. As a result, the foregoing
officers and directors, if they were to act in concert, would be in a position
to control the composition of the Board of Directors of the Company, and,
therefore the business, policies and affairs of the Company and the outcome of
issues which may be subject to a vote of the Company's stockholders. See
"Principal Stockholders," "Management" and "Certain Transactions."
POTENTIAL CONFLICTS OF INTEREST. Certain executive officers and directors
of the Company are also officers, directors and/or principal stockholders of TDA
and its affiliates and, consequently, may be able, through TDA and its
affiliates, to direct the election of the Company's directors, effect
significant corporate events and generally direct the affairs of the Company.
Eagle has been dependent on TDA for certain administrative services, and TDA
also furnishes certain services to JEH Eagle. Following completion of the Public
Offering and the consummation of the Acquisitions, TDA will provide the Company
with certain administrative services. Furthermore, a subsidiary of TDA, 39 Acre
Corp., and James E. Helzer, the President of the Company, Eagle and JEH Eagle,
lease approximately one-half of Eagle's and JEH Eagle's facilities to them,
respectively, and Gary L. Howard, a Vice President of the Company and President
of MSI Eagle, leases MSI Eagle's principle distribution facility, showroom and
executive offices to it. Conflicts of interest may arise in the future with
respect to such leases and possible renewal terms and conditions. The Company
does not intend to enter into any material transaction with TDA or its
affiliates in the future unless such transaction is fair and reasonable to the
Company and is approved by a majority of the independent members of the Board of
Directors of the Company. Notwithstanding the foregoing, there can be no
assurance that future transactions, if any, will not result in conflicts of
interest which will be resolved in a manner favorable to the Company. See
"--Control by Management and TDA," "Management," "Principal Stockholders" and
"Certain Transactions."
DEPENDENCE UPON KEY PERSONNEL. The success of the Company and the Combined
Entities may depend upon the continued contributions of their officers. The
business of the Company could be adversely affected by the loss of the services
of Douglas P. Fields, the Chief Executive Officer and Chairman of the Boards of
Directors of the Company and each of the Combined Entities, Frederick M.
Friedman, the Executive Vice President, Secretary and Treasurer of the Company
and each of the Combined Entities, James E. Helzer, the President of the Company
and each of JEH Eagle and Eagle or, Gary L. Howard, a Vice President of the
Company and President of MSI Eagle. Although JEH Eagle has "key person" life
insurance on the life of James E. Helzer in the amount of $2,000,000 naming JEH
Eagle as beneficiary, MSI Eagle has "key person" life insurance on the life of
Gary L. Howard in the amount of $2,000,000 plus the amount outstanding pursuant
to MSI Eagle's note to MSI Co. naming MSI Eagle as beneficiary, and the Company
has "key person" life insurance in the amount of $1,000,000 on each of the lives
of Messrs. Fields and Friedman, naming the Company as beneficiary, there can be
no assurance that the foregoing amounts will be adequate to compensate JEH
Eagle, MSI Eagle and/or the Company, in the event of the loss of any of their
lives. See "Management."
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KEY PERSONNEL; CONFLICTS OF INTEREST IN ALLOCATION OF MANAGEMENT'S
TIME. Additionally, the employment agreements already entered into and to be
entered into with Messrs. Fields and Friedman do not and will not require either
of them to devote a specified amount of time to the Company's or the Combined
Entities' affairs. Each of Messrs. Fields, Friedman and Helzer have significant
business interests outside of the Company, including but not limited to TDA and
its subsidiaries, as to Messrs. Fields and Friedman. Accordingly, Messrs.
Fields, Friedman and Helzer may have conflicts of interest in allocating time
among various business activities. There can be no assurance that any such
conflicts will be resolved in a manner favorable to the Company. See
"Management."
NO ASSURANCE OF CONTINUATION OF CREDIT FACILITIES. Each of Eagle, JEH Eagle
and MSI Eagle has substantial credit facilities that are needed to finance its
operations. All such credit facilities are guaranteed by TDA, and the
institutions providing the credit facilities will be required to consent to the
completion of the Public Offering and consummation of the Acquisitions. Assuming
the required consents from the lending institutions are obtained and the Public
Offering and the Acquisitions are completed and consummated, TDA has advised the
Company that in the event Eagle, JEH Eagle or MSI Eagle seek increased lines of
credit, new lines of credit or other changes in their respective credit
facilities which would give TDA the right to terminate or decline to grant a new
guarantee, TDA may seek compensation from the Company. Although no such
compensation has been agreed upon, such compensation, if paid, could be
materially adverse to any and all of the Combined Entities and could be a
material benefit to TDA and certain officers and directors of the Company, who
are also officers, directors and stockholders of TDA. In the event TDA were to
exercise any such right to terminate a guarantee or decline to grant a new
guarantee, credit facilities may no longer be available to Eagle, JEH Eagle
and/or MSI Eagle or credit facilities may be available only upon materially
different terms and conditions including, but not limited to, a reduced
availability of funds, additional and/or higher interest rates and charges and
other more restrictive financial terms and conditions. Any of the foregoing
events could have a material adverse effect upon the Company, Eagle, JEH Eagle
and/or MSI Eagle. See "--Control by Management and TDA," "-- Potential Conflicts
of Interest," "--Transactions With and For the Benefit of Affiliates,"
"Substantial Potential Future Financial Benefits to Prior Owners of Acquisition
Candidates Now Affiliated with the Company," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "The Acquisitions,"
"Management," "Principal Stockholders" and "Certain Transactions."
TRANSACTIONS WITH AND FOR THE BENEFIT OF AFFILIATES. Messrs. Fields and
Friedman, the Company's Chief Executive Officer and Chairman of its Board of
Directors; and Executive Vice President, Treasurer, Chief Financial Officer and
a Director of the Company, respectively, are also executive officers, directors
and principal stockholders of TDA and have and will or may be deemed to benefit,
directly or indirectly, from the Company's and each of the Combined Entities'
transactions with TDA. James E. Helzer, the Company's President and the nominee
Vice Chairman of the Company's Board of Directors, previously owned JEH Co. and
has and will or may be deemed to benefit, directly from his and JEH Eagle's
transactions with the Company and JEH Eagle. Gary L. Howard, a Vice President of
the Company and President of MSI Eagle, previously owned MSI Co. and has and
will or may be deemed to have benefitted or to benefit from his and MSI Co.'s
transactions with MSI Eagle and/or the Company. See "The Acquisitions,"
"Management," "Principal Stockholders" and "Certain Transactions."
Eagle, JEH Eagle and MSI Eagle have revolving credit facilities, in the
amounts of $10,900,000, $20,000,000 and $9,075,000, respectively, guaranteed by
TDA. To the extent these credit facilities are reduced or repaid, TDA will
derive an indirect benefit. During Eagle's June 30, 1995 fiscal year, Eagle used
its borrowings under this revolving credit facility to repay approximately
$2,326,000 of its indebtedness to TDA and to advance approximately $3,309,000 to
TDA. As part of the Acquisitions, Eagle, JEH Eagle and MSI Eagle combined will
have a book value of no less than $1,000,000 after Eagle cancels, in the form of
a non-cash dividend, all indebtedness of TDA to Eagle, except for an approximate
$495,000 receivable from TDA relating to and offsetting a mortgage in the same
amount on property previously owned by Eagle and for which Eagle remains the
primary obligor, with TDA contributing sufficient cash to Eagle, JEH Eagle or
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MSI Eagle, within forty-five days after the closing of the Public Offering and
consummation of the Acquisitions, to achieve that book value in the event of a
deficiency. At October 31, 1998, the combined book value of Eagle, JEH Eagle and
MSI Eagle was approximately $5,773,000, which exceeded the $1,000,000 required
book value by approximately $1,703,000, assuming the cancellation by Eagle, in
the form of a non-cash dividend, of all indebtedness of TDA to Eagle at that
date, excluding the foregoing receivable offsetting such mortgage. At October
31, 1998, TDA's indebtedness to Eagle, excluding the foregoing receivable
offsetting such mortgage, was approximately $3,070,000. To the extent TDA's
indebtedness to Eagle is so cancelled, TDA will directly, and Messrs. Fields and
Friedman will indirectly, derive a benefit. During Eagle's fiscal years ended
June 30, 1997 and 1998, Eagle made dividend payments to TDA of $1,250,000 and
$1,200,000, respectively. JEH Eagle did not make any dividend payments to TDA
during the fiscal year ended June 30, 1998, and neither Eagle nor JEH Eagle made
any dividend payments to TDA during the four-month period ended October 31,
1998. After October 31, 1998 until completion of the Public Offering and
consummation of the Acquisitions, both Eagle and JEH Eagle may make dividend
payments to TDA. MSI Eagle is precluded from making dividend payments and
certain other distributions to TDA pursuant to the terms of its credit facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The Acquisitions" and "Certain Transactions."
TDA, through a wholly-owned subsidiary, has rented to Eagle the premises for
several of Eagle's distribution facilities and Eagle's executive offices. Upon
completion of the Public Offering and the consummation of the Acquisitions,
Eagle and TDA intend to enter into lease agreements which will provide rental
arrangements for such facilities which the Company believes to be fair and
reasonable to Eagle. See "The Acquisitions," "Business" and "Certain
Transactions".
Eagle is responsible, as mortgagor, to make payments due on the mortgage
underlying its Birmingham, Alabama, distribution center. That property is owned
by 39 Acre Corp., a wholly-owned subsidiary of TDA and is leased to Eagle. Such
mortgage requires a "balloon" payment in April 1999. 39 Acre Corp. intends to
obtain replacement financing when the "balloon" payment is due. There can be no
assurance that such financing will be available on acceptable terms. Eagle also
remains responsible, as leasee, for lease payments to another TDA subsidiary,
Eagle Holding, Inc., under a lease for Eagle's former distribution center in
Fort Lauderdale, Florida, including a "balloon" payment due on May 1, 1999, the
lease expiration date, relating to industrial revenue bonds used to acquire and
develop the Fort Lauderdale, Florida, property. Eagle has no obligation to make
payments on the industrial revenue bond and presently subleases this property to
an unrelated third party. In the event the unrelated third party sublessee fails
to perform its obligations under the sublease, Eagle is required to make rental
payments to Eagle Holding, Inc., and, in any event, will be required to make the
"balloon" payment. However, through October 31, 1998, Eagle had been making
pro-rata payments upon the "balloon" payment to Eagle Holding, Inc., and these
payments, together with anticipated sublessee rental payments, are currently
projected to fully fund the "balloon" payment. Upon completion of the Public
Offering and as part of the Acquisitions, TDA will indemnify Eagle for any
payments that Eagle is required to make which are in excess of its obligations
under its leases for the foregoing properties and relate to the mortgage or the
industrial revenue bonds for the Birmingham, Alabama and Fort Lauderdale,
Florida properties, respectively. In the event of the failure of Eagle, TDA
and/or TDA's subsidiary to perform Eagle's obligations under said mortgage and
lease, Eagle could be subject to substantial judgments that would have a
material adverse effect on Eagle and its financial condition.
The mortgage underlying Eagle's Birmingham, Alabama, distribution center
requires monthly payments of approximately $4,700 through April 1999 and a
"balloon" payment of approximately $440,000 on that date. The lease for Eagle's
former Fort Lauderdale, Florida, distribution center requires variable monthly
payments and a "balloon" payment of approximately $580,000 on May 1, 1999. See
"Certain Transactions."
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The Company believes that TDA's transactions with Eagle with regard to the
Birmingham, Alabama, and Fort Lauderdale, Florida, properties are on terms no
less favorable than Eagle could obtain from independent third parties.
Upon completion of the Public Offering and consummation of the Acquisitions,
TDA will provide office space and administrative services to the Company at
TDA's offices in New York City pursuant to a month to month administrative
services agreement to be entered into by the Company and TDA requiring $3,000 to
be paid monthly to TDA, and Messrs. Fields' and Friedman's employment agreements
with the Company and Eagle will become effective. Messrs. Fields and Friedman
have already entered into employment agreements with JEH Eagle which will remain
effective. TDA also provides certain services to JEH Eagle pursuant to a
five-year agreement requiring monthly payments to TDA of $3,000. The payments
required to be made to Messrs. Fields and Friedman and to TDA pursuant to their
respective agreements with JEH Eagle will commence upon completion of the Public
Offering and consummation of the Acquisitions. The aggregate annual compensation
to be paid to Messrs. Fields and Friedman by the Company, Eagle and JEH Eagle
will be $260,000 each, exclusive of benefits, bonuses and annual increases. The
aggregate annual compensation to be paid by the Company, Eagle and JEH Eagle to
James E. Helzer is and will be $300,000, exclusive of benefits, bonuses, annual
increases and 20% of Eagle's earnings before taxes in excess of $600,000 per
year. The aggregate annual compensation to be paid to Mr. Gary L. Howard by the
Company and MSI Eagle will be $260,000 exclusive of benefits, bonuses and annual
increases. See "Transactions With And For the Benefit of Affiliates,"
"Business," "Management" and "Certain Transactions".
SUBSTANTIAL POTENTIAL FUTURE FINANCIAL BENEFITS TO PRIOR OWNERS OF
ACQUISITION CANDIDATES NOW AFFILIATED WITH THE COMPANY. JEH EAGLE. In July
1997, JEH Eagle acquired the business and substantially all of the assets of JEH
Co., a Texas corporation, wholly owned by James E. Helzer, now the President of
the Company, Eagle and JEH Eagle. The purchase price, as adjusted, was
approximately $14,473,000, consisting of $13,600,000 in cash and a five-year,
$864,852 principal amount note bearing interest at the rate of 6% per year. The
purchase price and the note are subject to further adjustments under certain
conditions. The first $250,000 of the adjustments was to be paid in cash by JEH
Co. to JEH Eagle but, as other adjustments to the purchase price are
anticipated, JEH Eagle elected to postpone the $250,000 payment from JEH Co.
until other adjustments to the purchase price are resolved, and the $250,000
payment has been established as a receivable due on demand from JEH Co. Certain,
potentially substantial, contingent payments, as additional future consideration
to JEH Co., or its designee, are to be paid by JEH Eagle. JEH Co. is to receive
a percentage of the EBITDA or the modified EBITDA (as defined) of the business
acquired (the "JEH EBITDA") on a per year non-cumulative basis for each of JEH
Eagle's fiscal years ending on June 30 of 1998 through 2002 (the "JEH Applicable
Period"). If the JEH EBITDA reaches $3,000,000, $4,000,000 and $5,000,000 in the
foregoing fiscal years, JEH Co. or its designee is to receive 35%, 40% and 50%,
respectively, of that fiscal year's JEH EBITDA in excess of those levels,
respectively. In addition to the foregoing percentages of JEH EBITDA, if the JEH
EBITDA (plus $50,000 of Mr. Helzer's compensation under his employment
agreement) (x) for any fiscal year in the JEH Applicable Period is not less than
$4,400,000, JEH Eagle is to pay JEH Co. or its designee $1,000,000, provided
that the aggregate amounts of such payments is not to exceed $2,000,000; and (y)
in the aggregate during the JEH Applicable Period is not less than $20,000,000,
JEH Eagle is to pay JEH Co. or its designee the sum of $1,350,000 plus the
amount of the difference, if any, between $2,000,000 and the amount to be paid
under (x). Additionally, with respect to certain Total Accounts Receivable
Reserves, as defined (the "JEH Reserves") which were established at the date of
acquisition, if JEH Eagle reduces the amount of the JEH Reserves in any fiscal
year during the Applicable Period, JEH Co. or its designee is to be paid 100% of
the reduction until the JEH Reserves are not less than $2,500,000 and 50% of the
reduction in the JEH Reserves below $2,300,000 down to $600,000. Both of the
immediately foregoing percentage payments to JEH Co. or its designee are subject
to adjustment in certain events. Additionally, if this Public Offering is
completed prior to June 30, 2002 and in the event certain JEH EBITDA levels are
reached for JEH Eagle during the period from July 1, 1997 through the date of
consummation of this Public Offering,
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JEH Co. or its designee will be entitled to receive (i) $1,000,000 or (ii)
$1,350,000 (either in cash or in shares of the Company's Common Stock valued at
its public offering price) if the JEH EBITDA level is (i) less than $3,800,000
per year but not less than $3,600,000 per year, or (ii) not less than $3,800,000
per year, respectively. The Company will issue 300,000 shares of its Common
Stock and not pay the foregoing amounts to James E. Helzer in fulfillment of the
obligation set forth above, even if the JEH EBITDA does not reach the required
levels. The foregoing may result in substantial financial benefits to James E.
Helzer, and may materially and adversely effect the financial condition and
income of JEH Eagle and the Company.
MSI EAGLE. In October 1998, MSI Eagle acquired substantially all of the
assets and the business of MSI Co., a Texas corporation, wholly-owned by Gary L.
Howard, now a Vice President of the Company and President of MSI Eagle. The
purchase price, as adjusted, was approximately $8,296,000, consisting of
$6,250,000 in cash and a $2,046,000 principal amount five-year note bearing
interest at the rate of 8% per year. All payments due on the note are
accelerated upon consummation of the Public Offering and are to be paid within
120 days of such consummation. At MSI Co.'s option, upon consummation of the
Public Offering, it may exchange up to $2,000,000 of the principal amount of the
note into shares of the Company's Common Stock valued at the public offering
price. MSI Co. has advised the Company that it intends to exchange $250,000 of
the principal amount of the note for shares of the Company's Common Stock and
transfer said shares or its right to receive said shares to Gary L. Howard. The
note is secured by substantially all of the assets of MSI Eagle with that
security agreement subordinate to the rights of MSI Eagle's credit facility
lending institution. The purchase price and the note are subject to further
adjustments under certain conditions. Certain, potentially substantial,
contingent payments, as additional future consideration to MSI Co., or its
designee, are to be paid by MSI Eagle. MSI Co. is to receive a percentage of the
EBITA (earnings before interest, federal income taxes, and amortization) or the
modified EBITA (as defined) of the business acquired (the "MSI EBITA") on a per
year non-cumulative basis for each of MSI Eagle's fiscal years ending on June 30
of 1999 through 2003 (the "MSI Applicable Period"). If the MSI EBITA reaches
$2,000,000 and $2,750,000 in the foregoing fiscal years, MSI Co. or its designee
is to receive 25% and 35%, respectively, of that fiscal year's MSI EBITA in
excess of those levels, respectively. Additionally, if the Public Offering is
completed prior to October 22, 2003 and in the event certain MSI EBITA levels
are reached for MSI Eagle, MSI Co. or its designee will be entitled to receive
(i) $1,000,000 or (ii) $750,000 (either in cash or in shares of the Company's
Common Stock valued at its public offering price) if the MSI EBITA level is (i)
not less than $2,000,000 per year or (ii) less than $2,000,000 but not less than
$1,500,000 per year, respectively. The Company will issue 200,000 shares of its
Common Stock and not pay the foregoing amounts to Gary L. Howard, as MSI Co.'s
designee, in fulfillment of the obligation set forth in the immediately
preceding sentence, even if the MSI EBITA does not reach the required levels.
See "The Acquisitions" and "Certain Transactions."
DILUTION. As a result of the sale of the Securities offered in the Public
Offering and the consummation of the Acquisitions, there will be immediate and
substantial dilution to public investors in that the pro forma net tangible book
value per share of the Company's Common Stock after the Public Offering and
consummation of the Acquisitions will be approximately $.50 per share, or
approximately $4.50 (90%) less than the $5.00 Public Offering price per share.
All of the Company's present stockholders purchased their shares at a price
substantially less than the Public Offering price per share. See "Dilution."
PRIOR ABSENCE OF WRITTEN LEASES WITH AFFILIATES; WRITTEN LEASES TO BE
ENTERED INTO. Several of Eagle's distribution centers are leased from a
subsidiary of TDA on a month-to-month basis without formal written lease
agreements. Upon completion of the Public Offering and consummation of the
Acquisitions, the subsidiary of TDA and Eagle intend to enter into written
leases for such distribution centers. Although the written leases are expected
to be on substantially equivalent economic terms as Eagle's prior oral
agreements, the written leases will be for ten-year terms. As a result, Eagle
will then be committed to pay rent for such distribution centers for ten years.
James E. Helzer has rented to JEH Eagle the premises for several of JEH Eagle's
distribution facilities pursuant to five-year leases at an approximate annual
base
20
<PAGE>
rental of $486,000 to JEH Eagle which the Company believes to be fair and
reasonable to JEH Eagle. Gary L. Howard has rented to MSI Eagle the premises for
MSI Eagle's executive offices and principle distribution center pursuant to a
three-year lease at an approximate annual base rental of $107,000 to MSI Eagle
which the Company believes to be fair and reasonable to MSI Eagle. See
"Business."
POSSIBLE SUSPENSION OF COMPANY'S SECURITIES FROM NASDAQ SMALLCAP. The
Company's Securities offered hereby have been approved for quotation on NASDAQ
SmallCap. However, there can be no assurance that the Company will meet the
criteria for continued quotation of its securities on NASDAQ SmallCap. Such
criteria include, among other things, (a) $2,000,000 in net tangible assets,
$35,000,000 in market capitalization or $500,000 in net income in an issuer's
last fiscal year or two of its last three fiscal years; (b) a public float of
500,000 shares; (c) a $1,000,000 public float market value; (d) a $1.00 minimum
bid price; (e) two market makers; and (f) at least 300 round lot shareholders.
If the Company is unable to meet the continued quotation criteria of NASDAQ
SmallCap and is suspended therefrom, trading, if any, in the Company's
securities could thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or, if then available, the OTC Bulletin Board. In such
an event, an investor would likely find it more difficult to dispose of, or
obtain accurate quotation of, the Company's Securities.
RISKS OF LOW-PRICED SECURITIES. If the Company's Securities were to be
suspended or delisted from the NASDAQ SmallCap, the Securities would be subject
to rules under the Securities Exchange Act of 1934 (the "Exchange Act") which
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established clients and "accredited investors"
(for example, individuals with a net worth in excess of $1,000,000 or an annual
income exceeding $200,000 or $300,000 together with their spouses). For
transactions covered by such rules, a broker-dealer must make a special
suitability determination of the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. Consequently, such rules
may affect the ability of broker-dealers to sell the Company's Securities and
the ability to sell any of the Company's Securities in any secondary market that
may develop for such Securities.
The Commission has enacted rules that define a "penny stock" to be any
equity security that has a price (as therein defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions, including securities listed on the NASDAQ SmallCap or on designated
exchanges. For any transaction involving a penny stock, unless exempt, the rules
require the delivery, prior to any transaction in a penny stock, of a disclosure
statement prepared by the Commission relating to the penny stock market.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading, and about commissions payable to
both the broker-dealer and the registered representative, current quotations for
the securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements must be sent
disclosing recent price information for the penny stocks held in the account and
information on the limited market in penny stocks. In the event the Company's
Securities are no longer listed on the NASDAQ SmallCap or are not otherwise
exempt from the provisions of the Commission's "penny stock" rules, such rules
may also affect the ability of broker-dealers to sell the Company's Securities
and the ability to sell any of the Securities acquired hereby in any secondary
market that may develop.
NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to
the offering, there has been no market for any of the Company's securities. The
initial public offering price of the Securities and the exercise price and other
terms of the Warrants have been arbitrarily determined by negotiations between
the Company and the Underwriter and such prices and terms are not necessarily
related to the Company's asset value, net worth or other established criteria of
value. In addition, there can be no assurance that a trading market will develop
after the Public Offering for any of the Company's Securities or that, if
developed, it will be sustained. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. In general, under Rule 144, a person who
has satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of shares of
21
<PAGE>
common stock that does not exceed the greater of 1% of the then outstanding
shares of common stock or the average weekly trading volume in such shares
during the four calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of shares without any quantity or other
limitation by a person which is not an affiliate of an issuer and which has
satisfied a two-year holding period. The holders of approximately 300,000 shares
of the Company's Common Stock, after giving effect to the Public Offering and
the Acquisitions, have agreed not to sell, transfer, hypothecate or otherwise
dispose of the shares of the Company's Common Stock for a period of fifteen
months from the date of this Prospectus without the prior written consent of the
Underwriter. The holders of 5,650,000 shares of the Company's Common Stock,
after giving effect to the Public Offering and the Acquisitions, has agreed not
to sell, transfer, hypothecate or otherwise dispose of said shares of the
Company's Common Stock for a period of two years from the date of this
Prospectus, without the possibility of earlier release.
After giving effect to the Acquisitions, the Company will have 6,950,000
shares of Common Stock outstanding that are "restricted securities," as that
term is defined under Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"). The Company also has outstanding Warrants to
purchase 300,000 shares of Common Stock which shares of Common Stock underlying
the Warrants are being registered under the Registration Statement of which this
Prospectus forms a part for sale by the Selling Securityholders.
Investors should be aware that sales of the Company's securities may have a
depressive effect on the price of the Company's securities in any market which
may develop for such securities. See "--Effect of Options, Warrants and
Registration Rights," "Shares Eligible for Future Sale" and "Selling
Securityholders."
EFFECT OF OPTIONS, WARRANTS AND REGISTRATION RIGHTS. For the respective
terms of the Underwriter's Warrant and Stock Warrants and Warrants sold as part
of the Public Offering and issued by the Company in the Private Placement and
any options granted and that may be granted by the Company under the Company's
stock option plan, the holders thereof are given an opportunity to profit from a
rise in the market price of the Common Stock, with a resulting dilution in the
interests of the other stockholders. Further, the terms on which the Company may
obtain additional financing during the exercise periods of said warrants and
options may be adversely effected by the existence of such warrants, options and
plan. The holders of options or warrants to purchase Common Stock may exercise
such options or warrants at a time when the Company might be able to obtain
additional capital through offerings of securities on terms more favorable than
those provided by such options or warrants. In addition, the holders of the
Underwriter's Warrant and Stock Warrants have demand and "piggyback"
registration rights with respect to their securities. Exercise of such
registration rights may involve substantial expense to the Company. See "The
Acquisitions," "Management," "Certain Transactions," "Description of
Securities," "Underwriting" and "Selling Securityholders."
NO CASH DIVIDENDS. The Company has not paid any dividends to date. The
Company's Board of Directors does not presently intend to declare any dividends
in the foreseeable future but instead intends to retain all earnings, if any,
for use in the business operations of the Company and the Combined Entities. See
"Description of Securities."
ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Company's
Certificate of Incorporation permits its directors to designate the terms of and
issue shares of preferred stock. The issuance of shares of preferred stock by
the Board of Directors could adversely effect the rights of holders of Common
Stock by, among other matters, establishing preferential dividends, liquidation
rights and voting power. Although the Company has no present intention to issue
shares of preferred stock, the issuance thereof might render it more difficult,
and therefore discourage, an unsolicited takeover proposal such as a tender
offer, proxy contest or the removal of incumbent management, even if such
actions would be in the best interest of the Company's stockholders. The Company
has agreed not to issue any shares of Preferred Stock until the
22
<PAGE>
third anniversary date of this Prospectus without the Underwriter's written
consent. See "Description of Securities."
DIRECTORS' LIABILITY LIMITED. The Company's Certificate of Incorporation
provides that its directors will not be held liable to the Company or its
stockholders for monetary damages upon breach of a director's fiduciary duty
with certain exceptions. The exceptions include a breach of the director's duty
of loyalty, acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, improper declarations of dividends, and
transactions from which the directors derived an improper personal benefit. See
"Management."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are not
redeemable prior to the first anniversary date of this Prospectus without the
written consent of the Underwriter. The Warrants may be redeemed by the Company
at a redemption price of $.25 per Warrant upon 30 days prior written notice if
the market price (as herein defined) of the Common Stock averages at least
$10.00 per share for 30 consecutive trading days ending within 10 days of the
notice. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Warrants at the current market price for the
Warrants when they might otherwise wish to hold the Warrants, or to accept the
redemption price, which may be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities."
CURRENT PROSPECTUS AND BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Holders of the Warrants will have the right to exercise the Warrants
for the purchase of shares of Common Stock only if a current prospectus relating
to such shares is then in effect and only if the shares are qualified for sale
under the securities laws of the states in which the warrantholders reside.
Although the Company intends to maintain such a current prospectus and to seek
to qualify the shares of Common Stock underlying the Warrants for sale in those
states where the Common Stock and Warrants are to be offered, there is no
assurance that it will be able to do so. The Warrants may be deprived of any
value if the current prospectus encompassing the shares underlying the Warrants
is not kept effective or if such underlying shares are not or cannot be
registered in the states in which warrantholders reside. See "Description of
Securities."
23
<PAGE>
DILUTION
The initial offering price per share of Common Stock is substantially higher
than the average price per share paid by the Company's existing stockholders
based upon net tangible book value. Based on an initial public offering price of
$5.00 per share, purchasers of the Common Stock in the Public Offering will
experience an immediate and substantial dilution in net tangible book value of
approximately 90% or $4.50 per share. For the purposes of this discussion, it is
assumed that no Warrants will be exercised, and, accordingly, no value is
attributed to the Warrants.
The following table presents certain information concerning the net tangible
book value per share of the Company's Common Stock as of October 31, 1998, as
adjusted to give effect to the sale of 2,500,000 shares of Common Stock by the
Company in the Public Offering (at an initial public offering price of $5.00 per
share and after deducting the estimated underwriting discounts and estimated
offering expenses payable by the Company) and the consummation of the
Acquisitions:
<TABLE>
<S> <C> <C> <C>
Initial Public Offering price.......................................... $ 5.00 $ 5.00
---------
Net tangible book value per share before the Public Offering and the
Acquisitions(1)...................................................... $ (.04)
Increase per share attributable to new investors....................... 2.13
---------
Pro forma net tangible book value per share after the Public Offering
and before the Acquisitions.......................................... 2.09 2.09
---------
Dilution per share to new investors before the Acquisitions............ $ 2.91
---------
---------
Decrease per share attributable to the Acquisitions.................... (1.59)
---------
Pro forma net tangible book value per share after the Public Offering
and the Acquisitions................................................. .50
---------
Total dilution per share to new investors(2)........................... $ 4.50
---------
---------
</TABLE>
- ------------------------
(1) Net tangible book value per share is determined by dividing the Company's
net tangible book value (total assets less intangible assets and total
liabilities) at October 31, 1998 by the number of shares of Common Stock
then outstanding.
(2) Dilution per share is determined by subtracting pro forma net tangible book
value per share after the Public Offering and the Acquisitions from the
initial public offering price per share. The foregoing table also assumes no
exercise of the Underwriter's Warrant, the Warrants issued in the Private
Placement or options to purchase 900,000 shares of Common Stock to be
granted upon the closing of the Public Offering pursuant to the Company's
Stock Option Plan.
In the event the Underwriter exercises its Overallotment Option in full, the
pro forma net tangible book value per share after the Public Offering and the
Acquisitions would be $.67 which would result in dilution to new investors of
$4.33 per share.
24
<PAGE>
The following table sets forth, on a pro forma basis as of the date of this
Prospectus, the respective positions of the Company's existing stockholders and
new investors with respect to the number of shares of Common Stock purchased
from the Company, the total cash consideration paid and the average price per
share paid by the existing stockholders and by the new investors with respect to
the 2,500,000 shares of Common Stock to be issued by the Company at an initial
public offering price of $5.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- --------------------------
<S> <C> <C> <C> <C> <C>
APPROXIMATE APPROXIMATE AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -----------
Existing stockholders(1)............................... 5,950,000 70% $ 1,550,210 11% $ .26
New investors.......................................... 2,500,000 30% 12,500,000 89% $ 5.00
---------- --- ------------- --- -----
Totals................................................. 8,450,000 100% $ 14,050,210 100% $ 1.66
---------- --- ------------- --- -----
---------- --- ------------- --- -----
</TABLE>
- ------------------------
(1) Includes 2,100,000 shares in connection with the Company's initial
capitalization, 300,000 issued as part of the Company's Private Placement,
3,000,000 shares of Common Stock to be issued to TDA in connection with the
Acquisitions, 300,000 shares of Common Stock to be issued to James E. Helzer
pursuant to the agreement by which JEH Eagle acquired the business and
substantially all of the assets and the business of JEH Co., 200,000 shares
to be issued to Gary L. Howard pursuant to the agreement by which MSI Eagle
acquired the business and substantially all of the assets of MSI Co. and
50,000 shares relating to a $250,000 portion of a note in the principal
amount of $2,046,000 that MSI Co. has advised the Company it intends to
exchange for shares of Common Stock of the Company at the initial offering
price of $5.00 per share.
The foregoing table assumes no exercise of any Warrants or options to
purchase 900,000 shares of Common Stock to be granted upon the closing of the
Public Offering pursuant to the Company's Stock Option Plan.
25
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,500,000 shares of Common
Stock and 2,500,000 Warrants offered hereby are estimated to be approximately
$10,351,000 ($12,023,000 if the Underwriter's Overallotment Option is exercised
in full) after deducting underwriting commissions and discounts and other
expenses of the Public Offering. The Company expects to use the net proceeds
over the next twelve to twenty-four months approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DOLLAR AMOUNT APPROXIMATE
OF NET PERCENTAGE OF
APPLICATION OF NET PROCEEDS PROCEEDS NET PROCEEDS
- ----------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Finance the cash portion of potential acquisitions(1).............................. $ 2,500,000 24%
Additional Eagle, JEH Eagle and MSI Eagle distribution centers(2).................. $ 2,176,000 21%
Reduce Eagle's, JEH Eagle's and MSI Eagle's credit facilities and debt
balances(3)...................................................................... $ 4,100,000 40%
Capital Expenditures(4)............................................................ $ 700,000 7%
Repayment of Private Financing(5).................................................. $ 425,000 4%
Working Capital.................................................................... $ 450,000 4%
-------------- -----
Totals......................................................................... $ 10,351,000 100.0%
-------------- -----
-------------- -----
</TABLE>
- ------------------------
(1) Represents the approximate amount that may be used to fund the potential
acquisition of businesses in accordance with the Company's current strategy
which is subject to change from time to time.
(2) Represents the approximate amount that may be used to expand Eagle's, JEH
Eagle's and MSI Eagle's operations which is subject to change from time to
time. The Company estimates that the foregoing allocation will be sufficient
to enable Eagle, JEH Eagle and MSI Eagle to establish approximately six new
distribution centers and will be used principally to carry accounts
receivable and purchase inventory. The foregoing allocation excludes the
purchase of trucks, forklifts and similar equipment identified in note (4).
(3) To be used (i) to prepay the unpaid principal and interest due, at the time
of such payment, to MSI Co. pursuant to the five-year note issued by MSI
Eagle in October 1998 to MSI Co. in connection with MSI Eagle's acquisition
of the business and substantially all of the assets of MSI Co. in the
principal amount of $2,046,000, subject to adjustment, bearing interest at
the rate of 8% per year; and (ii) to be used to reduce Eagle's, JEH Eagle's
and MSI Eagle's outstanding balances of borrowings under their credit
facilities. At October 31, 1998, Eagle had borrowed approximately $8,748,000
under its credit facility. During Eagle's June 30, 1995 fiscal year, Eagle
used its borrowings under its credit facility to repay approximately
$2,326,000 of its indebtedness to TDA and to advance approximately
$3,309,000 to TDA. The remainder of the outstanding balance of the credit
facility was used to fund continuing operations. At October 31, 1998, JEH
Eagle had borrowed approximately $13,106,000 under its credit facility. At
October 31, 1998, MSI Eagle had borrowed approximately $3,485,000 under its
credit facility. The Eagle, JEH Eagle and MSI Eagle revolving credit loans
under the credit facilities bear interest, at their respective options, at
the London interbank offered rate ("Libor") plus two and one-half percent or
the lender's prime rate plus one-half percent. Currently, Eagle, JEH Eagle
and MSI Eagle pay interest on their revolving credit loans based upon both
rates. The current annual rates of interest on their revolving credit loans
are 8.25% based on the prime rate and approximately 7.75% based on Libor. It
is anticipated that the borrowings under the revolving credit loans at the
higher interest rate will be reduced for each of them. Each of Eagle's, JEH
Eagle's and MSI Eagle's credit facilities mature in October 2003. See "The
Acquisitions."
(4) To be used for leasehold improvements for existing distribution centers and
to purchase, if necessary, trucks, forklifts and similar equipment to
support additional distribution centers for Eagle, JEH Eagle and MSI Eagle.
26
<PAGE>
(5) To be used to repay approximately $425,000 in principal and interest on
borrowings of $300,000 made by the Company in February 1998 pursuant to
promissory notes issued to TDA ($150,000) and two other stockholders of the
Company, and on borrowings made by the Company in August 1998 pursuant to a
promissory note issued to TDA in the principal amount of $100,000. The
February 1998 notes bear interest at the rate of 15% per year through June
30, 1998 and 6% per year after that date. The February 1998 notes mature on
the earlier of thirty months after issuance or the closing of the Public
Offering. The note issued to TDA in August 1998 bears interest at the rate
of 6% per year and matures on the earlier of two years after issuance or the
closing of the Public Offering. The proceeds from the issuance of the
foregoing notes have and are being used to pay certain expenses relating to
the Public Offering, legal fees and expenses in connection with seeking the
listing of the Company's securities on NASDAQ and the Acquisitions.
The Company currently estimates that the net proceeds of the Public Offering
will be sufficient to fund its planned operations, including the cash portion of
potential acquisitions, if any, and expansion efforts for approximately twelve
to twenty-four months from the date of this Prospectus. The net proceeds may be
sufficient for a greater or lesser period of time depending on the extent of the
Company's expansion efforts and on the number of acquisitions, if any, that the
Company consummates during the next twelve to twenty-four months and the portion
of the purchase price of such acquisitions paid in cash. In addition, the
Company may require additional financing prior to or following such period if
Eagle, JEH Eagle or MSI Eagle suffer losses or if the Company effects the
acquisition of a business that subsequently suffers losses. The Company has no
commitments or arrangements for any such additional financing, and there can be
no assurance that the Company will be able to obtain additional financing on
terms acceptable to the Company or at all. If required, the Company may seek to
finance the purchase price of acquisitions by purchase money indebtedness,
asset-based financing and/or issuances of its own securities; and to open
additional Eagle, JEH Eagle and MSI Eagle distribution centers by obtaining
short-term vendor inventory financing (inventory purchased on extended payment
terms), asset-based financing and/ or equipment leasing/financing. As each
potential acquisition will be individually negotiated, the Company is unable to
estimate the cash or other portions of a potential acquisition's purchase price.
In the event additional financing is unavailable to the Company, the Company may
be materially adversely affected.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Public Offering. Future events, as well as changes in
economic, regulatory or competitive conditions or the Company's business or
Eagle's, JEH Eagle's or MSI Eagle's business and the results of the Company's,
Eagle's, JEH Eagle's or MSI Eagle's activities may make shifts in the allocation
of funds within the described categories or to other purposes necessary or
desirable. In the event the Company is unable to fund the cash portion of
potential acquisitions with the net proceeds allocated above, Eagle, JEH Eagle
or MSI Eagle suffer losses or the Company completes an acquisition that
subsequently suffers losses, the Company may draw upon the net proceeds of the
Public Offering allocated to expand the number of Eagle's, JEH Eagle's or MSI
Eagle's distribution centers, purchase equipment to support that expansion
and/or working capital. The Company estimates that the net proceeds of the
Public Offering allocated to expand the number of Eagle's, JEH Eagle's and MSI
Eagle's distribution centers and to support that expansion will be sufficient to
establish approximately six new distribution centers at an average cost of
approximately $415,000 for each new distribution center. In the event the per
distribution center costs are greater than estimated, Eagle, JEH Eagle and MSI
Eagle may establish less than six new distribution centers, the Company may seek
vendor financing of inventory, asset-based financing and/or equipment
leasing/financing, or draw upon the net proceeds of the Public Offering
allocated to working capital. In the event the per distribution center costs are
less than estimated, a portion of the net proceeds of the Public Offering
allocated for such purposes will be reallocated to finance acquisitions or for
working capital. In order to conduct its proposed expansion, the Company intends
to use a significant portion of the net proceeds of the Public Offering for the
acquisition of businesses or assets that are consistent with the Company's
current strategy, which is subject to change from time to time. With the
exception of the Acquisitions, the Company does not currently have any
agreements, commitments or arrangements with
27
<PAGE>
respect to any proposed acquisitions nor has it identified or negotiated with
any potential acquisition candidates, and there can be no assurance that any
acquisitions will be consummated. Except for the Acquisitions, the Company has
no present intention to use the net proceeds of the Public Offering to acquire
assets from any of its affiliates.
Prior to expenditure, proceeds will be invested principally in high grade,
short-term, interest-bearing investments. Any proceeds received upon exercise of
the Overallotment Option or any of the Warrants will be used to finance
potential acquisitions or for working capital. There can be no assurance that
the Overallotment Option or any of the Warrants will be exercised.
28
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of October
31, 1998 (i) on an actual basis, (ii) on a combined basis, assuming the
consummation of the Acquisitions as of such date and (iii) as adjusted/combined
to give effect to the Public Offering of 2,500,000 shares of Common Stock and
2,500,000 Warrants at initial public offering prices of $5.00 per share and
$.125 per Warrant, the application of the net proceeds therefrom and assuming
consummation of the Acquisitions as of such date. The Acquisitions will be
treated as a combination of entities under common control similar to the
pooling-of-interests method of accounting. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Unaudited Pro Forma Condensed Consolidated
Balance Sheet, "Certain Transactions" and the Financial Statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1998
-------------------------------------------
<S> <C> <C> <C>
AS ADJUSTED/
ACTUAL COMBINED COMBINED
------------- ------------- -------------
Long-Term Debt.......................................................... $ -- $ 30,662,019 $ 26,312,019
Stockholders' Equity:
Preferred Stock, $.0001 par value; 2,500,000 shares authorized; no
shares issued and outstanding....................................... -- -- --
Common Stock, $.0001 par value; 25,000,000 shares authorized; 2,400,000
shares issued and outstanding (actual); 5,900,000 shares issued and
outstanding (combined)(1); 8,495,000 shares issued and outstanding (as
adjusted/combined)(2)(3).............................................. 240 590 845
Additional Paid-in Capital.............................................. 293,865 6,202,815 16,803,560
Deficit................................................................. (387,440) (1,093,768) (1,093,768)
------------- ------------- -------------
(93,335) 5,109,637 15,710,637
Due from TDA Industries, Inc. and Affiliated Companies.................. -- (495,497) (495,497)
------------- ------------- -------------
Total Stockholders' Equity (Deficit).................................... (93,335) 4,614,140 15,215,140
------------- ------------- -------------
Total Capitalization.................................................... $ (93,335) $ 35,276,159 $ 41,527,159
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Includes, in the combined column, 3,000,000, 300,000 and 200,000 shares of
Common Stock to be issued to TDA, James E. Helzer and Gary L. Howard,
respectively, simultaneously with the closing of the Public Offering and
consummation of the Acquisitions. See "Certain Transactions."
(2) Includes 2,500,000 shares of Common Stock to be issued in the Public
Offering and 50,000 shares of Common Stock relating to a $250,000 portion of
a note in the principal amount of $2,046,000 that MSI Co. has advised the
Company that it intends to exchange for shares of Common Stock of the
Company at the initial Public Offering price of $5.00 per share.
(3) Does not include (i) 375,000 shares of Common Stock and 375,000 Warrants and
375,000 shares of Common Stock underlying such Warrants subject to the
Underwriter's Overallotment Option; (ii) 2,500,000 shares of Common Stock
issuable upon the exercise of the Warrants; (iii) 300,000 shares of Common
Stock issuable upon the exercise of the Company's outstanding Warrants; (iv)
500,000 shares of Common Stock issuable upon the exercise of the
Underwriter's Warrants and Stock Warrants; and (v) 1,000,000 shares of
Common Stock reserved for issuance pursuant to the Company's Stock Option
Plan of which 900,000 shares of Common Stock are reserved for options to be
granted upon completion of the Public Offering. See "Management,"
"Description of Securities," "Underwriting," and "Selling Securityholders."
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated financial
statements are presented to illustrate the effects of certain adjustments to the
historical financial statements of the Company, Eagle, JEH Eagle and MSI Eagle
that would result from the completion of the Public Offering and the
Acquisitions and are presented as if these transactions had occurred on the
first day of the earliest period presented in the Unaudited Pro Forma Condensed
Consolidated Statements of Operations and the last day of the fourth month of
the current fiscal year for the Unaudited Pro Forma Condensed Consolidated
Balance Sheet.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the notes thereto and also in conjunction with the respective
audited and unaudited historical financial statements and notes thereto of the
Company, Eagle, JEH Eagle and MSI Eagle appearing elsewhere herein.
The unaudited pro forma condensed consolidated financial statements are
presented for illustrative purposes only and do not purport to represent the
actual results and financial position of the consolidated entities had the
Public Offering and the Acquisitions occurred on the dates described above, nor
are they necessarily indicative of the future operating results or financial
position of the consolidated entities after the Public Offering and the
Acquisitions.
The Acquisitions will be accounted for as the combining of four entities
under common control similar to the pooling-of-interests method of accounting
with the net assets of Eagle, JEH Eagle and MSI Eagle recorded at historical
carryover values. The 3,000,000 shares of Common Stock to be issued to TDA will
be recorded at Eagle's, JEH Eagle's and MSI Eagle's historical book values at
the date of the Acquisitions. Accordingly, these transactions will not result in
any re-evaluation of the Company's, Eagle's, JEH Eagle's or MSI Eagle's assets
or the creation of additional goodwill. The 300,000 shares of the Company's
Common Stock to be issued to James E. Helzer and the 200,000 shares to be issued
to Gary L. Howard will be accounted for as additional purchase price in
connection with the acquisition by JEH Eagle of JEH Co. and MSI Eagle of MSI
Co., respectively, and such shares will be valued at the Public Offering price
of $5.00 per share.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1998
<TABLE>
<CAPTION>
(HISTORICAL)
----------------------------------------------------------
EAGLE JEH/EAGLE MSI/EAGLE
THE SUPPLY, SUPPLY, SUPPLY,
COMPANY INC. INC. INC. TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................... $ 35,298 $ 21,180 $ 107,777 $ 171,339 $ 335,594
Accounts and notes receivable--net........................... 9,570,879 14,412,093 1,544,292 25,527,264
Inventories.................................................. 5,548,986 8,782,595 1,180,861 15,512,442
Deferred tax asset........................................... 226,054 309,500 1,000 536,554
Due from related party....................................... 250,000 250,000
Other current assets......................................... 351,261 343,101 295,516 108,930 1,098,808
---------- ---------- ---------- ---------- ----------
Total current assets....................................... 386,559 15,710,200 24,157,481 3,006,422 43,260,662
IMPROVEMENTS AND EQUIPMENT--net................................ 1,607,406 3,522,196 665,823 5,795,425
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED--net........ 2,682,604 5,486,126 8,168,730
DEFERRED FINANCING COSTS--net.................................. 212,892 109,686 322,578
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS................................................... $ 386,559 $17,317,606 $30,575,173 $9,268,057 $57,547,395
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $7,825,978 $9,793,367 $ 754,022 $18,373,367
Accrued expenses and other current liabilities............... $ 88,894 849,100 2,096,484 414,877 3,449,355
Due to related parties....................................... 150,446 250,000 400,446
Current portion of long-term debt............................ 600,000 1,216,590 1,270,542 3,087,132
Notes payable--shareholders.................................. 400,000 400,000
Loan payable--affiliated company............................. 1,400,000 1,400,000
Federal and state income taxes due to Parent................. (9,000) 2,488 390,250 24,000 407,738
---------- ---------- ---------- ---------- ----------
Total current liabilities.................................. 479,894 10,677,566 13,647,137 2,713,441 27,518,038
LONG-TERM DEBT................................................. 8,643,819 13,649,312 5,281,756 27,574,887
DUE TO TDA INDUSTRIES, INC..................................... 233,318 233,318
DEFERRED TAX LIABILITIES....................................... 91,812 15,200 107,012
---------- ---------- ---------- ---------- ----------
Total liabilities.......................................... 479,894 19,413,197 27,311,649 8,228,515 55,433,255
---------- ---------- ---------- ---------- ----------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Preferred shares............................................. 0
Common shares................................................ 240 59,300 30 30 59,600
Additional paid-in capital..................................... 293,865 1,000,000 1,349,970 999,970 3,643,805
Retained earnings.............................................. (387,440) 410,590 1,913,524 39,542 1,976,216
---------- ---------- ---------- ---------- ----------
(93,335) 1,469,890 3,263,524 1,039,542 5,679,621
Less: Due From TDA Industries, Inc, and affiliated companies... (3,565,481) (3,565,481)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity (deficiency).................... (93,335) (2,095,591) 3,263,524 1,039,542 2,114,140
---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)........ $ 386,559 $17,317,606 $30,575,173 $9,268,057 $57,547,395
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<CAPTION>
AS ADJUSTED/
ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSET
CURRENT ASSETS:
Cash......................................................... $ 335,594 $5,826,000(5) $6,161,594
Accounts and notes receivable--net........................... 25,527,264 25,527,264
Inventories.................................................. 15,512,442 15,512,442
Deferred tax asset........................................... 536,554 536,554
Due from related party....................................... 250,000 250,000
Other current assets......................................... 1,098,808 1,098,808
----------- ---------- ----------- ------------
Total current assets....................................... 43,260,662 5,826,000 49,086,662
IMPROVEMENTS AND EQUIPMENT--net................................ 5,795,425 5,795,425
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED--net........ $1,500,000(2) 10,668,730 10,668,730
1,000,000(3)
DEFERRED FINANCING COSTS--net.................................. 322,578 322,578
----------- ---------- ----------- ------------
TOTAL ASSETS................................................... $2,500,000 $60,047,395 $5,826,000 $65,873,395
----------- ---------- ----------- ------------
----------- ---------- ----------- ------------
LIABILITIES AND SHAR
CURRENT LIABILITIES:
Accounts payable............................................. $18,373,367 $18,373,367
Accrued expenses and other current liabilities............... 3,449,355 $ (25,000) 3,424,355
Due to related parties....................................... 400,446 400,446
Current portion of long-term debt............................ 3,087,132 3,087,132
Notes payable--shareholders.................................. 400,000 (400,000)(5) --
Loan payable--affiliated company............................. 1,400,000 1,400,000
Federal and state income taxes due to Parent................. 407,738 407,738
----------- ---------- ----------- ------------
Total current liabilities.................................. 27,518,038 (425,000) 27,093,038
(4,100,000)(5)
LONG-TERM DEBT................................................. 27,574,887 (250,000) 23,224,887
DUE TO TDA INDUSTRIES, INC..................................... 233,318 233,318
DEFERRED TAX LIABILITIES....................................... 107,012 107,012
----------- ---------- ----------- ------------
Total liabilities.......................................... 55,433,255 (4,775,000) 50,658,255
----------- ---------- ----------- ------------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Preferred shares............................................. 0 0
250(5)
Common shares................................................ (59,010) (4) 590 5(6) 845
1,499,970(2)
999,980(3)
(300)(4) 10,350,750(5)
Additional paid-in capital..................................... 59,360(1) 6,202,815 249,995(6) 16,803,560
Retained earnings.............................................. (3,069,984)(1) (1,093,768) (1,093,768)
----------- ---------- ----------- ------------
(569,984) 5,109,637 10,601,000 15,710,637
Less: Due From TDA Industries, Inc, and affiliated companies... 3,069,984(1) (495,497) (495,497)
----------- ---------- ----------- ------------
Total shareholders' equity (deficiency).................... 2,500,000 4,614,140 10,601,000 15,215,140
----------- ---------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)........ $2,500,000 $60,047,395 $5,826,000 $65,873,395
----------- ---------- ----------- ------------
----------- ---------- ----------- ------------
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Reflects the consummation of the Acquisitions. Upon the closing of the
Public Offering, Eagle, JEH Eagle and MSI Eagle combined will have no less
than $1,000,000 in book value. The Due from TDA Industries, Inc. and
Affiliated Companies account ("Inter-company Account") includes a receivable
for a $495,497 mortgage obligation on property previously owned by Eagle on
which Eagle remains the primary obligor. The mortgage obligation reflected
in Eagle's financial statements for financial reporting purposes is offset
by a corresponding increase in the Inter-company Account. The Inter-company
Account net of such mortgage obligation in the amount of $3,069,984 is the
amount that would cancel, in the form of a non-cash dividend, the entire Due
from TDA Industries, Inc. and Affiliated Companies, except for the
off-setting receivable. To the extent the non-cash dividend results in a
combined minimum equity for the Combined Entities of less than $1,000,000,
TDA has agreed to pay the difference, if any, in cash within forty-five days
after the closing of the Public Offering. Assuming the Acquisitions had
taken place on October 31, 1998, there would not have been any shortfall.
The actual amount of the non-cash dividend will vary based on the amount of
the Inter-company Account and the combined equity of the Combined Entities
on the date the Acquisitions actually occur. See "Risk Factors," "The
Acquisitions" and "Certain Transactions."
(2) Reflects the issuance of 300,000 shares of Common Stock to be issued to
James E. Helzer. Such shares will be accounted for as additional purchase
price in connection with the acquisition by JEH Eagle of JEH Co. and have
been valued at the public offering price of $5.00 per share.
(3) Reflects the issuance of 200,000 shares of Common Stock to be issued to Gary
L. Howard. Such shares will be accounted for as additional purchase price in
connection with the acquisition by MSI Eagle of MSI Co. and have been valued
at the public offering price of $5.00 per share.
(4) Reflects the issuance of 3,000,000 shares of Common Stock to be issued to
TDA upon consummation of the Acquisitions.
(5) Reflects the Public Offering of 2,500,000 shares of Common Stock at an
offering price of $5.00 per share and 2,500,000 Warrants at an offering
price of $.125 per Warrant including the application of cash toward the
aggregate offering expenses of approximately $2,461,625 and the planned
reduction of debt of $4,525,000. See "Underwriting" and "Use of Proceeds."
(6) Reflects 50,000 shares relating to a $250,000 portion of a note in the
principal amount of $2,046,000 that MSI Co. has advised the Company it
intends to exchange for shares of Common Stock of the Company and transfer
to Gary L. Howard.
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED OCTOBER 31, 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EAGLE JEH/EAGLE,
THE SUPPLY, SUPPLY, MSI/EAGLE,
COMPANY(10) INC. INC. SUPPLY,INC. MSI CO.(11) TOTAL ADJUSTMENTS
------------- ---------- ----------- ----------- ----------- ---------- -----------
REVENUES........................... $ -- $19,101,951 3$1,682,018 $ 364,684 $3,976,794 $55,125,447
COST OF SALES...................... -- 15,034,455 24,194,001 209,124 2,375,820 41,813,400
------------- ---------- ----------- ----------- ----------- ----------
-- 4,067,496 7,488,017 155,560 1,600,974 13,312,047
------------- ---------- ----------- ----------- ----------- ----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... -- 3,835,794 4,711,027 68,706 946,307 9,561,834 $ 173,000(1)
24,000(2)
(93,800)(6)
DEPRECIATION AND AMORTIZATION...... -- 203,746 191,835 4,858 40,490 440,929
AMORTIZATION OF EXCESS COST OF
INVESTMENTS OVER NET ASSETS
ACQUIRED......................... -- 22,701 3,764 2,588 29,053 20,000(3)
42,000(7)
AMORTIZATION OF DEFERRED FINANCING -- -- 19,354 604 19,958 7,000(7)
COSTS............................
------------- ---------- ----------- ----------- ----------- ---------- -----------
-- 4,039,540 4,944,917 77,932 989,385 10,051,774 172,200
------------- ---------- ----------- ----------- ----------- ---------- -----------
INCOME FROM OPERATIONS............. -- 27,956 2,543,100 77,628 611,589 3,260,273 (172,200)
------------- ---------- ----------- ----------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest income.................. -- 7,309 11,729 19,038
Interest expense................. (7,350) (265,613) (474,115) (14,086) (10,629) (771,793) (157,000)(7)
------------- ---------- ----------- ----------- ----------- ---------- -----------
(7,350) (258,304) (462,386) (14,086) (10,629) (752,755) (157,000)
------------- ---------- ----------- ----------- ----------- ---------- -----------
(LOSS) INCOME BEFORE (BENEFIT) (7,350) (230,348) 2,080,714 63,542 600,960 2,507,518 (329,200)(8)
PROVISION FOR INCOME TAXES.......
(BENEFIT) PROVISION FOR INCOME (2,000) (87,000) 775,000 24,000 710,000 222,000
TAXES............................
(122,000)(8)
------------- ---------- ----------- ----------- ----------- ---------- -----------
NET (LOSS) INCOME.................. $ (5,350) $ (143,348) $1,305,714 $ 39,542 $ 600,960 $1,797,518 $(429,200)
------------- ---------- ----------- ----------- ----------- ---------- -----------
------------- ---------- ----------- ----------- ----------- ---------- -----------
Basic Net Income per Share (9).....
Diluted Net Income per Share (9)...
Basic and Dilutive Weighted Average
Number of Shares Outstanding
(9)..............................
<CAPTION>
<S> <C> <C> <C>
AS ADJUSTED/
COMBINED ADJUSTMENTS COMBINED
---------- ----------- ------------
REVENUES........................... $55,125,447 $55,125,447
COST OF SALES...................... 41,813,400 41,813,400
---------- ------------
13,312,047 13,312,047
---------- ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... 9,665,034 $ 12,000(4) 9,677,034
DEPRECIATION AND AMORTIZATION...... 440,929 440,929
AMORTIZATION OF EXCESS COST OF
INVESTMENTS OVER NET ASSETS
ACQUIRED......................... 91,053 91,053
AMORTIZATION OF DEFERRED FINANCING 26,958 26,958
COSTS............................
---------- ----------- ------------
10,223,974 12,000 10,235,974
---------- ----------- ------------
INCOME FROM OPERATIONS............. 3,088,073 (12,000) 3,076,073
---------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income.................. 19,038 19,038
Interest expense................. (928,793) 130,000(5) (798,793)
---------- ----------- ------------
(909,755) 130,000 (779,755)
---------- ----------- ------------
(LOSS) INCOME BEFORE (BENEFIT) 2,178,318 118,000 2,296,318
PROVISION FOR INCOME TAXES.......
(BENEFIT) PROVISION FOR INCOME 810,000 44,000(8) 854,000
TAXES............................
---------- ----------- ------------
NET (LOSS) INCOME.................. $1,368,318 $ 74,000 $1,442,318
---------- ----------- ------------
---------- ----------- ------------
Basic Net Income per Share (9)..... $ 0.19
------------
------------
Diluted Net Income per Share (9)... $ 0.19
------------
------------
Basic and Dilutive Weighted Average 7,431,594
Number of Shares Outstanding
(9)..............................
------------
------------
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EAGLE JEH/EAGLE,
THE SUPPLY, SUPPLY,
COMPANY(10) INC. INC. MSI CO.(11) TOTAL ADJUSTMENTS
------------- ---------- ----------- ----------- ----------- -----------
REVENUES.................................... $ -- $58,497,263 7$1,005,549 1$1,960,092 $141,462,904
COST OF SALES............................... -- 46,429,897 55,097,524 7,374,319 108,901,740
------------- ---------- ----------- ----------- -----------
-- 12,067,366 15,908,025 4,585,773 32,561,164
------------- ---------- ----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE 437 10,741,092 13,028,890 3,392,046 27,162,465 $ 520,000(1)
EXPENSES..................................
72,000(2)
(465,200)(6)
DEPRECIATION AND AMORTIZATION............... -- 497,420 461,506 179,197 1,138,123
AMORTIZATION OF EXCESS COST OF INVESTMENT -- 171,829 8,360 180,189 62,000(3)
OVER NET ASSETS ACQUIRED..................
137,000(7)
AMORTIZATION OF DEFERRED FINANCING COSTS.... -- 58,062 58,062 22,000(7)
------------- ---------- ----------- ----------- ----------- -----------
437 11,238,512 13,720,287 3,579,603 28,538,839 347,800
------------- ---------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS...................... (437) 828,854 2,187,738 1,006,170 4,022,325 (347,800)
------------- ---------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................... -- 25,314 25,900 51,214
Interest expense.......................... (17,625) (594,032) (1,249,828) (43,053) (1,904,538) (514,000)(7)
------------- ---------- ----------- ----------- ----------- -----------
(17,625) (568,718) (1,223,928) (43,053) (1,853,324) (514,000)
------------- ---------- ----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR (18,062) 260,136 963,810 963,117 2,169,001 (861,800)
INCOME TAXES..............................
356,000(8)
(BENEFIT) PROVISION FOR INCOME TAXES........ (7,000) 100,000 356,000 449,000 (319,000)(8)
------------- ---------- ----------- ----------- ----------- -----------
NET (LOSS) INCOME........................... $ (11,062) $ 160,136 $ 607,810 $ 963,117 $ 1,720,001 $(898,800)
------------- ---------- ----------- ----------- ----------- -----------
------------- ---------- ----------- ----------- ----------- -----------
Basic Net Income per Share (9)..............
Diluted Net Income per Share (9)............
Basic and Dilutive Weighted Average Number
of Shares Outstanding (9).................
<CAPTION>
<S> <C> <C> <C>
AS ADJUSTED/
COMBINED ADJUSTMENTS COMBINED
----------- ----------- ------------
REVENUES.................................... $141,462,904 1$41,462,904
COST OF SALES............................... 108,901,740 108,901,740
----------- ------------
32,561,164 32,561,164
----------- ------------
SELLING, GENERAL AND ADMINISTRATIVE 27,289,265 $ 36,000(4) 27,325,265
EXPENSES..................................
DEPRECIATION AND AMORTIZATION............... 1,138,123 1,138,123
AMORTIZATION OF EXCESS COST OF INVESTMENT 379,189 379,189
OVER NET ASSETS ACQUIRED..................
AMORTIZATION OF DEFERRED FINANCING COSTS.... 80,062 -- 80,062
----------- ----------- ------------
28,886,639 36,000 28,922,639
----------- ----------- ------------
INCOME FROM OPERATIONS...................... 3,674,525 (36,000) 3,638,525
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income........................... 51,214 51,214
Interest expense.......................... (2,418,538) 390,000(5) (2,028,538)
----------- ----------- ------------
(2,367,324) 390,000 (1,977,324)
----------- ----------- ------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR 1,307,201 354,000 1,661,201
INCOME TAXES..............................
(BENEFIT) PROVISION FOR INCOME TAXES........ 486,000 131,000(8) 617,000
----------- ----------- ------------
NET (LOSS) INCOME........................... $ 821,201 $ 223,000 $1,044,201
----------- ----------- ------------
----------- ----------- ------------
Basic Net Income per Share (9).............. $ 0.14
------------
------------
Diluted Net Income per Share (9)............ $ 0.14
------------
------------
Basic and Dilutive Weighted Average Number 7,409,203
of Shares Outstanding (9).................
------------
------------
</TABLE>
See notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C>
(1) To reflect the compensation payable pursuant to employment agreements with Messrs. Fields and Friedman which
commence upon closing of the Public Offering and consummation of the Acquisitions. See "Management" and
"Certain Transactions."
(2) To reflect amounts payable pursuant to the administrative and strategic services agreements with TDA for
office space, administrative, financial and strategic consulting services, which commence upon completion of
the Public Offering and consummation of the Acquisitions.
(3) Reflects amortization over a 40 year period of the excess cost of investment over net assets acquired
("goodwill") and the additional purchase price resulting from the issuance of 300,000 shares to James E.
Helzer in connection with the acquisition by JEH Eagle of JEH Co. and the additional goodwill and purchase
price resulting from the issuance of 200,000 shares to Gary L. Howard in connection with the acquisition by
MSI Eagle of MSI Co. See "Risk Factors-- Amortization of Goodwill," "The Acquisitions" and "Certain
Transactions."
(4) Reflects the amount payable in connection with the Underwriter's financial consulting agreement.
(5) Reflects the reduction in interest expense in connection with the assumed retirement of $4,525,000 long-term
debt. See "Use of Proceeds."
(6) Reflects the compensation differential between Gary L. Howard's aggregate salary and S corporation
distributions during the period prior to the sale of MSI Co. to MSI Eagle and the contractual amount of Mr.
Howard's compensation subsequent thereto. This adjustment is the result of changed circumstances that exist
following the sale of MSI Co. to MSI Eagle. Mr. Howard's duties and responsibilities will not diminish with
the result that other costs will be incurred that would offset the pro forma adjustment to compensation
expenses. Management believes that this adjustment is necessary for investors to more realistically access
the impact of the contemplated acquisition. See "Certain Transactions."
(7) Reflects amortization of goodwill over a 40 year period created by the acquisition of MSI Co. by MSI Eagle;
the interest expense differential between the interest cost associated with the debt incurred to fund the
acquisition and provide post acquisition working capital compared to the historical interest expense
incurred by MSI Co. for working capital lines of credit and the amortization of deferred financing costs.
See "Risk Factors--Amortization of Goodwill" and "The Acquisitions."
(8) To reflect income taxes relating to the foregoing adjustments and, with respect to the year ended June 30,
1998 and the period July 1, 1998 to October 21, 1998, a pro forma tax provision relating to the operations
of MSI Co. (predecessor) during the period it was taxed as an S corporation.
(9) Basic and Dilutive Income per Share is based on the weighted average number of shares outstanding and
includes 2,100,000 shares issued in connection with the Company's initial capitalization, 300,000 shares
issued as part of the Company's Private Placement, 3,000,000, 300,000 and 200,000 shares to be issued to
TDA, James E. Helzer and Gary L. Howard, respectively, in connection with the Acquisitions, 50,000 shares of
Common Stock relating to a $250,000 portion of a note in the principal amount of $2,046,000 that MSI Co. has
advised the Company that it intends to exchange for shares of Common Stock of the Company and 1,481,594 and
1,459,203 shares ("Additional Shares") in the four months ended October 31, 1998 and year ended June 30,
1998, respectively, for the shares assumed to be issued in the Public Offering, the proceeds of which would
be used to retire $4,525,000 of debt and replace the capital in excess of the respective period's earnings
which is represented by the non-cash dividend to TDA from Eagle. The computations exclude shares to be
issued in connection with the Public Offering in excess of the Additional Shares and the 300,000 Warrants
issued in the Private Placement because they are not dilutive. The Underwriter's Warrant and options to be
granted upon the closing of the Public Offering pursuant to the Company's Stock Option Plan are not dilutive
and have not been included. See "Risk Factors," "Certain Transactions," "The Acquisitions" and the Financial
Statements and the Notes thereto.
(10) The Company was formed on May 1, 1996 and has had limited operations through October 31, 1998.
(11) Reflects the operations of MSI Co. for the year ended June 30, 1998 and the period July 1, 1998 to October
21, 1998 prior to its acquisition by MSI Eagle on October 22, 1998.
</TABLE>
35
<PAGE>
SELECTED FINANCIAL INFORMATION
Prior to the contemplated Acquisitions, the Company has had limited
operations. The historical selected financial information included in the
statement of operations has been prepared on a basis which combines the Company
(organized on May 1, 1996), Eagle Supply, Inc. ("Eagle"), JEH/Eagle Supply, Inc.
("JEH Eagle") (acquired on July 1, 1997) and MSI Eagle Supply, Inc. ("MSI
Eagle") (acquired on October 22, 1998) as four entities controlled by TDA
Industries, Inc. ("TDA") because the separate financial data of the Company
would not be meaningful. Information with respect to the Company is included
from May 1, 1996 (inception), information for Eagle is included for all periods
presented, information with respect to JEH Eagle is included from July 1, 1997
and information with respect to MSI Eagle is included from October 22, 1998.
The selected financial information presented below should be read in
conjunction with the consolidated financial statements and the notes thereto,
the unaudited financial statements and the notes thereto and the unaudited pro
forma condensed consolidated financial statements included elsewhere herein. The
historical information contained in the table at and for the fiscal years ended
June 30, 1998, 1997 and 1996 has been derived from audited financial statements
and is qualified in its entirety by, and should be read in connection with, the
audited financial statements (and the notes thereto) appearing elsewhere in this
Prospectus. The historical information at and for the fiscal years ended June
30, 1995 and 1994 have been derived from audited financial statements which are
not included in this Prospectus. The historical information at and for the four
months ended October 31, 1998 and 1997 have been derived from unaudited
financial statements which, in the opinion of management, include all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the financial condition and results of operations. The
unaudited financial statements are included elsewhere in this Prospectus. The
results of interim periods are not necessarily indicative of the results to be
obtained in a full fiscal year. The selected financial information as
adjusted/combined is derived from the Unaudited Pro Forma Condensed Consolidated
Financial Statements appearing elsewhere herein. The following financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Unaudited Pro
Forma Condensed Consolidated Financial Statements and the Notes thereto.
36
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
COMBINED(1)
--------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
1994 1995 1996 1997(7) 1998
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ 53,925,373 $ 50,483,469 $ 59,262,226 $ 57,575,712 $ 129,502,812
Gross Profit................................... 10,658,013 9,739,568 12,576,870 11,471,124 27,975,391
Income from Operations......................... 743,378 833,114 2,689,290 907,970 3,016,155
Net Income (Loss).............................. 464,270 352,589 1,315,035 (179,252) 756,884
Basic Net Income Per Share.....................
Diluted Net Income Per Share...................
Basic and Dilutive Weighted Average Number of
Shares Outstanding (2).......................
OTHER FINANCIAL DATA:
EBITDA (3)..................................... $ 1,453,702 $ 1,388,531 $ 3,251,371 $ 1,153,554 $ 4,256,186
Net Cash Provided by (Used In) Operating
Activities................................... $ 1,278,228 $ 165,963 $ 2,538,838 $ (766,978) $ (258,827)
Net Cash Used In Investing Activities.......... $ (509,645) $ (240,755) $ (863,448) $ (215,640) $ (3,704,624)
Net Cash (Used In ) Provided By Financing
Activities................................... $ (742,450) $ 315,284 $ (1,931,121) $ 1,575,357 $ 4,614,314
<CAPTION>
AS ADJUSTED/ COMBINED(5)(6)
FOUR MONTHS -------------------------------
ENDED FOUR MONTHS
OCTOBER 31, YEAR ENDED ENDED
--------------------------- JUNE 30, OCTOBER 31,
1997 1998 1998 1998
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ 44,205,473 $ 51,148,653 $ 141,462,904 $ 55,125,447
Gross Profit................................... 9,836,370 11,711,073 32,561,164 13,312,047
Income from Operations......................... 1,581,092 2,648,684 3,638,525 3,076,073
Net Income (Loss).............................. 637,749 1,196,558 1,044,201 1,442,318
Basic Net Income Per Share..................... $ 0.14 $ 0.19
-------------- --------------
-------------- --------------
Diluted Net Income Per Share................... $ 0.14 $ 0.19
-------------- --------------
-------------- --------------
Basic and Dilutive Weighted Average Number of
Shares Outstanding (2)....................... 7,409,203 7,431,594
-------------- --------------
-------------- --------------
OTHER FINANCIAL DATA:
EBITDA (3)..................................... $ 1,949,273 $ 3,114,584 $ 5,287,113 $ 3,654,052
Net Cash Provided by (Used In) Operating
Activities................................... $ 1,491,223 $ 582,501
Net Cash Used In Investing Activities.......... $ (2,114,267) $ (1,805,369)
Net Cash (Used In ) Provided By Financing
Activities................................... $ (25,938) $ (127,541)
</TABLE>
<TABLE>
<CAPTION>
COMBINED(1) THE COMPANY
---------------------------------------------------------- OCTOBER 31,
1998
JUNE 30 -----------
----------------------------------------------------------
1994 1995 1996 1997 1998 HISTORICAL
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficiency).................... $4,511,035 $5,450,306 $4,527,568 $6,232,891 $17,081,190 $ (93,335)
Total Assets.................................... 12,947,453 14,709,463 15,778,742 15,853,837 49,478,412 395,559
Long Term Debt.................................. -- 6,290,453 5,678,243 7,195,163 25,294,523 --
Total Liabilities............................... 9,659,216 14,552,647 15,586,657 15,832,712 49,618,968 488,894
Shareholders' Equity (Deficiency)............... 3,562,237 156,816 192,085 21,125 (140,556) (93,335)
<CAPTION>
AS ADJUSTED/
COMBINED(4) COMBINED(5)
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficiency).................... $15,742,624 $21,993,624
Total Assets.................................... 60,047,395 65,873,395
Long Term Debt.................................. 27,574,887 23,224,887
Total Liabilities............................... 55,433,255 50,658,255
Shareholders' Equity (Deficiency)............... 4,614,140 15,215,140
</TABLE>
37
<PAGE>
- ------------------------
(1) Prior to the contemplated Acquisitions, the Company has had limited
operations. The historical financial data included in the statement of
operations data has been prepared on a basis which combines the Company
(organized May 1, 1996), Eagle Supply, Inc. ("Eagle"), JEH/Eagle Supply,
Inc. ("JEH Eagle") (acquired on July 1, 1997) and MSI/Eagle Supply, Inc.
("MSI Eagle") (acquired on October 22, 1998) as four entities controlled by
TDA Industries, Inc. ("TDA"), because the separate financial data of the
Company would not be meaningful. Information with respect to the Company is
included from May 1, 1996 (inception), information for Eagle is included for
all periods presented, information with respect to JEH Eagle is included
from July 1, 1997 and information for MSI Eagle is included from October 22,
1998.
(2) Basic and Dilutive Net Income per Share is based on the weighted average
number of shares outstanding and includes 2,100,000 shares issued in
connection with the Company's initial capitalization, 300,000 shares issued
as part of the Company's Private Placement, 3,000,000, 300,000 and 200,000
shares to be issued to TDA, James E. Helzer and Gary L. Howard,
respectively, in connection with the Acquisitions, 50,000 shares relating to
a $250,000 portion of a note in the principal amount of $2,046,000 that MSI
Co. has advised the Company it intends to exchange for shares of the
Company's Common Stock valued at the initial Public Offering price of $5.00
per share and transfer to Gary L. Howard and 1,481,594 and 1,459,203 shares
("Additional Shares") in the four months ended October 31, 1998 and year
ended June 30, 1998, respectively, for the shares assumed to be issued in
the Public Offering, the proceeds of which would be used to retire
$4,525,000 of debt and replace the capital in excess of the respective
period's earnings which is represented by the non-cash dividend to TDA from
Eagle. The computation excludes shares to be issued in connection with the
Public Offering in excess of the Additional Shares. The Underwriter's
Warrant and options to be granted upon the closing of the Public Offering
pursuant to the Company's Stock Option Plan are not dilutive and have not
been included. See "Risk Factors," "The Acquisitions," "Certain
Transactions," and the Financial Statements and the Notes thereto.
The following is a summary of shares included in Basic and Diluted Net
Income per Share:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
OCTOBER 31, YEAR ENDED
1998 JUNE 30, 1998
--------------- -------------
<S> <C> <C>
Initial capitalization:
Founders shares issued to TDA................................................... 2,000,000 2,000,000
Founders shares issued to Steven R. Andrews..................................... 100,000 100,000
Private Placement shares issued to private investors.............................. 300,000 300,000
Acquisition shares to be issued to TDA............................................ 3,000,000 3,000,000
Acquisition shares to be issued to James E. Helzer................................ 300,000 300,000
Acquisition shares to be issued to Gary L. Howard................................. 200,000 200,000
Conversion of MSI Co. note into shares of the Company............................. 50,000 50,000
Additional Shares................................................................. 1,481,594 1,459,203
--------------- -------------
7,431,594 7,409,203
--------------- -------------
--------------- -------------
</TABLE>
(3) As used herein, EBITDA reflects net income (loss) increased by the effects
of interest expense, income tax provisions, depreciation and amortization
expense. EBITDA is used by management, along with other measures of
performance, to assess the Company's financial performance. EBITDA should
not be considered in isolation or as an alternative to measures of operating
performance or cash flows pursuant to generally accepted accounting
principles. In addition, the measure of EBITDA may not be comparable to
similar measures reported by other companies.
(4) Reflects the consumation of the Acquisitions. See the Unaudited Pro Forma
Condensed Consolidated Balance Sheet, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Certain Transactions"
and the Financial Statements and the Notes thereto.
(5) Reflects the Public Offering of 2,500,000 shares of Common Stock and
2,500,000 Warrants at initial public offering prices of $5.00 per share of
Common Stock and $.125 per Warrant, the application of the net proceeds
therefrom, 50,000 shares relating to a $250,000 portion of a note in the
principal amount of $2,046,000 that MSI Co. has advised the Company it
intends to exchange for shares of the Company's Common Stock valued at the
initial Public Offering price of $5.00 per share and the consummation of the
Acquisitions. See the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Certain Transactions" and the Financial Statements
and the Notes thereto.
(6) See Unaudited Pro Forma Condensed Consolidated Statements of Operations.
(7) The loss for the year ended June 30, 1997 includes a write-off of
registration costs of $370,353 for an offering which was not consumated.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and notes thereto appearing elsewhere in this Prospectus.
Prior to the contemplated Acquisitions, the Company has had limited
operations and activities consisting of seeking an underwriter, negotiating the
terms of the Acquisitions, negotiating and consummating a private placement for
the sale of common stock and warrants and a sale of promissory notes, seeking a
listing of the Company's securities on NASDAQ, and preparing and filing its
registration statement including ancillary documents and amendments. All
comparisons in Results of Operations and Liquidity and Capital Resources for
periods subsequent to July 1, 1997 relate to the combined activities of the
Company, Eagle and JEH Eagle, subsequent to JEH Eagle's acquisition of JEH Co.
which was effective as of July 1, 1997, as three entities under common control.
The comparisons in Results of Operations and Liquidity and Capital Resources for
the four-month period ended October 31, 1998 include the activities of MSI Eagle
subsequent to its acquisition of MSI Co. which was effective October 22, 1998.
All comparisons for any periods prior to July 1, 1997 relate to the combined
operations of the Company and Eagle only. The separate financial information for
the Company is not meaningful. The discussion and analysis included under the
caption Predecessor Companies relates primarily to the operations of JEH Co. and
MSI Co. prior to being acquired by JEH Eagle and MSI Eagle, respectively.
INTRODUCTION
The Company was organized on May 1, 1996 to raise capital and acquire, own,
integrate and operate seasoned, privately-held companies engaged in the
wholesale distribution of roofing supplies and related products industry and
companies which manufacture products for or supply products to such industry.
Simultaneously with the closing of the Public Offering, the Company will
consummate the Acquisitions. Although the primary focus of the Company's
expansion and acquisition program will be on seeking suitable acquisition
candidates which are engaged in the wholesale distribution of roofing supplies
and related products, the Company will consider the purchase of manufacturers or
vendors of products which may be distributed through its wholesale distribution
business.
Eagle, which was founded in Florida in 1905, distributes roofing supplies
and related products to contractors and subcontractors engaged in commercial and
residential roofing repair and the construction of new residential and
commercial properties. JEH Co. was founded in 1982 by James E. Helzer and the
business and substantially all of the assets of JEH Co. were purchased by JEH
Eagle in July of 1997. JEH Eagle distributes roofing supplies, drywall and
plywood to roofing contractors, builders and developers engaged primarily in the
construction industry. MSI Co. was founded in 1979 by Gary L. Howard and the
business and substantially all of the assets of MSI Co. were purchased by MSI
Eagle in October of 1998. MSI Eagle distributes masonry supplies and related
products to building contractors, sub-contractors and masons primarily engaged
in residential and commercial construction. Eagle, JEH Eagle and MSI Eagle rely
on their own direct sales forces and distribution facilities to generate sales.
Historically, Eagle, JEH Eagle and MSI Eagle have entered into arrangements with
customers on a basis permitting either party to the arrangement to have the
right to terminate the arrangement at any time prior to performance without
liability or penalty. Upon consummation of the Acquisitions, Eagle, JEH Eagle
and MSI Eagle will become wholly-owned subsidiaries of the Company and will
constitute the only business operations of the Company until and unless the
Company consummates additional acquisitions.
The Company has funded itself since inception by (i) selling 300,000 shares
of its Common Stock and 300,000 Warrants in the Private Placement pursuant to
which the Company derived aggregate gross proceeds of $300,000; (ii) issuing
$300,000 in principal amount of its promissory notes to TDA ($150,000) and two
other stockholders, Hi-Tel Group, Inc. ($100,000) and Paul Schmidt ($50,000);
(iii) issuing
39
<PAGE>
$100,000 in principal amount of its promissory notes to TDA; and (iv) incidental
other borrowings from TDA.
COMPARISON OF TRENDS OF EAGLE, JEH CO. AND JEH EAGLE
REVENUES
Although both Eagle and JEH Eagle rely heavily on repeat business, they have
differing strategies on entering into new markets. Eagle has historically
entered into new, or grew in existing markets, based solely upon management's
evaluation of where it believed growth was expected and whether these areas
could support another roofing distributor whereas JEH Co. historically entered
into new markets on the heels of storms and, therefore, JEH Co.'s new
distribution centers had the tendency to show more immediate growth in revenues
which would help defray startup costs. As storm-related revenues subside,
management of JEH Co. would evaluate whether or not the area could support the
distribution center based upon future growth expectations whereas Eagle's new
distributions centers were gradually opened as new and permanent centers.
This conceptual difference has the tendency to cause more fluctuation in JEH
Eagle's revenues than in Eagle's as shown in the numbers presented. Although it
is the Company's belief that both entities have a solid core of repeat business
that will continue to sustain growth from existing operating centers, the
Company anticipates most of Eagle's and JEH Eagle's future growth to come from
the opening of new distribution centers and the introduction of new product
lines into existing distribution centers. Generally, as a percentage of the
combined revenues of Eagle and JEH Co. in non-storm related periods, Eagle and
JEH Co. contributed approximately 45% and 55%, respectively, of such combined
revenues. Prior to July 1998, neither Eagle nor JEH Eagle have had the benefit
of significant storms to increase revenues, but
when they occur, JEH Eagle should benefit to a greater degree than Eagle because
of the likelihood of storms of more intensity and frequency occurring in JEH
Eagle's market areas. However, in July 1998 JEH Eagle opened a storm-related
distribution center in Minnesota.
The following is a comparison of accounts receivable turnover levels for
Eagle, JEH Eagle and JEH Eagle's predecessor, JEH Co. Eagle's accounts
receivable turnover ratios have remained within a fairly narrow range while JEH
Eagle's and JEH Co.'s accounts receivable turnover ratios show a declining trend
through the fiscal year 1998 and the four-month period ended October 31, 1998
compared to the 1997 four-month period. This declining trend may be attributed
to increased revenues in 1994, 1995 and 1996 from storm related business in the
Texas markets, the continued growth in the Colorado markets and the expansion
into the Indiana market followed by a subsequent slow-down in business due to
the "El Nino" weather patterns and the recent paucity of significant storms
which resulted in the business of certain customers slowing dramatically. As
result of these factors, JEH Co. began to experience difficulty in collecting
its receivables during the end of its 1996 year and the six month period ending
June 30, 1997.
40
<PAGE>
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
PERIOD TURNOVER RATIO*
----------------------------------- ---------------------
<S> <C> <C>
Eagle
Four Months October 31,
1998 5.43
1997 5.56
Fiscal Year June 30,
1998 6.05
1997 6.39
1996 6.52
1995 6.27
1994 5.97
JEH Eagle and JEH Co.
Four Months October 31,
1998 6.62
1997 8.64
Fiscal Year June 30,
1998 6.33
Six Months June 30,
1997 6.72
1996 7.58
Calendar Year
1996 9.09
1995 11.24
1994 12.38
</TABLE>
- ------------------------
* Computation is based on each period's credit sales divided by average
accounts receivable.
41
<PAGE>
GROSS PROFIT MARGINS
Although both Eagle and JEH Eagle operate in similar industries, more of JEH
Co.'s historical revenues have come from sales of residential roofing
(approximately 81% on average) than sales of commercial roofing (approximately
6% on average) or other products (approximately 13% on average). Eagle's
historical revenues have come from sales of residential roofing (approximately
57% on average), sales of commercial roofing (approximately 30% on average) and
other products (approximately 13% on average). Revenues generated from
residential sales generally produce higher gross profit margins than commercial
sales which are generally shipped directly to the customer from the vendor. For
this reason, JEH Co.'s historical gross profit margins on average are
approximately two percentage points higher than Eagle's gross profit margin,
approximately 22.4% and 22.6%, respectively. The Company expects that in the
future it will be able to consolidate Eagle's and JEH Eagle's purchasing power
and therefore be able to buy product more favorably.
The following is a comparison of inventory turnover levels for Eagle, JEH
Eagle and JEH Co. Eagle's inventory turnover ratios have been adjusted for
purposes of this analysis to the lower of first-in, first-out ("FIFO") cost or
market and all of the ratios exclude the impact of purchases made from vendors
for direct shipment. As can be seen from the following comparison, Eagle's
inventory turnover ratios have remained within a narrower range than the
inventory turnover ratios of JEH Eagle and JEH Co. Whereas Eagle maintains
fairly steady levels of inventory, the JEH Eagle and JEH Co. inventory levels
fluctuate significantly in anticipation of storm related business. At June 30,
1997 and 1996, JEH Co.'s inventory levels had been increased in anticipation of
storms that did not materialize, which resulted in a decline in inventory
turnover ratios. During the four-month period ended October 31, 1998, JEH Eagle
reduced its inventory levels, which resulted in an increase in its inventory
turnover ratio.
<TABLE>
<CAPTION>
INVENTORY
PERIOD TURNOVER RATIO*
-------------------------------- ---------------------
<S> <C> <C>
Eagle
Four Months October 31,
1998 5.35
1997 6.31
Fiscal Year June 30,
1998 5.94
1997 6.25
1996 7.04
1995 6.96
1994 6.19
JEH Eagle and JEH Co.
Four Months October 31,
1998 8.18
1997 6.57
Fiscal Year June 30,
1998 6.00
Six Months June 30,
1997 4.90
1996 6.38
Calendar Year
1996 7.80
1995 9.07
1994 9.38
</TABLE>
- ------------------------
* Computation is based on each period's out of stock sales divided by average
inventory.
42
<PAGE>
RESULTS OF OPERATIONS
FOUR-MONTH PERIOD ENDED OCTOBER 31, 1998 COMPARED TO
FOUR-MONTH PERIOD ENDED OCTOBER 31, 1997
Revenues of the Company during the four-month period ended October 31, 1998
increased by approximately $6,943,000 (15.7%) compared to the 1997 four-month
period. Sales of Eagle during the 1998 four-month period were approximately
$19,102,000, an increase of approximately $1,711,000 (9.8%) from the comparable
1997 four-month period. This increase may be attributed to a general improvement
in market conditions. Sales of JEH Eagle during the 1998 four-month period were
approximately $31,682,000, an increase of approximately $4,868,000 (18.2%) from
the comparable 1997 four-month period. This increase may be primarily attributed
to sales generated as a result of the opening in July 1998 of a storm-related
branch in Minnesota ($6,159,000) offset by decreased revenues at other branches
due to the continued paucity of hail storms in the southwest. Included in
revenues in the 1998 four-month period are sales of MSI Eagle for the period
October 22, 1998 (date of the acquisition of the business and substantially all
of the net assets of MSI Co. by MSI Eagle) through October 31, 1998 in the
amount of approximately $365,000
Cost of goods sold increased between the 1998 and 1997 four-month periods at
a lesser rate than the increase in revenues between these four-month periods.
Accordingly, cost of goods sold as a percentage of revenues decreased to 77.1%
in the four-month period ended October 31, 1998 from 77.7% in the four-month
period ended October 31, 1997, and gross profit as a percentage of revenues
increased to 22.9% in the four-month period ended October 31, 1998 from 22.3% in
the four-month period ended October 31, 1997. This increase in gross profit
margin may be attributed primarily to the relative increase in the 1998
four-month period in sales to customers out of warehouse inventory which carry a
higher gross profit margin than direct sales shipments to customers from
vendors. Whereas a significant amount of the sales to Eagle's customers are
direct shipments from vendors, almost all of the sales to customers of JEH Eagle
are out of warehouse inventory. The Company's management is unable to predict if
sales to customers out of warehouse inventory is a trend that will continue in
the future.
Operating expenses of the Company increased by approximately $807,000 (9.8%)
between the 1998 and 1997 four-month periods. Of this amount, JEH Eagle's
operating expenses increased by approximately $169,000 (3.5%) in the 1998
four-month period from the 1997 four-month period. This increase is due
primarily to the expenses attributable to the opening and operations of the
storm-related branch in Minnesota (approximately $440,000) offset by the
benefits derived from cost-cutting measures. During the fiscal year 1998,
management of JEH Eagle evaluated its accounts receivable and determined that no
further deterioration of the customer accounts specifically reserved in 1997 had
occurred, and, accordingly, no specific increase in the provision for doubtful
accounts was required beyond the normal level which has ranged between .8% and
1.4% of sales. During fiscal 1998, collections of customer accounts receivable
specifically reserved in fiscal 1997 were not material. Eagle's operating
expenses increased by approximately $560,000 (16.1%) in the 1998 four-month
period from the 1997 four-month period. This increase is due primarily to an
increase in depreciation expense of approximately $49,000 on equipment purchased
and put in service during the fiscal year ended June 30, 1998, an increase in
the allowance for doubtful accounts receivable of approximately $104,000 due
primarily to a general slowdown in the collection of accounts receivable, and an
increase in payroll and related costs of approximately $425,000 due primarily to
the additional manpower needed to service the increased sales out of warehouse
inventory. Included in operating expenses in the 1998 four-month period are
operating expenses of MSI Eagle for the period October 22, 1998 through October
31, 1998 in the amount of approximately $78,000. Operating expenses as a
percentage of revenues were 17.7% in the 1998 period compared to 18.7% in the
1997 period.
Interest expense increased by approximately $186,000 (32.3%) between the
1998 and 1997 four-month periods. This increase is due to the interest expense
incurred on higher average outstanding balances under the Eagle credit facility
($58,000) and the JEH Eagle credit facility ($81,000), on JEH Eagle's
capitalized
43
<PAGE>
lease obligations ($26,000), on the MSI Eagle credit facility and other
long-term debt ($14,000) used primarily to fund its acquisition in October 22,
1998 of MSI Co. and on short-term borrowings by the Company ($7,000).
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1997
Revenues of the Company during the fiscal year ended June 30, 1998 increased
by approximately $71,927,000 (124.9%) compared to the 1997 fiscal year. This
increase is due almost entirely to the acquisition of JEH Co. in July 1997 by
JEH Eagle. Sales of JEH Eagle during the fiscal year ended June 30, 1998 were
approximately $71,006,000. Excluding the sales of JEH Eagle, revenues of the
Company would have been approximately $58,497,000 in the fiscal year ended June
30, 1998, an increase of approximately $922,000 (1.6%) from the comparable 1997
fiscal year. This increase was comprised of an increase of approximately
$3,195,000 in sales to customers out of warehouse inventory offset by a decrease
in direct sales shipments to customers from vendors of approximately $2,273,000.
Sales of both Eagle and JEH Eagle during the fiscal year ended June 30, 1998
were adversely effected by the "El Nino" weather patterns. Unusually heavy and
record rainfall in the southeast and the paucity of hail storms in the southwest
negatively impacted sales of Eagle and JEH Eagle, respectively, whereas
hurricanes and intense rainstorms accompanied by strong winds, which can cause
significant roof damage, did not occur in any significant amount in the
Company's market areas.
At June 30, 1998, all of the Company's twenty-seven distribution centers had
been in operation for at least one year. No distribution centers were closed
during the fiscal year 1998.
Cost of goods sold increased between the fiscal years 1998 and 1997 at a
lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of goods sold as a percentage of revenues decreased to 78.4%
in the fiscal year 1998 from 80.1% in the fiscal year 1997, and gross profit as
a percentage of revenues increased to 21.6% in the fiscal year 1998 from 19.9%
in the fiscal year 1997. This increase in gross profit margin may be attributed
primarily to the relative increase in fiscal year 1998 sales to customers out of
warehouse inventory which carry a higher gross profit margin than direct sales
shipments to customers from vendors. Whereas a significant amount of the sales
to Eagle's customers are direct shipments from vendors, almost all of the sales
to customers of JEH Eagle are out of warehouse inventory.
Operating expenses of the Company increased by approximately $14,396,000
(136.3%) between the fiscal years 1998 and 1997. This increase is due almost
entirely to the acquisition of JEH Co. in July 1997 by JEH Eagle. Operating
expenses of JEH Eagle during the fiscal year 1998 were approximately
$13,720,000, including approximately $172,000 of amortization of cost of
investment over net assets acquired (goodwill) and approximately $58,000 of
amortization of deferred financing costs attributable to the acquisition. During
the fiscal year 1998, management of JEH Eagle evaluated its accounts receivable
and determined that no further deterioration of the customer accounts
specifically reserved in 1997 had occurred, and, accordingly, no specific
increase in the provision for doubtful accounts was required beyond the normal
level which has ranged between .8% and 1.4% of sales. During fiscal 1998,
collections of customer accounts receivable specifically reserved in fiscal 1997
were not material. Excluding the operating expenses of JEH Eagle, operating
expenses of the Company would have been approximately $11,239,000 in the fiscal
year 1998, an increase of approximately $676,000 (6.4%) from the fiscal year
1997. This increase is due primarily to the increase in data processing expenses
of approximately $251,000 due to an upgrading, in March 1997, of Eagle's data
processing hardware and software, and an increase in payroll costs of
approximately $441,000 due primarily to the additional manpower needed to
service the increased sales out of warehouse inventory. Operating expenses as a
percentage of revenues were 19.3% in the fiscal year 1998 compared to 18.3% in
the fiscal year 1997.
44
<PAGE>
Excess cost of investment over net assets acquired (goodwill) is being
amortized on a straight-line method over forty years. The Company's management
routinely evaluates the recoverability of goodwill based upon expectations of
future non-discounted cash flows. During the fiscal year ended June 30, 1998,
management re-evaluated the remaining useful life of goodwill in light of
anticipated future operations, management's experience operating in this
industry since 1973, and an analysis of the goodwill amortization policies of
other companies in this industry. Management determined that a forty-year
amortization period was more appropriate than the fifteen-year period initially
established at the date of the acquisition of JEH Co. by JEH Eagle. The change
has been accounted for prospectively beginning May 1, 1998. See "Risk
Factors--Amortization of Goodwill."
Interest expense increased by approximately $1,262,000 (218.8%) between the
fiscal years 1998 and 1997. This increase is due principally to the interest
expense incurred by JEH Eagle of approximately $1,250,000 on its credit facility
used primarily to fund its acquisition in July 1997 of JEH Co. Excluding the
interest expense of JEH Eagle, interest expense of the Company would have been
approximately $612,000 in fiscal 1998, an increase of approximately $13,000
(2.2%) from fiscal 1997. This increase is due to the increase in interest
expense on short-term borrowings by the Company (approximately $18,000) offset
by the reduction in interest expense on borrowings under Eagle's credit facility
(approximately $5,000).
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1996
Revenues of the Company during the fiscal year ended June 30, 1997 decreased
by approximately $1,687,000 (2.8%) compared to the 1996 fiscal year. This
decrease was primarily due to the decrease in revenues derived from storm
related business in fiscal 1996 from Hurricane Opal (approximately $6,495,000),
and a decrease in revenues from distribution centers that did not benefit from
Hurricane Opal (approximately $578,000). That decrease in revenues was the
result of a decline in general business conditions. This decrease in revenues
was partially offset by additional revenues generated in fiscal 1997 from
distribution centers opened in fiscal 1996 (approximately $5,386,000).
At June 30, 1997, all of the Company's fifteen distribution centers had been
in operation for at least one year. No distribution centers were closed during
this fiscal year.
Cost of goods sold decreased between the fiscal years 1997 and 1996 at a
lesser rate than the decrease in revenues between these fiscal years.
Accordingly, cost of goods sold as a percentage of revenues increased to 80.1%
in the fiscal year 1997 from 78.8% in the fiscal year 1996, and gross profit as
a percentage of revenues decreased to 19.9% in the fiscal year 1997 from 21.2%
in the fiscal year 1996. This decrease in gross profit margin may be attributed
primarily to the decrease in fiscal 1997 in sales generated at distribution
centers which benefitted from storm related business and sales to customers out
of warehouse inventory which carry a higher gross profit margin than direct
sales shipments to customers from vendors.
Operating expenses increased by approximately $675,000 (6.8%) between the
fiscal years 1997 and 1996. Operating expenses in fiscal 1997 includes
approximately $546,000 of operating expenses attributable to distribution
centers opened in fiscal 1996. Operating expenses as a percentage of revenues
were 18.3% in the fiscal year 1997 compared to 16.7% in the fiscal year 1996.
Other expenses of approximately $370,000 in fiscal 1997 represents
registration costs and expenses incurred by the Company in connection with the
filing in 1996 of its registration statement for an initial public offering of
its securities.
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FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO
FISCAL YEAR ENDED JUNE 30, 1995
Revenues of the Company during the fiscal year ended June 30, 1996 increased
by approximately $8,779,000 (17.4%) compared to the 1995 fiscal year. This
increase was primarily due to revenues in the aggregate amount of approximately
$4,057,000 generated from new distribution centers opened during fiscal 1996,
improvement in business in market areas served by distribution centers opened
for at least one year (approximately $1,487,000), and additional business
resulting from Hurricane Opal of approximately $7,842,000 as hurricanes as well
as intense rainstorms accompanied by strong winds can cause significant roof
damage. During the fiscal year ended June 30, 1996, revenues decreased by
approximately $4,608,000, which revenues had been generated from a distribution
center sold as of June 30, 1995.
At June 30, 1996, the Company had ten distribution centers opened for at
least one year. The Company's revenues during the fiscal year ended June 30,
1996 from distribution centers opened for at least one year increased by
approximately $9,329,000 (20.3%) from the fiscal year ended June 30, 1995. This
increase in such revenues may be attributed to an improvement in business in
general and the additional business that resulted from the hurricane damage in
Florida in the late summer and fall of 1995.
Cost of goods sold increased between the fiscal years 1996 and 1995 at a
lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of goods sold as a percentage of revenues decreased to 78.8%
in the fiscal year 1996 from 80.7% in the fiscal year 1995, and, accordingly,
gross profit as a percentage of revenues increased to 21.2% in the fiscal year
1996 from 19.3% in the fiscal year 1995. This increase in gross profit margin
may be attributed primarily to the increase in fiscal 1996 in sales to customers
out of warehouse inventory which carry a higher gross profit margin than direct
sales shipments to customers from vendors. The Company's management is unable to
determine if the increase in revenues during the fiscal year ended June 30,
1996, as compared to its fiscal year ended June 30, 1995, was the result of unit
price increases to any significant extent as opposed to increased sales volume.
Operating expenses increased by approximately $981,000 (11%) between the
fiscal years 1996 and 1995 at a lesser rate than the increase in revenues
between these fiscal years. Operating expenses in fiscal 1995 includes
approximately $1,064,000 of operating expenses attributable to the distribution
centers that was sold as of June 30, 1995; and fiscal 1996 includes
approximately $1,007,000 of start-up costs and expenses attributable to new
distribution centers operations, and increased operating expenses in the
aggregate amount of approximately $1,039,000 comprised primarily of payroll and
related costs and transportation expenses directly related to the increase in
business in fiscal 1996. Operating expenses as a percentage of revenues were
16.7% in the fiscal year 1996 compared to 17.6% in the fiscal year 1995.
Interest expense increased by approximately $316,000 between fiscal 1996 and
1995. Interest expense in fiscal 1995 is for less than a full year since
borrowings under Eagle's revolving credit facility commenced in December 1994.
See "--Liquidity and Capital Resources."
PREDECESSOR COMPANIES
The following discussion and analysis should be read in conjunction with the
JEH Eagle and the JEH Co. Financial Statements and notes thereto and the MSI
Eagle and the MSI Co. Financial Statements and notes thereto appearing elsewhere
in this Prospectus. This discussion and analysis are included for information
purposes only since JEH Eagle acquired JEH Co. effective July 1, 1997 and MSI
Eagle acquired MSI Co. effective October 22, 1998.
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JEH EAGLE FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO
JEH CO. FISCAL YEAR ENDED JUNE 30, 1997
Revenues during the fiscal year ended June 30, 1998 increased by
approximately $9,000 (less than 1%) compared to the 1997 fiscal year. The "El
Nino" weather patterns and the paucity of significant storms in JEH Eagle's
market areas adversely effected sales of JEH Eagle during the fiscal year ended
June 30, 1998.
Cost of goods sold increased between the fiscal years 1998 and 1997 at a
greater rate than the increase in revenues between these fiscal years.
Accordingly, cost of goods sold as a percentage of revenues increased to 77.6%
in the fiscal year 1998 from 77.1% in the fiscal year 1997, and gross profit as
a percentage of revenues decreased to 22.4% in the fiscal year 1998 from 22.9%
in the fiscal year 1997.
Operating expenses decreased by approximately $3,549,000 (20.6%) between the
fiscal years 1998 and 1997. This decrease is due primarily to the reduction in
the compensation of the owner of JEH Co. (approximately $2,084,000) since the
acquisition of JEH Co. in July 1997 by JEH Eagle. Prior to the acquisition, JEH
Co. was a subchapter S corporation, and the compensation of its owner was
discretionary. Additionally, adverse economic conditions and a general slowdown
in the collection of accounts receivable necessitated an addition to the
allowance for doubtful accounts receivable (approximately $1,644,000) in fiscal
1997, a substantial portion of which was allocated specifically to two accounts.
During fiscal 1998, collections of customer accounts receivable specifically
reserved in fiscal 1997 were not material. Offsetting the decrease in operating
expenses between the fiscal years 1998 and 1997 are approximately $172,000 of
amortization of cost of investment over net assets acquired (goodwill) and
approximately $58,000 of amortization of deferred financing costs incurred in
fiscal 1998 and attributable to the acquisition of JEH Co. by JEH Eagle in July
1997. Operating expenses as a percentage of revenues were 19.3% in the fiscal
year 1998 compared to 24.3% in the fiscal year 1997.
Excess cost of investment over net assets acquired (goodwill) is being
amortized on a straight-line method over forty years. The Company's management
routinely evaluates the recoverability of goodwill based upon expectations of
future non-discounted cash flows. During the fiscal year ended June 30, 1998,
management re-evaluated the remaining useful life of goodwill in light of
anticipated future operations, management's experience operating in this
industry since 1973, and an analysis of the goodwill amortization policies of
other companies in this industry. Management determined that a forty-year
amortization period was more appropriate than the fifteen-year period initially
established at the date of the acquisition of JEH Co. by JEH Eagle. The change
has been accounted for prospectively beginning May 1, 1998. See "Risk
Factors--Amortization of Goodwill."
Interest expense increased by approximately $407,000 (48.3%) between fiscal
1998 and 1997. This increase is due principally to the increase in interest
expense resulting from the increase in JEH Eagle's long-term debt used primarily
to fund its acquisition of JEH Co. in July 1997.
JEH CO. SIX MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO
JEH CO. SIX MONTH PERIOD ENDED JUNE 30, 1996
Revenues of JEH Co. during the six-month period ended June 30, 1997
decreased by approximately $3,882,000 (11.8%) compared to the six-month period
ended June 30, 1996. This decrease may be primarily attributed to a reduction in
revenues in its Texas markets (approximately $9,111,000) due to the adverse
effects of the "El Nino" weather patterns and the paucity of significant storms
in its market areas, offset by the continued growth in its Colorado markets
(approximately $3,314,000) and its Indianapolis, Indiana, market (approximately
$1,884,000).
Cost of goods sold decreased between the 1997 and 1996 six-month periods at
a greater rate than the decrease in revenues between these six-month periods.
Accordingly, cost of goods sold as a percentage of revenues decreased to 73.7%
in the 1997 six-month period from 78.4% in the 1996 six-month period, and,
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accordingly, gross profit as a percentage of revenues increased to 26.3% in the
1997 six-month period from 21.6% in the 1996 six-month period.
Operating expenses increased by approximately $2,445,000 (41.5%) between the
1997 and 1996 six-month periods at a greater rate than the increase in revenues
between these periods. This increase is primarily due to an increase in the
provision for doubtful accounts of approximately $2,055,000 due to the
deterioration of certain customer accounts receivable. Management of JEH Co. has
historically based its provision for doubtful accounts on an evaluation of the
levels of its trade accounts receivable, the aging and collection history of
such receivables, and the business conditions in each market area in which JEH
Co. operated. In establishing its estimates of the levels of the provisions for
doubtful accounts required for each reporting period, management also estimated
the value of the collateral and/or the personal guarantees received from certain
customers with past-due balances. The majority of the provision for doubtful
accounts relates to specific customers with past-due balances. During the latter
part of calendar 1996, certain customer accounts began to age, and JEH Co. began
to experience more difficulty in collecting its receivables. Accordingly, JEH
Co. increased its provision for doubtful accounts and related allowance for
doubtful accounts to $844,235 and $321,718, respectively, in calendar 1996 from
$334,372 and $181,336, respectively, in 1995. Additionally, write-offs of its
customer accounts increased to $703,853 in 1996 from $334,372 in 1995. JEH Co.
realized increased revenues from its customers in 1996 from business related to
storms in certain of its market areas; however, no such storms occurred in the
spring of 1997 in any of JEH Co.'s market areas. As a result, the business of
certain of JEH Co.'s customers slowed dramatically and receivables continued to
deteriorate. As a result of the foregoing circumstances, which changed during
the six-month period ended June 30, 1997 as compared to the latter part of
calendar 1996, the level and age of certain customers' accounts had worsened
significantly from prior periods, and other customers who have historically been
current began to pay late and their accounts began to age as well. Accordingly,
management performed a critical assessment of the quality of its receivables and
current business conditions and determined that an increase in the allowance for
doubtful accounts of $2,383,218 at June 30, 1997 was appropriate, a substantial
portion of which was allocated specifically to two accounts. Other increases in
operating expenses during the 1997 six-month period included commissions
(approximately $265,000) and increased payroll and related costs (approximately
$97,000). Operating expenses as a percentage of revenues were 28.7% in the 1997
six-month period compared to 17.9% in the 1996 six-month period.
Interest expense increased by approximately $76,000 between the 1997 and
1996 six-month periods. This increase is due principally to increased borrowing
incurred by JEH Co. used primarily to fund its growth in current markets and
expansion into new markets.
JEH CO. YEAR ENDED DECEMBER 31, 1996 COMPARED TO
JEH CO. YEAR ENDED DECEMBER 31, 1995
Revenues of JEH Co. during the year ended December 31, 1996 increased by
approximately $1,072,000 (1.5%) compared to the year ended December 31, 1995.
This increase may be primarily attributed to JEH Co.'s expansion into the
Indianapolis, Indiana, market (approximately $3,488,000) and JEH Co.'s continued
growth in its Colorado markets (approximately $4,371,000), offset by a decline
in revenues in its Texas markets (approximately $6,787,000). The decline in the
Texas markets may be attributed to the slow-down in business generated from the
significant storms experienced in 1995 and the lack of any significant storms in
1996.
Cost of goods sold increased between the 1996 and 1995 years at a greater
rate than the increase in revenues between these years. Accordingly, cost of
goods sold as a percentage of revenues increased to 79% in 1996 from 77.8% in
1995, and, accordingly, gross profit as a percentage of revenues decreased to
21% in 1996 from 22.2% in 1995. This decrease in gross profit margins may be
directly attributable to the decrease in storm related revenues which tend to
carry higher gross profit margins.
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Operating expenses decreased by approximately $1,166,000 (7.3%) between the
1996 and 1995 years at a greater rate than the decrease in revenues between
these years. This decrease is primarily due to a reduction in the compensation
of the owner of JEH Co. (approximately $1,659,000), offset by increased expenses
attributable to the expansion into the Indianapolis, Indiana, market
(approximately $370,000), and an increase in the provision for doubtful accounts
(approximately $291,000) due to the deterioration of certain customer accounts
receivable. Operating expenses as a percentage of revenues were 19.8% in 1996
compared to 21.7% in 1995.
Interest expense increased by approximately $217,000 between the 1996 and
1995 years. This increase is due principally to increased borrowing by JEH Co.
to fund its growth in current markets and expansion into new markets.
MSI CO. (JULY 1, 1998 THROUGH OCTOBER 21, 1998) AND
MSI EAGLE (OCTOBER 22, 1998 THROUGH OCTOBER 31, 1998)
FOUR-MONTH PERIOD ENDED OCTOBER 31, 1998 COMPARED TO MSI CO.
FOUR-MONTH PERIOD ENDED OCTOBER 31, 1997
Revenues during the four-month period ended October 31, 1998 increased by
approximately $185,000 (4.5%) compared to the four-month period ended October
31, 1997. This increase may be primarily attributed to the continued growth in
the market areas served by MSI Eagle and its predecessor, MSI Co.
Cost of goods sold increased between the 1998 and 1997 four-month periods at
a lesser rate than the increase in revenues between these four-month periods.
Accordingly, cost of goods sold as a percentage of revenues decreased to 59.5%
in the 1998 period from 63% in the 1997 period, and gross profit as a percentage
of revenues increased to 40.5% in the 1998 period from 37% in the 1997 period.
This increase may be primarily attributed to more aggressive pricing in the 1998
period.
Operating expenses increased by approximately $50,000 (5.0%) between the
1998 and 1997 four-month periods. This increase is due primarily to the increase
in the compensation of the owner of MSI Co. (approximately $30,000). Prior to
the acquisition in October 1998, MSI Co. was a subchapter S corporation, and the
compensation of its owner was discretionary. Operating expenses as a percentage
of revenues were 24.2% in the 1998 period compared to 24% in the 1997 period.
Interest expense increased by approximately $9,000 (58.1%) between the
fiscal 1998 and 1997 four-month periods. This increase is due principally to the
interest expense incurred on MSI Eagle's long-term debt used to fund its
acquisition of MSI Co. on October 22, 1998.
MSI CO. FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO
MSI CO. FISCAL YEAR ENDED JUNE 30, 1997
Revenues during the fiscal year ended June 30, 1998 increased by
approximately $2,859,000 (31.4%) compared to the 1997 fiscal year. This increase
may be attributed primarily to the sales generated from a masonry supply
business acquired in May 1997 (approximately $1,328,000) and the continued
growth in the market areas served by MSI Co.
Cost of goods sold increased between the fiscal years 1998 and 1997 at a
greater rate than the increase in revenues between these fiscal years.
Accordingly, cost of goods sold as a percentage of revenues increased to 61.7%
in the fiscal year 1998 from 61.1% in the fiscal year 1997, and gross profit as
a percentage of revenues decreased to 38.3% in the fiscal year 1998 from 38.9%
in the fiscal year 1997.
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Operating expenses increased by approximately $595,000 (20%) between the
fiscal years 1998 and 1997. This increase is due primarily to the increase in
expenses attributable to the May 1977 acquisition (approximately $233,000) and
an increase in the compensation of the owner of MSI Co. (approximately
$203,000). Prior to its acquisition in October 1998, MSI Co. was a subchapter S
corporation, and the compensation of its owner was discretionary. Operating
expenses as a percentage of revenues were 29.9% in the fiscal year 1998 compared
to 32.7% in the fiscal year 1997.
Interest expense increased by approximately $12,000 (39.8%) between the
fiscal years 1998 and 1997. This increase is due principally to the increase in
MSI Co.'s debt used primarily to fund the acquisition in May 1997.
MSI CO. FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO
MSI CO. FISCAL YEAR ENDED JUNE 30, 1996
Revenues during the fiscal year ended June 30, 1997 increased by
approximately $660,000 (7.8%) compared to the 1996 fiscal year. This increase
may be attributed in part to the sales generated from a masonry supply business
acquired in May 1997 (approximately $118,000) and the continued growth in the
market areas served by MSI Co.
Cost of goods sold increased between the fiscal years 1997 and 1996 at a
lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of goods sold as a percentage of revenues decreased to 61.1%
in the fiscal year 1997 from 61.4% in the fiscal year 1996, and gross profit as
a percentage of revenues increased to 38.9% in the fiscal year 1997 from 38.6%
in the fiscal year 1996.
Operating expenses increased by approximately $296,000 (11.1%) between the
fiscal years 1997 and 1996. This increase is due partially to the increase in
the compensation of the owner of MSI Co. (approximately $50,000). Prior to the
acquisition in October 1998, MSI Co. was a subchapter S corporation, and the
compensation of its owner was discretionary. Additionally, adverse economic
conditions and a general slowdown in the collection of accounts receivable
necessitated an addition to the allowance for doubtful accounts receivable
(approximately $72,000) in fiscal 1997. Also contributing to the increase in
operating expenses in fiscal 1997 were costs attributable to the May 1997
acquisition ($24,000), payroll costs ($24,000), office expenses ($19,000), rent
($27,000) and repairs and maintenance ($28,000). Operating expenses as a
percentage of revenues were 32.7% in the fiscal year 1997 compared to 31.8% in
the fiscal year 1996.
Interest expense decreased by approximately $15,000 (32.1%) between the
fiscal years 1997 and 1996. This decrease is due principally to the decrease in
average debt outstanding in fiscal 1997.
MSI CO. FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO
MSI CO. FISCAL YEAR ENDED JUNE 30, 1995
Revenues during the fiscal year ended June 30, 1996 increased by
approximately $206,000 (2.4%) compared to the 1995 fiscal year. This increase
may be attributed primarily to the continued growth in the market areas served
by MSI Co.
Cost of goods sold increased between the fiscal years 1996 and 1995 at a
lesser rate than the increase in revenues between these fiscal years.
Accordingly, cost of goods sold as a percentage of revenues decreased to 61.4%
in the fiscal year 1996 from 62.6% in the fiscal year 1995, and gross profit as
a percentage of revenues increased to 38.6% in the fiscal year 1996 from 37.4%
in the fiscal year 1995.
Operating expenses increased by approximately $86,000 (3.1%) between the
fiscal years 1996 and 1995. This decrease is due to the decrease in the
compensation of the owner of MSI Co. (approximately $99,000). Prior to the
acquisition in October 1998, MSI Co. was a subchapter S corporation, and the
compensation of its owner was discretionary. Operating expenses as a percentage
of revenues were 31.8% in the fiscal year 1996 compared to 33.5% in the fiscal
year 1995.
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Interest expense increased by approximately $10,000 (28.2%) between the
fiscal years 1996 and 1995. This increase is due principally to the interest
expense on debt incurred in fiscal 1996 to fund the purchase of equipment needed
for continued growth and expansion.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through operating cash
flow, support from TDA or affiliates of TDA and the proceeds from the Company's
June 1996 private placement and February 1998 and August 1998 issuance of
promissory notes.
Eagle is a party to a Loan Agreement (the "Eagle Facility") which is due in
October 2003 and provides for secured borrowing consisting of a revolving credit
loan in the amount of $10 million and an equipment loan in the amount of
$900,000. The Eagle Facility is collateralized by certain of Eagle's tangible
and intangible current assets and certain of Eagle's automotive equipment,
approximating $15,656,000 and $628,000, respectively, at October 31, 1998, and
is guaranteed by TDA. The initial borrowing, in December 1994, in the amount of
approximately $4.6 million, was advanced to TDA partially in payment of
intercompany debt. TDA has guaranteed the obligations of Eagle under the Loan
Agreement. At June 30, 1998 and October 31, 1998, Eagle's borrowings under its
revolving credit loan were $9,012,417 and $7,979,322, respectively, and its
borrowings under its equipment loan were $710,000 and $769,000 at those dates,
respectively. The borrowings under the revolving credit loan are based on a
formula relating to certain levels of receivables and inventory. Except for the
equipment loan, interest only is payable monthly and is based on a floating rate
equal to the lender's prime rate plus one-half percent or Libor plus two and
one-half percent, at Eagle's option. The principal amount of the equipment loan
is payable in equal consecutive monthly installments based upon a 75 month
amortization schedule with any remaining principal amount due upon the earlier
of August 1, 2004 or the end of the Eagle Facility's initial or renewal term.
The Eagle Facility is due in October 2003.
The Company's working capital was approximately $15,743,000 at October 31,
1998 (including approximately $293,000 of working capital of MSI Eagle) compared
to $17,081,000 at June 30, 1998. At October 31, 1998, the Company's current
ratio was 1.57 to 1 compared to 1.71 to 1 at June 30, 1998.
During the four-month period ended October 31, 1998, cash flows provided by
operating activities approximated $583,000. Such amount consisted primarily of
net income of $1,197,000, depreciation and amortization of $447,000, allowance
for doubtful accounts of $352,000, decreased levels of inventories of $1,066,000
and increased levels of accrued expenses and other current liabilities of
$333,000, offset by increased levels of accounts and notes receivables of
$1,341,000 and other assets of $117,000, decreased levels of trade accounts
payable of $835,000 and federal and state taxes due to Parent of $385,000,
offset by increased levels of deferred income taxes of $133,000. During the
fiscal year ended June 30, 1998, cash flows used in operating activities
approximated $259,000. Such amount consisted primarily of net income of
$757,000, depreciation and amortization of $1,189,000, allowance for doubtful
accounts of $528,000, decreased levels of other assets of $843,000, increased
levels of trade accounts payable of $3,241,000, accrued expenses and other
current liabilities of $752,000 and federal and state taxes due to Parent of
$652,000, offset by a net gain on sales of equipment of $26,000, increased
levels of accounts and notes receivable of $6,754,000, inventories of $1,261,000
and deferred income taxes of $179,000.
During the four-month period ended October 31, 1998, cash flows used in
investing activities approximated $1,805,000. Such amount consisted primarily of
capital expenditures of $285,000 and payment for the purchase of the net assets
of MSI Co. of $1,520,000. During the fiscal year ended June 30, 1998, cash flows
used in investing activities approximated $3,705,000. Such amount consisted
primarily of capital expenditures of $2,122,000 and payment for the purchase of
the net assets of JEH Co. of $1,659,000, offset by proceeds from the sale of
equipment of $77,000.
Capital expenditures approximated $296,000, $2,122,000 and $286,000 during
the fiscal years ended June 30, 1997 and 1998 and four-month period ended
October 31, 1998, respectively. Management of the
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Company presently anticipates such expenditures in the next twelve months of not
less than $2,000,000, of which approximately $1,600,000 will be financed and
used for the purchase of trucks and forklifts for the Company's currently
existing operations, in anticipation of increased business and to upgrade its
vehicles to compete better in its market areas. Management's anticipation of
increased business is based on sales expected to be generated by the opening of
new distribution centers, the locations of which have not yet been decided.
During the four-month period ended October 31, 1998, cash flows used in
financing activities approximated $128,000. Such amount consisted primarily of
principal borrowings on long-term debt of $49,515,000, proceeds from the
issuance of notes payable--shareholder of $1,100,000 and loans payable--
affiliated companies of $1,400,000, an increase in due to Parent and affiliated
companies of $58,000 and a capital contribution from the Parent of $1,000,000,
offset by an increase in deferred registration costs of $128,000 and principal
reductions on long-term debt of $53,073,000. During the fiscal year ended June
30, 1998, cash flows provided by financing activities approximated $4,614,000.
Such amount consisted primarily of principal borrowings on long-term debt of
$139,493,000, proceeds from the issuance of notes payable--shareholders of
$300,000 and a capital contribution from the Parent of $1,350,000, offset by
principal reductions on long-term debt of $134,037,000, an increase in deferred
registration costs of $223,000, a decrease in due to Parent and affiliated
companies of $1,069,000 and dividends paid to Parent of $1,200,000.
During Eagle's fiscal years ended June 30, 1997 and June 30, 1998, Eagle
made dividend payments of $1,250,000 and $1,200,000, respectively, to TDA. JEH
Eagle did not make any dividend payments to TDA during the fiscal year ended
June 30, 1998, and neither Eagle nor JEH Eagle made any dividend payments to TDA
during the four-month period ended October 31, 1998. After October 31, 1998
until completion of the Public Offering and consummation of the Acquisitions,
both Eagle and JEH Eagle may make dividend payments to TDA. MSI Eagle is
precluded from making dividend payments and certain other distributions to TDA
pursuant to the terms of its credit facility.
As Eagle has historically made dividend payments to TDA, dividend payments
Eagle may make to TDA subsequent to October 31, 1998 are not anticipated to vary
Eagle's cash sufficiency from its historical levels and, as the dividend
payments to TDA will cease upon the closing of the Public Offering and
consummation of the Acquisitions, it is anticipated that Eagle's available funds
from operations will be increased. It is anticipated that the increase in
available funds will be partially offset by the salaries to be paid to Messrs.
Fields and Friedman in the aggregate annual amount of $520,000 and the aggregate
annual amount of $72,000 payable to TDA pursuant to the respective employment
and services agreements of each of Messrs. Fields and Friedman and of TDA with
the Company and JEH Eagle. Eagle and JEH Eagle (as subsidiaries of the Company)
may make dividend payments to the Company following the closing of the Public
Offering and consummation of the Acquisitions, subject to Eagle's and JEH
Eagle's respective management's evaluations of working capital needs. MSI Eagle
is precluded from making dividend payments and certain other distributions
pursuant to the terms of its credit facility. See "Management" and "Certain
Transactions."
During the fiscal years ended June 30, 1997 and June 30, 1998, TDA allocated
to Eagle the sum of $50,000 for accounting and auditing fees. Upon the closing
of the Public Offering and consummation of the Acquisitions all such accounting
and auditing fees will be incurred directly by Eagle. See "Certain
Transactions."
Upon closing of the Public Offering and consummation of the Acquisitions,
Eagle, JEH Eagle and MSI Eagle combined will have no less than $1,000,000 in
book value after Eagle cancels, in the form of a non-cash dividend, all
indebtedness of TDA to Eagle, except for an approximately $495,000 receivable
from TDA relating to a mortgage in the same amount on property previously owned
by Eagle and for which Eagle remains the primary obligor, with TDA contributing
sufficient cash, within forty-five days after the closing of the Public Offering
and consummation of the Acquisitions to achieve that book value in the
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event of a deficiency. At October 31, 1998, the combined book value of Eagle,
JEH Eagle and MSI Eagle was approximately $5,773,000, which exceeded the
$1,000,000 required book value by approximately $1,703,000, assuming the
cancellation by Eagle, in the form of a non-cash dividend, of all indebtedness
of TDA to Eagle at that date, excluding the foregoing receivable offsetting such
mortgage. If effected as of October 31, 1998, the amount of such non-cash
dividend from Eagle to TDA would have been approximately $3,070,000. See
"Certain Transactions."
Although a portion of the net proceeds of the Public Offering are to be used
for inventory purchases for new distribution centers, the Company does not
presently intend to increase the inventory levels at Eagle's present
distribution centers with such proceeds. See "Use of Proceeds."
The Company believes that its existing sources of liquidity, including its
present availability under its revolving credit facilities and its current cash
flows, will be adequate to sustain its normal operations and to satisfy its
current working capital and capital expenditure requirements for the next
eighteen to twenty-four months.
In July 1997, JEH Eagle acquired the business and substantially all of the
assets of JEH Co., a Texas corporation, wholly-owned by James E. Helzer, now the
President of the Company, Eagle and JEH Eagle. The purchase price, as adjusted,
excluding transaction expenses, was $14,464,852, consisting of $13,600,000 in
cash, net of $250,000 due from JEH Co., and a five-year $864,852 principal
amount note bearing interest at the rate of 6% per year. The purchase price and
the note are subject to further adjustments under certain conditions. The first
$250,000 of the adjustments was to be paid in cash but as other adjustments to
the purchase price are anticipated, JEH Eagle elected to postpone the $250,000
payment from JEH Co. until other adjustments to the purchase price are resolved,
and the $250,000 payment has been established as a receivable due on demand from
JEH Co. Certain, potentially substantial, contingent payments, as additional
future consideration to JEH Co., or its designee, are to be paid by JEH Eagle.
JEH Co. is to receive a percentage of the EBITDA or the modified EBITDA (as
defined) of the business acquired (the "JEH EBITDA") on a per year
non-cumulative basis for each of JEH Eagle's fiscal years ending on June 30 of
1998 through 2002 (the "JEH Applicable Period"). If the JEH EBITDA reaches
$3,000,000, $4,000,000 and $5,000,000 in the foregoing fiscal years, JEH Co. or
its designee is to receive 35%, 40% and 50%, respectively, of that fiscal year's
JEH EBITDA in excess of those levels, respectively. In addition to the foregoing
percentages of JEH EBITDA, if the JEH EBITDA (plus $50,000 of Mr. Helzer's
compensation under his employment agreement) (x) for any fiscal year in the JEH
Applicable Period is not less than $4,400,000, JEH Eagle is to pay JEH Co. or
its designee $1,000,000, provided that the aggregate amount of such payments is
not to exceed $2,000,000; and (y) in the aggregate during the JEH Applicable
Period is not less than $20,000,000, JEH Eagle is to pay JEH Co. or its designee
the sum of $1,350,000 plus the amount of the difference, if any, between
$2,000,000 and the amount to be paid under (x). Additionally, with respect to
certain Total Accounts Receivable Reserves, as defined (the "JEH Reserves")
which were established at the date of the acquisition, if JEH Eagle reduces the
amount of the JEH Reserves, in any fiscal year during the JEH Applicable Period,
JEH Co. or its designee is to be paid 100% of the reduction until the JEH
Reserves are not less than $2,500,000 and 50% of the reduction in the JEH
Reserves below $2,300,000 down to $600,000. Both of the immediately foregoing
percentage payments to JEH Co. or its designee are subject to adjustment in
certain events. Additionally, if this Public Offering is completed prior to June
30, 2002 and in the event certain JEH EBITDA levels are reached for JEH Eagle
during the period from July 1, 1997 through the date of consummation of this
Public Offering, JEH Co. or its designee will be entitled to receive (i)
$1,000,000 or (ii) $1,350,000 (either in cash or in shares of the Company's
Common Stock valued at its public offering price) if the JEH EBITDA level is (i)
less than $3,800,000 per year but not less than $3,600,000 per year, or (ii) not
less than $3,800,000 per year, respectively. The Company will issue 300,000
shares of its Common Stock and not pay the foregoing amounts to James E. Helzer
in fulfillment of the obligation set forth in the immediately preceding
sentence, even if the JEH EBITDA does not reach the required levels. James E.
Helzer and E.G. Helzer serve as Eagle's President and Senior Vice
President-Operations of Eagle, respectively, and are compensated at the rate of
$50,000
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and $25,000 per year, respectively. Pursuant to their arrangements with Eagle,
James E. Helzer and E.G. Helzer are also entitled to receive 20% and 6%,
respectively, of Eagle's income before taxes in excess of $600,000 per year.
James E. Helzer and E.G. Helzer are employed as President and Senior Vice
President-Operations, respectively, of the Company and Eagle pursuant to oral
agreements that can be terminated by either party without notice or penalty.
In order to pay a substantial portion of the purchase price for the
acquisition of JEH Co.'s business and to provide working capital for JEH Eagle,
JEH Eagle in July 1997 entered into a loan agreement for a credit facility of up
to $20,000,000 (the "JEH Facility") guaranteed by TDA and collateralized by
substantially all of the assets of JEH Eagle. The JEH Facility, as amended,
consists of a $3,000,000 term loan, a $2,475,000 equipment loan and, the
balance, a revolving credit loan. The principal amount of the term loan is
payable in 48 equal monthly installments of $62,500. The term loan is due on the
earlier of August 1, 2001 or the loan agreement's termination. The outstanding
balance of the term loan at October 31, 1998 was $2,062,500. The term loan bears
interest at Libor plus three and one-quarter percent or the lender's prime rate
plus one and one-half percent, as JEH Eagle may elect. The principal amount of
the equipment loan is payable in equal consecutive monthly installments of
$26,000 based upon a 76 month amortization schedule with any remaining principal
amount due upon the earlier of August 1, 2004 or the end of the loan agreement's
initial or renewal term. The outstanding balance of the equipment loan at
October 31, 1998 was approximately $1,807,000. The equipment loan bears interest
at Libor plus two and one-half percent or the lender's prime rate plus one-half
percent, as JEH Eagle may elect. The principal amount of the revolving credit
loan is payable upon the earlier of the loan agreement's termination or other
stated events. The outstanding balance on the revolving credit loan at October
31, 1998 was approximately $9,237,000. The revolving credit loan bears interest
at Libor plus two and one-half percent or the lender's prime rate plus one-half
percent, as JEH Eagle may elect. All interest payments under the foregoing loans
are payable monthly in arrears. The maximum amount borrowable under the JEH
Facility is determined by a Borrowing Base as defined in the JEH Facility.The
JEH Facility is due in October 2003.
Of the $13,600,000 initial cash payment portion of the $14,464,857 JEH Co.
tentative purchase price, approximately $12,500,000 was supplied pursuant to the
JEH Facility and approximately $1,350,000 was contributed to JEH Eagle by TDA as
equity capital. In connection with the acquisition of JEH Co.'s business and
assets, JEH Eagle paid TDA a financing fee of $150,000.
In October 1998, MSI Eagle acquired the business and substantially all of
the assets of MSI Co., a Texas corporation, wholly-owned by Gary L. Howard, now
a Vice President of the Company and President of MSI Eagle. The purchase price,
as adjusted, was approximately $8,296,000, consisting of $6,250,000 in cash and
a $2,046,000 principal amount five-year note bearing interest at the rate of 8%
per year. All payments due on the note are accelerated upon consummation of the
Public Offering and are to be paid within 120 days of such consummation. At MSI
Co.'s option, upon consummation of the Public Offering, it may exchange up to
$2,000,000 of the principal amount of the note into shares of the Company's
Common Stock valued at the public offering price. MSI Co. has advised the
Company that it intends to convert $250,000 of the principal amount of the note
for shares of the Company's Common Stock and transfer said shares, or its right
to receive said shares, to Gary L. Howard. The note is secured by substantially
all of the assets of MSI Eagle with that security agreement subordinate to the
rights of MSI Eagle's credit facility lending institution. The purchase price
and the note are subject to further adjustments under certain conditions.
Certain, potentially substantial, contingent payments, as additional future
consideration to MSI Co., or its designee, are to be paid by MSI Eagle. MSI Co.
is to receive a percentage of the EBITA (earnings before interest, federal
income taxes and amortization) or the modified EBITA (as defined) of the
business acquired (the "MSI EBITA") on a per year non-cumulative basis for each
of MSI Eagle's fiscal years ending on June 30 of 1999 through 2003 (the "MSI
Applicable Period"). If the MSI EBITA reaches $2,000,000 and $2,750,000 in the
foregoing fiscal years, MSI Co. or its designee is to receive 25% and 35%,
respectively, of that fiscal year's MSI EBITA in excess of those levels,
respectively. Additionally, if the Public Offering is completed prior to October
22, 2003 and in the event certain MSI EBITA levels are
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reached for MSI Eagle, MSI Co. or its designee will be entitled to receive (i)
$1,000,000 or (ii) $750,000 (either in cash or in shares of the Company's Common
Stock valued at its public offering price) if the MSI EBITA level is (i) not
less than $2,000,000 per year or (ii) less than $2,000,000 but not less than
$1,500,000 per year, respectively. The Company will issue 200,000 shares of its
Common Stock, and not pay the foregoing amounts, to Gary L. Howard as MSI Co.'s
designee in fulfillment of the obligation set forth in the immediately preceding
sentence, even if the MSI EBITA does not reach the required levels. Gary L.
Howard serves as MSI Eagle's President at a salary of $260,000 per year pursuant
to an employment agreement terminating in June 2003. He also serves as the
Company's Vice President at no additional salary. See "The Acquisitions" and
"Management."
In order to pay a substantial portion of the purchase price for the
acquisition of MSI Co.'s business and assets and to provide working capital to
MSI Eagle, MSI Eagle in October 1998 entered into a loan agreement for a credit
facility of up to $9,075,000 (the "MSI Facility") guaranteed by TDA and
collateralized by substantially all of the assets of MSI Eagle. The MSI Facility
consists of a $3,075,000 term loan and the balance as a revolving credit loan.
The principal amount of the term loan is payable in 83 equal monthly
installments of $37,000 commencing on December 1, 1998 with the remaining unpaid
balance payable with the 84th installment. The term loan is due upon the earlier
of December 1, 2005 or the end of the loan agreement's initial or renewal term.
The term loan bears interest at Libor plus three and one-quarter percent or the
lender's prime rate plus one and one-quarter percent, as MSI Eagle may elect.
The principal amount of the revolving credit loan is payable upon the earlier of
the loan agreement's termination or other stated events. The revolving credit
loan bears interest at Libor plus two and one-half percent or the lender's prime
rate plus one-half percent, as MSI Eagle may elect. All interest payments under
the foregoing loans are payable monthly in arrears. The maximum amount
borrowable under the MSI Facility is determined by a borrowing base as defined
in the MSI Facility. The MSI Facility is due in October 2003.
Of the $6,250,000 cash payment portion of the approximate $8,296,000
tentative purchase price for the business and substantially all of the assets of
MSI Co., approximately $4,250,000 was supplied pursuant to the MSI Facility,
$1,000,000 was invested by TDA into MSI Eagle as an equity investment and
$1,000,000 was lent to MSI Eagle by TDA pursuant to a six (6%) percent two-year
note in that principal amount payable in full in October 2000. TDA has agreed
with MSI Eagle's credit facility lending institution to defer the interest
payable on such note until its maturity.
For the Company to acquire Eagle, JEH Eagle and MSI Eagle, the Eagle
Facility, JEH Facility and MSI Facility provide that the respective lending
institution's consent will be required. See "The Acquisitions" and "Certain
Transactions."
IMPACT OF INFLATION
General inflation in the economy has driven the operating expenses of many
businesses higher, and, accordingly, each of the Combined Entities have
increased salaries and bore higher prices for supplies, goods and services. The
Combined Entities continuously seek methods of reducing costs and streamlining
operations while maximizing efficiency through improved internal operating
procedures and controls. While each of the Combined Entities is subject to
inflation as described above, the Company, Eagle, JEH Eagle and MSI Eagle
believe that inflation currently does not have a material effect on Eagle's, JEH
Eagle's or MSI Eagle's operating results, but there can be no assurance that
this will continue to be so in the future.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") Compliance issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900, rather than year 2000. This could result in a system
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failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
In 1997, systems were identified and purchased that would meet, at that
time, Eagle's requirements and be Y2K compliant in regard to the maintenance and
management of its operating system and distribution software package. Eagle then
commenced the upgrade of its hardware and the conversion to new software
programs that are Y2K compliant. Additionally, Eagle's and JEH Eagle's
management have started to integrate and centralize certain of Eagle's and JEH
Eagle's administrative functions, including data processing, and it is
anticipated that MSI Eagle's administrative functions, including data
processing, also will be integrated and centralized with the administrative
functions of Eagle and JEH Eagle. Additionally, JEH Eagle and MSI Eagle will be
utilizing and adopting Eagle's upgraded data processing equipment and new
software programs. As their hardware and software vendors have certified that
their products are Y2K compliant, management of Eagle, JEH Eagle and MSI Eagle
have determined that the Y2K compliance issue will not pose significant
operational problems for their computer systems. The Company's and the Combined
Entities' desktop systems are running products which management believes are
compliant except for minor issues.
The Combined Entities are in the process of initiating formal communications
with all of their significant suppliers and large customers to determine the
extent to which the Combined Entities may be vulnerable to those third parties'
failure to remediate their own Y2K compliance issues. There can be no guarantee
that the systems of other companies on which the Combined Entities' systems rely
will be timely converted and would not have an adverse effect on the Combined
Entities.
Management of the Combined Entities believes that all significant testing
for all potential Y2K issues will be completed during the second quarter of
1999. However, unforeseen difficulties may arise which could adversely affect
the ability to complete any necessary system modifications correctly, completely
and/ or on time. In addition, there can be no assurances that customers,
suppliers and/or service providers on which the Combined Entities rely will
resolve their Y2K issues accurately, thoroughly and/or on time. Contingency
plans are being considered and will be in place by the third quarter of 1999 in
the event that the Company and the Combined Entities are at risk in regard to
suppliers, customers or their own internal hardware and software.
Based on management's assessment of the cost of addressing Y2K compliance
issues, such cost is not currently expected to have a material adverse impact on
the Company's financial position. The total cost of the project is estimated at
$300,000 and is being expensed over the three-year term of the operating lease
for the new equipment and software which is Y2K compliant. The estimated cost of
the project and the date on which the Company believes it will complete the Year
2000 modifications and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Failure to complete the Y2K project by the year 2000
could have a material adverse affect on future operating results and financial
condition of the Company.
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THE ACQUISITIONS
Simultaneously with the closing of the Public Offering, the Company will
consummate the Acquisitions. The Underwriter and the Company have agreed that at
the consummation of the Acquisitions, the Combined Entities have a book value of
$1,000,000 and that TDA will receive 3,000,000 shares of the Company's Common
Stock. The Company, TDA, Eagle, JEH Eagle and MSI Eagle have not allocated the
consideration for Eagle, JEH Eagle or MSI Eagle. The foregoing number of shares
of the Company's Common Stock to be issued to TDA was determined by negotiations
among the Company, TDA and the Underwriter. Factors considered in said
negotiations included but were not limited to (a) the historical results of the
Combined Entities, (b) their future business prospects, (c) their position in
their industry principally on a combined basis, (d) the breadth of their product
lines, (e) their customer bases, (f) the experience of their management and
personnel, (g) the locations of their distribution facilities, and (h) their net
worth.
The 3,000,000 shares of the Company's Common Stock that TDA is to receive in
connection with the Acquisitions was negotiated and evaluated based on the
assessments made by the parties to the negotiations of the relative interests
that would be held in the Company after the consummation of the Public Offering
and the Acquisitions. There was no specific value assigned to the shares of
Common Stock to be issued to TDA for the Acquisitions. Management of TDA weighed
the relative merits of maintaining the Combined Entities as privately and
wholly-owned by TDA while the Combined Entities would seek to implement their
internal expansion and acquisition growth strategies or, alternatively, of
transferring the Combined Entities to the Company which, as a public company,
could provide potential advantages in implementing the Combined Entities'
internal expansion and acquisition growth strategies but would leave TDA with an
ownership position of less than 100% through its stock ownership in the Company.
In agreeing to transfer 3,000,000 shares of Common Stock of the Company to TDA
for the Combined Entities, the Company determined that the amount of ownership
interest of the Company to be transferred to TDA in connection with the
consummation of the Acquisitions, in light of all of the terms and provisions of
the Acquisitions transaction, was beneficial to the Company and would provide a
sound basis for implementing the Company's business plan. The 300,000 and
200,000 shares of the Company's Common Stock to be issued to Messrs. Helzer and
Howard were determined by negotiations between JEH Eagle and JEH Co. and MSI
Eagle and MSI Co. at the times of JEH Eagle's and MSI Eagle's acquisitions of
substantially all of the business and assets of JEH Co. and MSI Co.,
respectfully. Additionally, as part of the Acquisitions, TDA guarantees that the
Combined Entities will have a book value of no less than $1,000,000 after Eagle
cancels, in the form of a non-cash dividend, all indebtedness of TDA to Eagle,
except for an approximately $495,000 receivable from TDA relating to and
offsetting a mortgage in the same amount on property previously owned by Eagle
and for which Eagle remains the primary obligor, with TDA contributing cash
sufficient to achieve that book value in the event of a deficiency. At October
31, 1998, the combined book value of the Combined Entities was approximately
$5,773,000, which exceeded the required $1,000,000 combined book value by
approximately $1,703,000 after assuming cancellation by Eagle, in the form of a
non-cash dividend, of all indebtedness of TDA to Eagle, at that date, excluding
the foregoing receivable offsetting such mortgage. Any payment to Eagle, JEH
Eagle or MSI Eagle by TDA to satisfy the $1,000,000 combined book value
requirement set forth above will be paid to Eagle, JEH Eagle or MSI Eagle by TDA
within forty-five days of the closing of the Public Offering and consummation of
the Acquisitions. At October 31, 1998, TDA's indebtedness to Eagle, excluding
the foregoing receivable offsetting such mortgage, was approximately $3,070,000.
Upon consummation of the Acquisitions, Eagle, JEH Eagle and MSI Eagle will
become wholly-owned subsidiaries of the Company and will constitute the only
business operations and sources of revenue of the Company until such time, if
any, as the Company consummates additional acquisitions.
TDA, through a wholly-owned subsidiary, 39 Acre Corp., has rented to Eagle
on a month-to-month basis without formal written leases the premises for several
of Eagle's distribution facilities and Eagle's executive offices at aggregate
annual rentals of approximately $782,000 and $790,000 during its fiscal years
ended June 30, 1997 and 1998, respectively. Upon successful completion of the
Public Offering and the
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consummation of the Acquisitions, Eagle and TDA intend to enter into ten-year
leases for said premises on economic terms substantially similar to current
arrangements. However, the leases will now be written on a long-term, ten-year
basis, and it is anticipated that TDA will derive a profit therefrom. The
Company believes that the rent and other terms of the written lease agreements
to be entered into between 39 Acre Corp. and Eagle are on at least as favorable
terms as Eagle would expect to negotiate with unaffiliated third parties.
Neither Eagle nor 39 Acre Corp. will be permitted to terminate the leases before
the end of the term without a breach or default by the other party.
The Company and Eagle have entered into employment agreements with Messrs.
Fields and Friedman, to become effective upon closing of the Public Offering and
consummation of the Acquisitions, pursuant to which they will act as Chairman of
the Board and Chief Executive Officer, and Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a Director of the Company and Eagle,
respectively, for a five-year period, at annual salaries of $200,000 each,
subject to annual increases or bonuses as may be determined by the Board of
Directors.
JEH Eagle has entered into agreements with Messrs. Fields and Friedman
pursuant to which they act as Chairman of the Board of Directors and Chief
Executive Officer, and Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and a Director of JEH Eagle, respectively, for a five-year
period which commenced in July 1997, at annual compensation of $60,000 each,
subject to annual increases and bonuses as may be determined by JEH Eagle's
Board of Directors. The compensation payable to Messrs. Fields and Friedman
under their employment agreements shall commence upon the closing of the Public
Offering and consummation of the Acquisitions.
Pursuant to the foregoing employment agreements, Messrs. Fields' and
Friedman's written consent is required if they are to be employed other than in
proximity to their residences. Messrs. Fields and Friedman reside in Connecticut
and New York, respectively. The agreements require the Company, Eagle, and JEH
Eagle to provide their beneficiaries and each of them, respectively, with twelve
months salary in the event of death or disability and indemnify Messrs. Fields
and Friedman to the full extent permitted under the Delaware General Corporation
Law. Their agreements do not require either Messrs. Fields or Friedman to commit
a specific amount of their time to the affairs of the Company, Eagle, and JEH
Eagle. However, Messrs. Fields and Friedman will devote no less time than they
deem reasonably necessary to carry out their duties to the Company, Eagle, JEH
Eagle and MSI Eagle.
The Company's and JEH Eagle's agreements with Messrs. Fields and Friedman
contain provisions for payments of salary and benefits following a change of
control (as defined) of the Company or JEH Eagle, the failure to reappoint
either of them to his position, a salary reduction or the Company's or JEH
Eagle's failure to perform its obligation under their respective agreements. In
general, under such circumstances, each of Messrs. Fields and Friedman would be
entitled to a cash payment equivalent to his salary for the remaining term of
his agreement, and continued life, health and disability insurance benefits for
a period of two years.
Eagle had purchased the premises for its Birmingham, Alabama, distribution
center from an unrelated third party in April 1994, with a purchase money
mortgage and promissory note in the principal amount of $550,000 to be paid in
fifty-nine equal monthly installments of approximately $4,700 and a "balloon"
payment of approximately $440,000 in April 1999. The mortgage and promissory
note for the Birmingham, Alabama, premises bears interest at the lending bank's
fluctuating prevailing prime rate. Prior to June 30, 1994, Eagle transferred
this property to TDA in partial repayment of intercompany debt, and TDA then
transferred the property to a wholly-owned subsidiary. The amount of the
intercompany debt that was satisfied in fiscal 1994 by the transfer of the
Birmingham, Alabama, property from Eagle to TDA was approximately $216,000. In
fiscal 1995, the approximate amount of $90,000 of leasehold improvements on a
property in Jacksonville, Florida, was transferred from Eagle to TDA in
satisfaction of intercompany debt. The Jacksonville, Florida, property had been
leased by Eagle from 39 Acre Corp. and operated as a distribution center until
the sale by Eagle of this distribution center in June 1995. 39 Acre Corp. is the
TDA subsidiary to which the Birmingham, Alabama, property and the improvements
on the
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Jacksonville, Florida, property were ultimately transferred. Eagle remains
liable for the payments under this mortgage and, in the event of a default under
the mortgage by 39 Acre Corp., Eagle could be held liable for the monthly and
"balloon" mortgage payments in addition to its rental payments. Eagle's rental
payments to 39 Acre Corp. for the Birmingham, Alabama, property have exceeded
the mortgage payments for this property and have not required Eagle to pay any
sums in excess of its rental payments.
Eagle also remains responsible to Eagle Holding, Inc., a TDA subsidiary,
pursuant to a lease for Eagle's former Fort Lauderdale, Florida, distribution
center expiring on May 1, 1999, which requires annual rental payments and a
"balloon" payment of approximately $580,000 due on May 1, 1999 for an industrial
revenue bond underlying these premises. These premises have been subleased by
Eagle to an unrelated third party at an annual rental in excess of Eagle's lease
obligation. The payments by Eagle have included through October 31, 1998 a
ratable share of the "balloon" payment. These payments, together with
anticipated sublessee rental payments, are currently projected by the Company to
fully fund the "balloon" payment.
Upon completion of the Public Offering and consummation of the Acquisitions,
TDA will indemnify Eagle for any payments that Eagle is required to make which
are in excess of Eagle's obligations under the Birmingham, Alabama, and Fort
Lauderdale, Florida, leases and relate to the mortgage or the industrial revenue
bonds for the Birmingham, Alabama and Fort Lauderdale, Florida, properties,
respectively.
In July 1997 JEH Eagle acquired the business and substantially all of the
assets of JEH Co., a Texas corporation, wholly-owned by James E. Helzer, now the
President of the Company, Eagle and JEH Eagle. The purchase price, as adjusted,
was approximately $14,464,000, consisting of $13,600,000 in cash, net of
$250,000 due from JEH Co., and a five-year $864,852 principal amount note
bearing interest at the rate of 6% per year. The purchase price and the note are
subject to further adjustments under certain conditions. The first $250,000 of
the adjustments was to be paid in cash by JEH Co. to JEH Eagle but, as other
adjustments to the purchase price are anticipated, JEH Eagle elected to postpone
the $250,000 payment from JEH Co. until other adjustments to the purchase price
are resolved, and the $250,000 payment has been established as a receivable due
on demand from JEH Co. Certain, potentially substantial, contingent payments, as
additional future consideration to JEH Co., or its designee, are to be paid by
JEH Eagle. JEH Co. is to receive a percentage of the EBITDA or the modified
EBITDA (as defined) of the business acquired (the "JEH EBITDA") on a per year
non-cumulative basis for each of JEH Eagle's fiscal years ending on June 30 of
1998 through 2002 (the "JEH Applicable Period"). If the JEH EBITDA reaches
$3,000,000, $4,000,000 and $5,000,000 in the foregoing fiscal years, JEH Co. or
its designee is to receive 35%, 40% and 50%, respectively, of that fiscal year's
JEH EBITDA in excess of those levels, respectively. In addition to the foregoing
percentages of JEH EBITDA, if the JEH EBITDA (plus $50,000 of Mr. Helzer's
compensation under his employment agreement) (x) for any fiscal year in the JEH
Applicable Period is not less than $4,400,000, JEH Eagle is to pay JEH Co. or
its designee $1,000,000, provided that the aggregate amounts of such payments is
not to exceed $2,000,000; and (y) in the aggregate during the JEH Applicable
Period is not less than $20,000,000, JEH Eagle is to pay JEH Co. or its designee
the sum of $1,350,000 plus the amount of the difference, if any, between
$2,000,000 and the amount to be paid under (x). Additionally, with respect to
certain Total Accounts Receivable Reserves, as defined (the "JEH Reserves")
which were established at the date of the Acquisition, if JEH Eagle reduces the
amount of the JEH Reserves, in any fiscal year during the Applicable Period, JEH
Co. or its designee is to be paid 100% of the reduction until the JEH Reserves
are not less than $2,500,000 and 50% of the reduction in the JEH Reserves below
$2,300,000 down to $600,000. Both of the immediately foregoing percentage
payments to JEH Co. or its designee are subject to adjustment in certain events.
Additionally, if this Public Offering is completed prior to June 30, 2002 and in
the event certain JEH EBITDA levels are reached for JEH Eagle during the period
from July 1, 1997 through the date of consummation of this Public Offering, JEH
Co. or its designee will be entitled to receive (i) $1,000,000 or (ii)
$1,350,000 (either in cash or in shares of the Company's Common Stock valued at
its public offering price) if the JEH EBITDA level is (i) less than $3,800,000
per year but not less than $3,600,000 per year, or (ii) not less than $3,800,000
per year, respectively. The Company will issue 300,000 shares of its Common
Stock and not pay the foregoing
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amounts to James E. Helzer in fulfillment of the obligation set forth in the
immediately preceding sentence, even if the JEH EBITDA does not reach the
required levels. James E. Helzer and E.G. Helzer serve as Eagle's President and
Senior Vice President-Operations and are compensated at the rates of $50,000 and
$25,000 per year, respectively, and are also entitled to receive 20% and 6%,
respectively, of Eagle's income before taxes in excess of $600,000 per year.
Messrs. Helzers are employed by the Company and Eagle pursuant to oral
agreements that can be terminated by either party without notice or penalty.
In order to pay a substantial portion of the purchase price for the
acquisition of JEH Co.'s business and to provide working capital for JEH Eagle,
JEH Eagle in July 1997 entered into a loan agreement for a credit facility of up
to $20,000,000 (the "JEH Facility") guaranteed by TDA and collateralized by
substantially all of the assets of JEH Eagle. Of the $13,850,000 initial cash
payment portion of the $14,850,000 JEH Co. tentative purchase price,
approximately $12,500,000 was supplied pursuant to the JEH Facility and
approximately $1,350,000 was contributed to JEH Eagle by TDA as equity capital.
In connection with the acquisition of JEH Co., JEH Eagle paid TDA a financing
fee of $150,000.
In October 1998, MSI Eagle acquired the business and substantially all of
the assets of MSI Co., a Texas corporation, wholly-owned by Gary L. Howard, now
a Vice President of the Company and President of MSI Eagle. The purchase price,
as adjusted, was approximately $8,296,000, consisting of $6,250,000 in cash and
a $2,046,000 principal amount five-year note bearing interest at the rate of 8%
per year. All payments due on the note are accelerated upon consummation of the
Public Offering and are to be paid within 120 days of such consummation. At MSI
Co.'s option, upon consummation of the Public Offering, it may exchange up to
$2,000,000 of the principal amount of the note into shares of the Company's
Common Stock valued at the public offering price. MSI Co. has advised the
Company that it intends to convert $250,000 of the principal amount of the note
for shares of the Company's Common Stock and transfer said shares or its right
to receive said shares to Gary L. Howard. The note is secured by substantially
all of the assets of MSI Eagle with that security agreement subordinate to the
rights of MSI Eagle's credit facility lending institution. The purchase price
and the note are subject to further adjustments under certain conditions.
Certain, potentially substantial, contingent payments, as additional future
consideration to MSI Co., or its designee, are to be paid by MSI Eagle. MSI Co.
is to receive a percentage of the EBITA or the modified EBITA (as defined) of
the business acquired (the "MSI EBITA") on a per year non-cumulative basis for
each of MSI Eagle's fiscal years ending on June 30 of 1999 through 2003 (the
"MSI Applicable Period"). If the MSI EBITA reaches $2,000,000 and $2,750,000 in
the foregoing fiscal years, MSI Co. or its designee is to receive 25% and 35%,
respectively, of that fiscal year's MSI EBITA in excess of those levels,
respectively. Additionally, if the Public Offering is completed prior to October
22, 2003 and in the event certain MSI EBITA levels are reached for MSI Eagle,
MSI Co. or its designee will be entitled to receive (i) $1,000,000 or (ii)
$750,000 (either in cash or in shares of the Company's Common Stock valued at
its public offering price) if the MSI EBITA level is (i) not less than
$2,000,000 per year or (ii) less than $2,000,000 but not less than $1,500,000
per year, respectively. The Company will issue 200,000 shares of its Common
Stock, and not pay the foregoing amounts, to Gary L. Howard as MSI Co.'s
designee, in fulfillment of the obligation set forth in the immediately
preceding sentence, even if the MSI EBITA does not reach the required levels.
Gary L. Howard serves as MSI Eagle's President at a salary of $260,000 per year
pursuant to an employment agreement terminating in June 2003. He also serves as
the Company's Vice President at no additional salary.
In order to pay a substantial portion of the purchase price for the
acquisition of MSI Co.'s business and assets and to provide working capital to
MSI Eagle, MSI Eagle in October 1998 entered into a loan agreement for a credit
facility of up to $9,075,000 (the "MSI Facility") guaranteed by TDA and
collateralized by substantially all of the assets of MSI Eagle. The MSI Facility
consists of a $3,075,000 term loan and the balance as a revolving credit loan.
The principal amount of the term loan is payable in 83 equal monthly
installments of $37,000 commencing on December 1, 1998 with the remaining unpaid
balance payable with the 84th installment. The term loan is due upon the earlier
of December 1, 2005 or the end of the loan agreement's initial or renewal term.
The term loan bears interest at Libor plus three and one-quarter percent or the
lender's prime rate plus one and one-quarter percent, as MSI Eagle may
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elect. The principal amount of the revolving credit loan is payable upon the
earlier of the loan agreement's termination or other stated events. The
revolving credit loan bears interest at Libor plus two and one-half percent or
the lender's prime rate plus one-half percent, as MSI Eagle may elect. All
interest payments under the foregoing loans are payable monthly in arrears. The
maximum amount borrowable under the MSI Facility is determined by a borrowing
base as defined in the MSI Facility.
Of the $6,250,000 cash payment portion of the approximate $8,296,000
tentative purchase price for the business and substantially all of the assets of
MSI Co., approximately $4,250,000 was supplied pursuant to the MSI Facility,
$1,000,000 was invested by TDA into MSI Eagle as an equity investment and
$1,000,000 was lent to MSI Eagle by TDA pursuant to a six (6%) percent two-year
note in that principal amount payable in full in October 2000. TDA has agreed
with MSI Eagle's credit facility lending institution to defer the interest
payable on such note until its maturity.
For the Company to acquire Eagle, JEH Eagle and MSI Eagle, the Eagle
Facility, JEH Facility and MSI Facility provide that their respective lending
institution's consent will be required.
Assuming the required consents from the lending institution are obtained and
the Public Offering and the Acquisitions are completed and consummated, TDA has
advised the Company that in the event Eagle, JEH Eagle or MSI Eagle seek
increased lines of credit, new lines of credit or other changes in any credit
facility which would give TDA the right to terminate or decline to grant a new
guarantee, TDA may seek compensation from the Company. No such compensation has
been agreed upon, could be material to the Company, Eagle, JEH Eagle and/or MSI
Eagle and result in a material benefit to TDA and certain officers and directors
of TDA. In the event TDA were to exercise any such right to terminate a
guarantee or decline to grant a new guarantee, credit facilities may no longer
be available to Eagle, JEH Eagle and/or MSI Eagle or credit facilities may be
available only upon materially different terms and conditions including, but not
limited to, a reduced availability of funds, additional and/or higher interest
rates and charges and other more restrictive financial terms and conditions. Any
of the foregoing events could have a material adverse effect upon the Company,
Eagle, JEH Eagle and/or MSI Eagle.
James E. Helzer had rented to JEH Co. and continues to rent to JEH Eagle,
pursuant to five-year written leases, the premises for JEH Eagle's executive
office and several distribution centers at aggregate annual rentals of
approximately $485,000. Rental payments to Mr. Helzer for the executive offices
and several distribution centers he leases to JEH Eagle aggregated $492,000 and
$162,000 for JEH Eagle's fiscal year ended June 30, 1998 and its four-month
period ended October 31, 1998, respectively.
TDA and JEH Eagle have entered into an agreement pursuant to which TDA
provides JEH Eagle with certain services including (i) managerial, (ii)
strategic planning, (iii) banking negotiation, (iv) investor relations, and (v)
advisory services relating to acquisitions for a five-year term which commenced
in July 1997. The monthly fee, the payment of which is to commence upon the
closing of the Public Offering and the consummation of the Acquisitions, for the
foregoing services is $3,000.
Gary L. Howard had rented to MSI Co. and continues to rent to MSI Eagle,
pursuant to a three-year written lease, the premises for MSI Eagle's executive
offices and principal distribution center at an approximate annual base rental
of $107,000. Rental payments to Mr. Howard were approximately $192,000 for MSI
Co.'s fiscal year ended June 30, 1998 and $64,000 for its four-month period
ended October 31, 1998. The Company believes that the lease rental amount is
fair and reasonable to MSI Eagle and is not in excess of what MSI Eagle would be
required to pay independent third parties for comparable facilities.
Upon completion of the Public Offering and consummation of the Acquisitions,
TDA will provide office space and administrative services to the Company at
TDA's offices in New York City pursuant to an administrative services agreement
to be entered into by the Company and TDA. The term of the administrative
services agreement will be on a month-to-month basis. The fee payable by the
Company to TDA for such administrative services will be $3,000 per month. Prior
to the date of this Prospectus, the Company utilized office space and
administrative services provided by TDA without charge.
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BUSINESS
INTRODUCTION
The Company was organized to raise capital and acquire, own, integrate and
operate seasoned, privately-held companies engaged in the wholesale distribution
of roofing supplies and related products industry and companies which
manufacture products for or supply products to such industry. Simultaneously
with the closing of the Public Offering, the Company will consummate the
Acquisitions of Eagle, JEH Eagle and MSI Eagle. The Combined Entities are to
have a combined book value of not less than $1,000,000. See "Certain
Transactions." Eagle was founded in Florida in 1905. Eagle is a wholesale
distributor of a complete line of roofing supplies and related products through
its own sales force and distribution facilities to roofing supply and related
products contractors and sub-contractors in the geographic areas where Eagle has
distribution centers. Such contractors and sub-contractors are engaged in
commercial and residential roofing repair and the construction of new
residential and commercial properties. JEH Co. was founded in 1982 and its
business and substantially all of its assets were purchased by JEH Eagle in July
of 1997. Similar to Eagle, JEH Eagle is a wholesale distributor of roofing
supplies and related products within the geographic areas of its distribution
facilities using similar sales methods. JEH Eagle also distributes drywall,
plywood, vinyl siding and similar products to contractors, builders, and
developers primarily engaged in the construction industry. MSI Co. was founded
in 1979, and its business and substantially all of its assets were purchased by
MSI Eagle in October of 1998. MSI Eagle is a wholesale distributor of cement,
masonry supplies and related products to building contractors and subcontractors
through its own sales force and distribution centers. Such contractors and
subcontractors are engaged in residential and commercial construction. Upon
consummation of the Acquisitions, Eagle, JEH Eagle and MSI Eagle will become
wholly-owned subsidiaries of the Company and will constitute the only business
operations of the Company until and unless the Company consummates additional
acquisitions. Although the primary focus of the Company's expansion and
acquisition program will be on seeking suitable acquisition candidates which are
engaged in the wholesale distribution of roofing supplies and related products,
the Company will consider the purchase of manufacturers or vendors of products
which may be distributed through its wholesale distribution business.
During Eagle's fiscal years ended June 30, 1997 and 1998, Eagle had revenues
of approximately $57,576,000 and $58,498,000, respectively, and a net income of
approximately $192,000 and $160,000, respectively. For the four-month period
ended October 31, 1998, Eagle had revenues and a net loss of approximately
$19,102,000 and $143,000, respectively.
During JEH Co.'s fiscal year ended December 31, 1996 and six-month period
ended June 30, 1997, JEH Co. had revenues of approximately $74,893,000 and
$28,979,000, respectively, and net income of approximately $171,000 and a net
loss of approximately $1,179,000, respectively. During JEH Eagle's fiscal year
ended June 30, 1998, and four-month period ended October 31, 1998, it had
revenues of approximately $71,006,000 and $31,682,000 and net income of
approximately $608,000 and $1,306,000, respectively.
During MSI Co.'s fiscal years ended June 30, 1997 and 1998 and four-month
period ended October 31, 1998, MSI Co. had revenues of approximately $9,101,000,
$11,960,000, and $4,341,000, respectively, and net income of approximately
$487,000, $963,000, and $641,000, respectively.
The Company's activities to date have been limited primarily to its initial
organization, negotiating the terms and conditions of the Public Offering, its
listing on NASDAQ SmallCap, the Acquisitions and obtaining financing.
STRATEGY
Based upon its management's experience in the industry, the Company believes
that the roofing supplies and related products distribution industry is
fragmented and has the potential for consolidation in
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response to the competitive disadvantages faced by smaller distributors. The
Company believes that the industry is characterized by a large number of
relatively small local distribution companies and a few very large, multi-branch
and multi-regional distributors and a large, national multi-branch distributor.
Roofing supplies and related products distributors are overwhelmingly privately
owned, relationship-based companies that emphasize service, delivery and
reliability as well as competitive pricing and breadth of product line to their
customers. The Company believes that the competitive environment faced by small
distributors, coupled with the desire of many owners of such distributors for
liquidity, has prompted a trend toward consolidation in those industries that
offers significant opportunities for expansion oriented distributors, such as
the Company. The Company believes that there are opportunities for a company
which has the capability to source and distribute products effectively to serve
the roofing supplies and related products markets and to effect cost savings and
increased profit opportunities through efficiencies of scale which can be
applied to companies acquired in the roofing supplies and related products
industry.
The Company plans to seek acquisition candidates primarily in the roofing
supplies and related products industry throughout the United States, with
greater emphasis on the Southeastern, Midwestern and Western regions and less
emphasis on the Northeastern region of the United States. However, the Company
may consider acquisition candidates in any of the foregoing regions of the
United States if an exceptional opportunity arises. Initial acquisition
candidates will be sought in the roofing supply industry, and the factors that
the Company may consider in reviewing a potential acquisition candidate include,
but are not limited to, the following: (i) geographical locations; (ii)
operations contiguous to current areas of operations; (iii) members of its
management; (iv) economic viability; (v) the experience of management; (vi)
revenues; (vii) historical profitability; (viii) balance sheet quality; (ix)
product lines carried; (x) type of customers; (xi) qualities of fleet; (xii)
size and number of locations; and (xiii) vendors. As the characteristics of
potential acquisition candidates can vary widely, the Company is unable to
indicate the weight to be given to the foregoing and other factors, and the
foregoing factors should not be considered to be set forth in the Company's
order of priority. Acquisition candidates will be sought by members of the
management team and the officers of the Company, Eagle, JEH Eagle and MSI Eagle.
Additionally, potential acquisition candidates may be made known to the Company
from various sources such as business brokers, venture capitalists, members of
the financial community, vendors, others who may present unsolicited proposals
and through industry associations. In certain circumstances, the Company may
agree to pay a finder's fee for services provided by persons who are not
currently executive officers of the Company, Eagle, JEH Eagle or MSI Eagle, or
executive officers or directors of TDA which include, but are not limited to,
Messrs. Fields and Friedman, which submit acquisition candidates to the Company
that are subsequently acquired by the Company. However, in the event an
acquisition candidate is submitted to and acquired by the Company by a director
of the Company, Eagle, JEH Eagle or MSI Eagle who is not an executive officer of
the Company, Eagle, JEH Eagle or MSI Eagle, the Company anticipates that it may
pay any such person a finder's fee the same as if such person were an
independent third party. Any such finder's fee will be paid at the then
prevailing market rates as determined by the Company's executive officers and be
subject to approval by the Company's Board of Directors if such a fee is to be
paid to an affiliate of the Company. No such finder's fee will be paid to TDA or
persons who are officers or directors of TDA. Purchase prices for the Company's
potential acquisition candidates will be determined by negotiations conducted by
the Company's management with the prospective sellers. The Company's management
will conduct a review of a potential acquisition candidate's business operations
and historical financial information in connection with the negotiating process.
The Company intends to attempt to make such acquisitions at an amount related to
the candidate's book value. However, the Company may pay a sum in excess of a
candidate's book value if the Company's assessment of the candidate's product
lines, geographic market area, competitive position in that market, customer mix
(commercial or residential), the fair market value of its assets or perceived
potential future profit warrants such a premium.
The Company anticipates that it will be able to enhance the profit potential
of acquired companies by combining their operations with the operations of
Eagle, JEH Eagle and MSI Eagle. It is anticipated that acquired companies should
be able to take advantage of (as well as, by becoming affiliated with Eagle, JEH
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Eagle and/or MSI Eagle, enhance) Eagle's, JEH Eagle's and/or MSI Eagle's ability
to obtain volume discounts and other favorable terms (many of which are
dependent on the volume of purchases) from vendors, enabling the acquired
companies to obtain better purchasing terms and thereby offer more competitive
pricing to customers as a result of Eagle's, JEH Eagle's and MSI Eagle's
practice of negotiating prices and terms from vendors on a company-wide or
multi-center basis. Additionally, it is anticipated that acquired companies
should also be able to take advantage of Eagle's centralized administrative and
data processing systems which provide real-time management information systems
and centralized administrative functions, thereby relieving acquired companies
of some record keeping and administrative functions and enabling them to reduce
personnel and overhead expenses. Also, acquired companies should be able to use
Eagle's centralized administrative and data processing systems, among other
things, to monitor inventory levels and sales by distribution center, allowing
each distribution center manager to better assure that his center has sufficient
and balanced product inventory to meet the customer needs in that market area.
JEH Eagle and Eagle have begun to integrate their computer systems with the
objective to fully integrate their systems by the end of March 1999 to allow for
certain administrative, purchasing, billing, collection, credit control and
other similar functions to be combined at one location. It is anticipated that a
similar integration of MSI Eagle's computer system with that of Eagle and JEH
Eagle will occur by the end of the 1999 calendar year. The Company anticipates
that any future acquisitions will have their similar administrative and other
functions integrated with this combined facility. The operations of acquired
companies may be enhanced by expanding the product lines that they carry, if
they carry fewer product lines than Eagle, JEH Eagle or MSI Eagle currently
carry. Acquired companies may also be able to draw upon the industry experience
of Eagle's, JEH Eagle's or MSI Eagle's management to improve their product
knowledge, training of branch managers and sales personnel, and ability to
service customers. The Company intends to provide expansion capital, if
necessary, and administrative and management services to acquired companies.
The Company considers suitable acquisition candidates to be privately-owned
companies having a history of profitable operations or for which profitable
potential is perceived by the Company's management. Additionally, as roofing and
related products distributors are overwhelmingly relationship based, suitable
acquisition candidates should have key managerial personnel willing to continue
their employment after the acquisition and a stable sales force that the
Company's management anticipates to remain substantially in place after the
acquisition. Suitable acquisition candidates may also include the assets and
sites of entities which may not be currently profitable or which may be
underperforming but located in a geographical market area that the Company's
management believes to have profitable potential when restructured and placed
under new management. The Company has no present intention to make any
acquisitions from any of its affiliates other than the Acquisitions.
In formulating its acquisition strategy, the Company has relied upon the
experience of management in the wholesale distribution of roofing supplies and
related products industry. The majority of distribution center managers have
been associated with Eagle, JEH Eagle or MSI Eagle for more than ten years.
James E. Helzer, the President of the Company, Eagle and JEH Eagle, founded JEH
Co. in 1982 and was its owner and chief executive officer until substantially
all of its business and assets were acquired by JEH Eagle. E.G. Helzer, Senior
Vice President-Operations of the Company, Eagle and JEH Eagle was associated
with JEH Co. since its inception in 1982. In 1982, JEH Co. commenced operations
and by the time of its acquisition by JEH Eagle in July 1997, it had eleven
distribution centers. Gary L. Howard, a Vice President of the Company and the
President of MSI Eagle, founded MSI Co. in 1979 and was its owner and chief
executive officer until its business and substantially all of its assets were
acquired by MSI Eagle. In 1979, MSI Co. commenced operations and by the time of
its acquisition by MSI Eagle in October 1998, it had four distribution centers.
Douglas P. Fields and Frederick M. Friedman, executive officers and directors of
the Company, Eagle, JEH Eagle and MSI Eagle have been executive officers and
directors of Eagle for approximately twenty-five years. In 1973, at the time
Eagle was acquired by TDA, it had one distribution center. Eagle now has sixteen
distribution centers.
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The Combined Entities have an aggregate of approximately 49 managerial
employees. It is planned that the managerial staffs of the Combined Entities,
other members of their staffs and the Company's executive officers, other than
Messrs. Fields and Friedman, will principally provide administrative and
management services to any acquired companies with Messrs. Fields and Friedman
providing oversight of such management and administrative assistance and
expertise in evaluating, negotiating and financing acquisitions. Messrs. Fields
and Friedman each have more than twenty-five years experience in the management
of acquisition oriented companies. Under their management, TDA acquired the
businesses of Eagle, JEH Eagle, MSI Eagle, a distributor of flooring products, a
tennis facility, a number of distributors of plumbing, heating, electrical and
hardware supplies, a manufacturer of electrical products, a number of other
companies and various real estate. James E. Helzer, an executive officer of the
Company, Eagle and JEH Eagle founded JEH Co. and developed it into a roofing
supply distributor with twelve distribution centers in five states. Gary L.
Howard, a Vice President of the Company and President of MSI Eagle, founded MSI
Co. and developed it into a building supply distributor with four distribution
centers. Although Messrs. Fields and Friedman have not agreed to devote any
specified amount of time to the Company and the Combined Entities, they intend
to devote such time as is necessary to perform the foregoing services. Gary L.
Howard has agreed to devote all of his business time to MSI Eagle and the
Company. James E. Helzer has agreed to devote a substantial amount of his time
to the Company, Eagle and JEH Eagle. See "Management".
Although the Company has not specifically identified any probable
acquisition candidates and does not currently have any agreements, arrangements
or commitments with respect to any proposed acquisition in place, other than the
Acquisitions, based upon its management's experience in the industry, it
believes that there are a number of suitable acquisition candidates that may
meet its criteria. However, there can be no assurance that any additional
acquisitions will be consummated. The Company intends to seek out prospective
acquisition candidates in businesses that complement or are otherwise related to
the business of Eagle, JEH Eagle and/or MSI Eagle. The Company anticipates that
it will finance future acquisitions, if any, through a combination of cash
(including a substantial portion of the net proceeds of the Public Offering),
issuances of shares of capital stock of the Company and additional equity or
debt financing. There can be no assurance that the Company will be able to
obtain additional equity or debt financing on terms acceptable to the Company or
at all.
EXPANSION
Management intends to pursue expansion of the operations of the Combined
Entities by adding new distribution centers with the proceeds of the Public
Offering and by internal growth. During the 1998 calendar year, the Combined
Entities have opened two new distribution centers.
The Company has allocated approximately $2,176,000 from the net proceeds of
the Public Offering to establish six new distribution centers and approximately
$700,000 to make leasehold improvements to existing distribution centers and to
purchase equipment (trucks, forklifts and similar items) to support the planned
six additional distribution centers which are intended to be opened within
twenty-four months following the completion of the Public Offering and
consummation of the Acquisitions. The Company presently anticipates that the six
additional distribution centers will be leased from third parties not affiliated
with the Company, Eagle, JEH Eagle or MSI Eagle. There can be no assurance that
any or all of such new distribution centers will be opened within such
twenty-four month period, that they will not be leased from affiliates of the
Company or the Combined Entities or that they will be opened at all.
BUSINESS
Eagle and JEH Eagle are wholesale distributors of a complete line of roofing
supplies and related products through their own sales forces to roofing supply
and related products contractors and sub-contractors in the geographic areas
where they have distribution centers. Such contractors and sub-
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contractors are engaged in commercial and residential roofing repair and the
construction of new residential and commercial properties.
Eagle also distributes sheet metal products used in the roofing repair and
construction industries. JEH Eagle also distributes drywall, plywood and related
products and, solely in Colorado, vinyl siding to the construction industry. In
general, products distributed by Eagle and JEH Eagle include equipment, tools
and accessory products for the removal of old roofing, re-roofing and roof
construction, and related materials such as shingles, tiles, insulation, liquid
roofing materials, fasteners, ventilation materials, sheet metal of the type
used in the roofing industry, drywall and plywood. Sales to retail customers are
made principally in Colorado but are believed by the Company to be very small in
dollar volume.
The following chart indicates the approximate percentage of the indicated
product categories sold by Eagle and JEH Eagle (JEH Co. prior to July 1, 1997)
for the periods indicated:
<TABLE>
<CAPTION>
RESIDENTIAL COMMERCIAL
ROOFING ROOFING SHEET METAL DRYWALL AND PLYWOOD
------------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C>
EAGLE
FISCAL YEAR ENDED JUNE 30,
1996................................................. 57% 31% 12% N/A
1997................................................. 55% 32% 13% N/A
1998................................................. 60% 27% 12% 1%
JEH EAGLE
(JEH CO. PRIOR TO JULY 1, 1997)
FISCAL YEAR ENDED DECEMBER 31,
1996................................................. 81% 5% N/A 14%
1997................................................. 79% 6% N/A 15%
Six Months Ended June 30, 1997....................... 79% 6% N/A 15%
Fiscal Year Ended June 30, 1998...................... 85% 5% N/A 10%
</TABLE>
MSI Eagle is a wholesale distributor of a complete line of cements and
masonry supplies and related products through its own direct sales force to
building and masonry contractors and sub-contractors in the Dallas/Fort Worth
metropolitan area. In general, products distributed by MSI Eagle include cement,
cement mixtures and similar "bag" products (lime, sand, etc.), angle iron,
cinder blocks, cultured stones and bricks, fireplace and pool construction
materials, and equipment, tools and accessory products for use in residential
and commercial construction.
The following chart indicates the approximate percentage of total revenues
that were provided by the indicated product categories sold by MSI Co. for the
periods indicated.
<TABLE>
<CAPTION>
BLOCKS/STONE SWIMMING POOL
BAGGED/BULK AND FIREPLACE AND ALL OTHER
PRODUCTS BRICKS ANGLE IRON PRODUCTS PRODUCTS
--------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30
1996............................................. 58% 14% 8% 8% 12%
1997............................................. 61% 13% 8% 5% 13%
1998............................................. 65% 12% 9% 1% 13%
</TABLE>
Eagle has grown from nine distribution centers at June 30, 1991, including
locations in Florida (seven) and Alabama (two), to its current level of sixteen
distribution centers including locations in Florida (eleven), Alabama (four) and
Mississippi (one). Eagle has pursued its expansion activities by opening new
distribution centers. Similarly, JEH Co. grew from six distribution centers in
1990, including locations in Texas (five) and Colorado (one) to twelve
distribution centers, including locations in Texas (five), Colorado (four),
Indiana (one), Minnesota (one) and Virginia (one). MSI Co. grew from its sole
distribution center in 1979 to four distribution centers. JEH Co. in the past
and JEH Eagle now, occasionally, establish
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temporary distribution centers in response to storms which have created
temporary markets. After opening a new distribution center, the initial focus is
to develop a customer base, to develop and improve the distribution center's
market position and operational efficiency and then to expand its customer base.
After a distribution center is opened, the policy of the Combined Entities
is to continue to assess each distribution center's performance and
profitability. As a result of this ongoing assessment, the Combined Entities
have on occasion sold or closed certain distribution centers.
OPERATING STRATEGY
Key elements of the current operating strategy of the Combined Entities are
as follows:
PURCHASING ECONOMIES. Eagle, JEH Eagle, MSI Eagle and, where possible, the
Combined Entities negotiate with suppliers to obtain volume discounts and other
favorable terms. Individual distribution center managers are responsible within
their inventory budgets for selecting and ordering inventory tailored to the
varied needs of customers in their local markets. Management believes the
Combined Entities are able to obtain competitive pricing and purchasing terms,
maintain a broad and balanced product line, ensure timely delivery of products,
maintain appropriate inventory levels and maintain satisfactory relationships
with vendors.
CENTRALIZING MANAGEMENT INFORMATION SYSTEMS AND ADMINISTRATION. Eagle
maintains centralized computer and data processing systems to support decision
making throughout its organization including what management believes to be an
in-depth credit analysis of its customers. Distribution centers are equipped
with on-line, real time management information systems. Eagle's management
information systems enable management to perform, control and monitor accounts
receivable, inventory levels, order entry, invoicing, sales and profitability by
distribution center. Each Eagle distribution center is, therefore, able to
respond to specific customer needs and overall market demand and to monitor the
effects of actions or decisions on performance and profitability. Eagle has also
centralized many administrative functions, such as payroll and employee
benefits, credit and collection, insurance, accounting and internal auditing,
cash management, human resources, fleet management safety and legal, both to
achieve economies of scale and to help managers remain focused on maximizing
profitability of their distribution centers. Following JEH Eagle's acquisition
of JEH Co.'s distribution centers in July of 1997, Eagle and JEH Eagle began to
integrate their computer, data processing and management information systems,
and it is anticipated that by the end of March 1999, Eagle and JEH Eagle will be
functioning on the same computer hardware and software systems. It is
anticipated that by the end of the 1999 calendar year MSI Eagle will have
integrated its computer, data processing and management information systems with
that of Eagle and JEH Eagle. See "--Strategy."
DECENTRALIZING OPERATIONS. The Combined Entities have a decentralized
operating philosophy to maximize responsiveness to customers' varied needs and
to give distribution center managers a sense of responsibility for the
performance of their own operations and the Combined Entities as a whole. While
Eagle and JEH Eagle negotiate purchase prices and terms for many products from
many vendors on a joint or multi-center basis and each uses central management
information systems to achieve economies of scale, each Eagle and JEH Eagle
distribution center manager is responsible for selecting and ordering inventory
to meet the needs of his customers, for staffing, for controlling all line item
expenses (other than central administration allocated items), for product
pricing and profit margins, and for creating his annual budget. Further, each
Eagle and JEH Eagle distribution center manager has individual profit and loss
responsibility for his distribution center and receives incentive compensation
based upon the profitability of his distribution center. Management of MSI
Eagle's operations are not as decentralized as that at Eagle and JEH Eagle,
although management anticipates that, in the event that MSI Eagle increases the
number of its distribution centers, either by acquisition or internal expansion,
more decision making will be made by distribution center managers. Although MSI
Eagle's distribution center managers do not have full responsibility for all
items affecting profit and loss, such as purchases of products at the
distribution
67
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centers that they manage, they receive annual bonuses based on the profitability
of their respective distribution centers.
PRINCIPAL PRODUCTS
EAGLE AND JEH EAGLE
Eagle and JEH Eagle distribute a variety of roofing supplies and related
products and accessories for use in the commercial and residential roofing
repair and construction industries.
RESIDENTIAL ROOFING PRODUCTS. Shingles (asphalt, ceramic, slate, concrete,
fiberglass and fiberglass combined with asphalt), tiles, felt, insulation,
waterproof underlaying, ventilation systems and skylights.
COMMERCIAL ROOFING PRODUCTS. Asphalt, cements, tar, other coatings,
modified bitumen and roll roofings.
SHEET METAL PRODUCTS. These products are sold principally by Eagle and
include aluminum, copper, galvanized and stainless sheet metal.
DRYWALL/PLYWOOD PRODUCTS. These products are sold principally by JEH Eagle
and include sheet rock and plywood.
Eagle and JEH Eagle also sell accessory products related to each of the
foregoing, including, but not limited to, roofing equipment, power and hand
tools and fasteners.
MSI EAGLE
MSI Eagle distributes a variety of cement and masonry supplies and related
products and accessories for use in the residential and commercial building and
masonry industries.
CONCRETE AND MASONRY PRODUCTS. Portland cement for use in housing
foundations, laying pavements, walkways and other similar uses. Masonry cement
for use in brick and stone masonry. Cement is principally sold by bags of
varying weight (approximately 10 pounds to 95 pounds) and is sold in a variety
of mixtures such as concrete mixes (portland cement, sand and gravel), sand
mixes (portland cement and sand), mortar mixes (masonry mortar cement and
masonry sand) and grout (cement and sand). Also sold are sand, gravel,
underwater cement, concrete and asphalt "patching" compounds.
ANGLE IRON. Iron forged at a ninety degree angle which is cut to customer's
specification for use as support above windows and doorways.
BRICKS AND STONES. Bricks, used bricks, firewall bricks, "cultured"
(man-made) stones in a variety of colors and shapes, cinder blocks, glass
blocks.
FIREPLACE PRODUCTS. Fireboxes, dampers, flues, facings, insulations,
fireplace tools and accessories.
SWIMMING POOL PRODUCTS. Cements and molds used in pool construction.
MSI Eagle also sells a variety of products related to the foregoing,
including cement mixers, rulers, levels, trowels, and other tools, cleaning
solvents, patching compounds, supports and fasteners.
VENDORS
Each of the Combined Entities distribute products manufactured by a number
of major vendors. GAF is Eagle's largest supplier, accounting for approximately
23%, 23%, and 18% of Eagle's product lines during its fiscal years ended June
30, 1997 and 1998 and four-month period ended October 31, 1998, respectively.
During the foregoing periods, three other vendors' products accounted for an
aggregate of approximately 32%, 22%, and 21%, respectively, of Eagle's product
lines. Atlas Roofing Corp., a supplier of residential and commercial roofing
materials, is JEH Eagle's largest supplier, accounting for approximately 22%,
15%, 15% and 14% of JEH Co.'s product lines during its fiscal years ended
December 31, 1995 and 1996, JEH Eagle's product lines during its fiscal year
ended June 30, 1998 and four-month period
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ended October 31, 1998, respectively. During the foregoing periods, three other
vendors' products accounted for an aggregate of approximately 31%, 34%, 35% and
38%, respectively, of JEH Co.'s and JEH Eagle's product lines. Included within
the foregoing three vendors were GAF and Elk which accounted for approximately
15% and 10% and 16% and 10% of JEH Co.'s product lines during its fiscal years
ended December 31, 1995 and 1996, respectively, and 16% and 13%, 17% and 13% of
JEH Eagle's product lines during its fiscal year ended June 30, 1998 and
four-month period ended October 31, 1998, respectively. No supplier accounted
for in excess of 27% of MSI Eagle's (including its predecessor company, MSI Co.)
product for its fiscal years ended June 30, 1997 and 1998 and four-month period
ended October 31, 1998. None of the Combined Entities have written long-term
supply agreements with any vendors. Management believes that in the event of any
interruption of product deliveries from any suppliers, they will be able to
secure suitable replacement suppliers on acceptable terms. There can be no
assurance that they will be able to secure suitable replacement suppliers on
acceptable terms or at all.
CUSTOMERS, SALES AND MARKETING
The Combined Entities sell and distribute roofing, cements and masonry
supplies and related products to approximately 6,800 customers engaged in
commercial and residential roofing repair and the construction of new residences
and commercial properties from distribution centers in eight states. Practically
all of their customers purchase products pursuant to short-term credit
arrangements. Sales efforts are primarily directed through their salespersons
assigned to their distribution centers including "inside" counter persons who
serve walk-in and call-in customers and "outside" salespersons calling upon
past, current and potential customers with MSI Eagle placing a greater emphasis
on its outside sales force, viewing selling inside its distribution centers as
only incidental to the "inside" personnel's other job responsibilities.
Salespersons rely upon a range of selling techniques all based upon personal and
telephone contact, which techniques include but are not limited to "cold
calling" for new customers, maintaining relationships with current and former
customers, and arranging or locating projects for customers. None of the
Combined Entities have written long-term supply agreements with any of their
customers. No Eagle customer accounted for more than 3% of Eagle's sales during
either its fiscal year ended June 30, 1998 or four-month period ended October
31, 1998. No JEH Co. or JEH Eagle customer accounted for more than 4% of JEH
Co.'s or JEH Eagle's sales during either its fiscal year ended June 30, 1998 or
four month period ended Ocotber 31, 1998. No MSI Co. customer accounted for more
than 4% of MSI Co.'s sales during either its fiscal year ended June 30, 1998 or
four-month period ended October 31, 1998.
COMPETITION
Each of the Combined Entities faces substantial competition in the wholesale
distribution of roofing, cement and masonry supplies from relatively smaller
distributors, retail distribution centers and as to Eagle and JEH Eagle from a
number of multi-regional and national wholesale distributors of building
products, including suppliers of roofing products which are larger than the
Combined Entities, including American Builders & Contractors Supply Co., Inc.,
Cameron Ashley Building Products, Inc., Allied Building Products and Bradco
Supply Corporation, each of which has greater financial resources than the
Combined Entities. Each of the Combined Entities currently competes in its
wholesale distribution business on the basis of competitive pricing, breadth of
product line, prompt delivery, service, providing discounts for prompt payment
and on the abilities of its personnel. To a substantially lesser degree, Eagle
and JEH Eagle also compete with larger high volume discount general building
supply stores selling standardized lower priced products, sometimes at lower
prices, but not carrying the breadth of product lines or offering the same
service as provided by full service wholesale distributors such as they are.
Each of the Combined Entities competes with its competitors on the basis of
product delivery, credit extension, customer service and breadth of product
line.
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<PAGE>
The Company anticipates that it may experience competition from entities and
individuals (including venture capital partnerships and corporations, equity
funds, blind pool companies, competing wholesale roofing supply distribution
centers, large industrial and financial institutions, small business investment
companies and wealthy individuals) which are well-established and have greater
financial resources and more extensive experience than the Company and the
Combined Entities in connection with identifying and effecting acquisitions of
the type sought by the Company. The Company's and the Combined Entities'
financial resources will be limited in comparison to those of many of such
competitors. Such competition could result in the loss of an acquisition
candidate or an increase in the price the Company would be required to pay for
such acquisitions.
BACKLOG
The businesses of the Combined Entities are conducted on the basis of
short-term orders and prompt delivery schedules precluding any substantial
backlog.
EMPLOYEES
At October 31, 1998, the Combined Entities employed approximately 344
full-time employees, including eight executives, 49 managerial employees, 94
salespersons (including 35 "inside" salespersons), 206 warehouse persons,
drivers and helpers, and 87 clerical and administrative persons. Eagle, JEH
Eagle and MSI Eagle have experienced difficulties in retaining drivers and
helpers because of the tight job market in their respective market areas and the
need for drivers to be certified by the departments of motor vehicles and pass
other testing standards, but suitable replacements have been readily available
without economic impact. None of the Combined Entities is subject to any
collective bargaining agreement, and each believes that its relationship with
its employees is good.
The Company has no employees. The Company's management currently consists of
five officers, including two officers, Douglas P. Fields and Frederick M.
Friedman, neither of whom are required to commit a specific amount of their time
to the affairs of the Company. Each of Messrs. Fields and Friedman have
significant business interests outside of the Company, including but not limited
to TDA and its subsidiaries. Messrs. Fields and Friedman currently devote
substantially all of their business time to TDA and its subsidiaries, with
approximately 5% to 10% of that time being devoted to the Combined Entities.
Accordingly, Messrs. Fields and Friedman may have conflicts of interest in
allocating their time among various business activities. However, Messrs. Fields
and Friedman will devote no less time than they deem reasonably necessary to
carry out their duties to the Company, including the evaluation and negotiation
of potential acquisitions. See "The Acquisitions," "Management" and "Certain
Transactions."
FACILITIES
EAGLE
Eagle leases approximately 15,000 square feet of executive office space
located at 1451 Channelside Drive, Tampa, Florida 33629 from 39 Acre Corp., a
wholly-owned subsidiary of TDA, at an approximate annual rental of $120,000.
Approximately 7,500 square feet of such space is subleased by Eagle to an
unrelated third party tenant. See "Certain Transactions."
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<PAGE>
The following tables list the locations of Eagle's showroom and distribution
centers.
<TABLE>
<CAPTION>
LOCATIONS OWNED BY AND LEASED FROM A WHOLLY-OWNED TDA SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE APPROXIMATE BASE
CITY AND STATE SQUARE FOOTAGE ANNUAL RENTAL
- ------------------------------------------------------------------------------- --------------- ----------------
Tampa, Florida................................................................. 69,000 $ 173,000
St. Petersburg, Florida........................................................ 25,000 $ 88,000
Holiday, Florida............................................................... 16,000 $ 56,000
Fort Myers, Florida............................................................ 16,000 $ 56,000
Lakeland, Florida.............................................................. 20,000 $ 135,000
Pensacola, Florida............................................................. 26,000 $ 90,000
Birmingham, Alabama............................................................ 39,000 $ 127,000(1)
Mobile, Alabama................................................................ 24,000 $ 65,000
</TABLE>
- ------------------------
(1) See "Certain Transactions."
As part of the foregoing leasing arrangements between Eagle and 39 Acre
Corp., additional undeveloped land is leased to Eagle from the TDA subsidiary.
That undeveloped land is used for storage or reserved for future use. The
locations and approximate acreage of the undeveloped land are as follows: Tampa
(one); St. Petersburg (two); Holiday (three); Ft. Myers (one and a third);
Pensacola (two and a half); and Birmingham (one).
As Eagle has been a wholly-owned subsidiary of TDA since 1973, generally
there has been no need for Eagle to enter into written leases with 39 Acre
Corp., which owns Eagle's foregoing distribution centers. All of the foregoing
current distribution centers of Eagle leased from 39 Acre Corp. have been leased
pursuant to oral agreements. Eagle has not entered into any written leases for
the foregoing premises. Upon the closing of the Public Offering and consummation
of the Acquisitions, Eagle will enter into written ten-year leases with 39 Acre
Corp. which will provide for base annual rentals substantially similar to those
set forth above for the first five years of such leases with provisions for
increases in rent based upon the consumer price index at the beginning of the
sixth year of such ten-year leases and with provisions for five-year renewal
options, increases in rent based upon the consumer price index, and lease terms,
additional rental and other charges customarily included in such leases,
including provisions requiring Eagle to insure and maintain and pay real estate
taxes on the premises as is currently required. The Company believes that the
rent and other terms of the written lease agreements to be entered into between
39 Acre Corp. and Eagle are on at least as favorable terms as Eagle would expect
to negotiate with unaffiliated third parties. Neither Eagle nor 39 Acre Corp.
will be permitted to terminate the leases before the end of their term without a
breach or default by the other party. See "The Acquisitions" and "Certain
Transactions."
At the time Eagle opened its former Fort Lauderdale, Florida, distribution
center, in the early part of the 1980s, TDA established a subsidiary, Eagle
Holding, Inc., to acquire that facility which was financed by the issuance of an
industrial revenue bond. The financial institution providing the industrial
revenue bond required a written lease between the TDA subsidiary and Eagle as a
precondition to the issuance of that bond. The term of Eagle's lease for the
Fort Lauderdale, Florida, premises continues through May 1, 1999 even though
Eagle has vacated those premises. Eagle's monthly lease payment for the Fort
Lauderdale, Florida, premises is approximately $20,000. Upon completion of the
Public Offering and consummation of the Acquisitions, TDA will indemnify Eagle
for any payments that Eagle is required to make which are in excess of Eagle's
obligations under the foregoing lease. The Fort Lauderdale, Florida, premises
has been sublet to an entity not otherwise affiliated with Eagle or TDA for a
term expiring on May 1, 1999. See "The Acquisitions" and "Certain Transactions."
71
<PAGE>
<TABLE>
<CAPTION>
LOCATIONS LEASED FROM THIRD PARTIES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE APPROXIMATE BASE
CITY AND STATE SQUARE FOOTAGE ANNUAL RENTAL
- ------------------------------------------------------------------------------- --------------- ----------------
Clearwater, Florida............................................................ 6,000 $ 23,000(1)
Montgomery, Alabama............................................................ 24,000 $ 90,000(2)
Panama City, Florida........................................................... 5,000 $ 63,000(3)
Fort Walton Beach, Florida..................................................... 8,000 $ 36,000(4)
Crystal River, Florida......................................................... 12,600 $ 42,000(5)
Tallahassee, Florida........................................................... 15,000 $ 45,000(6)
Gulfport, Mississippi.......................................................... 13,000 $ 32,000(7)
Decatur, Alabama............................................................... 12,300 $ 87,000(8)
</TABLE>
- ------------------------
(1) The lease for the Clearwater, Florida, premises expires on or about June 30,
1999 and provides for a five-year renewal option with increased renewal term
rental payments based upon the Consumer Price Index ("CPI"), but not to
exceed 5%. Pursuant to this lease, Eagle is required to pay all municipal,
county and state taxes , maintain and carry comprehensive public liability
insurance on the premises.
(2) The lease for the Montgomery, Alabama, premises expires on June 1, 2003.
This lease provides for a three-year renewal option and grants Eagle a
purchase option. Pursuant to this lease, Eagle is required to maintain
liability, fire, casualty and other types of insurance coverage on the
premises.
(3) The lease for the Panama City, Florida, premises expires on or about
February 15, 2001 and provides for a five-year renewal option at an
increased rental based upon the CPI. Pursuant to this lease, Eagle is
required to maintain the premises and provide fire, windstorm and other
insurance. Additionally, Eagle is required to pay all sales and use taxes
imposed upon the rental payments for the premises. Eagle has the right of
first refusal to purchase these premises in certain events.
(4) The lease for the Fort Walton Beach, Florida, premises is on a
month-to-month basis and provides for a five-year renewal option at
increased rent based upon the CPI along with applicable sales and use taxes.
Eagle is also required to maintain liability insurance on the premises.
(5) The lease for the Crystal River, Florida, premises is on a month-to-month
basis. Eagle is also required to maintain the premises, pay certain taxes
(sales, use, rent, receipts) and pay public liability insurance premiums.
(6) The lease for the Tallahassee, Florida, premises expires on July 31, 1999
and provides for two five-year renewal options with the base rental
escalating at the rate of three percent per year during option years and a
right of first refusal to purchase the premises. This lease requires Eagle
to pay any real estate and sales taxes, maintain the premises and provide
liability insurance.
(7) The lease for the Gulfport, Mississippi, premises expires on May 31, 2003.
This lease requires Eagle to maintain liability insurance on the premises,
maintain the premises and pay any real estate and personal property taxes.
(8) The lease for the Decatur, Alabama, premises expires on August 31, 2000.
This lease requires Eagle to maintain liability insurance on the premises.
JEH EAGLE
JEH Eagle leases approximately 8,000 and 10,000 square feet of executive
office and showroom space located at 2500 U.S. Highway 287, Mansfield, Texas
76063 and 8221 E. 96th Avenue, Henderson, Colorado 80640, respectively, from
James E. Helzer, the President of the Company, Eagle and JEH Eagle. The annual
aggregate rental for the foregoing premises is combined with the rentals of
relevant distribution centers discussed below. See "Certain Transactions."
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<PAGE>
The following tables list the locations of JEH Eagle's distribution centers.
<TABLE>
<CAPTION>
LOCATIONS OWNED BY AND LEASED FROM JAMES E. HELZER
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE APPROXIMATE BASE
CITY AND STATE SQUARE FOOTAGE ANNUAL RENTAL
- ------------------------------------------------------------------------------- -------------- ----------------
Henderson, Colorado............................................................ 100,000 $ 108,000
Colorado Springs, Colorado..................................................... 3,000 $ 19,000
Mansfield, Texas............................................................... 48,000 $ 213,000
Colleyville, Texas............................................................. 7,000 $ 42,000
Frisco, Texas.................................................................. 17,000 $ 60,000
Mesquite, Texas................................................................ 10,000 $ 43,000
</TABLE>
The foregoing premises are leased to JEH Eagle from James E. Helzer pursuant
to five-year leases expiring in June 2002 providing the indicated base annual
rentals with provisions for five percent (5%) increases effective July 2000.
Except for the Frisco, Texas, premises, said leases grant JEH Eagle two five-
year renewal options providing for five percent (5%) increases in the base
annual rent during certain renewal years. Additional rental and other charges
for the foregoing leases include provision for JEH Eagle to insure and maintain
and pay all taxes on the premises. JEH Eagle also has a right of first refusal
to purchase the foregoing premises. The Company believes that such leases are on
terms no less favorable than JEH Eagle could have obtained from independent
third parties.
As part of the foregoing leases, additional undeveloped land is leased to
JEH Eagle from James E. Helzer. That undeveloped land is used for storage or
reserved for future use. The locations and approximate acreage of the
undeveloped land is as follows: Henderson (six), Colorado Springs (three),
Mansfield (twelve and a half), Colleyville (one and a half), Frisco (two and a
half) and Mesquite (two).
<TABLE>
<CAPTION>
LOCATIONS LEASED FROM THIRD PARTIES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
APPROXIMATE APPROXIMATE BASE
CITY AND STATE SQUARE FOOTAGE ANNUAL RENTAL
- ------------------------------------------------------------------------------- --------------- ----------------
Eagle, Colorado................................................................ 10,000 $ 72,000(1)
Fort Collins, Colorado......................................................... 9,000 $ 32,000(2)
Indianapolis, Indiana.......................................................... 15,000 $ 66,000(3)
Eagan, Minnesota............................................................... 31,200 $ 110,000(4)
Austin, Texas.................................................................. 56,000 $ 96,000(5)
Norfolk, Virginia.............................................................. 19,000 $ 55,000(6)
</TABLE>
- ------------------------
(1) The lease for the Eagle, Colorado, premises expires in April 1999 but may be
terminated by JEH Eagle on thirty days notice and provides for two two-year
renewal options. Pursuant to this lease, JEH Eagle is required to pay all
utility bills and assessments and maintain and carry comprehensive public
liability insurance on the premises.
(2) The lease for the Fort Collins, Colorado, premises is on a month-to-month
basis. JEH Eagle is required to pay its proportionate share of taxes,
insurance and maintenance charges for these premises and maintain the
portion of the premises it occupies.
(3) The lease for the Indianapolis, Indiana, premises expires in March 2002 and
requires JEH Eagle to pay real estate taxes and carry comprehensive public
liability insurance on the premises.
(4) The lease for the Eagan, Minnesota, premises expires in June 2000 and
requires JEH Eagle to pay real estate taxes, maintenance charges and carry
comprehensive public liability and other insurance on the premises.
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<PAGE>
(5) The lease for the Austin, Texas, premises expired and continues on a
month-to-month basis and requires JEH Eagle to pay all real estate taxes and
carry comprehensive public liability insurance on the premises.
(6) The lease for the Norfolk, Virginia, premises is on a month-to-month basis.
JEH Eagle is also required to pay all real estate taxes and assessments and
maintain and carry comprehensive public liability insurance on the premises.
MSI EAGLE
MSI Eagle leases approximately 30,000 square feet of executive office,
showroom and warehouse space, and approximately four acres of outdoor storage
space in Mansfield, Texas from Gary L. Howard and his spouse at an annual base
rental of approximately $107,000 pursuant to a lease expiring in October 2001.
MSI Eagle has the right to two, three-year renewals at a base annual rental five
percent over the prior term. Additional rental and other charges for the
foregoing lease include provisions for MSI Eagle to insure and maintain and pay
taxes on the premises. MSI Eagle has a right of first refusal to purchase the
foregoing premises. The Company believes that the foregoing lease is on terms no
less favorable than MSI Eagle could have obtained from an independent third
party. See "Certain Transactions."
The following table lists the locations of MSI Eagle's other distribution
centers, all of which are leased from independent third parties and are located
in the Dallas/Fort Worth metropolitan area of Texas.
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE BASE
CITY SQUARE FOOTAGE ANNUAL RENTAL
- ------------------------------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Mesquite....................................................................... 10,000 $ 30,000(1)
Plano.......................................................................... 20,000 $ 44,000(2)
Southlake...................................................................... 9,000 $ 42,000(3)
</TABLE>
- ------------------------
(1) The lease for the Mesquite premises expires in May 2000. The lease for the
Mesquite premises provides for successive three-year renewal options.
Pursuant to this lease, MSI Eagle is required to pay taxes on the property,
maintain and carry comprehensive public liability insurance, pay all utility
charges and maintain the premises.
(2) The lease for the Plano premises expires in May 1999. Pursuant to this
lease, MSI Eagle is required to maintain and carry comprehensive public
liability insurance.
(3) The lease for the Southlake premises expires in December 2001. Pursuant to
this lease, MSI Eagle is required to pay taxes on the property and maintain
and carry comprehensive public liability insurance and maintain the
premises.
COMPANY
TDA will provide office space and administrative services to the Company at
its offices in New York City pursuant to an administrative services agreement to
be entered into by the Company and TDA upon the closing of the Public Offering
and consummation of the Acquisitions. The term of the administrative services
agreement will be on a month-to-month basis. The fee payable by the Company to
TDA for such administrative services will be $3,000 per month. Prior to the
closing of the Public Offering, the Company utilized office space and
administrative services provided by TDA without charge. See "Certain
Transactions."
LEGAL PROCEEDINGS
Neither the Company, Eagle, JEH Eagle nor MSI Eagle are subject to any
material legal proceedings.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Douglas P. Fields(1)...................... 56 Chairman of the Board and Chief Executive Officer
James E. Helzer(1)........................ 58 President and Director Nominee, Vice Chairman Nominee of the
Board of Directors(4)
Frederick M. Friedman(1).................. 58 Executive Vice President, Treasurer, Secretary and a Director
E.G. Helzer............................... 48 Senior Vice President-Operations
Gary L. Howard............................ 44 Vice President--Masonry Products
Steven R. Andrews(2)(4)................... 44 Vice President--Legal and a Director
Paul D. Finkelstein(2)(3)(4).............. 56 Director Nominee
John E. Smircina(1)(3)(4)................. 66 Director Nominee
George Skakel III(2)(3)(4)................ 48 Director Nominee
</TABLE>
Upon the successful completion of the Public Offering and consummation of
the Acquisitions, the Company will establish Audit, Executive and Compensation
Committees of the Company's Board of Directors as indicated above. The majority
of the members each of the Audit and Compensation Committees will be independent
directors. The Vice President-Legal will be a member of the Audit Committee and
report to it.
- ------------------------
(1) Upon successful completion of the Public Offering and consummation of the
Acquisitions, said persons are anticipated to become members of the
Executive Committee of the Company's Board of Directors.
(2) Upon successful completion of the Public Offering and consummation of the
Acquisitions, said persons are anticipated to become members of the Audit
Committee of the Company's Board of Directors and Mr. Finkelstein will
become Chairman of the Audit Committee.
(3) Upon successful completion of the Public Offering and consummation of the
Acquisitions, said persons are anticipated to become members of the
Compensation Committee of the Company's Board of Directors.
(4) Upon successful completion of the Public Offering and consummation of the
Acquisitions, said person is anticipated to become the Company's Vice
President-Legal and/or a member of the Company's Board of Directors, as the
case may be.
Management of the Company believes that Messrs. Andrews, Finkelstein,
Smircina and Skakel may be considered to be independent directors of the
Company.
Set forth below is a brief background of the executive officers, directors
and director nominees of the Company, based on information supplied by them.
Douglas P. Fields has been the Chairman of the Board of Directors, Chief
Executive Officer and a Director of the Company since inception. From the
Company's inception until July 1996, Mr. Fields also served as its President.
For more than the past five years, Mr. Fields has been the Chairman of the Board
of Directors, President and Chief Executive Officer of TDA and Chief Executive
Officer and a Director of each of its subsidiaries, including Eagle, Cooper
Flooring International, Inc. ("CFI") (which was a subsidiary of TDA until it was
sold by TDA on June 12, 1998) and Northeastern Plastics, Inc. ("NPI") (which was
a subsidiary of TDA until August 1996 when it was acquired by Acqueren, Inc.
("AI") of which Mr. Fields was Chief Executive Officer until TDA sold its
interest in AI in August 1998). Since July 1997
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<PAGE>
and October 1998, Mr. Fields has held the positions of Chairman of the Board and
Chief Executive Officer of JEH Eagle and MSI Eagle, respectively. TDA is a
holding company whose operating subsidiaries are engaged primarily in the
wholesale distribution of building supplies (Eagle, JEH Eagle and MSI Eagle),
the operation of an indoor tennis facility and the management of real estate.
Upon successful completion of the Public Offering and consummation of the
Acquisitions, it is anticipated that Mr. Fields will devote no less time to the
Company's affairs than he deems reasonably necessary to discharge his duties to
the Company. Mr. Fields received a Master's degree in Business Administration
from the Harvard University Graduate School of Business Administration in 1966
and a B.S. degree from Fordham University in 1964.
Frederick M. Friedman has been Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and a Director of the Company since inception. For
more than the past five years, Mr. Friedman has been Executive Vice President,
Chief Financial Officer, Treasurer, Secretary and a Director of TDA and Vice
President, Chief Financial Officer, Treasurer, Secretary and a Director of each
of its subsidiaries, including Eagle, CFI (which was a subsidiary of TDA until
it was sold by TDA on June 12, 1998) and NPI (which was a subsidiary of TDA
until August 1996 when it was acquired by AI in which Mr. Friedman held similar
positions until TDA's interest in AI was sold in August 1998). Since July 1997
and October 1998, Mr. Friedman has held the same positions with JEH Eagle and
MSI Eagle, respectively. Upon successful completion of the Public Offering and
consummation of the Acquisitions, it is anticipated that Mr. Friedman will
devote no less time to the Company's affairs than he deems reasonably necessary
to discharge his duties to the Company. Mr. Friedman received a B.S. degree in
Economics from The Wharton School of the University of Pennsylvania in 1962.
James E. Helzer has been the President of JEH Eagle since July 1997 and
President of the Company and Eagle since December 1997. From 1982 until July
1997, Mr. James E. Helzer was the owner and Chief Executive Officer of JEH Co.
E.G. Helzer has been the Senior Vice President-Operations of JEH Eagle,
Eagle and the Company since July 1997, December 1997 and December 1997,
respectively. From 1994 until July 1997, Mr. E.G. Helzer was the Vice President
of Operations and Colorado Manager of JEH Co. From 1982 until 1994, he was JEH
Co.'s Manager Production and Service. E.G. Helzer is the brother of James E.
Helzer.
Gary L. Howard has been the Vice President-Masonry Products of the Company
since December 1998 and President of MSI Eagle since October 1998. For more than
the last five years, Gary L. Howard was the owner and chief executive officer of
MSI Co.
Steven R. Andrews has been a Director of the Company since May 1996. For
more than the past five years, Mr. Andrews has been engaged in the private
practice of law. Mr. Andrews received a Juris Doctor degree and an L.L.M. degree
in 1977 and 1978 from Stetson University and New York University, respectively.
Mr. Andrews has agreed to serve as the Company's Vice President-Legal upon the
consummation of the Public Offering and the Acquisitions. In his capacity as the
Company's Vice President-Legal, Mr. Andrews has entered into an agreement with
the Company requiring him to review the Company's and its officers' and
directors' compliance with their obligations under federal and state securities
laws. Mr. Andrews will be required to report his findings to the Audit Committee
of the Company's Board of Directors, of which he will be a member, on a periodic
basis. The Company's agreement with Mr. Andrews does not require him to devote
any minimum amount of time to the foregoing obligations and provides him with
compensation of $500 per month.
Paul D. Finkelstein has been the president and director of the Regis
Corporation, an operator of beauty salons and a cosmetic sales company, for more
than the past five years and that corporation's Chief Executive Officer since
July 1996. Mr. Finkelstein received a Master's degree in Business Administration
from the Harvard University Graduate School of Business Administration in 1966
and a B.S. degree in Economics from The Wharton School of the University of
Pennsylvania in 1964.
76
<PAGE>
John E. Smircina is a practicing attorney and has been a partner in the law
firm of Wade, Hughes and Smircina, P.C. since April 1993. From prior to 1991 to
March 1993, Mr. Smircina was self-employed as a consultant. For more than the
past five years, Mr. Smircina has been a Director of TDA, and he was a director
of AI from February 1996 until TDA sold its interest in AI in August 1998. Mr.
Smircina received a Master's degree in Industrial Management from Ohio
University in 1954 and a B.A. degree in Political Science from Ohio University
in 1953.
George Skakel III has been a private investor for more than the past five
years. Mr. Skakel received a B.S. degree in Economics from the University of
Delaware in 1973 and a master's degree in Business Administration from the
Harvard University Graduate School of Business Administration in 1978.
Directors of the Company serve until the next annual meeting of stockholders
of the Company and until their successors are elected and duly qualified.
Officers of the Company will be elected annually by the Board of Directors and
serve at the discretion of the Board of Directors. The Company's independent
directors will be responsible for reviewing and approving all material related
party transactions including potential conflicts of interest and ensuring
stockholder approval is obtained when they believe it is necessary.
The Board of Directors has established an Executive Committee which is
composed of Douglas P. Fields and Frederick M. Friedman. The Board of Directors
of the Company can delegate to the Executive Committee all of the powers and
authority (other than those reserved by statute to the full Board of Directors)
of the full Board of Directors in the management of the business and affairs of
the Company.
Pursuant to Section 141(c)(1) of the Delaware Corporation Law, as applicable
to corporations formed in that state prior to July 1, 1996, the following powers
are reserved to a Delaware corporation's Board of Directors: amending a
corporation's certificate of incorporation (except that a committee may, to the
extent authorized in the resolution or resolutions providing for the issuance of
shares of stock adopted by the board of directors, fix the designations and any
of the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of a
corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of a corporation's property and assets,
recommending to the stockholders a dissolution of a corporation or a revocation
of a dissolution, or amending the bylaws of a corporation; and, unless a
resolution, the bylaws or the certificate of incorporation expressly so
provides, the declaration of a dividend, the issuance of stock or adoption of a
certificate of ownership and merger.
In connection with certain transactions which occurred in 1971 and 1973,
Messrs. Fields and Friedman and TDA, then a public company, without admitting or
denying the allegations set forth in a civil action commenced by the Commission,
in 1976 consented to a final judgment of permanent injunction which, in summary,
provided that Messrs. Fields and Friedman and TDA were permanently enjoined from
violating the registration, reporting, proxy and the anti-fraud provisions of
the federal securities laws and rules. Additionally, Messrs. Fields and Friedman
agreed to certain ancillary relief which included their agreements, for a period
of two years, to resign as directors of TDA and a publicly held subsidiary of
TDA and not to vote any securities of TDA and the subsidiary owned or controlled
by them. The Commission's complaint alleged, among other things, that in 1973
TDA and Messrs. Fields and Friedman, in connection with TDA's acquisition of
Eagle, caused an improper finder's fee to be paid to Messrs. Fields' and
Friedman's designee with a portion of such finder's fee being paid back to Mr.
Friedman. Based upon facts related to the injunctive action, in 1979, Messrs.
Fields and Friedman were found guilty of conspiring to violate the federal
securities laws and making false statements in filings made with the Commission.
Messrs. Fields and Friedman were sentenced to six and three months
incarceration, respectively, and both
77
<PAGE>
were fined. Also, on facts related to the injunctive action, Mr. Friedman was
found guilty of mail and wire frauds. Mr. Friedman was sentenced to one month
incarceration on each of three counts.
In order to secure the Company's NASDAQ listing, the Company has agreed with
NASDAQ: (i) to establish Audit and Compensation Committees, each with a majority
of independent directors; (ii) to have independent Company director oversight of
material related party transactions including potential conflicts of interest
and to have independent directors determine when shareholder approval is to be
obtained for any such transactions; (iii) that neither Messrs. Fields, Friedman
nor TDA will (a) receive finders fees in connection with any acquisition by the
Company or (b) dispose of any of the Company's shares of Common Stock for a
two-year period from NASDAQ listing; (iv) to create the position of "Vice
President--Legal" who will report to the Company's Audit Committee and who will
be removed or re-elected only by the vote of the Company's stockholders; (v)
that purchasers of shares of the Company's Common Stock in the Public Offering
will be entitled, but not required, to purchase an equal number of Warrants;
(vi) to repeat the information set forth in the immediately preceding paragraph
in the Company's first five annual reports; and (vii) that two years after the
Company's Securities are listed on NASDAQ, the Audit Committee is to certify
that the foregoing requirements have been complied with by the Company.
KEY PERSON LIFE INSURANCE
JEH Eagle maintains a "key person" life insurance policy in the amount of
$2,000,000 on the life of James E. Helzer, the President of the Company, Eagle
and JEH Eagle, naming JEH Eagle beneficiary of such policy. MSI Eagle has "key
person" life insurance on the life of Gary L. Howard, a Vice President of the
Company and President of MSI Eagle, in the amount of $2,000,000 plus the amount
outstanding pursuant to MSI Eagle's outstanding note to MSI Co., naming MSI
Eagle beneficiary of such policy. The Company maintains "key person" life
insurance policies in the amount of $1,000,000 on each of the lives of Douglas
P. Fields, its Chairman of the Board and Chief Executive Officer, and Frederick
M. Friedman, its Executive Vice President, Chief Financial Officer, Treasurer,
Secretary and a Director of the Company.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect to
the compensation paid by the Company, Eagle, JEH Eagle or MSI Eagle for services
rendered in all capacities to each of these entities during each of their last
two fiscal years by those persons indicated. Neither the Company, Eagle, JEH
Eagle nor MSI Eagle have had any other executive officer whose total annual
salary and bonus exceeded $100,000 for either of said fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL YEAR
NAME AND ENDED
PRINCIPAL POSITION JUNE 30, SALARY BONUS
- --------------------------------------------------------------------------------- ------------- ---------- -----------
<S> <C> <C> <C>
Douglas P. Fields................................................................ 1998 $ 0 $ 0
Chief Executive Officer of the Company, Eagle, JEH Eagle and MSI Eagle 1997 $ 0 $ 0
James E. Helzer.................................................................. 1998 $ 275,000 $ 0
President of the Company, Eagle and JEH Eagle 1997 (1) (1)
E.G. Helzer...................................................................... 1998 $ 137,500 $ 0
Senior Vice President of the Company, Eagle and JEH Eagle 1997 (1) (1)
</TABLE>
- ------------------------
(1) Neither of Messrs. Helzer was associated with the Company, Eagle or JEH
Eagle prior to the commencement of their latest completed fiscal year.
78
<PAGE>
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
The Company, Eagle, JEH Eagle and MSI Eagle have entered into agreements
with five persons who are anticipated to receive cash compensation in excess of
$100,000 per year.
The Company and Eagle have entered into employment agreements with Messrs.
Fields and Friedman, to become effective upon closing of the Public Offering and
consummation of the Acquisitions, pursuant to which they will act as Chairman of
the Board and Chief Executive Officer, and Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a Director of the Company and Eagle,
respectively, for a five-year period, at annual salaries of $200,000 each,
subject to annual increases or bonuses as may be determined by the Board of
Directors.
JEH Eagle has entered into agreements with Messrs. Fields and Friedman,
pursuant to which they act as Chairman of the Board of Directors and Chief
Executive Officer, and Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and a Director of JEH Eagle, respectively, for a five-year
period which commenced in July 1997, at annual salaries of $60,000 each, subject
to annual increases and bonuses as may be determined by JEH Eagle's Board of
Directors. The compensation payable to Messrs. Fields and Friedman under their
employment agreements shall commence upon the closing of the Public Offering and
consummation of the Acquisitions.
Pursuant to the foregoing employment agreements, Messrs. Fields' and
Friedman's written consent is required if they are to be employed other than in
proximity to their residences. Messrs. Fields and Friedman reside in Connecticut
and New York, respectively. The agreements require Eagle and JEH Eagle to
provide their beneficiaries and each of them, respectively, with twelve months
salary in the event of death or disability and indemnify Messrs. Fields and
Friedman to the full extent permitted under the Delaware General Corporation
Law. Their agreements do not require either Messrs. Fields or Friedman to commit
a specific amount of their time to the affairs of Eagle or JEH Eagle. Messrs.
Fields and Friedman will devote no less time than they deem reasonably necessary
to carry out their duties to the Company, Eagle, JEH Eagle and MSI Eagle.
The Company's and JEH Eagle's agreements with Messrs. Fields and Friedman
contain provisions for payments of salary and benefits following a change of
control (as defined) of the Company or JEH Eagle, the failure to reappoint
either of them to his position, a salary reduction or the Company's or JEH
Eagle's failure to perform its obligations under their respective agreements. In
general, under such circumstances, each of Messrs. Fields and Friedman would be
entitled to a cash payment equivalent to his salary for the remaining term of
his agreement, and continued life, health and disability insurance benefits for
a period of two years.
JEH Eagle has also entered into agreements with Messrs. James E. Helzer and
E.G. Helzer pursuant to which they serve as executive officers of JEH Eagle for
terms of five and three years, respectively, which commenced in July 1997, at
compensation rates of $250,000 and $125,000 per year, respectively, subject to
annual review by JEH Eagle's Board of Directors. Additionally, in December 1997,
James E. Helzer accepted the positions of President of the Company and Eagle,
and E.G. Helzer accepted the positions of Senior Vice President--Operations of
the Company and Eagle. Additionally, James E. Helzer's rate of compensation was
increased by $50,000 to $300,000 per year and he is required to devote
approximately 80% of his working time to the Company, Eagle and JEH Eagle; and
E.G. Helzer's rate of compensation was increased by $25,000 to $150,000 per
year. Additionally, James E. Helzer and E.G. Helzer are entitled to receive 20%
and 6%, respectively, of Eagle's earnings before taxes in excess of $600,000 per
year. James E. Helzer and E.G. Helzer are employed as President and Senior Vice
President-Operations, respectively, of the Company and Eagle pursuant to oral
agreements that can be terminated by either party without notice or penalty.
James E. Helzer will continue as the President of JEH Eagle and will become Vice
Chairman of the Company's Board of Directors upon closing of the Public Offering
and consummation of the Acquisitions. See "The Acquisitions" and "Certain
Transactions."
79
<PAGE>
James E. Helzer, as the sole shareholder and chief executive officer of JEH
Co., received compensation from JEH Co. of approximately $2,330,000 and $120,000
for JEH Co.'s fiscal year ended December 31, 1996 and six-month period ended
June 30, 1997, respectively.
MSI Eagle has entered into an agreement with Gary L. Howard pursuant to
which he serves as an executive officer of MSI Eagle, currently President, for a
term ending on June 30, 2003, at an annual salary of $260,000, subject to annual
review by MSI Eagle's Board of Directors. Additionally, as of November 1998,
Gary L. Howard has accepted the position of Vice President-- Masonry Products,
of the Company. Gary L. Howard, as the sole shareholder and chief executive
officer of MSI Co., received compensation from MSI Co. of approximately $522,000
and $725,000 for MSI Co.'s fiscal years ended June 30, 1997 and 1998,
respectively.
Steven R. Andrews has agreed to become the Company's Vice President--Legal
upon closing of the Public Offering and consummation of the Acquisitions. Mr.
Andrews will be compensated at the rate of $500 per month. The Company's
agreement with Mr. Andrews is oral and can be terminated by either party without
notice or penalty.
Upon the closing of the Public Offering and consummation of the
Acquisitions, pursuant to the Company's Stock Option Plan, the Company intends
to grant to each of Messrs. Douglas P. Fields, Frederick M. Friedman, James H.
Helzer, E.G. Helzer, Steven R. Andrews and Gary L. Howard options exercisable to
purchase 25,000, 25,000, 120,000, 50,000, 100,000 and 100,000 shares of Common
Stock, respectively. Such options will have a term of ten years and will be
exercisable at the offering price of the Common Stock sold pursuant to the
Public Offering. Such options will vest as to 20% of the underlying shares of
Common Stock on each successive anniversary of the date of grant commencing one
year from the date of the closing of the Public Offering, provided that they are
employees of the Company on such dates.
Following the completion of the Public Offering and consummation of the
Acquisitions, it is anticipated that Messrs. Fields, Friedman, Helzer, Howard
and Andrews will hold the positions set forth opposite their names for the
corporations indicated below:
<TABLE>
<CAPTION>
NAME THE COMPANY EAGLE JEH EAGLE MSI EAGLE
- ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Douglas P. Fields..... Chairman of the Board Chairman of the Board Chairman of the Board Chairman of the Board
and Chief Executive and Chief Executive and Chief Executive and Chief Executive
Officer Officer Officer Officer
James E. Helzer....... President and Vice President and Director President and Director Director
Chairman of the Board
of Directors
Frederick M.
Friedman.............. Executive Vice Executive Vice Executive Vice Executive Vice
President, Treasurer, President, Treasurer, President, Treasurer, President, Treasurer,
Secretary and Director Secretary and Director Secretary and Director Secretary and Director
E.G. Helzer........... Senior Vice President- Senior Vice President- Senior Vice President- --
Operations Operations Operations
Gary L. Howard........ Vice President-- -- -- President
Masonry Products
Steven R. Andrews..... Vice President-- Legal -- -- --
and Director
</TABLE>
80
<PAGE>
COMPENSATION OF DIRECTORS
Directors of the Company do not receive compensation for their services as
directors; however, the Board of Directors may authorize the payment of
compensation to directors for their attendance at regular and special meetings
of the Board and for attendance at meetings of committees of the Board as is
customary for similar companies. Directors will be reimbursed for their
reasonable out-of-pocket expenses incurred in connection with their duties to
the Company. Upon completion of the Public Offering and consummation of the
Acquisitions, all non-officer directors and director nominees, except for Mr.
Smircina, of the Company will each receive options to purchase 10,000 shares of
the Company's Common Stock, exercisable at $5.00 per share.
LIMITATION ON LIABILITY OF DIRECTORS
The Delaware General Corporation Law permits a corporation, through its
Certificate of Incorporation, to exonerate its directors from personal liability
to the corporation or to its stockholders for monetary damages for breach of
fiduciary duty of care as a director, with certain exceptions. The exceptions
include a breach of the director's duty of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of law,
improper declarations of dividends, and transactions from which the directors
derived an improper personal benefit. The Company's Certificate of Incorporation
exonerates its directors from monetary liability to the extent permitted by this
statutory provision. The Company has been advised that it is the position of the
Commission that, insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, that provision is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
STOCK OPTION PLAN
In August 1996, the Board of Directors adopted and the stockholders approved
the Company's 1996 Stock Option Plan. In December 1998, the Board of Directors
and the stockholders terminated the 1996 Stock Option Plan and adopted and
approved, as the case may be, the Company's 1998 Stock Option Plan (the "Stock
Option Plan"). The Stock Option Plan provides for the grant of (i) options that
are intended to qualify as incentive stock options ("Incentive Stock Options")
within the meaning of Section 422A of the Internal Revenue Code, as amended (the
"Code"), to certain employees, directors and consultants and (ii) options not
intended to so qualify ("Non-Qualified Stock Options") to employees (including
directors and officers who are employees of the Company), directors and
consultants. The total number of shares of Common Stock for which options may be
granted under the Stock Option Plan is 1,000,000 shares. Upon the closing of the
Public Offering and consummation of the Acquisitions, the Company intends to
grant options exercisable into 900,000 shares of Common Stock to various of its
employees, including options to purchase an aggregate of 420,000 shares which
will be issued to Messrs. Fields, Friedman, James E. Helzer, E.G. Helzer, Gary
L. Howard and Steven R. Andrews. The exercise price of these options will be the
price to the public of the shares of Common Stock offered in the Public
Offering.
Upon the closing of the Public Offering and consummation of the
Acquisitions, Messrs. Finkelstein and Skakel, director nominees of the Company,
will each be granted options to purchase 10,000 shares of Common Stock pursuant
to the Company's Stock Option Plan. Such options will have a term of ten years
and will be exercisable at $5.00 per share and will vest on the first
anniversary of the date of grant.
The Stock Option Plan is to be administered by the Board of Directors or a
committee appointed by the Board of Directors which will determine the terms of
options granted, including the exercise price, the number of shares subject to
the option and the terms and conditions of exercise. No option granted under the
Stock Option Plan is transferable by the optionee other than by will or the laws
of descent and distribution and each option is exercisable during the lifetime
of the optionee only by such optionee.
The exercise price of all stock options granted under the Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. With respect to any participant who owns stock
81
<PAGE>
possessing more than 10% of the voting rights of all classes of the Company's
outstanding capital stock, the exercise price of any Incentive Stock Option must
be not less than 110% of the fair market value on the date of grant. The term of
each option granted pursuant to the Stock Option Plan may be established by the
Board of Directors or a committee of the Board of Directors, in its sole
discretion; provided, however, that the maximum term of each Incentive Stock
Option granted pursuant to the Stock Option Plan is ten years. With respect to
any Incentive Stock Option granted to a participant who owns stock possessing
more than 10% of the voting rights of all classes of the Company's outstanding
capital stock, the maximum term is five years. Options shall become exercisable
at such times and in such installments as the Board of Directors or a committee
of the Board of Directors shall provide in the terms of each individual option.
OPTIONS GRANTED PURSUANT TO THE STOCK OPTION PLAN TO EXECUTIVE OFFICERS,
DIRECTORS AND DIRECTOR NOMINEES OF THE COMPANY
The table below shows, as to each of the executive officers, Directors and
Director Nominees of the Company and as to all executive officers, Directors and
Director Nominees of the Company as a group, the following information with
respect to stock options to be granted under the Stock Option Plan: (i) the
aggregate amounts of shares of Common Stock subject to options to be granted on
the closing date of the Public Offering and consummation of the Acquisitions;
and (ii) the price or range per share option exercise price for options to be
granted on the closing date of the Public Offering and consummation of the
Acquisitions for these individuals. No other options for these individuals have
been issued or will be issued and outstanding on the closing date of the Public
Offering and consummation of the Acquisitions.
<TABLE>
<CAPTION>
NAMES OF EXECUTIVE OFFICERS, SHARES SUBJECT PER SHARE
DIRECTORS AND DIRECTOR NOMINEES TO OPTIONS EXERCISE PRICE
- ----------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Douglas P. Fields(1)............................................................... 25,000 $ 5.00
Frederick M. Friedman(1)........................................................... 25,000 $ 5.00
James E. Helzer(1)................................................................. 120,000 $ 5.00
E.G. Helzer(1)..................................................................... 50,000 $ 5.00
Gary L. Howard..................................................................... 100,000 $ 5.00
Steven R. Andrews(1)............................................................... 100,000 $ 5.00
Paul D. Finkelstein(2)............................................................. 10,000 $ 5.00
George Skakel III(2)............................................................... 10,000 $ 5.00
All Executive Officers, Directors and Director Nominees as a group (9 persons)..... 440,000 $ 5.00
</TABLE>
- ------------------------
(1) All of the options to be granted to Messrs. Fields, Friedman, James E.
Helzer, E.G. Helzer, Gary L. Howard and Steven R. Andrews will vest at a
rate of 20% per year from the closing date of the Public Offering with the
initial 20% vesting on the first anniversary of such closing date, limited,
however, such that the total amount of all options granted to each of them
and vesting in any single year does not exceed $100,000 at the exercise
price.
(2) The options to be granted to Messrs. Finkelstein and Skakel will vest one
year from the closing date of the Public Offering.
OTHER COMPENSATION
Eagle, JEH Eagle and MSI Eagle provide basic health, major medical and life
insurance for its employees, including its executive officers. Eagle and JEH
Eagle have also adopted 401(k) Retirement Savings Plans for eligible employees,
as described below. No other retirement, pension or similar program has been
adopted by the Company, Eagle, JEH Eagle or MSI Eagle. These and other benefits
may be adopted by the Company for its employees or the employees of its
subsidiaries in the future.
82
<PAGE>
In July 1992 and January 1998, Eagle and JEH Eagle adopted 401(k) Retirement
Savings Plans for employees of Eagle and JEH Eagle, respectively (the "401(k)
Plan"). Eligible employees include all employees of Eagle and JEH Eagle who have
completed one year of employment and have attained the age of 21. The 401(k)
Plan permits employees to make voluntary contributions to the 401(k) Plan up to
a dollar limit set by law. Eagle and JEH Eagle may contribute discretionary
matching contributions equal to a determined percentage of the employees'
contributions. Benefits under the 401(k) Plan are distributable upon retirement,
disability, termination of employment or certain financial hardship, subject to
regulatory requirements. Each participant's share of Eagle's and JEH Eagle's
contributions vests at the rate of 20% per year until after six years of
service, at which time the participant becomes fully vested.
A $9,000 contribution to the 401(k) Plan was made by Eagle during its fiscal
year ended June 30, 1997. No contributions were made to the 401(k) Plan by Eagle
or JEH Eagle during the fiscal year ended June 30, 1998. Amounts to be
contributed in the future are at the discretion of Eagle's and JEH Eagle's
Boards of Directors. Accordingly, it is not possible to estimate the amount of
benefits that will be payable to participants in the 401(k) Plan upon their
retirement. The trustees under the 401(k) Plan are Robert L. Noojin and Dennis
J. Paliaga.
83
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, after
giving effect to the Acquisitions as if they had occurred on that date, certain
information concerning beneficial ownership of shares of Common Stock with
respect to (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each executive officer, director and
director nominee of the Company, and (iii) all officers, directors and director
nominees of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE APPROXIMATE PERCENTAGE OF APPROXIMATE PERCENTAGE OF
OF BENEFICIAL COMMON STOCK OWNED COMMON STOCK OWNED
OWNERSHIP BEFORE PUBLIC OFFERING AFTER PUBLIC OFFERING(6)
---------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
TDA Industries, Inc.(1).............. 5,000,000(2) 84.0% 59.2%
Douglas P. Fields(1)................. 5,000,000(2)(3) 84.0% 59.2%
Frederick M. Friedman(1)............. 5,000,000(2)(3) 84.0% 59.2%
James E. Helzer(1)................... 300,000(3)(4) 5.0% 3.6%
Gary L. Howard (1)(5)................ 250,000(3) 4.2% 3.0%
E.G. Helzer(1)....................... 0(3) 0% 0%
Steven R. Andrews(1)................. 100,000(3) 1.7% 1.2%
Paul D. Finkelstein(1)............... 0(3) 0% 0%
John E. Smircina(1).................. 5,000,000(2) 84.0% 59.2%
George Skakel III(1)................. 0(3) 0% 0%
All executive officers, directors and
director-nominees as a group (9
persons)........................... 5,650,000(2)(3) 95.0% 66.9%
</TABLE>
- ------------------------
(1) The address for TDA Industries, Inc. is 122 East 42nd Street, New York, New
York 10168. The address for Messrs. Fields and Friedman is c/o Eagle Supply
Group, Inc. at the foregoing street address, Suite 1116. The address for
Messrs. Helzer is 2500 U.S. Highway 287, Mansfield, Texas 76063. The address
for Mr. Howard is 20 Woodland Court, Mansfield, Texas 76063. The address for
Mr. Andrews is 822 North Monroe Street, Tallahassee, Florida 32303. The
address for Mr. Finkelstein is c/o Regis Corp., 7201 Metro Boulevard,
Minneapolis, Minnesota 55439-2130. The address for Mr. Smircina is 616 N.
Washington Street, Alexandria, Virginia 22314. The address for Mr. Skakel is
333 Ludlow Street, Stamford, Connecticut 06902.
(2) Includes 2,000,000 shares of Common Stock currently owned by TDA. Also
includes 3,000,000 shares of Common Stock to be issued to TDA upon
consummation of the Acquisitions. Does not include any securities of the
Company that are being offered hereby that may be purchased by TDA. Messrs.
Fields and Friedman are officers and directors and principal stockholders of
TDA. Mr. Smircina is a director of TDA. Each of Messrs. Fields, Friedman and
Smircina may be deemed to exercise voting control over securities of the
Company owned by TDA. See "The Acquisitions," "Management" and "Certain
Transactions."
(3) Does not include options granted under the Company's Stock Option Plan. See
"Management."
(4) Includes 300,000 shares of Common Stock to be issued to James E. Helzer
pursuant to the agreement by which JEH Eagle acquired the business and
substantially all of the assets of JEH Co.
(5) Includes 250,000 shares of Common Stock to be issued to Gary L. Howard
pursuant to the agreement by which MSI Eagle acquired the business and
substantially all of the assets of MSI Co. and the exchange of $250,000 of
the principal amount of MSI Eagle's note payable to MSI Co. for 50,000
shares of the Company's Common Stock, all of which shares are to be issued
upon the closing of the Public Offering and consummation of the
Acquisitions. See "The Acquisitions" and "Certain Transactions."
(6) All approximate percentages after the Public Offering give effect to the
issuance of the foregoing 3,000,000, 300,000 and 250,000 shares of the
Company's Common Stock to TDA, James E. Helzer and Gary L. Howard,
respectively. See "The Acquisitions" and "Certain Transactions."
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<PAGE>
CERTAIN TRANSACTIONS
Simultaneously with the closing of the Public Offering, the Company will
consummate the Acquisitions. The Underwriter and the Company have agreed that at
the consummation of the Acquisitions, the Combined Entities have a book value of
not less than $1,000,000 after Eagle cancels, in the form of a non-cash
dividend, all indebtedness of TDA to Eagle, except for an approximately $495,000
receivable from TDA relating to and offsetting a mortgage in the same amount on
property previously owned by Eagle and for which Eagle remains the primary
obligor, with TDA contributing sufficient cash to Eagle, JEH Eagle, and/or MSI
Eagle, within forty-five days after the closing of the Public Offering and
consummation of the Acquisitions, to achieve that book value in the event of a
deficiency. At October 31, 1998, the Combined Entities had a book value of
approximately $5,773,000 which exceeded the required book value of the Combined
Entities by approximately $1,703,000 after assuming the cancellation by Eagle,
in the form of a non-cash dividend, of all indebtedness of TDA to Eagle, at that
date, excluding the foregoing receivable offsetting such mortgage. At October
31, 1998, TDA's indebtedness to Eagle, excluding the foregoing receivable
offsetting such mortgage, was approximately $3,070,000. The number of shares of
the Company's Common Stock to be issued to TDA in connection with the
Acquisitions was determined by negotiations among the Company, TDA and the
Underwriter. Factors considered in such negotiations included but were not
limited to (a) the historical results of the Combined Entities, (b) their future
business prospects, (c) their industry position, principally on a combined
basis, (d) their product line breadth, (e) their customer bases, (f) the
experience of their management and personnel, (g) the locations of their
distribution facilities, and (h) their net worth.
The 3,000,000 shares of the Company's Common Stock that TDA is to receive in
connection with the Acquisitions was negotiated and evaluated based on the
assessments made by the parties to the negotiations of the relative interests
that would be held in the Company after the consummation of the Public Offering
and the Acquisitions. There was no specific value assigned to the shares of
Common Stock to be issued to TDA for the Acquisitions. Management of TDA weighed
the relative merits of maintaining the Combined Entities as privately and
wholly-owned by TDA while the Combined Entities would seek to implement their
internal expansion and acquisition growth strategies or, alternatively, of
transferring the Combined Entities to the Company which, as a public company,
could provide potential advantages in implementing the Combined Entities'
internal expansion and acquisition growth strategies but would leave TDA with an
ownership position of less than 100% through its stock ownership in the Company.
In agreeing to transfer 3,000,000 shares of Common Stock of the Company to TDA
for the Combined Entities, the Company determined that the amount of ownership
interest of the Company to be transferred to TDA in connection with the
consummation of the Acquisitions, in light of all of the terms and provisions of
the Acquisitions transaction, was beneficial to the Company and would provide a
sound basis for implementing the Company's business plan. The number of shares
to be issued to James E. Helzer and Gary L. Howard were determined by
negotiations among JEH Eagle and JEH Co. and MSI Eagle and MSI Co.,
respectively, at the times of the acquisition of the business and substantially
all of the assets of JEH Co. by JEH Eagle and of MSI Co. by MSI Eagle,
respectively. The consideration to be paid by the Company to TDA for the
Acquisitions was determined by negotiations among the Company, TDA and the
Underwriter, without independent appraisal. Upon consummation of the
Acquisitions, Eagle, JEH Eagle and MSI Eagle will become wholly-owned
subsidiaries of the Company and will constitute the only business operations and
sources of revenue of the Company until such time, if any, as the Company
consummates additional acquisitions. The Company, TDA, Eagle, JEH Eagle and MSI
Eagle have not allocated the consideration for Eagle, JEH Eagle or MSI Eagle.
See "The Acquisitions."
TDA is a holding company which operates four business enterprises, including
Eagle, JEH Eagle, MSI Eagle and real estate investment companies. At the date of
this Prospectus, Eagle, JEH Eagle and MSI Eagle are wholly-owned by TDA. See
"Principal Stockholders." For TDA's fiscal year ended June 30, 1997, Eagle's
revenues constituted a majority of TDA's revenues and for TDA's fiscal year
ended June 30, 1998, the revenues of Eagle and JEH Eagle constituted a majority
of TDA's revenues.
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In 1994, Eagle entered into the Eagle Facility, then in the amount of
$7,500,000, which has been increased to $10,900,000 and is now due in October
2003 and is guaranteed by TDA. Eagle's obligations under the Eagle Facility are
collateralized by certain tangible and intangible current assets and certain
automotive equipment of Eagle with borrowings under the revolving credit loan of
the Eagle Facility based on a formula relating to certain levels of receivables
and inventory, as defined therein. By June 30, 1995, Eagle used its borrowings
under this the Eagle Facility to repay $2,325,533 of its indebtedness to TDA and
to advance $3,308,681 to TDA. At June 30, 1998 and October 31, 1998, Eagle's
borrowings under the Eagle Facility were approximately $9,722,000 and
$8,748,000, respectively. The Eagle Facility requires TDA's reaffirmation of its
guaranty in certain events including, but not limited to, the event that TDA or
TDA's stockholders cease to own all of Eagle's securities. For the Company to
acquire Eagle, the Eagle Facility lending institution's consent will be
required.
TDA, through a wholly-owned subsidiary, 39 Acre Corp., has rented to Eagle
on a month-to-month basis without formal written leases the premises for several
of Eagle's distribution facilities and Eagle's executive offices at aggregate
annual rentals net of sublease income of approximately $790,000 and $279,000
during its fiscal year ended June 30, 1998, and four-month period ended October
31, 1998, respectively. The Company believes that the amounts of these rental
payments are fair and reasonable to Eagle and are not in excess of what Eagle
would be required to pay independent third parties for comparable facilities.
Upon successful completion of the Public Offering and the consummation of the
Acquisitions, Eagle and TDA intend to enter into ten-year leases for said
premises on economic terms substantially similar to current arrangements.
However, the leases will now be written and on a long-term, ten-year basis, and
it is anticipated that TDA will derive a profit therefrom. The Company believes
that the rent and other terms of the written lease agreements to be entered into
between 39 Acre Corp. and Eagle are on at least as favorable terms as Eagle
would expect to negotiate with unaffiliated third parties. Neither Eagle nor 39
Acre Corp. will be permitted to terminate the leases before the end of their
term without a breach or default by the other party. See "Business."
Eagle had purchased the premises for its Birmingham, Alabama, distribution
center from an unrelated third party in April 1994, with a purchase money
mortgage and promissory note in the principal amount of $550,000 to be paid in
fifty-nine equal monthly installments of approximately $4,700 and a "balloon"
payment of approximately $440,000 due in April 1999. The mortgage and promissory
note for the Birmingham, Alabama, premises bears interest at the lending bank's
fluctuating prevailing prime rate. Prior to June 30, 1994, Eagle transferred
this property to TDA in partial repayment of intercompany debt, and TDA then
transferred the property to a wholly-owned subsidiary, 39 Acre Corp. Eagle
remains liable for the payments under this mortgage which had a balance due of
approximately $495,000 at October 31, 1998, and, in the event of a default under
the mortgage by 39 Acre Corp., Eagle could be held liable for the monthly and
"balloon" mortgage payments in addition to its rental payments. Eagle's rental
payment obligations to 39 Acre Corp. for the Birmingham, Alabama, distribution
center exceed this property's mortgage payments and Eagle has not been required
to make any payments in excess of the payments required pursuant to the leases
for the property. See "Business" and the Financial Statements and the Notes
thereto.
Eagle also remains responsible to Eagle Holding, Inc., a wholly-owned
subsidiary of TDA, pursuant to a lease for Eagle's former Fort Lauderdale,
Florida, distribution center expiring on May 1, 1999, which requires approximate
annual rental payments including a "balloon" payment of approximately $580,000
due on May 1, 1999 for an industrial revenue bond underlying these premises.
These premises have been subleased by Eagle to an unrelated third party at an
approximate annual rental of $240,000, which amount is approximately equal to
Eagle's lease obligation. The payments by Eagle to Eagle Holding, Inc. have
included through October 31, 1998 a ratable share of the "balloon" payment.
These payments, together with anticipated sublessee rental payments, are
currently projected by the Company to fully fund the "balloon" payment. Upon
completion of the Public Offering and consummation of the Acquisitions, TDA
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will indemnify Eagle for any payments that Eagle is required to make which are
in excess of Eagle's obligations under the foregoing properties.
During its fiscal years ended June 30, 1997 and 1998, Eagle made dividend
payments to TDA of $1,250,000 and $1,200,000, respectively. During each of
Eagle's last three fiscal years, Eagle was allocated by TDA the amounts of
$50,000 for accounting and auditing fees. Upon the closing of the Public
Offering and consummation of the Acquisitions, all such dividends will cease and
such accounting and auditing fees will be incurred directly by Eagle. See the
Financial Statements and the Notes thereto.
In or about May 1996, the Company sold 2,000,000 shares of its Common Stock
to TDA and 100,000 shares of its Common Stock to Steven R. Andrews for the
aggregate sum of $210. TDA and Mr. Andrews were the Company's founding
stockholders and are also the principal stockholder and a Director of the
Company, respectively. In connection with the Acquisitions, TDA will be issued
3,000,000 shares of the Company's Common Stock.
In February 1998, Eagle Holding, Inc., a TDA subsidiary, lent Eagle $400,000
repayable on demand but without interest, which amount was repaid in full prior
to June 30, 1998. In October 1998, Eagle Holding, Inc. again lent Eagle $400,000
repayable on demand but without interest. Also in October 1998, TDA lent Eagle
$1,000,000 repayable on demand without interest. The loans were made to enhance
Eagle's working capital. Management anticipates that these loans will be paid in
full prior to the closing of the Public Offering and consummation of the
Acquisitions.
In June and July 1996, the Company sold an aggregate of 300,000 shares of
its Common Stock and a like number of Warrants to 12 private investors for
aggregate gross proceeds of $300,000. See "Selling Securityholders."
In July 1997, JEH Eagle acquired the business and substantially all of the
assets of JEH Co., a Texas corporation, wholly-owned by James E. Helzer, now the
President of the Company, Eagle and JEH Eagle. The purchase price, as adjusted,
was approximately $14,464,000, consisting of $13,600,000 in cash, net of
$250,000 due from JEH Co., and a five-year $864,852 principal amount note
bearing interest at the rate of 6% per year. The purchase price and the note are
subject to further adjustments under certain conditions. The first $250,000 of
the adjustments was to be paid in cash by JEH Co. to JEH Eagle but, as other
adjustments to the purchase price are anticipated, JEH Eagle elected to postpone
the $250,000 payment from JEH Co. until other adjustments to the purchase price
are resolved, and the $250,000 payment has been established as a receivable due
on demand from JEH Co. Certain, potentially substantial, contingent payments, as
additional future consideration to JEH Co., or its designee, are to be paid by
JEH Eagle. JEH Co. is to receive a percentage of the EBITDA or the JEH EBITDA on
a per year non-cumulative basis for each of JEH Eagle's five fiscal years in the
JEH Applicable Period. If the JEH EBITDA reaches $3,000,000, $4,000,000 and
$5,000,000 in the foregoing fiscal years, JEH Co. or its designee is to receive
35%, 40% and 50%, respectively, of that fiscal year's JEH EBITDA in excess of
those levels, respectively. In addition to the foregoing percentages of JEH
EBITDA, if the JEH EBITDA (plus $50,000 of Mr. Helzer's compensation under his
employment agreement) (x) for any fiscal year in the JEH Applicable Period is
not less than $4,400,000, JEH Eagle is to pay JEH Co. or its designee
$1,000,000, provided that the aggregate amounts of such payments is not to
exceed $2,000,000; and (y) in the aggregate during the JEH Applicable Period is
not less than $20,000,000, JEH Eagle is to pay JEH Co. or its designee the sum
of $1,350,000 plus the amount of the difference, if any, between $2,000,000 and
the amount to be paid under (x). Additionally, with respect to the JEH Reserves
which were established at the date of the acquisition, if JEH Eagle reduces the
amount of the JEH Reserves in any fiscal year during the JEH Applicable Period,
JEH Co. or its designee is to be paid 100% of the reduction until the JEH
Reserves are not less than $2,500,000 and 50% of the reduction in the JEH
Reserves below $2,300,000 down to $600,000. Both of the immediately foregoing
percentage payments to JEH Co. or its designee are subject to adjustment in
certain events. Additionally, if the Public Offering is completed prior to June
30, 2002 and in the event certain JEH EBITDA levels are reached for JEH Eagle
during the period from July 1, 1997
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through the date of consummation of the Public Offering, JEH Co. or its designee
will be entitled to receive (i) $1,000,000 or (ii) $1,350,000 (either in cash or
in shares of the Company's Common Stock valued at its public offering price) if
the JEH EBITDA level is (i) less than $3,800,000 per year but not less than
$3,600,000 per year, or (ii) not less than $3,800,000 per year, respectively.
The Company will issue 300,000 shares of its Common Stock and not pay the
foregoing amounts to James E. Helzer in fulfillment of the obligation set forth
in the immediately preceding sentence, even if the JEH EBITDA does not reach the
required levels. James E. Helzer and E.G. Helzer serve as Eagle's President and
Senior Vice President-Operations at salaries of $50,000 and $25,000 per year,
respectively, and are also entitled to receive 20% and 6%, respectively, of
Eagle's income before taxes in excess of $600,000 per year. Messrs. Helzers are
employed by the Company and Eagle pursuant to oral agreements that can be
terminated by either party without notice or penalty. See "The Acquisitions" and
"Management."
In order to pay a substantial portion of the purchase price for the
acquisition of JEH Co.'s business and to provide working capital to JEH Eagle,
JEH Eagle in July 1997 entered into a loan agreement for a credit facility of up
to $20,000,000 (the "JEH Facility") guaranteed by TDA and collateralized by
substantially all of the assets of JEH Eagle. The JEH Facility, as amended,
consists of a $3,000,000 term loan, a $2,475,000 equipment loan and, the
balance, a revolving credit loan. The principal amount of the term loan is
payable in 48 equal monthly installments of $62,500. The term loan is due on the
earlier of October 2003 or the loan agreement's termination. The outstanding
balance of the term loan at October 31, 1998 was $2,062,500. The term loan bears
interest at Libor plus three and one-quarter percent or the lender's prime rate
plus one and one-half percent, as JEH Eagle may elect. The principal amount of
the equipment loan is payable in equal consecutive monthly installments of
$26,000 based upon an 76 month amortization schedule with any remaining
principal amount due upon the earlier of August 1, 2004 or the end of the loan
agreement's initial or renewal term. The outstanding balance of the equipment
loan at October 31, 1998 was approximately $1,807,000. The equipment loan bears
interest at Libor plus two and one-half percent or the lender's prime rate plus
one-half percent, as JEH Eagle may elect. The principal amount of the revolving
credit loan is payable upon the earlier of the loan agreement's termination or
other stated events. The outstanding balance of the revolving credit loan at
October 31, 1998 was approximately $9,237,000. The revolving credit loan bears
interest at Libor plus two and one-half percent or the lender's prime rate plus
one-half percent, as JEH Eagle may elect. All interest payments under the
foregoing loans are payable monthly in arrears. The maximum amount borrowable
under the JEH Facility is determined by a Borrowing Base, as defined in the JEH
Facility. The JEH Facility is due in October 2003.
Of the $13,850,000 initial cash payment portion of the $14,850,000 JEH Co.
tentative purchase price, approximately $12,500,000 was supplied pursuant to the
JEH Facility and approximately $1,350,000 was contributed to JEH Eagle by TDA as
equity capital. In connection with the acquisition of JEH Co., JEH Eagle paid
TDA a financing fee of $150,000. For the Company to acquire JEH Eagle, the JEH
Facility lending institution's consent will be required.
James E. Helzer had rented to JEH Co. and continues to rent to JEH Eagle,
pursuant to five-year written leases, the premises for several of JEH Eagle's
distribution centers and JEH Eagle's executive offices at aggregate annual
rentals of approximately $485,000. Rental payments to Mr. Helzer for the several
distribution facilities he leases to JEH Eagle aggregated $402,000 and $492,000
for JEH Co.'s fiscal year ended December 31, 1996 and JEH Eagle's fiscal year
ended June 30, 1998, respectively, and $162,000 for JEH Eagle's four-month
period ended October 31, 1998. The Company believes that the amounts of these
rental payments are fair and reasonable to JEH Eagle and are not in excess of
what JEH Eagle would be required to pay independent third parties for comparable
facilities. See "The Acquisitions" and "Business."
During its fiscal year ended December 31, 1996 and six-month period ended
June 30, 1997, JEH Co. had substantial indebtedness to James E. Helzer for funds
advanced by him to JEH Co. As part of JEH
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Eagle's purchase of the business and substantially all of the assets of JEH Co.,
JEH Eagle did not assume this liability to Mr. Helzer.
During its fiscal year ended December 31, 1996 and six month period ended
June 30, 1997, JEH Co. made sales aggregating approximately $985,000 and
$327,000 to Classic Roofs and Indy Roofing Service, respectively, two entities
owned by Jay James Helzer, the son of James E. Helzer. During its fiscal year
ended June 30, 1998 and the four-month period ended October 31, 1998, JEH Eagle
made sales aggregating approximately $1,018,000 and $211,000, respectively, to
the foregoing two entities. Management of the Company believes that such sales
by JEH Eagle to the two entities owned by the son of James E. Helzer were made
on terms no less favorable to JEH Eagle than sales made to independent third
parties.
TDA and JEH Eagle have entered into an agreement pursuant to which TDA
provides JEH Eagle with certain services including (i) managerial, (ii)
strategic planning, (iii) banking negotiation, (iv) investor relations, and (v)
advisory services relating to acquisitions for a five-year term which commenced
in July 1997. The monthly fee, the payment of which is to commence upon the
closing of the Public Offering and the consummation of the Acquisitions, for the
foregoing services is $3,000.
In February of 1998, the Company sold an aggregate of $300,000 in principal
amount of its promissory notes to three of its stockholders, including TDA, for
aggregate gross proceeds of $300,000. TDA purchased $150,000 of said notes and
Hi-Tel Group, Inc. and Paul Schmidt purchased $100,000 and $50,000 of said
notes, respectively. Said notes bear interest at the rate of 15% per year
through June 30, 1998 and 6% per year after that date. The notes mature on the
earlier of thirty months after issuance or the closing of the Public Offering.
In August 1998, TDA lent the Company $100,000 pursuant to a two-year 6% note
which is required to be prepaid if the Public Offering is consummated. The
Company intends to repay said notes in full with the net proceeds of this Public
Offering.
In October 1998, MSI Eagle acquired the business and substantially all of
the assets of MSI Co., a Texas corporation, wholly-owned by Gary L. Howard, now
a Vice President of the Company and President of MSI Eagle. The purchase price,
as adjusted, was approximately $8,296,000, consisting of $6,250,000 in cash and
a $2,046,000 principal amount five-year note bearing interest at the rate of 8%
per year. All payments due on the note are accelerated upon consummation of the
Public Offering and are to be paid within 120 days of such consummation. At MSI
Co.'s option, upon consummation of the Public Offering, it may exchange up to
$2,000,000 of the principal amount of the note into shares of Company's Common
Stock valued at the public offering price. MSI Co. has advised the Company that
it intends to exchange $250,000 of the principal amount of the note for shares
of the Company's Common Stock and transfer said shares or its right to receive
said shares to Gary L. Howard. The note is secured by substantially all of the
assets of MSI Eagle with that security agreement subordinate to the rights of
MSI Eagle's credit facility lending institution. The purchase price and the note
are subject to further adjustments under certain conditions. Certain,
potentially substantial, contingent payments, as additional future consideration
to MSI Co., or its designee, are to be paid by MSI Eagle. MSI Co. is to receive
a percentage of the EBITA or the modified EBITA (as defined) of the business
acquired (the "MSI EBITA") on a per year non-cumulative basis for each of MSI
Eagle's fiscal years ending on June 30 of 1999 through 2003 (the "MSI Applicable
Period"). If the MSI EBITA reaches $2,000,000 and $2,750,000 in the foregoing
fiscal years, MSI Co. or its designee is to receive 25% and 35%, respectively,
of that fiscal year's MSI EBITA in excess of those levels, respectively.
Additionally, if the Public Offering is completed prior to October 22, 2003 and
in the event certain MSI EBITA levels are reached for MSI Eagle, MSI Co. or its
designee will be entitled to receive (i) $1,000,000 or (ii) $750,000 (either in
cash or in shares of the Company's Common Stock valued at its public offering
price) if the MSI EBITA level is (i) not less than $2,000,000 per year or (ii)
less than $2,000,000 but not less than $1,500,000 per year, respectively. The
Company will issue 200,000 shares of its Common Stock, and not pay the foregoing
amounts, to Gary L. Howard as MSI Co.'s designee, in fulfillment of the
obligation set forth in the immediately preceding sentence, even if the MSI
EBITA does not reach the required levels. Gary L. Howard serves as MSI Eagle's
President at a salary of $260,000 per
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year pursuant to an employment agreement terminating in June 2003. He also
serves as the Company's Vice President at no additional salary. See "The
Acquisitions" and "Management."
In order to pay a substantial portion of the purchase price for the
acquisition of MSI Co.'s business and assets and to provide working capital to
MSI Eagle, MSI Eagle in October 1998 entered into a loan agreement for a credit
facility of up to $9,075,000 (the "MSI Facility") guaranteed by TDA and
collateralized by substantially all of the assets of MSI Eagle. The MSI Facility
consists of a $3,075,000 term loan and the balance as a revolving credit loan.
The principal amount of the term loan is payable in 83 equal monthly
installments of $37,000 commencing on December 1, 1998 with the remaining unpaid
balance payable with the 84th installment. The term loan is due upon the earlier
of December 1, 2005 or the end of the loan agreement's initial or renewal term.
The term loan bears interest at Libor plus three and one-quarter percent or the
lender's prime rate plus one and one-quarter percent, as MSI Eagle may elect.
The principal amount of the revolving credit loan is payable upon the earlier of
the loan agreement's termination or other stated events. The revolving credit
loan bears interest at Libor plus two and one-half percent or the lender's prime
rate plus one-half percent, as MSI Eagle may elect. All interest payments under
the foregoing loans are payable monthly in arrears. The maximum amount
borrowable under the MSI Facility is determined by a borrowing base as defined
in the MSI Facility. For the Company to acquire MSI Eagle, the MSI Facility
lending institution's consent will be required.
Of the $6,250,000 cash payment portion of the approximate $8,296,000
tentative purchase price for the business and substantially all of the assets of
MSI Co., approximately $4,250,000 was supplied pursuant to the MSI Facility,
$1,000,000 was invested by TDA into MSI Eagle as an equity investment and
$1,000,000 was lent to MSI Eagle by TDA pursuant to a six (6%) percent two-year
note in that principal amount payable in full in October 2000. TDA has agreed
with MSI Eagle's credit facility lending institution to defer the interest
payable on such note until its maturity.
Upon completion of the Public Offering and consummation of the Acquisitions,
TDA will provide office space and administrative services to the Company at
TDA's offices in New York City pursuant to an administrative services agreement
to be entered into by the Company and TDA. The term of the administrative
services agreement will be on a month to month basis. The fee payable by the
Company to TDA for such administrative services will be $3,000 per month. Prior
to the date of this Prospectus, the Company utilized office space and
administrative services provided by TDA without charge.
Upon completion of the Public Offering and consummation of the Acquisitions,
Messrs. Fields' and Friedman's employment agreements with the Company and Eagle
will become effective. Their employment agreements with JEH Eagle have already
become effective. The aggregate annual compensation to be paid to Messrs. Fields
and Friedman by the Company, Eagle and JEH Eagle will be $260,000 each,
exclusive of benefits, bonuses and annual increases. See "The Acquisitions" and
"Management."
The foregoing transactions that Eagle, JEH Eagle and MSI Eagle have engaged
in with TDA have benefitted or may be deemed to have benefitted TDA directly or
indirectly. Messrs. Fields and Friedman, the Company's Chief Executive Officer
and Chairman of its Board of Directors and Executive Vice President, Chief
Financial Officer, Treasurer, Secretary, and a Director of the Company,
respectively, are also executive officers, directors and principal stockholders
of TDA and have benefitted or may be deemed to have benefitted, directly or
indirectly, from Eagle's, JEH Eagle's and MSI Eagle's transactions with TDA. TDA
is a holding company which, among other things, owns Eagle, JEH Eagle, MSI
Eagle, an indoor tennis facility, and owns and manages commercial and
undeveloped real estate. TDA and/or certain of its subsidiaries derive funds
from all of the foregoing sources, including dividend and lease payments from
Eagle. These sources pay TDA's operating expenses, including the payment of
salaries and benefits to Messrs. Fields and Friedman. See "Management."
The foregoing transactions that Eagle and JEH Eagle have engaged in with
James E. Helzer have benefitted or may be deemed to have benefitted Mr. Helzer,
directly or indirectly. James E. Helzer is the President of the Company, Eagle
and JEH Eagle. The foregoing transactions that MSI Eagle have engaged
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in with Gary L. Howard have benefitted or may be deemed to have benefitted Mr.
Howard. Mr. Howard is a Vice President of the Company and the President of MSI
Eagle. See "The Acquisitions" and "Management."
Messrs. Fields and Friedman are also officers, directors and principal
stockholders of TDA, and Mr. Smircina is an officer and director of TDA, and,
consequently, they will be able, through TDA, to direct the election of the
Company's directors, effect significant corporate events and generally direct
the affairs of the Company. The Company does not intend to enter into any
material transactions, loans or forgiveness of loans with any affiliates, except
as contemplated or disclosed in this Prospectus, unless such transaction is fair
and reasonable to the Company and is on terms no less favorable than could be
obtained from unaffiliated third parties. Additionally, any such event must be
approved by a majority of the Company's directors who do not have an interest in
such a transaction and who have had access, at the Company's expense, to
independent legal counsel. See "Management."
Each of TDA and Messrs. Fields and Friedman may be deemed to be a "promoter"
of the Company as such term is defined under the federal securities laws.
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DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$.0001 par value per share, 2,400,000 of which are issued and outstanding as of
the date of this Prospectus. The holders of shares of the Company's Common Stock
are entitled to receive dividends equally when, as and if declared by the Board
of Directors, out of funds legally available therefor.
Subject to the rights that may be designated by the Board of Directors to
the holders of any shares of Preferred Stock, the holders of the Common Stock
have voting rights, one vote for each share held of record, and are entitled
upon liquidation of the Company to share ratably in the net assets of the
Company available for distribution. Shares of the Company's Common Stock do not
have cumulative voting rights. Therefore, the holders of a majority of the
shares of Common Stock may elect all of the directors of the Company and control
its affairs and day to day operations. The shares of Common Stock are not
redeemable and have no preemptive or similar rights. All 2,400,000 outstanding
shares of the Company's Common Stock are fully paid and non-assessable.
2,000,000 shares of the Company's Common Stock are owned by TDA and 100,000
shares are owned by Steven R. Andrews, Esq. TDA and Mr. Andrews purchased their
shares of the Company's Common Stock at the per share par value. The remaining
300,000 shares of the Company's Common Stock were sold in the Private Placement.
Upon completion of the Public Offering and consummation of the Acquisitions,
TDA, James E. Helzer and Gary L. Howard will be issued 3,000,000, 300,000 and
250,000 shares of the Company's Common Stock, respectively.
PREFERRED STOCK
The Company is authorized to issue 2,500,000 shares of Preferred Stock, par
value $.0001 per share ("Preferred Stock"). The Board of Directors of the
Company, without further stockholder action, may issue shares of Preferred Stock
in any number of series and may establish as to each such series the designation
and number of shares to be issued and the relative rights and preferences of the
shares of each series, including provisions regarding voting powers, redemption,
dividend rights, rights upon liquidation and conversion rights. The issuance of
shares of Preferred Stock by the Board of Directors could adversely affect the
rights of holders of Common Stock by, among other matters, establishing
preferential dividends, liquidation rights and voting power. The Company has not
issued any shares of Preferred Stock and has no present intention to issue
shares of Preferred Stock. The issuance thereof could discourage or defeat
efforts to acquire control of the Company through acquisition of shares of
Common Stock. The Company has agreed not to issue any shares of Preferred Stock
until the third anniversary of the date of this Prospectus without the
Underwriter's written consent.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The Company has authorized the issuance of up to 2,875,000 Redeemable Common
Stock Purchase Warrants to be sold in the Public Offering. As of the date of
this Prospectus, the Company had 300,000 Warrants issued and outstanding. Said
300,000 issued and outstanding Warrants were sold as part of the Private
Placement.
The following statements and summaries of the material provisions of the
Warrants are subject to the more detailed provisions of the Warrants, a copy of
which has been included as an Exhibit to the Registration Statement of which
this Prospectus forms a part.
RIGHTS TO PURCHASE SHARES OF COMMON STOCK
Each Warrant entitles the registered holder to purchase from the Company one
share of Common Stock at an exercise price of $5.50 per share during the period
commencing on the date of this Prospectus and ending on the fifth anniversary of
such date, except for the 300,000 Warrants sold as part of the Private
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Placement which expire on the third anniversary of such date (and which have an
exercise price of $5.00 per share). The exercise prices are subject to
adjustment in certain circumstances as defined herein.
EXERCISE
Each holder of a Warrant may exercise such Warrant, in whole or in part, by
surrendering the certificate evidencing such Warrant, with the form of election
to purchase attached to such certificate properly completed and executed,
together with payment of the exercise price and any required transfer taxes, to
the Company. No Warrants may be exercised unless at the time of exercise there
is a current prospectus encompassing the shares of Common Stock issuable upon
the exercise of such Warrants under an effective registration statement. The
Company will endeavor to maintain an effective registration statement, including
such current prospectus, so long as any of the exercisable Warrants remain
outstanding. While it is the Company's intention to comply with this intention,
there can be no assurance that it will be able to do so.
The exercise price and any required transfer taxes will be payable in cash
or by certified or official bank check payable to the Company. If fewer than all
of the Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Warrants. Certificates
evidencing the Warrants may be exchanged for new certificates of different
denominations by presenting the Warrant certificate at the offices of the
Company's Warrant Agent.
ADJUSTMENTS
The exercise price and the number of shares of Common Stock purchasable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events including stock dividends, reclassifications, reorganizations,
consolidations, mergers, and certain issuances of Common Stock and securities
convertible into or exchangeable for Common Stock excluding the Company's
2,100,000 shares of Common Stock issued to TDA and Mr. Andrews, the 3,000,000,
300,000 and 250,000 shares of the Company's Common Stock to be issued to TDA,
Mr. Helzer and Mr. Howard, respectively, any issuances of the Company's
securities in connection with the Private Placement, the Public Offering and the
Company's stock option plan. No adjustments in the exercise price will be
required to be made with respect to the Warrants until cumulative adjustments
amount to $.05. In the event of any capital reorganization, certain
reclassifications of the Common Stock, any consolidation or merger involving the
Company (other than (i) a consolidation or merger which does not result in any
reclassification or change in the outstanding shares of Common Stock or (ii) the
Acquisitions or the acquisition of any other business), or sale of the
properties and assets of the Company, as, or substantially as, an entirety to
any other corporation, Warrants will thereupon become exercisable only for the
number of shares of stock or other securities, assets, or cash to which a holder
of the number of shares of Common Stock of the Company purchasable (at the time
of such reorganization, reclassification, consolidation, merger or sale) upon
exercise of such Warrants would have been entitled upon such reorganization,
reclassification, consolidation, merger or sale.
OTHER RIGHTS
In the event of an adjustment in the number of shares of Common Stock
issuable upon exercise of the Warrants, the Company will not be required to
issue fractional shares of Common Stock upon exercise of the Warrants. In lieu
of fractional shares of Common Stock, there will be paid to the holders of the
Warrants, at the time of such exercise, an amount in cash equal to the same
fraction of the then current market price of a share of Common Stock of the
Company.
Warrantholders do not have voting or any other rights of stockholders of the
Company and are not entitled to dividends, if any.
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REDEMPTION OF WARRANTS
If the market price of the Common Stock shall have averaged at least $10.00
per share for a period of thirty consecutive trading days at any time after the
date of this Prospectus, the Company may redeem the Warrants by paying holders
$.25 per Warrant, provided that notice of such redemption is mailed not later
than 10 days after the end of such period and prescribes a redemption date at
least thirty days thereafter. For these purposes, the market price of the Common
Stock shall mean the closing per share bid price, as reported by the NASDAQ
SmallCap, so long as the Common Stock is quoted on the NASDAQ SmallCap, and if
the Common Stock is listed on a national securities exchange or on the
NASDAQ-NMS system, shall be determined by the closing sales price on the primary
exchange on which the Common Stock is traded or the NASDAQ-NMS if such shares
are not listed on an exchange. Warrantholders will be entitled to exercise
Warrants at any time up to the business day next preceding the redemption date.
The Warrants are not redeemable prior to the first anniversary of the date of
this Prospectus without the written consent of the Underwriter. Additionally,
the Warrants may not be redeemed unless at the time of redemption there is a
current prospectus encompassing the shares of Common Stock issuable upon
exercise of such Warrants under a registration statement effective and current
under the Securities Act and the "Blue Sky" laws then applicable to the holders
of the warrants.
WARRANT AGREEMENT
Upon the closing of the Public Offering and consummation of the
Acquisitions, the Company will enter into a warrant agreement ("Warrant
Agreement") with Continental Stock Transfer & Trust Company, as warrant agent
("Warrant Agent"). It is anticipated that the Warrant Agreement will contain
provisions permitting the Company and the Warrant Agent, without the consent of
the Warrant holders, to supplement or amend the Warrant Agreement in order to
cure any ambiguity or defect or to make any other provisions in regard to
matters or questions arising thereunder that the Company and the Warrant Agent
may deem necessary or desirable and that does not adversely affect the interests
of the Warrantholders.
UNDERWRITER'S WARRANT AND STOCK WARRANTS
The Company has agreed to grant the Underwriter a Warrant and Stock Warrants
entitling the holders thereof to purchase an aggregate of 500,000 shares of the
Company's Common Stock. See "Underwriting."
DIVIDEND POLICY
The Company has not paid dividends to date. The payment of dividends, if
any, in the future is within the discretion of the Board of Directors. The
payment of dividends, if any, in the future will depend upon the Company's
earnings, capital requirements and financial conditions and other relevant
factors. The Company's Board of Directors does not presently intend to declare
any dividends in the foreseeable future but instead intends to retain all
earnings, if any, for use in the Company's, Eagle's, JEH Eagle's and MSI Eagle's
business operations.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent for the Company's Common Stock and the Warrant Agent for
the Company's Warrants is Continental Stock Transfer & Trust Company, New York,
New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Public Offering and consummation of the Acquisitions,
the Company will have 8,450,000 shares of Common Stock outstanding (8,825,000
shares if the Underwriter's Overallotment Option is exercised in full). All of
the shares of Common Stock sold in the Public Offering will be freely tradeable
without restriction or further registration under the Securities Act, except for
any shares purchased by an "affiliate" of the Company which will be subject to
certain limitations of Rule 144 adopted under the Securities Act.
2,100,000 of the 2,400,000 presently outstanding shares of Common Stock and
the aggregate of 3,550,000 shares of Common Stock to be issued to TDA, James E.
Helzer and Gary L. Howard will be restricted securities and will be subject to
the resale limitations provided for in Rule 144. Under Rule 144, as currently in
effect, subject to the satisfaction of certain other conditions, a person,
including an affiliate of the Company, which has owned restricted shares of
Common Stock beneficially for at least one year, is entitled to sell, within any
three month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class or, if the Common Stock
is quoted on an exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. A non-affiliate which has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and which has beneficially owned such shares for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above. Rule 144(d)(1) states as follows: "GENERAL RULE. A
minimum of one year must elapse between the later of the date of the acquisition
of the securities from the issuer or from an affiliate of the issuer, and any
resale of such securities in reliance on this rule for the account of either the
acquiror or any subsequent holder of those securities. If the acquiror takes the
securities by purchase, the one-year period shall not begin until the full
purchase price or other consideration is paid or given by the person acquiring
the securities from the issuer or from an affiliate of the issuer."
The holders of 300,000 shares of the Company's Common Stock have agreed not
to sell, for a period of fifteen months from the date of this Prospectus, any
shares of the Company's Common Stock without the prior written consent of the
Underwriter. The Underwriter does not anticipate that it will release any of the
foregoing stockholders except under extraordinary circumstances that are
presently not forseeable. TDA, the holder of 5,000,000 shares of the Company's
Common Stock (including the 3,000,000 shares of the Company's Common Stock to be
issued in connection with the Acquisitions), James E. Helzer and Gary L. Howard
(who are to be issued an aggregate of 550,000 shares of the Company's Common
Stock) and, Messrs. Fields and Friedman have agreed, for a period of two years
from the date of this Prospectus, not to dispose of any shares of the Company's
Common Stock without the possibility of earlier release.
Furthermore, in connection with the Public Offering, the Underwriter has
been granted warrants to purchase up to 250,000 shares of Common Stock and up to
250,000 Warrants to purchase up to an additional 250,000 shares of Common Stock.
The holders thereof have the right to require the Company to register said
Underwriter's Warrants and/or the underlying securities under certain
circumstances. In addition, the holders of said warrants have the right to
"piggy-back" said Underwriter's Warrants and/or underlying securities on
registration statements of the Company. Any exercise of such registration rights
may result in dilution in the interest of the Company's stockholders, may hinder
efforts by the Company to arrange future financing and may have an adverse
effect on the market price for the Company's securities. See "Underwriting."
Prior to the Public Offering, there has been no market for any securities of
the Company. The effect, if any, of public sales of any of the Company's
securities by present securityholders or the availability of such securities for
future sale at prevailing market prices cannot be predicted. Nevertheless, the
possibility that substantial amounts of the Company's securities may be resold
in the public market may adversely affect prevailing market prices for the
Company's securities, if any such market should develop.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Barron
Chase Securities, Inc. (the "Underwriter") has agreed to purchase from the
Company an aggregate of 2,500,000 Shares and 2,500,000 Warrants (collectively,
the "Securities"). The Securities are offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel and certain other
conditions. The Underwriter is committed to purchase all Securities offered by
this Prospectus, if any are purchased (other than those covered by the
Overallotment Option described below).
Each purchaser of shares of the Company's Common stock in the Public
Offering will be entitled, but not required, to purchase an equal number of
warrants.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Securities to the public at the offering prices set forth
on the cover page of this Prospectus. The Underwriter has advised the Company
that the Underwriter proposes to offer the Securities through members of the
National Association of Securities Dealers, Inc. ("NASD"), and may allow
concessions, in its discretion, to certain selected dealers who are members of
the NASD and who agree to sell the Securities in conformity with the NASD's
Conduct Rules. Such concessions will not exceed the amount of the underwriting
discount that the Underwriter is to receive.
The Company has granted to the Underwriter an Overallotment Option,
exercisable for 45 days from the Effective Date, to purchase up to an additional
375,000 Shares and an additional 375,000 Warrants at the respective public
offering prices less the Underwriting Discounts set forth on the cover page of
this Prospectus. The Underwriter may exercise this option solely to cover
overallotments in the sale of the Securities being offered by this Prospectus.
Officers and directors of the Company may introduce the Underwriter to
persons to consider the Public Offering and to purchase Securities either
through the Underwriter or through participating dealers. In this connection, no
Securities have been reserved for those purchases and officers and directors
will not receive any commissions or any other compensation.
The Company has advised the Underwriter that it may purchase, and the
Underwriter has advised the Company that it will permit such, up to 100,000
shares of the Common Stock and a like number of the Warrants offered hereby.
The Company has agreed to pay to the Underwriter a commission of ten percent
(10%) of the gross proceeds of the Public Offering (the "Underwriting
Discount"), including the gross proceeds from the sale of the Overallotment
Option, if exercised. In addition, the Company has agreed to pay to the
Underwriter the Non-Accountable Expense Allowance of three percent (3%) of the
gross proceeds of the Public Offering, including proceeds from any Securities
purchased pursuant to the Overallotment Option. The Company has paid to the
Underwriter a $50,000 advance in respect of the Non-Accountable Expense
Allowance. The Underwriter's expenses in excess of the Non-Accountable Expense
Allowance will be paid by the Underwriter. To the extent that the expenses of
the Underwriter are less than the amount of the Non-Accountable Expense
Allowance received, such excess shall be deemed to be additional compensation to
the Underwriter. The Underwriter has informed the Company that it does not
expect sales to discretionary accounts to exceed five percent (5%) of the total
number of Securities offered by the Company hereby.
The Company has agreed to engage the Underwriter as a financial advisor at a
fee of $108,000, which is payable to the Underwriter on the Closing Date.
Pursuant to the terms of a financial advisory agreement, the Underwriter has
agreed to provide, at the Company's request, advice to the Company concerning
potential merger and acquisition and financing proposals, whether by public
financing or otherwise. The Company has also agreed that if the Company
participates in any transaction which the Underwriter has introduced in writing
to the Company during a period of five years after the Closing
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(including mergers, acquisitions, joint ventures and any other business
transaction for the Company introduced in writing by the Underwriter), and which
is consummated after the Closing (including an acquisition of assets or stock
for which it pays, in whole or in part, with shares or other securities of the
Company), or if the Company retains the services of the Underwriter in
connection with any such transaction (an "Introduced Consummated Transaction"),
then the Company will pay for the Underwriter's services an amount equal to 5%
of up to one million dollars of value paid or received in the transaction, 4% of
the next million of such value, 3% of the next million of such value, 2% of the
next million of such value, and 1% of the next million dollars of such value and
of all such value above $4,000,000.
Prior to the Public Offering, there has been no public market for the shares
of Common Stock or the Warrants. Consequently, the initial public offering
prices for the Securities, and the terms of the Warrants (including the exercise
price of the Warrants), have been determined by negotiation between the Company
and the Underwriter. Among the factors considered in determining the public
offering prices were the history of, and the prospects for, the Company's
business, an assessment of the Company's management, the Company's past and
present operations, its development and the general condition of the securities
market at the time of the Public Offering. The initial public offering prices do
not necessarily bear any relationship to the Company's assets, book value,
earnings, or other established criteria of value. Such prices are subject to
change as a result of market conditions and other factors, and no assurance can
be given that a public market for the Shares or the Warrants will develop after
the Closing, or if a public market in fact develops, that such public market
will be sustained, or that the Shares or the Warrants can be resold at any time
at the offering or any other price. See "Risk Factors."
At the Closing, the Company will issue to the Underwriter and/or persons
related to the Underwriter, for nominal consideration, the Common Stock
Underwriter Warrants to purchase up to 250,000 shares of Common Stock (the
"Underlying Shares") and the Warrant Underwriter Warrants to purchase up to
250,000 Warrants (the "Underlying Warrants"). The Common Stock Underwriter
Warrants, the Warrant Underwriter Warrants and the Underlying Warrants are
sometimes referred to in this Prospectus as the "Underwriter Warrants." The
Common Stock Underwriter Warrants and the Warrant Underwriter Warrants will be
exercisable for a five-year period commencing on the Effective Date. The initial
exercise price of each Common Stock Underwriter Warrant shall be $8.25 per
Underlying Share (165% of the public offering price). The initial exercise price
of each Warrant Underwriter Warrant shall be $.20625 per Underlying Warrant
(165% of the public offering price). Each Underlying Warrant will be exercisable
for a five-year period commencing on the Effective Date to purchase one share of
Common Stock at an exercise price of $8.25 per share of Common Stock. The
Underwriter Warrants will be restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the Effective Date by the
holder, except (i) to officers of the Underwriter and members of the selling
group and officers and partners thereof; (ii) by will; or (iii) by operation of
law.
The Common Stock Underwriter Warrants and the Warrant Underwriter Warrants
contain provisions providing for appropriate adjustment in the event of any
merger, consolidation, recapitalization, reclassification, stock dividend, stock
split or similar transaction. The Underwriter Warrants contain net issuance
provisions permitting the holders thereof to elect to exercise the Underwriter
Warrants in whole or in part and instruct the Company to withhold from the
securities issuable upon exercise, a number of securities, valued at the current
fair market value on the date of exercise, to pay the exercise price. Such net
exercise provision has the effect of requiring the Company to issue shares of
Common Stock without a corresponding increase in capital. A net exercise of the
Underwriter Warrants will have the same dilutive effect on the interests of the
Company's stockholders as will a cash exercise. The Underwriter Warrants do not
entitle the holders thereof to any rights as a stockholder of the Company until
such Underwriter Warrants are exercised and shares of Common Stock are purchased
thereunder.
The Underwriter Warrants and the securities issuable thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. The Company has agreed that if it shall
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cause a post-effective amendment, a new registration statement, or similar
offering document to be filed with the Commission, the holders shall have the
right, for seven (7) years from the Effective Date, to include in such
registration statement or offering statement the Underwriter Warrants and/or the
securities issuable upon their exercise at no expense to the holders.
Additionally, the Company has agreed that, upon request by the holders of 50% or
more of the Underwriter Warrants during the period commencing one year from the
Effective Date and expiring four years thereafter, the Company will, under
certain circumstances, register the Underwriter Warrants and/or any of the
securities issuable upon their exercise.
In order to facilitate the offering of the Common Stock and Warrants, the
Underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock and Warrants. Specifically, the Underwriter
may overallot in connection with the Public Offering, creating a short position
in the Common Stock and Warrants for its own account. In addition, to cover
overallotments or to stabilize the price of the Common Stock and Warrant, the
Underwriter may bid for, and purchase, shares of Common Stock and Warrants in
the open market. Finally, the Underwriter may reclaim selling concessions
allowed to a dealer for distributing the Common Stock and Warrants in the Public
Offering, if the Underwriter repurchases previously distributed Common Stock or
Warrants in transactions to cover the Underwriter's short position in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock and Warrants above independent
market levels. The Underwriter is not required to engage in these activities,
and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriter against any costs or
liabilities incurred by the Underwriter by reason of misstatements or omissions
to state material facts in connection with the statements made in the
Registration Statement filed by the Company with the Commission under the
Securities Act (together with all amendments and exhibits thereto, the
"Registration Statement") and this Prospectus. The Underwriter has in turn
agreed to indemnify the Company against any costs or liabilities by reason of
misstatements or omissions to state material facts in connection with the
statements made in the Registration Statement and this Prospectus, based on
information relating to the Underwriter and furnished in writing by the
Underwriter. To the extent that these provisions may purport to provide
exculpation from possible liabilities arising under the federal securities laws,
in the opinion of the Commission, such indemnification is contrary to public
policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
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SELLING SECURITYHOLDERS
Concurrently with the Public Offering, 300,000 shares of Common Stock
underlying Warrants sold in the Company's Private Placement have been registered
for immediate resale. The Company will not receive any proceeds from sales of
the shares of the Company's Common Stock by the Selling Securityholders. To the
best of the Company's knowledge, none of the holders of such securities or their
affiliates has ever held any position or office with the Company or had any
other material relationship with the Company. The holders of such securities
have agreed not to sell, transfer, hypothecate or otherwise dispose of, for a
period of fifteen months from the date of this Prospectus, an aggregate of
300,000 shares of Common Stock and 300,000 Warrants and the 300,000 shares of
Common Stock underlying said Warrants without the prior written consent of the
Underwriter.
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LEGAL MATTERS
The validity of the issuance of the securities offered in the Public
Offering will be passed upon for the Company by Gusrae, Kaplan & Bruno, New
York, New York. Certain legal matters in connection with the Public Offering
will be passed upon for the Underwriter by David A. Carter, P.A., Boca Raton,
Florida.
EXPERTS
The balance sheets of the Company as of June 30, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for the years ended June 30, 1998 and 1997 and the period May 1,
1996 (inception) to June 30, 1996 appearing in this Prospectus and Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein and has been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The balance sheets of Eagle Supply, Inc. as of June 30, 1998 and 1997 and
the related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended June 30, 1998 appearing in
this Prospectus and Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and has been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The balance sheet of JEH/Eagle Supply, Inc. as of June 30, 1998 and the
related consolidated statement of operations, shareholder's equity and cash
flows for the year ended June 30, 1998 appearing in this Prospectus and
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
has been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The balance sheets of the JEH Company for the six months ended June 30, 1997
and years ended December 31, 1996 and 1995 and the related statements of
operations, retained earnings and cash flows for the six months ended June 30,
1997 and each of the years in the two year period ended December 31, 1996
appearing in this Prospectus and Registration Statement have been audited by
Waters, Murray & Associates, independent auditors, as set forth in their report
thereon appearing elsewhere herein and has been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The balance sheets of Masonry Supply, Inc. as of October 21, 1998, June 30,
1998 and 1997 and the related consolidated statements of operations, equity and
cash flows for the period July 1, 1998 to October 21, 1998 and the three years
ended June 30, 1998 appearing in this Prospectus and Registration Statement have
been audited by Waters, Murray & Associates, independent auditors, as set forth
in their reports thereon appearing elsewhere herein and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Washington, D.C. office of the Commission a
Registration Statement under the Securities Act with respect to the Securities
offered by this Prospectus. This Prospectus does not contain all the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and this offering, reference is made to
the Registration Statement, including the exhibits filed therewith, which may be
inspected without charge or copies made at prescribed rates from the Commission
at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 or at
its Northeast Regional Office located at Seven World Trade Center, New York, New
York 10048. Statements contained in the Prospectus as to the contents of any
contract or other document are not necessarily complete and reference is made to
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each such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
Upon effectiveness of the Registration Statement, of which this Prospectus
forms a part, the Company will be subject to the reporting requirements of the
Exchange Act and in accordance therewith will file reports and other information
with the Commission. Reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at the following addresses: Northeast Regional
Office, Seven World Trade Center, New York, New York 10048; and Midwest Regional
Office, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a website that contains reports, proxies and information
statements and other information regarding issuers that file electronically with
the Commission. The Commission's website is located at http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
EAGLE SUPPLY GROUP, INC.
INDEPENDENT AUDITORS' REPORT.............................................................................. F-4
Balance Sheets at June 30, 1998 and 1997.................................................................. F-5
Statements of Operations for the Years Ended June 30, 1998 and 1997 and the period May 1, 1996 (inception)
to June 30, 1996........................................................................................ F-6
Statements of Shareholders' (Deficiency) Equity for the Years Ended June 30, 1998 and 1997 and the period
May 1, 1996 (inception) to June 30, 1996................................................................ F-7
Statements of Cash Flows for the Years Ended June 30, 1998 and 1997 and the period May 1, 1996 (inception)
to June 30, 1996........................................................................................ F-8
Notes to Financial Statements for the Years Ended June 30, 1998 and 1997 and the period May 1, 1996
(inception) to June 30, 1996............................................................................ F-9
Unaudited Balance Sheet at October 31, 1998............................................................... F-13
Unaudited Statements of Operations and Deficiency for the Four Months Ended October 31, 1998 and 1997..... F-14
Unaudited Statements of Cash Flows for the Four Months Ended October 31, 1998 and 1997.................... F-15
Notes to Unaudited Financial Statements for the Four Months Ended October 31, 1998 and 1997............... F-16
EAGLE SUPPLY, INC.
INDEPENDENT AUDITORS' REPORT.............................................................................. F-20
Balance Sheets at June 30, 1998 and 1997.................................................................. F-21
Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996................................. F-22
Statements of Shareholder's (Deficiency) Equity for the Years Ended June 30, 1998, 1997 and 1996.......... F-23
Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996................................. F-24
Notes to Financial Statements for the Years Ended June 30, 1998, 1997 and 1996............................ F-25
Unaudited Balance Sheet at October 31, 1998............................................................... F-32
Unaudited Statements of Operations and Retained Earnings for the Four Months Ended October 31, 1998 and
1997.................................................................................................... F-33
Unaudited Statements of Cash Flows for the Four Months Ended October 31, 1998 and 1997.................... F-34
Notes to Unaudited Financial Statements for the Four Months Ended October 31, 1998 and 1997............... F-35
JEH/EAGLE SUPPLY, INC.
INDEPENDENT AUDITORS' REPORT.............................................................................. F-37
Balance Sheet at June 30, 1998............................................................................ F-38
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Statement of Operations for the Year Ended June 30, 1998.................................................. F-39
Statement of Shareholder's Equity for the Year Ended June 30, 1998........................................ F-40
Statement of Cash Flows for the Year Ended June 30, 1998.................................................. F-41
Notes to Financial Statements for the Year Ended June 30, 1998............................................ F-42
Unaudited Balance Sheet at October 31, 1998............................................................... F-49
Unaudited Statements of Operations and Retained Earnings for the Four Months Ended October 31, 1998 and
1997.................................................................................................... F-50
Unaudited Statements of Cash Flows for the Four Months Ended October 31, 1998 and 1997.................... F-51
Notes to Unaudited Financial Statements for the Four Months Ended October 31, 1998 and 1997............... F-52
JEH COMPANY, INC.
INDEPENDENT AUDITORS' REPORT.............................................................................. F-54
Balance Sheet at June 30, 1997............................................................................ F-55
Statements of Operations and Retained Earnings for the Six Months Ended June 30, 1997 and Unaudited June
30, 1996................................................................................................ F-56
Statements of Cash Flows for the Six Months Ended June 30, 1997 and Unaudited June 30, 1996............... F-57
Notes to Financial Statements for the Six Months Ended June 30, 1997 and Unaudited June 30, 1996.......... F-58
INDEPENDENT AUDITORS' REPORT F-65
Balance Sheet at December 31, 1996........................................................................ F-66
Statements of Operations and Retained Earnings for the Years Ended December 31, 1996 and 1995............. F-67
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995................................... F-68
Notes to Financial Statements for the Years Ended December 31, 1996 and 1995.............................. F-69
MASONRY SUPPLY, INC.
INDEPENDENT AUDITORS' REPORT.............................................................................. F-76
Balance Sheet at October 21, 1998......................................................................... F-77
Statements of Operations and Retained Earnings for the Periods July 1, 1998 through October 21, 1998 and
Unaudited July 1, 1997 through October 31, 1997......................................................... F-78
Statements of Cash Flows for the Periods July 1, 1998 through October 21, 1998 and Unaudited July 1, 1997
through October 31, 1997................................................................................ F-79
Notes to Financial Statements for the Periods July 1, 1998 through October 21, 1998 and Unaudited July 1,
1997 through October 31, 1997........................................................................... F-80
INDEPENDENT AUDITORS' REPORT.............................................................................. F-85
Balance Sheets at June 30, 1998 and 1997.................................................................. F-86
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Statements of Operations and Retained Earnings for the Years Ended June 30, 1998, 1997 and 1996........... F-87
Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996................................. F-88
Notes to Financial Statements for the Years Ended June 30, 1998, 1997 and 1996............................ F-89
MSI/EAGLE SUPPLY, INC.
Unaudited Balance Sheet at October 31, 1998............................................................... F-94
Unaudited Statement of Operations and Retained Earnings for the Period October 22, 1998 to October 31,
1998.................................................................................................... F-95
Unaudited Statement of Cash Flows for the Period October 22, 1998 to October 31, 1998..................... F-96
Notes to Unaudited Financial Statements for the Period October 22, 1998 to October 31, 1998............... F-97
</TABLE>
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Eagle Supply Group, Inc.
We have audited the accompanying balance sheets of Eagle Supply Group, Inc.
(the "Company"), a majority-owned subsidiary of TDA Industries, Inc., as of June
30, 1998 and 1997, and the related statements of operations, shareholders'
(deficiency) equity and cash flows for the years ended June 30, 1998 and 1997
and the period May 1, 1996 (inception) to June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Eagle Supply Group, Inc. as of June 30, 1998
and 1997, and the results of its operations and its cash flows for the years
ended June 30, 1998 and 1997 and the period May 1, 1996 (inception) to June 30,
1996, in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
September 18, 1998
New York, New York
F-4
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
BALANCE SHEET
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................................................... $ 51,027 $ 5,366
Federal and state taxes due from parent................................................ 7,000 --
Deferred registration costs (Note 6)................................................... 223,488 --
---------- -----------
$ 281,515 $ 5,366
---------- -----------
---------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities......................................... $ 69,500 $ 82,289
Notes payable--shareholders (Note 5)................................................... 300,000 --
---------- -----------
Total current liabilities............................................................ 369,500 82,289
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)
SHAREHOLDERS' DEFICIENCY (Note 4):
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, 2,400,000
issued and outstanding............................................................... 240 240
Additional paid-in capital............................................................. 293,865 293,865
Deficit................................................................................ (382,090) (371,028)
---------- -----------
Total shareholders' deficiency....................................................... (87,985) (76,923)
---------- -----------
$ 281,515 $ 5,366
---------- -----------
---------- -----------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997 AND THE PERIOD
MAY 1, 1996 (INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
ADMINISTRATIVE EXPENSES...................................................... $ 437 $ 675 $ --
---------- ----------- ----------
LOSS FROM OPERATIONS......................................................... (437) (675) --
---------- ----------- ----------
OTHER EXPENSES:
Interest expense........................................................... (17,625) -- --
Registration costs......................................................... -- (370,353) --
---------- ----------- ----------
(17,625) (370,353) --
---------- ----------- ----------
LOSS BEFORE BENEFIT FOR INCOME TAXES......................................... (18,062) (371,028)
BENEFIT FOR INCOME TAXES..................................................... (7,000) -- --
---------- ----------- ----------
NET LOSS..................................................................... $ (11,062) $ (371,028) $ --
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997 AND THE PERIOD
MAY 1, 1996 (INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL
----------------------- PAID-IN
SHARES AMOUNT CAPITAL DEFICIENCY TOTAL
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Initial capitalization............................. 2,100,000 $ 210 $ -- $ -- $ 210
Proceeds from private placement, net of related
expenses......................................... 300,000 30 293,865 -- 293,895
---------- ----- ---------- ----------- -----------
BALANCE, JUNE 30, 1996............................... 2,400,000 240 293,865 -- 294,105
Net loss........................................... -- -- -- (371,028) (371,028)
---------- ----- ---------- ----------- -----------
BALANCE, JUNE 30, 1997............................... 2,400,000 240 293,865 (371,028) (76,923)
Net loss........................................... -- -- -- (11,062) (11,062)
---------- ----- ---------- ----------- -----------
BALANCE, JUNE 30, 1998............................... 2,400,000 $ 240 $ 293,865 $ (382,090) $ (87,985)
---------- ----- ---------- ----------- -----------
---------- ----- ---------- ----------- -----------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997 AND THE PERIOD
MAY 1, 1996 (INCEPTION) TO JUNE 30, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................... $ (11,062) $ (371,028) $ --
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in operating assets and liabilities:
(Decrease) increase in accrued expenses and other current
liabilities.......................................................... (12,789) 82,289 --
Increase in federal and state taxes due from Parent.................... (7,000) -- --
---------- ----------- ----------
Net cash used in operating activities................................ (30,851) (288,739) --
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable--shareholders...................... 300,000 -- --
Increase in deferred registration costs.................................... (223,488) -- --
(Repayments) proceeds of loan payable to shareholder....................... -- (6,105) 6,105
Proceeds from initial capitalization....................................... -- -- 210
Proceeds from private placement............................................ -- -- 300,000
Decrease (increase) in stock subscriptions receivable...................... -- 56,250 (56,250)
Costs associated with private placement.................................... -- -- (6,105)
---------- ----------- ----------
Net cash provided by financing activities............................ 76,512 50,145 243,960
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH.............................................. 45,661 (238,594) 243,960
CASH, BEGINNING OF YEAR/PERIOD............................................... 5,366 243,960 --
---------- ----------- ----------
CASH, END OF YEAR/PERIOD..................................................... $ 51,027 $ 5,366 $ 243,960
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
See notes to financial statements.
F-8
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1997 AND PERIOD
MAY 1, 1996 (INCEPTION) TO JUNE 30, 1996
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION--Eagle Supply Group, Inc. (the "Company") is a
majority-owned subsidiary of TDA Industries, Inc. ("TDA" or the "Parent") and
was organized to acquire, integrate and operate seasoned, privately-held
companies which distribute products to or manufacture products for the building/
construction industry.
The Company is dependent on its ability to raise funds through debt or
equity financing in order to meet its obligations and accomplish its acquisition
objectives.
TDA has incurred certain administrative expenses in connection with the
Company's limited activities. Such expenses have not been charged to the Company
and management believes that the aggregate of such expenses is not significant
to the Company's results of operations or financial condition.
ACQUISITIONS--Upon completion of the Offering described in Note 6, the
Company will acquire all of the issued and outstanding common shares of Eagle
Supply, Inc. ("Eagle"), JEH/Eagle Supply, Inc. ("JEH Eagle") and MSI/Eagle
Supply, Inc. ("MSI Eagle") (the "Acquisitions") from TDA for consideration
consisting of 3,000,000 of the Company's common shares. The Acquisitions will be
accounted for as the combining of four entities under common control, similar to
a pooling of interests, with the net assets of Eagle, JEH Eagle and MSI Eagle
recorded at historical carryover values. The 3,000,000 common shares of the
Company to be issued to TDA will be recorded at Eagle's, JEH Eagle's and MSI
Eagle's historical net book values at the date of acquisition. Accordingly, this
transaction will not result in any revaluation of Eagle's, JEH Eagle's or MSI
Eagle's assets or the creation of any goodwill. Upon the consummation of the
Acquisitions, Eagle, JEH Eagle and MSI Eagle will become wholly-owned
subsidiaries of the Company and will constitute the sole business operations of
the Company until such time, if any, as the Company consummates additional
acquisitions. As a result of the Acquisitions, the financial statements of the
Company, Eagle, JEH Eagle and MSI Eagle will be combined. The financial
statements of Eagle will be included in the consolidated financial statements
for all periods presented, the financial statements of JEH Eagle will be
included in the consolidated financial statements for periods subsequent to the
acquisition of JEH Company, Inc. by JEH Eagle on July 1, 1997 and the financial
statements of MSI Eagle will be included in the consolidated financial
statements for periods subsequent to the acquisition of Masonry Supply, Inc. by
MSI Eagle on October 22, 1998. Eagle, JEH Eagle and MSI Eagle operate in a
single industry segment.
INCOME TAXES--The Company is included in the consolidated Federal and state
income tax returns of its Parent. Income taxes are calculated on a separate
return filing basis.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-9
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998 AND 1997 AND PERIOD
MAY 1, 1996 (INCEPTION) TO JUNE 30, 1996
2. TRANSACTIONS WITH PARENT AND AFFILIATED COMPANIES
During the period ended June 30, 1996, TDA advanced $6,105 to the Company
which was used by the Company to pay certain costs and expenses related to its
private placement in June 1996 described in Note 6. This advance was repaid to
TDA in July 1996.
3. CONTEMPLATED TRANSACTIONS WITH RELATED PARTIES
TDA will provide office space and administrative services to the Company at
its offices in New York City pursuant to an administrative services agreement to
be entered into by the Company and TDA upon the closing of the Offering
described in Note 6 and consummation of the Acquisitions described in Note 1.
The administrative services agreement will be on a month-to-month basis, and the
fee payable by the Company to TDA for such services will be $3,000 per month.
Further, TDA and JEH Eagle have entered into an agreement pursuant to which TDA
provides JEH Eagle with certain management services. This agreement is for a
period of five years and commenced in July 1997. The fee payable to TDA for such
services, to commence upon the completion of the Offering and the consummation
of the Acquisitions, is $3,000 per month.
Eagle operates a substantial portion of its business from facilities which
it leases from a subsidiary of TDA on a month-to-month basis. Upon completion of
the Offering and the consummation of the Acquisitions, Eagle and TDA intend to
enter into ten-year leases for such facilities.
The Chief Executive Officer and Chairman of the Board of Directors of the
Company is an officer and a director of TDA, Eagle, JEH Eagle and MSI Eagle.
Additionally, the Executive Vice President, Secretary, Treasurer and a director
of the Company is an officer and a director of TDA, Eagle, JEH Eagle and MSI
Eagle. A director nominee of the Company is also a director of TDA.
The Company and Eagle have entered into employment agreements with their
Chief Executive Officer and their Executive Vice President, Secretary and
Treasurer, to become effective upon closing of the Offering and consummation of
the Acquisitions, for a five-year period at annual salaries of $200,000 each,
subject to annual increases and bonuses as may be determined by the Board of
Directors. Further, in July 1997, JEH Eagle entered into five-year employment
agreements with such officers at annual salaries of $60,000 each. The payment of
such salaries by JEH Eagle shall commence upon completion of the Offering and
the consummation of the Acquisitions. The employment agreements provide for,
among other things, continued payments of salary and benefits, under certain
conditions.
4. SHAREHOLDERS' (DEFICIENCY) EQUITY
INITIAL CAPITALIZATION--In May 1996, the Company approved the issuance of
2,000,000 of its common shares to TDA (a founding shareholder) for a
subscription price of $200 and 100,000 common shares to another founding
shareholder and director for a subscription price of $10.
On December 12, 1997 the Company increased its authorized number of shares
from 17,000,000 to 27,500,000. The number of preferred shares was increased from
2,000,000 to 2,500,000 and the number of common shares was increased from
15,000,000 to 25,000,000. There was no change in the par value per share.
F-10
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998 AND 1997 AND PERIOD
MAY 1, 1996 (INCEPTION) TO JUNE 30, 1996
4. SHAREHOLDERS' (DEFICIENCY) EQUITY (CONTINUED)
PREFERRED SHARES--The preferred shares may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by shareholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions.
COMMON SHARES--Holders of common shares are entitled to one vote for each
share held of record on each matter submitted to a vote of shareholders. There
is no cumulative voting for election of directors. Subject to the prior rights
of any series of preferred shares which may from time to time be outstanding,
holders of common shares are entitled to receive dividends when and if declared
by the Board of Directors out of funds legally available thereof and, upon the
liquidation, dissolution or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities and payment of
accrued dividends and liquidation preferences on the preferred shares, if any.
Holders of common shares have no pre-emptive rights and have no rights to
convert their common shares into any other securities.
WARRANTS--Each warrant (Note 5) entitles the registered holder to purchase
one common share at an exercise price of $5.00 per share (subject to adjustment)
for three years commencing on the date of the Offering, provided that during
such time a current prospectus relating to the common shares is then in effect
and the common shares are qualified for sale or exempt from qualification under
applicable state securities laws. The warrants that will be included in the
Offering are exercisable at $5.50 per share, are transferable separately from
the common shares and are exercisable for five years from the date of the
Offering (Note 6).
STOCK OPTION PLAN--In December 1998, the Board of Directors adopted and
shareholders approved the Company's Stock Option Plan (the "Stock Option Plan").
The Stock Option Plan provides for the grant of options that are intended to
qualify as incentive stock options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code, as amended (the "Code"),
to certain employees, officers and directors. The total number of common shares
for which options may be granted under the Stock Option Plan is 1,000,000 common
shares. Upon the closing of the Offering, the Company intends to grant options
exercisable into 900,000 common shares to various of its employees and certain
of its officers and directors. All of such options will have a term of ten
years. The exercise price of these options will be the price to the public of
the common shares offered in the Offering and will vest at a rate of no more
than 20% per year commencing on the first anniversary of the date of grant.
5. PRIVATE PLACEMENTS
In June 1996, the Company sold an aggregate of 300,000 common shares and
300,000 warrants to private investors for aggregate gross proceeds of $300,000.
In February 1998, the Company borrowed an aggregate of $300,000 pursuant to
promissory notes issued to TDA ($150,000) and two other shareholders of the
Company. The promissory notes provide for interest at the rate of 15% per annum
through June 30, 1998 and 6% per annum thereafter. The promissory notes mature
on the earlier of August 9, 2000 or upon the closing of the Offering described
below.
F-11
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998 AND 1997 AND PERIOD
MAY 1, 1996 (INCEPTION) TO JUNE 30, 1996
5. PRIVATE PLACEMENTS (CONTINUED)
In August 1998, the Company borrowed an additional $100,000 pursuant to a
promissory note issued to TDA. This promissory note provides for interest at the
rate of 6% per annum payable at maturity on the earlier of August 9, 2000 or
upon the closing of the Offering described below.
The proceeds from the issuance in February 1998 and in August 1998 of the
promissory notes are being used to pay certain costs and expenses related to the
Offering.
6. INITIAL PUBLIC OFFERING
In April 1996, the Company signed a letter of intent with an underwriter for
an initial public offering. This offering was not consummated, and the
registration expenses incurred by the Company in connection with the filing of
its registration statement for that offering were expensed in fiscal 1997.
In September 1997, as amended, the Company signed a new letter of intent
with the same underwriter for an initial public offering (the "Offering"). The
Company intends to sell 2,500,000 common shares, par value $.0001 per share, of
the Company and 2,500,000 redeemable common share purchase warrants in the
Offering.
The costs incurred in connection with the Offering will be offset against
the proceeds at the closing.
*****
F-12
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED BALANCE SHEET
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................... $ 35,298
Federal and state taxes due from parent........................................ 9,000
Deferred registration costs (Note 6)........................................... 351,261
---------
$ 395,559
---------
---------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities................................. $ 88,894
Notes payable--shareholders (Note 5)........................................... 400,000
---------
Total current liabilities.................................................. 488,894
---------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)
SHAREHOLDERS' DEFICIENCY (Note 4):
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,
2,400,000 issued and outstanding............................................. 240
Additional paid-in capital..................................................... 293,865
Deficit........................................................................ (387,440)
---------
Total shareholders' deficiency............................................. (93,335)
---------
$ 395,559
---------
---------
</TABLE>
See notes to unaudited financial statements.
F-13
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENTS OF OPERATIONS AND DEFICIENCY
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
INTEREST EXPENSE........................................................................ $ 7,350 $ --
----------- -----------
LOSS BEFORE BENEFIT FOR INCOME TAXES.................................................... (7,350) --
BENEFIT FOR INCOME TAXES................................................................ (2,000) --
----------- -----------
NET LOSS................................................................................ (5,350) --
DEFICIENCY, BEGINNING OF PERIOD......................................................... (382,090) (371,028)
----------- -----------
DEFICIENCY, END OF PERIOD............................................................... $ (387,440) $ (371,028)
----------- -----------
----------- -----------
</TABLE>
See notes to unaudited financial statements.
F-14
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENTS OF CASH FLOWS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $ (5,350) $ --
Adjustments to reconcile net loss to net cash provided by operating activities:
Changes in operating assets and liabilities:
Increase in federal and state taxes due from Parent................................ (2,000) --
Increase in accrued expenses and other current liabilities......................... 19,394 36,695
----------- ----------
Net cash provided by operating activities........................................ 12,044 36,695
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred registration costs................................................ (127,773) (37,992)
Proceeds from issuance of note payable--shareholder.................................... 100,000 --
----------- ----------
Net cash used in financing activities............................................ (27,773) (37,992)
----------- ----------
NET DECREASE IN CASH..................................................................... (15,729) (1,297)
CASH, BEGINNING OF PERIOD................................................................ 51,027 5,366
----------- ----------
CASH, END OF PERIOD...................................................................... $ 35,298 $ 4,069
----------- ----------
----------- ----------
</TABLE>
See notes to unaudited financial statements.
F-15
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements of Eagle Supply Group, Inc. (the "Company"), a
majority-owned subsidiary of TDA Industries, Inc. ("TDA" or the "Parent") have
been prepared by the Company, which is responsible for their integrity and
objectivity, without audit. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for the fair presentation
of financial position, results of operations and cash flows have been included.
These financial statements, which, to the best of management's knowledge and
belief, were prepared in accordance with generally accepted accounting
principles, should be read in conjunction with the financial statements of the
Company for the fiscal years ended June 30, 1998 and 1997 and notes thereto
included elsewhere in this Prospectus. Operating results for the interim period
are not necessarily indicative of results for the entire year.
The Company is dependent on its ability to raise funds through debt or
equity financing in order to meet its obligations and accomplish its acquisition
objectives.
TDA has incurred certain administrative expenses in connection with the
Company's limited activities. Such expenses have not been charged to the Company
and management believes that the aggregate of such expenses is not significant
to the Company's results of operations or financial condition.
2. ACQUISITIONS
Upon completion of the Offering described in Note 6, the Company will
acquire all of the issued and outstanding common shares of Eagle Supply, Inc.
("Eagle"), JEH/Eagle Supply, Inc. ("JEH Eagle") and MSI/Eagle Supply, Inc. ("MSI
Eagle") (the "Acquisitions") from TDA for consideration consisting of 3,000,000
of the Company's common shares. The Acquisitions will be accounted for as the
combining of four entities under common control, similar to a pooling of
interests, with the net assets of Eagle, JEH Eagle and MSI Eagle recorded at
historical carryover values. The 3,000,000 common shares of the Company to be
issued to TDA will be recorded at Eagle's, JEH Eagle's and MSI Eagle's
historical net book values at the date of acquisition. Accordingly, this
transaction will not result in any revaluation of Eagle's, JEH Eagle's or MSI
Eagle's assets or the creation of any goodwill. Upon the consummation of the
Acquisitions, Eagle, JEH Eagle and MSI Eagle will become wholly-owned
subsidiaries of the Company and will constitute the sole business operations of
the Company until such time, if any, as the Company consummates additional
acquisitions. As a result of the Acquisitions, the financial statements of the
Company, Eagle, JEH Eagle and MSI Eagle will be combined. The financial
statements of Eagle will be included in the consolidated financial statements
for all periods presented, the financial statements of JEH Eagle will be
included in the consolidated financial statements for periods subsequent to the
acquisition of JEH Company, Inc. by JEH Eagle on July 1, 1997 and the financial
statements of MSI Eagle will be included in the consolidated financial
statements for periods subsequent to the acquisition of Masonry Supply, Inc. by
MSI Eagle on October 22, 1998. Eagle, JEH Eagle and MSI Eagle operate in a
single industry segment.
3. CONTEMPLATED TRANSACTIONS WITH RELATED PARTIES
TDA will provide office space and administrative services to the Company at
its offices in New York City pursuant to an administrative services agreement to
be entered into by the Company and TDA upon the closing of the Offering
described in Note 6 and consummation of the Acquisitions described in Note 2.
The administrative services agreement will be on a month-to-month basis, and the
fee payable by the
F-16
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
3. CONTEMPLATED TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Company to TDA for such services will be $3,000 per month. Further, TDA and JEH
Eagle have entered into an agreement pursuant to which TDA provides JEH Eagle
with certain management services. This agreement is for a period of five years
and commenced in July 1997. The fee payable to TDA for such services, to
commence upon the completion of the Offering and the consummation of the
Acquisitions, is $3,000 per month.
Eagle operates a substantial portion of its business from facilities which
it leases from a subsidiary of TDA on a month-to-month basis. Upon completion of
the Offering and the consummation of the Acquisitions, Eagle and TDA intend to
enter into ten-year leases for such facilities.
The Chief Executive Officer and Chairman of the Board of Directors of the
Company is an officer and a director of TDA, Eagle, JEH Eagle and MSI Eagle.
Additionally, the Executive Vice President, Secretary, Treasurer and a director
of the Company is an officer and a director of TDA, Eagle, JEH Eagle and MSI
Eagle. A director nominee of the Company is also a director of TDA.
The Company and Eagle have entered into employment agreements with their
Chief Executive Officer and their Executive Vice President, Secretary and
Treasurer, to become effective upon closing of the Offering and consummation of
the Acquisitions, for a five-year period at annual salaries of $200,000 each,
subject to annual increases and bonuses as may be determined by the Board of
Directors. Further, in July 1997, JEH Eagle entered into five-year employment
agreements with such officers at annual salaries of $60,000 each. The payment of
such salaries by JEH Eagle shall commence upon completion of the Offering and
the consummation of the Acquisitions. The employment agreements provide for,
among other things, continued payments of salary and benefits, under certain
conditions.
4. SHAREHOLDERS' DEFICIENCY
INITIAL CAPITALIZATION--In May 1996, the Company approved the issuance of
2,000,000 of its common shares to TDA (a founding shareholder) for a
subscription price of $200 and 100,000 common shares to another founding
shareholder and director for a subscription price of $10.
On December 12, 1997 the Company increased its authorized number of shares
from 17,000,000 to 27,500,000. The number of preferred shares was increased from
2,000,000 to 2,500,000 and the number of common shares was increased from
15,000,000 to 25,000,000. There was no change in the par value per share.
PREFERRED SHARES--The preferred shares may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by shareholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions.
COMMON SHARES--Holders of common shares are entitled to one vote for each
share held of record on each matter submitted to a vote of shareholders. There
is no cumulative voting for election of directors. Subject to the prior rights
of any series of preferred shares which may from time to time be outstanding,
holders of common shares are entitled to receive dividends when and if declared
by the Board of Directors out of funds legally available thereof and, upon the
liquidation, dissolution or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities and payment of
accrued
F-17
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
4. SHAREHOLDERS' DEFICIENCY (CONTINUED)
dividends and liquidation preferences on the preferred shares, if any. Holders
of common shares have no pre-emptive rights and have no rights to convert their
common shares into any other securities.
WARRANTS--Each warrant (Note 5) entitles the registered holder to purchase
one common share at an exercise price of $5.00 per share (subject to adjustment)
for three years commencing on the date of the Offering, provided that during
such time a current prospectus relating to the common shares is then in effect
and the common shares are qualified for sale or exempt from qualification under
applicable state securities laws. The warrants that will be included in the
Offering are exercisable at $5.50 per share, are transferable separately from
the common shares and are exercisable for five years from the date of the
Offering (Note 6).
STOCK OPTION PLAN--In December 1998, the Board of Directors adopted and
shareholders approved the Company's Stock Option Plan (the "Stock Option Plan").
The Stock Option Plan provides for the grant of options that are intended to
qualify as incentive stock options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code, as amended (the "Code"),
to certain employees, officers and directors. The total number of common shares
for which options may be granted under the Stock Option Plan is 1,000,000 common
shares. Upon the closing of the Offering, the Company intends to grant options
exercisable into 900,000 common shares to various of its employees and certain
of its officers and directors. All of such options will have a term of ten
years. The exercise price of these options will be the price to the public of
the common shares offered in the Offering and will vest at a rate of no more
than 20% per year commencing on the first anniversary of the date of grant.
5. PRIVATE PLACEMENTS
In June 1996, the Company sold an aggregate of 300,000 common shares and
300,000 warrants to private investors for aggregate gross proceeds of $300,000.
In February 1998, the Company borrowed an aggregate of $300,000 pursuant to
promissory notes issued to TDA ($150,000) and two other shareholders of the
Company. The promissory notes provide for interest at the rate of 15% per annum
through June 30, 1998 and 6% per annum thereafter. The promissory notes mature
on the earlier of August 9, 2000 or upon the closing of the Offering described
below.
In August 1998, the Company borrowed an additional $100,000 pursuant to a
promissory note issued to TDA. This promissory note provides for interest at the
rate of 6% per annum payable at maturity on the earlier of August 9, 2000 or
upon the closing of the Offering described below.
The proceeds from the issuance in February 1998 and in August 1998 of the
promissory notes are being used to pay certain costs and expenses related to the
Offering.
F-18
<PAGE>
EAGLE SUPPLY GROUP, INC.
(A MAJORITY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
6. INITIAL PUBLIC OFFERING
In April 1996, the Company signed a letter of intent with an underwriter for
an initial public offering. This offering was not consummated, and the
registration costs incurred by the Company in connection with the filing of its
registration statement for that offering were expensed in fiscal 1997.
In September 1997, as amended, the Company signed a new letter of intent
with the same underwriter for an initial public offering (the "Offering"). The
Company intends to sell 2,500,000 common shares, par value $.0001 per share, of
the Company and 2,500,000 redeemable common share purchase warrants in the
Offering.
The costs incurred in connection with the Offering will be offset against
the proceeds at the closing.
*****
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Eagle Supply, Inc.
We have audited the accompanying balance sheets of Eagle Supply, Inc. (the
"Company"), a wholly-owned subsidiary of TDA Industries, Inc., as of June 30,
1998 and 1997, and the related statements of operations, shareholder's
(deficiency) equity and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Eagle Supply, Inc. as of June 30, 1998 and
1997 and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
Deloitte & Touche, LLP
September 9, 1998
Tampa, Florida
F-20
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 603,276 $ 1,029,774
Accounts and notes receivable--trade (net of allowance for doubtful
accounts--1998--$427,000; 1997--$450,000) (Note 3)............................. 8,701,013 8,530,600
Inventories (Note 3)............................................................. 6,209,753 4,505,534
Deferred tax asset (Note 5)...................................................... 182,934 188,558
Other current assets............................................................. 347,508 539,696
------------- -------------
Total current assets........................................................... 16,044,484 14,794,162
IMPROVEMENTS AND EQUIPMENT (net of accumulated depreciation and amortization)
(Notes 2 and 4).................................................................. 1,686,522 1,054,309
------------- -------------
$ 17,731,006 $ 15,848,471
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDER'S (DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 8,330,052 $ 7,763,779
Accrued expenses and other current liabilities................................... 858,941 569,569
Current portion of long-term debt (Note 3)....................................... 600,065 11,000
Federal and state income taxes due to Parent..................................... 240,000 140,000
------------- -------------
Total current liabilities...................................................... 10,029,058 8,484,348
LONG-TERM DEBT (Note 3)............................................................ 9,622,417 7,195,163
DEFERRED TAX LIABILITY (Note 5).................................................... 89,912 70,912
------------- -------------
Total liabilities.............................................................. 19,741,387 15,750,423
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6 and 8)
SHAREHOLDER'S (DEFICIENCY) EQUITY (Note 4):
Common shares, $100 par value:
Authorized--1,500 shares,
Outstanding--593 shares........................................................ 59,300 59,300
Additional paid-in capital....................................................... 1,000,000 1,000,000
Retained earnings................................................................ 553,938 1,593,802
------------- -------------
1,613,238 2,653,102
Less: Due from Parent and affiliated companies (Note 4)........................ (3,623,619) (2,555,054)
------------- -------------
Total shareholder's (deficiency) equity........................................ (2,010,381) 98,048
------------- -------------
$ 17,731,006 $ 15,848,471
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES............................................................ $ 58,497,263 $ 57,575,712 $ 59,262,226
COST OF SALES....................................................... 46,429,897 46,104,588 46,685,356
------------- ------------- -------------
12,067,366 11,471,124 12,576,870
------------- ------------- -------------
OPERATING EXPENSES (including a provision for doubtful accounts of
$245,736, $299,433 and $203,133 in 1998, 1997 and 1996,
respectively (Notes 4, 6, 7 and 9)................................ 10,741,092 9,968,759 9,348,749
DEPRECIATION........................................................ 497,420 593,720 538,831
------------- ------------- -------------
11,238,512 10,562,479 9,887,580
------------- ------------- -------------
INCOME FROM OPERATIONS.............................................. 828,854 908,645 2,689,290
OTHER INCOME (EXPENSE):
Interest income................................................... 25,314 22,217 23,250
Interest expense (Note 3)......................................... (594,032) (599,086) (604,505)
------------- ------------- -------------
(568,718) (576,869) (581,255)
------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES............................ 260,136 331,776 2,108,035
PROVISION FOR INCOME TAXES (Note 5)................................. 100,000 140,000 793,000
------------- ------------- -------------
NET INCOME.......................................................... $ 160,136 $ 191,776 $ 1,315,035
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-22
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
DUE FROM
COMMON SHARES ADDITIONAL PARENT AND
---------------------- PAID-IN RETAINED AFFILIATED
SHARES AMOUNT CAPITAL EARNINGS TOTAL COMPANIES TOTAL
----------- --------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1,
1995........................ 593 $ 59,300 $ 1,000,000 $ 2,433,991 $ 3,493,291 $ (3,872,579) $ (379,288)
Net income.................. -- -- -- 1,315,035 1,315,035 -- 1,315,035
Due from Parent and
affiliated companies--
net....................... -- -- -- -- -- 59,233 59,233
Dividend paid to Parent..... -- -- -- (1,097,000) (1,097,000) -- (1,097,000)
--- --------- ------------ ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1996........ 593 59,300 1,000,000 2,652,026 3,711,326 (3,813,346) (102,020)
Net income.................. -- -- -- 191,776 191,776 -- 191,776
Due from Parent and
affiliated companies--
net....................... -- -- -- -- -- 1,258,292 1,258,292
Dividend paid to Parent..... -- -- -- (1,250,000) (1,250,000) -- (1,250,000)
--- --------- ------------ ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1997........ 593 59,300 1,000,000 1,593,802 2,653,102 (2,555,054) 98,048
Net income.................. -- -- -- 160,136 160,136 -- 150,136
Due from Parent and
affiliated companies--
net....................... -- -- -- -- -- (1,068,565) (1,068,565)
Dividend paid to Parent..... -- -- -- (1,200,000) (1,200,000) -- (1,200,000)
--- --------- ------------ ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1998........ 593 $ 59,300 $ 1,000,000 $ 553,938 $ 1,613,238 $ (3,623,619) $ (2,010,381)
--- --------- ------------ ------------- ------------- ------------- -------------
--- --------- ------------ ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-23
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 160,136 $ 191,776 $ 1,315,035
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization................................ 497,420 593,720 538,831
Deferred income taxes........................................ 24,624 (14,457) 84,017
Decrease in allowance for doubtful accounts.................. (22,206) (15,550) (286,215)
(Gain) loss on sale of equipment............................. (6,740) 710 (975)
Changes in assets and liabilities:
(Increase) decrease in accounts and notes receivable....... (148,207) (223,219) 755,529
(Increase) decrease in inventories......................... (1,704,219) 320,368 (1,306,440)
Decrease (increase) in other current assets................ 192,188 (3,965) (210,264)
Increase (decrease) in accounts payable.................... 566,273 (430,033) 739,801
Increase (decrease) in accrued expenses and other current
liabilities.............................................. 289,372 (244,589) 331,519
Increase (decrease) in federal and state taxes due to
Parent................................................... 100,000 (653,000) 578,000
-------------- -------------- --------------
Net cash (used in) provided by operating activities...... (51,359) (478,239) 2,538,838
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................... (1,169,479) (296,071) (900,498)
Proceeds from sale of equipment................................ 46,586 80,431 37,050
-------------- -------------- --------------
Net cash used in investing activities.................... (1,122,893) (215,640) (863,448)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt......................... 67,701,574 64,165,367 62,358,731
Principal reductions on long-term debt......................... (64,685,255) (62,648,447) (63,496,045)
(Increase) decrease in due from Parent and affiliated
companies--net............................................... (1,068,565) 1,258,292 59,233
Dividend paid to Parent........................................ (1,200,000) (1,250,000) (1,097,000)
-------------- -------------- --------------
Net cash provided by (used in) financing activities...... 747,754 1,525,212 (2,175,081)
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............. (426,498) 831,333 (499,691)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................... 1,029,774 198,441 698,132
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR........................... $ 603,276 $ 1,029,774 $ 198,441
-------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest......................... $ 594,032 $ 599,086 $ 604,505
-------------- -------------- --------------
-------------- -------------- --------------
Income taxes paid to Parent.................................... $ -- $ -- $ 793,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to financial statements.
F-24
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION--The Company is a wholly-owned subsidiary of TDA
Industries, Inc. (the "Parent", "TDA") and is engaged in the wholesale
distribution of roofing supplies and related products utilized primarily in the
construction industry in Florida, Alabama and Mississippi. The Company operates
in a single industry segment.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined by using the last-in, first-out (LIFO) method. If inventories had
been valued at the lower of first-in, first-out (FIFO) cost or market,
inventories would be higher by approximately $520,000, $511,000 and $510,000 for
fiscal 1998, 1997 and 1996, respectively, and income before provision for income
taxes would have increased by approximately $9,000 and $1,000 in fiscal 1998 and
1997, respectively, and decreased by approximately $17,000 in fiscal 1996.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization of improvements
and equipment are provided principally by an accelerated method at various rates
calculated to extinguish the carrying values of the respective assets over their
estimated useful lives.
INCOME TAXES--The Company is included in the consolidated Federal and State
income tax returns of its Parent. Income taxes are calculated on a separate
return filing basis.
CASH AND CASH EQUIVALENTS--The Company considers money market accounts and
bank repurchase agreements to be cash equivalents for the purpose of these
statements.
LONG-LIVED ASSETS--Financial Accounting Standards Board Statement Number
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" requires that they be stated at the lower of the
expected net realizable value or cost. The carrying value of long-lived assets
is periodically reviewed to determine whether impairment exists. The review is
based on comparing the carrying amount of the asset to the undiscounted
estimated cash flows over the remaining useful lives. No impairment is indicated
as of June 30, 1998. The Company has adopted this statement and the impact has
not been significant.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value amounts have
been determined by the Company using available market in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
CASH AND CASH EQUIVALENTS, ACCOUNTS AND NOTES RECEIVABLE, ACCOUNTS PAYABLE
AND ACCRUED EXPENSES-- The carrying amounts of these items are a reasonable
estimate of their fair value.
F-25
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are available.
The carrying amount of this item is a reasonable estimate of fair value.
The fair value estimates presented herein are based on pertinent information
available to management as of June 30, 1998. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
CONCENTRATION OF CREDIT RISK--The financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
accounts receivable. The Company grants credit to customers based on an
evaluation of the customer's financial condition and in certain instances
obtains collateral in the form of liens on both business and personal assets of
its customers. Exposure to losses on receivables is principally dependent on
each customer's financial condition. The Company controls its exposure to credit
risks through credit approvals, credit limits and monitoring procedures and
establishes allowances for anticipated losses.
2. IMPROVEMENTS AND EQUIPMENT
The major classes of improvements and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30, ESTIMATED
-------------------------- USEFUL
1998 1997 LIVES
------------ ------------ -----------
<S> <C> <C> <C>
Automotive equipment.................................................... $ 2,624,701 $ 1,953,036 5 years
Furniture, fixtures and equipment....................................... 1,506,798 2,155,812 5-7 years
Leasehold improvements.................................................. 602,848 597,890 10 years
------------ ------------
4,734,347 4,706,738
Less: Accumulated depreciation and amortization......................... 3,047,825 3,652,429
------------ ------------
$ 1,686,522 $ 1,054,309
------------ ------------
------------ ------------
</TABLE>
F-26
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Revolving credit loan (A)............................................................. $ 9,012,417 $ 6,693,236
Equipment loan (A).................................................................... 710,000 --
Variable rate mortgage (8 1/2% at June 30, 1998), payable in monthly installments
through 1999 (B).................................................................... 500,065 512,927
------------ ------------
10,222,482 7,206,163
Less: Current portion of long-term debt............................................... 600,065 11,000
------------ ------------
$ 9,622,417 $ 7,195,163
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(A) The Company is a party to a loan agreement (last amended December 11, 1998)
which provides for a credit facility in the aggregate amount of $10,900,000,
guaranteed by the Company's Parent. The credit facility consists of a $10
million revolving credit loan and a $900,000 equipment loan. The initial
term of the credit facility matures on October 22, 2003. Obligations under
the credit facility are collateralized by certain current assets of the
Company (aggregating approximately $16,063,000 at June 30, 1998).
Borrowings under the revolving credit loan are based on a formula relating
to certain levels of receivables and inventory, as defined. Interest only is
payable monthly at a floating rate equal to the lender's prime rate, plus
one-half percent, or at the London interbank offered rate, plus two and
one-half percent, at the option of the Company.
The equipment loan is payable in equal monthly installments, based on a
seventy-five month amortization schedule, each in the amount of $11,000,
with a balloon payment due on the earlier of August 1, 2004 or at the end of
the loan agreement's initial or renewal term. The equipment loan bears
interest at the lender's prime rate, plus one-half percent, or at the London
interbank offered rate, plus two and one-half percent, at the option of the
Company.
(B) During fiscal 1994, the Company purchased land and a building in Birmingham,
Alabama, for $735,000, of which $550,000 was financed by a first mortgage.
The mortgage is repayable in fifty-nine equal monthly installments of
approximately $4,700 each and a balloon payment of approximately $440,000
due in April, 1999. During fiscal 1994, the Company transferred this
property, including related improvements (at a net book value of $216,189,
net of the mortgage), to its Parent in partial repayment of intercompany
debt. The Company remains the primary obligor on this mortgage.
4. TRANSACTIONS WITH PARENT AND AFFILIATED COMPANIES
The Company is liable for certain lease payments to a subsidiary of its
Parent under a lease for a former distribution center in Fort Lauderdale,
Florida, including a balloon payment due May 1, 1999 in the approximate amount
of $580,000 relating to industrial revenue bonds issued to acquire and develop
the Fort Lauderdale property. The Company has no direct obligation on the
industrial revenue bond, which
F-27
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
4. TRANSACTIONS WITH PARENT AND AFFILIATED COMPANIES (CONTINUED)
obligation is reflected in the financial statements of a real estate subsidiary
of the Parent. The lease expires on May 1, 1999. These premises have been
subleased to an unrelated third party at an annual rental in excess of the
Company's annual lease obligation. The payments by the Company have included,
through June 30, 1998, a ratable share of the balloon payment.
The Company operates a substantial portion of its business from facilities
which it has been leasing from a subsidiary of its Parent on a month to month
basis. Upon consummation of the Offering described in Note 8, the Company
intends to enter into long-term leases for these facilities. Rent expense for
these facilities, net of sublease income of approximately $200,000, including
taxes and other occupancy costs, aggregated approximately $790,000, $782,000 and
$709,000 in fiscal 1998, 1997 and 1996, respectively.
The approximate future minimum rental commitments under these leases, net of
sublease income of approximately $200,000, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
------------ ------------
<S> <C>
1999................................................................................................ $ 870,000
2000................................................................................................ 885,000
2001................................................................................................ 885,000
2002................................................................................................ 885,000
2003................................................................................................ 885,000
Thereafter.......................................................................................... 4,440,000
------------
$ 8,410,000
------------
------------
</TABLE>
Except for audit fees and accounting services which are provided by the
Parent, the Company's financial statements include all costs of doing business.
Fees of $50,000 have been charged to the Company by its Parent in each of fiscal
1998, 1997 and 1996. Such fees represent audit fees and accounting services
incurred on behalf of the Company. Management believes that the allocation of
such costs is fair and reasonable.
During fiscal 1998, a subsidiary of TDA made a loan to the Company in the
amount of $400,000 as a short-term working capital advance. This loan was repaid
in full prior to June 30, 1998 and was non-interest bearing.
During fiscal 1997, the Company loaned various amounts for varying periods
to a former subsidiary of its Parent. The highest balance outstanding at any
time during fiscal 1997 was $300,000. Such amounts were repaid prior to June 30,
1997 with interest computed at the rate of 9 1/4% per annum. No such loans were
made during fiscal 1998.
F-28
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
4. TRANSACTIONS WITH PARENT AND AFFILIATED COMPANIES (CONTINUED)
The following is a reconciliation of the activity in the Due from Parent and
Affiliated Companies account for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------- ------------
Balance, beginning of year............................................. $ 2,555,054 $ 3,813,346 $ 3,872,579
Fees for auditing and accounting services............................ (50,000) (50,000) (50,000)
Interest expense paid to Parent...................................... -- (30,484) --
Cash advances--net................................................... 1,118,565 (1,177,808) (9,233)
------------ ------------- ------------
Balance, end of year................................................... $ 3,623,619 $ 2,555,054 $ 3,813,346
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The Due from Parent and Affiliated Companies account represents a
non-interest bearing advance account with the Company's Parent and certain other
subsidiaries of the Parent. The interest related to the long-term debt incurred
to fund the activity in this account is based on a floating rate equal to the
lender's prime rate, plus one-half percent, or at the London interbank offered
rate, plus two and one-half percent, at the option of the Company.
In connection with the Offering described in Note 8, the Company intends to
cancel, in the form of a non-cash dividend, all of TDA's indebtedness to the
Company except for $500,065 relating to and offsetting a mortgage in the same
amount (at June 30, 1998) on property previously owned by the Company and for
which the Company remains the primary obligor (Note 3B).
5. INCOME TAXES
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
Current:
Federal.................................................................... $ 64,376 $ 134,457 $ 609,000
State and local............................................................ 11,000 20,000 99,983
Deferred..................................................................... 24,624 (14,457) 84,017
---------- ---------- ----------
$ 100,000 $ 140,000 $ 793,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A reconciliation of income taxes at the Federal statutory rate to amounts
provided, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
Tax provision at statutory rate.............................................. $ 88,446 $ 112,804 $ 716,732
State and local income taxes................................................. 7,000 13,000 60,000
Other........................................................................ 4,554 14,196 16,268
---------- ---------- ----------
$ 100,000 $ 140,000 $ 793,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-29
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
5. INCOME TAXES (CONTINUED)
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Deferred Tax Assets:
Provision for doubtful accounts......................................................... $ 162,414 $ 170,852
Inventory capitalization................................................................ 20,520 17,706
---------- ----------
182,934 188,558
Deferred Tax Liability:
Depreciation............................................................................ (89,912) (70,912)
---------- ----------
Net deferred tax asset.................................................................... $ 93,022 $ 117,646
---------- ----------
---------- ----------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company is committed to unrelated parties for long-term leases for
property, automotive and data processing equipment. The leases expire on various
dates through 2006. Certain of the leases for property include renewal options
and provide for the payment of taxes and other occupancy costs.
The approximate future minimum rental commitments under these unrelated
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
------------ ------------
<S> <C>
1999................................................................................................ $ 919,000
2000................................................................................................ 695,000
2001................................................................................................ 512,000
2002................................................................................................ 230,000
2003................................................................................................ 148,000
Thereafter.......................................................................................... 151,000
------------
$ 2,655,000
------------
------------
</TABLE>
Rent expense for the property and equipment under these leases amounted to
approximately $911,000, $853,000 and $371,000 in fiscal 1998, 1997 and 1996,
respectively, and includes certain occupancy costs.
During the fiscal years ended June 30, 1998, 1997 and 1996, the Company
purchased approximately 23%, 23% and 21% in each of fiscal 1998, 1997 and 1996
of its product lines from one supplier. Since similar products are available to
the Company from other suppliers, the loss of this supplier would not have a
material adverse effect on the business of the Company.
The Company has a 401(k) plan covering eligible employees (the "Plan"). The
Plan provides for contributions at the Company's discretion. A Company
contribution in the amount of $9,000 was made to the Plan in fiscal 1997. No
Company contribution was made to the Plan in fiscal 1998 or 1996.
F-30
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
7. BRANCH OPENING AND CLOSING COSTS
During fiscal 1997, the Company opened two new branches. The Company's
result of operations in fiscal 1997 include start-up costs and operating losses
of approximately $273,000 attributable to these two branches; and additional
expenses in the amount of approximately $80,000 attributable to the operations
of branches disposed of in prior fiscal years.
During fiscal 1996, the Company opened four new branches, one of which was
closed prior to the end of the fiscal year, and commenced the distribution of a
new product line. The Company's results of operations in fiscal 1996 include
start-up costs and operating losses of approximately $290,000 attributable to
these four branches and the introduction of the new product line; and additional
expenses in the amount of approximately $32,000 attributable to the operations
of branches disposed of in prior fiscal years.
8. TRANSACTION WITH RELATED PARTIES
Effective January 1, 1998, pursuant to oral agreements that can be
terminated by either party without notice or penalty, the Company's President
and Senior Vice President--Operations began receiving salaries of $50,000 and
$25,000 per year, respectively. Pursuant to the foregoing agreements, these
individuals also are entitled to receive 20% and 6%, respectively, of the
Company's income before taxes in excess of $600,000 per year.
In September 1997, as amended, Eagle Supply Group, Inc. ("Eagle"), a
majority-owned subsidiary of the Parent, signed a letter of intent with an
underwriter for an initial public offering (the "Offering").
Upon closing of the Offering, Eagle will acquire all of the issued and
outstanding capital stock of the Company from its Parent. The acquisition will
be accounted for as the combining of two entities under common control, similar
to a pooling of interests, and will not result in any revaluation of the
Company's assets or the creation of goodwill. Upon the consummation of the
acquisition, the Company will become a wholly-owned subsidiary of Eagle.
9. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
YEAR ENDING BEGINNING BALANCE AT
JUNE 30, OF YEAR PROVISION WRITEOFFS END OF YEAR
------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1996........................................................... $ 751,376 $ 203,133 $ (489,348) $ 465,161
1997........................................................... $ 465,161 $ 299,433 $ (314,983) $ 449,611
1998........................................................... $ 449,611 $ 245,736 $ (267,942) $ 427,405
</TABLE>
F-31
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED BALANCE SHEET
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 21,180
Accounts and notes receivable--trade (net of allowance for doubtful accounts
of $536,000) (Note 2)...................................................... 9,570,879
Inventories (Note 2)......................................................... 5,548,986
Deferred tax asset........................................................... 226,054
Other current assets......................................................... 343,101
----------
Total current assets....................................................... 15,710,200
IMPROVEMENTS AND EQUIPMENT (net of accumulated depreciation and amortization)
(Note 2)..................................................................... 1,607,406
----------
$17,317,606
----------
----------
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Accounts payable............................................................. $7,825,978
Accrued expenses and other current liabilities............................... 849,100
Current portion of long-term debt (Note 2)................................... 600,000
Loans payable--affiliated companies (Note 3)................................. 1,400,000
Federal and state income taxes due to Parent................................. 2,488
----------
Total current liabilities.................................................. 10,677,566
LONG-TERM DEBT (Note 2)........................................................ 8,643,819
DEFERRED TAX LIABILITY......................................................... 91,812
----------
Total liabilities.......................................................... 19,413,197
----------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDER'S DEFICIENCY:
Common shares, $100 par value per share, 1,500 shares authorized, 593 issued
and outstanding............................................................ 59,300
Additional paid-in capital................................................... 1,000,000
Retained earnings............................................................ 410,590
----------
1,469,890
Less: Due from Parent and affiliated companies (Note 3).................... (3,565,481)
----------
Total shareholder's deficiency............................................. (2,095,591)
----------
$17,317,606
----------
----------
</TABLE>
See notes to unaudited financial statements.
F-32
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
REVENUES........................................................................... $ 19,101,951 $ 17,391,142
COST OF SALES...................................................................... 15,034,455 13,707,012
------------- -------------
4,067,496 3,684,130
------------- -------------
OPERATING EXPENSES (including a provision for doubtful accounts of $147,482 and
$73,190 in 1998 and 1997, respectively).......................................... 3,835,794 3,325,460
DEPRECIATION....................................................................... 203,746 154,303
------------- -------------
4,039,540 3,479,763
------------- -------------
INCOME FROM OPERATIONS............................................................. 27,956 204,367
------------- -------------
OTHER INCOME (EXPENSE):
Interest income.................................................................. 7,309 9,698
Interest expense................................................................. (265,613) (207,852)
------------- -------------
(258,304) (198,154)
------------- -------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES.......................... (230,348) 6,213
(BENEFIT) PROVISION FOR INCOME TAXES............................................... (87,000) 3,000
------------- -------------
NET (LOSS) INCOME.................................................................. (143,348) 3,213
RETAINED EARNINGS, BEGINNING OF PERIOD............................................. 553,938 1,593,802
DIVIDEND PAID TO PARENT............................................................ -- (300,000)
------------- -------------
RETAINED EARNINGS, END OF PERIOD................................................... $ 410,590 $ 1,297,015
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited financial statements.
F-33
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENTS OF CASH FLOWS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................................... $ (143,348) $ 3,213
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation.................................................................. 203,746 154,303
Deferred income taxes......................................................... (41,220) 14,331
Increase (decrease) in allowance for doubtful accounts........................ 108,474 (37,714)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................................. (978,340) 536,971
Decrease in inventories..................................................... 660,767 217,975
Decrease in other current assets............................................ 4,407 35,941
Decrease in accounts payable................................................ (504,074) (843,847)
Decrease in accrued expenses and other current liabilities.................. (9,841) (109,399)
(Decrease) increase in federal and state income taxes due to Parent......... (237,512) 3,000
-------------- --------------
Net cash used in operating activities..................................... (936,941) (25,226)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (124,630) (136,523)
-------------- --------------
Net cash used in investing activities..................................... (124,630) (136,523)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt.......................................... 20,459,697 21,339,051
Principal reductions on long-term debt.......................................... (21,438,360) (21,301,701)
Proceeds from loans payable -affiliated companies............................... 1,400,000 400,000
Decrease (increase) in due from Parent and affiliated companies--net............ 58,138 (987,700)
Dividend paid to Parent......................................................... -- (300,000)
-------------- --------------
Net cash provided by (used in) financing activities....................... 479,475 (850,350)
-------------- --------------
NET DECREASE IN CASH.............................................................. (582,096) (1,012,099)
CASH, BEGINNING OF PERIOD......................................................... 603,276 1,029,774
-------------- --------------
CASH, END OF PERIOD............................................................... $ 21,180 $ 17,675
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 265,613 $ 207,852
-------------- --------------
-------------- --------------
Income taxes paid to Parent..................................................... $ 150,512 $ --
-------------- --------------
-------------- --------------
</TABLE>
See notes to unaudited financial statements.
F-34
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements of Eagle Supply, Inc. (the "Company"), a
wholly-owned subsidiary of TDA Industries, Inc. ("TDA" or the "Parent") have
been prepared by the Company, which is responsible for their integrity and
objectivity, without audit. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for the fair presentation
of financial position, results of operations and cash flows have been included.
These financial statements, which, to the best of management's knowledge and
belief, were prepared in accordance with generally accepted accounting
principles, should be read in conjunction with the financial statements of the
Company for the fiscal years ended June 30, 1998 and 1997 and notes thereto
included elsewhere in this Prospectus. Operating results for the interim period
are not necessarily indicative of results for the entire year.
2. LONG-TERM DEBT
At October 31, 1998, long-term debt consists of the following:
<TABLE>
<S> <C>
Revolving credit loan (A)....................................... $7,979,322
Equipment loan (A).............................................. 769,000
Variable rate mortgage (8 1/2% at October 31, 1998), payable in
monthly installments through 1999 (B)......................... 495,497
---------
9,243,819
Less: Current portion of long-term debt......................... 600,000
---------
$8,643,819
---------
---------
</TABLE>
- ------------------------
(A) The Company is a party to a loan agreement (last amended December 11,
1998) which provides for a credit facility in the aggregate amount of
$10,900,000, guaranteed by the Company's Parent. The credit facility
consists of a $10 million revolving credit loan and a $900,000 equipment
loan. The initial term of the credit facility matures on October 22,
2003. Obligations under the credit facility are collateralized by certain
current assets of the Company (aggregating approximately $16,284,000 at
October 31, 1998).
Borrowings under the revolving credit loan are based on a formula
relating to certain levels of receivables and inventory, as defined.
Interest only is payable monthly at a floating rate equal to the lender's
prime rate, plus one-half percent, or at the London interbank offered
rate, plus two and one-half percent, at the option of the Company.
The equipment loan is payable in equal monthly installments, based on a
seventy-five month amortization schedule, each in the amount of $11,000,
with a balloon payment due on the earlier of August 1, 2004 or at the end
of the loan agreement's initial or renewal term. The equipment loan bears
interest at the lender's prime rate, plus one-half percent, or at the
London interbank offered rate, plus two and one-half percent, at the
option of the Company.
(B) During fiscal 1994, the Company purchased land and a building in
Birmingham, Alabama, for $735,000, of which $550,000 was financed by a
first mortgage. The mortgage is repayable in fifty-nine equal monthly
installments of approximately $4,700 each and a balloon payment of
F-35
<PAGE>
EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
2. LONG-TERM DEBT (CONTINUED)
approximately $440,000 due in April, 1999. During fiscal 1994, the
Company transferred this property, including related improvements (at a
net book value of $216,189, net of the mortgage), to its Parent in
partial repayment of intercompany debt. The Company remains the primary
obligor on this mortgage.
3. TRANSACTIONS WITH PARENT AND AFFILIATED COMPANIES
During the four-month period ended October 31, 1998, TDA and a subsidiary of
TDA made loans to the Company in the aggregate amount of $1,400,000 as
short-term working capital advances. These loans are non-interest bearing and
are due on demand. These loans are expected to be repaid from cash flow
generated from operations and/or additional borrowings under the Company's
Revolving Credit Facility.
The following is a reconciliation of the activity in the Due from Parent and
Affiliated Companies account for the four-month period ended October 31, 1998:
<TABLE>
<S> <C>
Balance, beginning of period.................................... $3,623,619
Fees for auditing and accounting services..................... (16,667)
Cash advances--net............................................ (41,471)
---------
Balance, end of period.......................................... $3,565,481
---------
---------
</TABLE>
The Due from Parent and Affiliated Companies account represents a
non-interest bearing advance account with the Company's Parent and certain other
subsidiaries of the Parent. The interest rate related to the long-term debt
incurred to fund the activity in this account is based on a floating rate equal
to the lender's prime rate, plus one-half percent, or at the London interbank
offered rate, plus two and one-half percent, at the option of the Company.
In connection with the Offering described in Note 4, the Company intends to
cancel, in the form of a non-cash dividend, all of TDA's indebtedness to the
Company except for $495,497 relating to and offsetting a mortgage in the same
amount (at October 31, 1998) on property previously owned by the Company and for
which the Company remains the primary obligor (Note 2B).
4. TRANSACTION WITH RELATED PARTIES
In September 1997, as amended, Eagle Supply Group, Inc. ("Eagle"), a
majority-owned subsidiary of the Parent, signed a letter of intent with an
underwriter for an initial public offering (the "Offering").
Upon closing of the Offering, Eagle will acquire all of the issued and
outstanding capital stock of the Company from its Parent. The acquisition will
be accounted for as the combining of two entities under common control, similar
to a pooling of interests, and will not result in any revaluation of the
Company's assets or the creation of goodwill. Upon the consummation of the
acquisition, the Company will become a wholly-owned subsidiary of Eagle.
* * * * *
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
of JEH/Eagle Supply, Inc.
We have audited the accompanying balance sheet of JEH/Eagle Supply, Inc.
(the "Company"), a wholly-owned subsidiary of TDA Industries, Inc., as of June
30, 1998, and the related statement of operations, shareholder's equity and cash
flows for the year ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of JEH/Eagle Supply, Inc. as of June 30, 1998
and the results of its operations and its cash flows for the year ended June 30,
1998, in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
September 11, 1998 (December 11, 1998 as to Note 4A)
Dallas, Texas
F-37
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................................... $1,031,700
Accounts and notes receivable--trade (net of allowance for doubtful
accounts--$550,000) (Note 9)............................................... 14,322,376
Inventories.................................................................. 8,966,462
Deferred tax asset (Note 6).................................................. 218,500
Due from related party (Note 2).............................................. 250,000
Other current assets......................................................... 185,486
----------
Total current assets....................................................... 24,974,524
IMPROVEMENTS AND EQUIPMENT (net of accumulated depreciation
and amortization) (Note 3)................................................... 3,553,816
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED
(net of accumulated amortization of $171,829) (Note 2)....................... 2,705,305
DEFERRED FINANCING COSTS....................................................... 232,246
----------
$31,465,891
----------
----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $10,151,568
Accrued expenses and other current liabilities............................... 1,816,677
Due to related party (Note 5)................................................ 143,197
Current portion of long-term debt (Note 4)................................... 1,150,033
Federal and state income taxes due to Parent................................. 559,300
----------
Total current liabilities.................................................. 13,820,775
LONG-TERM DEBT (Note 4)........................................................ 15,672,106
DEFERRED TAX LIABILITY (Note 6)................................................ 15,200
----------
Total liabilities.......................................................... 29,508,081
----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, 7 and 8)
SHAREHOLDER'S EQUITY:
Common shares, $.01 par value per share, 3,000 shares authorized,
issued and outstanding..................................................... 30
Additional paid-in capital................................................... 1,349,970
Retained earnings............................................................ 607,810
----------
Total shareholder's equity................................................. 1,957,810
----------
$31,465,891
----------
----------
</TABLE>
See notes to financial statements.
F-38
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
<TABLE>
<S> <C>
REVENUES....................................................................... $71,005,549
COST OF SALES.................................................................. 55,097,524
----------
15,908,025
----------
OPERATING EXPENSES (including a provision for doubtful accounts of $966,376)
(Notes 7 and 9).............................................................. 13,028,890
DEPRECIATION................................................................... 461,506
AMORTIZATION OF EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED............. 171,829
AMORTIZATION OF DEFERRED FINANCING COSTS....................................... 58,062
----------
13,720,287
----------
INCOME FROM OPERATIONS......................................................... 2,187,738
OTHER INCOME (EXPENSE):
Interest income.............................................................. 25,900
Interest expense............................................................. (1,249,828)
----------
(1,223,928)
----------
INCOME BEFORE PROVISION FOR INCOME TAXES....................................... 963,810
PROVISION FOR INCOME TAXES (Note 6)............................................ 356,000
----------
NET INCOME..................................................................... $ 607,810
----------
----------
</TABLE>
See notes to financial statements.
F-39
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENT OF SHAREHOLDER'S EQUITY
YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Initial capitalization............................... 3,000 $ 30 $ 1,349,970 $ -- $ 1,350,000
Net income........................................... -- -- -- 607,810 607,810
----- --- ------------ ------------ ------------
BALANCE, JUNE 30, 1998............................... 3,000 $ 30 $ 1,349,970 $ 607,810 $ 1,957,810
----- --- ------------ ------------ ------------
----- --- ------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-40
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 607,810
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization.............................................. 691,397
Deferred income taxes...................................................... (203,300)
Increase in allowance for doubtful accounts................................ 550,000
Gain on sale of equipment.................................................. (19,421)
Changes in assets and liabilities:
Increase in accounts and notes receivable................................ (6,606,260)
Decrease in inventories.................................................. 442,840
Decrease in other current assets......................................... 650,457
Increase in accounts payable............................................. 2,675,000
Increase in accrued expenses and other current liabilities............... 475,560
Increase in federal and state taxes due to Parent........................ 559,300
-----------
Net cash used in operating activities.................................. (176,617)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (952,918)
Proceeds from sale of equipment.............................................. 30,200
Payment for purchase of net assets from JEH Co. (See below and Note 2)....... (1,659,013)
-----------
Net cash used in investing activities.................................. (2,581,731)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt....................................... 71,791,454
Principal reductions on long-term debt....................................... (69,351,406)
Capital contribution from Parent............................................. 1,350,000
-----------
Net cash provided by financing activities.............................. 3,790,048
-----------
NET INCREASE IN CASH........................................................... 1,031,700
CASH, BEGINNING OF YEAR........................................................ --
-----------
CASH, END OF YEAR.............................................................. $ 1,031,700
-----------
-----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest....................................... $ 1,249,828
-----------
-----------
SUPPLEMENTAL DISCLOSURE OF INVESTING AND NONCASH FINANCING ACTIVITIES:
Acquisition of JEH Co.:
Fair value of assets acquired.............................................. $23,734,747
Liabilities assumed........................................................ (8,960,882)
Due from related party..................................................... 250,000
Note issued to seller...................................................... (864,852)
Bank debt incurred......................................................... (12,500,000)
-----------
Cash paid.................................................................... $ 1,659,013
-----------
-----------
Capital leases for equipment................................................. $ 1,017,239
-----------
-----------
</TABLE>
See notes to financial statements.
F-41
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION--The Company is a wholly-owned subsidiary of TDA
Industries, Inc. ("TDA" or the "Parent") and is engaged in the wholesale
distribution of roofing supplies and related products utilized primarily in the
construction industry in Texas, Colorado, Indiana, Virginia and Minnesota. The
Company operates in a single industry segment.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined by using the first-in, first-out (FIFO) method.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization of improvements
and equipment are provided principally by straight-line methods at various rates
calculated to extinguish the carrying values of the respective assets over their
estimated useful lives.
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED--Excess cost of
investment over net assets acquired ("goodwill") is being amortized on a
straight-line method over 40 years. Management of the Company routinely
evaluates the realizability of goodwill based upon expectations of future
non-discounted cash flows. During the year ended June 30, 1998, management
re-evaluated the remaining useful life of goodwill in light of anticipated
future operations, the Parent's management experience through ownership, since
1973, of another company in the same industry and an analysis of the goodwill
amortization policies of other companies in this industry. Management determined
that a 40-year amortization period was more appropriate than the 15-year period
initially established at the date of the acquisition described in Note 2. The
change has been accounted for prospectively beginning on May 1, 1998.
DEFERRED FINANCING COSTS--Deferred financing costs are related to the
acquisition financing obtained in connection with the acquisition described in
Note 2 and are being amortized on a straight-line method over the term of the
related debt obligations described in Note 4A.
INCOME TAXES--The Company is included in the consolidated Federal income tax
return of its Parent. Income taxes are calculated on a separate return filing
basis.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
CASH, ACCOUNTS AND NOTES RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES--The carrying amounts of these items are a reasonable estimate of their
fair value.
F-42
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are available.
The carrying amount of this item is a reasonable estimate of fair value, except
for a 6% note due July 2002. Such note has a carrying value of $864,852 and an
estimated fair market value of $775,000.
The fair value estimates presented herein are based on pertinent information
available to management as of June 30, 1998. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
CONCENTRATION OF CREDIT RISK--The financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
accounts receivable. The Company grants credit to customers based on an
evaluation of the customer's financial condition and in certain instances
obtains collateral in the form of liens on both business and personal assets of
its customers. Exposure to losses on receivables is principally dependent on
each customer's financial condition. The Company controls its exposure to credit
risks through credit approvals, credit limits and monitoring procedures and
establishes allowances for anticipated losses.
2. ACQUISITION
On July 8, 1997, effective as of July 1, 1997, the Company acquired the
business and substantially all of the assets of JEH Co., engaged in the
wholesale distribution of roofing supplies and related products utilized
primarily in the construction industry. The purchase price, as adjusted,
excluding transaction expenses, was $14,464,852 consisting of $13,600,000 in
cash, net of $250,000 due from JEH Co., and a five-year, 6% per annum note in
the principal amount of $864,852. The purchase price and the note are subject to
further adjustment under certain conditions. The first $250,000 of the
adjustments was to be paid in cash by JEH Co. to the Company but, as other
adjustments to the purchase price are anticipated, the Company elected to
postpone the $250,000 payment from JEH Co. until other adjustments to the
purchase price are resolved, and the $250,000 payment has been established as a
receivable due on demand from JEH Co. Further, the Company is obligated for
potentially substantial additional payments if, among other factors, the
business of the Company attains certain levels of income, as defined, during the
five-year period ending June 30, 2002. More specifically, JEH Co. or its
designee is to receive a percentage of the EBITDA or the modified EBITDA (as
defined) of the Company (the "JEH EBITDA") on a per year, non-cumulative basis
for each of the Company's fiscal years ending on June 30 of 1998 through 2002
(the "Applicable Period"). If the JEH EBITDA reaches $3,000,000, $4,000,000 and
$5,000,000 in the foregoing fiscal years, JEH Co. or its designee is to receive
35%, 40% and 50%, respectively, of that fiscal year's JEH EBITDA in excess of
those levels, respectively. If the JEH EBITDA (plus $50,000 attributable to an
employment agreement) (x) for any fiscal year in the Applicable Period is not
less than $4,400,000, the Company is to pay JEH Co. or its designee $1,000,000,
provided that the aggregate amount of such payments is not to exceed $2,000,000;
and (y) in the aggregate during the Applicable Period is not less than
$20,000,000, the Company is to pay JEH Co. or its designee the sum of $1,350,000
plus the amount of the difference, if any, between $2,000,000 and the amount
paid under (x).
F-43
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
2. ACQUISITION (CONTINUED)
Additionally, with respect to certain Total Accounts Receivable Reserves, as
defined (the "JEH Reserves"), which were established at date of acquisition, if
the Company reduces the amount of the JEH Reserves in any fiscal year during the
Applicable Period, JEH Co. or its designee is to be paid 100% of the reduction
until the JEH Reserves are not less than $2,500,000 and 50% of the reduction in
the JEH Reserves below $2,300,000 down to $600,000. Both of the immediately
foregoing percentage payments to JEH Co. or its designee are subject to
adjustment in certain instances. Additionally, if the Offering described in Note
8 is consummated prior to June 30, 2002 and in the event certain JEH EBITDA
levels are reached for the Company during the period July 1, 1997 through the
date of consummation of the Offering, JEH Co. or its designee will be entitled
to receive $1,000,000 or $1,350,000 (either in cash or in common shares of Eagle
Supply Group, Inc. valued at the public offering price) depending upon the JEH
EBITDA level. Upon consummation of the Offering and the sale of the Company as
described in Note 8, Eagle Supply Group, Inc. will issue 300,000 of its common
shares in fulfillment of the obligation set forth in the immediately preceding
sentence, even if the JEH EBITDA does not reach the required levels.
The foregoing transaction was accounted for as a purchase and, accordingly,
the results of the operations acquired from JEH Co. have been included in the
statement of operations from the effective date of the acquisition. This
transaction gave rise to approximately $2,877,000 of goodwill which is being
amortized over a forty-year period. Any additional payments to which JEH Co. or
its designee will be entitled will be accounted for as additional goodwill which
will be amortized over the then remaining forty-year period.
3. IMPROVEMENTS AND EQUIPMENT
The major classes of improvements and equipment at June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
-------------------------
<S> <C> <C>
Automotive equipment................................ $2,088,508 5 years
Assets acquired under capitalized leases............ 1,017,239 The lesser of 2-6 years
or the lease term
Furniture, fixtures and equipment................... 469,389 5-7 years
Leasehold improvements.............................. 438,936 10 years
------------
4,014,072
Less: Accumulated depreciation and amortization..... 460,256
------------
$3,553,816
------------
------------
</TABLE>
F-44
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
4. LONG-TERM DEBT
At June 30, 1998, long-term debt consists of the following:
<TABLE>
<S> <C>
Revolving credit loan (A)...................................... $10,785,793
Term loan (A).................................................. 2,312,500
Equipment loan (A)............................................. 1,899,500
6% promissory note due July 2002 (Note 2)...................... 864,852
Capitalized equipment lease obligations (B).................... 959,494
----------
16,822,139
Less: Current portion of long-term debt........................ 1,150,033
----------
$15,672,106
----------
----------
</TABLE>
- ------------------------
(A) In order to finance the purchase of substantially all of the assets and
business of JEH Co. and to provide for working capital needs, the Company
entered into a loan agreement, last amended on December 11, 1998, for a
credit facility in the aggregate amount of $20 million which is
collateralized by substantially all of the tangible and intangible assets of
the Company. The credit facility has an initial maturity of October 22, 2003
and consists of a $3,000,000 term loan, a $2,475,000 equipment loan, and the
balance in the form of a revolving credit loan. The term loan is payable in
48 equal monthly installments, each in the amount of $62,500; the equipment
loan is payable in equal monthly installments, based on a seventy-six month
amortization schedule, each in the amount of $20,500, with a balloon payment
due on the earlier of August 1, 2004 or the end of the loan agreement's
initial or renewal term. The equipment and revolving credit loans bear
interest at the lender's prime rate, plus one-half percent, or at the London
interbank offered rate, plus two and one-half percent, at the option of the
Company. The term loan bears interest at the lender's prime rate, plus one
and one-half percent, or at the London interbank offered rate, plus three
and one-quarter percent, at the option of the Company. The credit facility
has been guaranteed by the Parent.
(B) Future minimum lease payments for capitalized equipment lease obligations at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1999............................................................................ $ 277,425
2000............................................................................ 349,755
2001............................................................................ 213,843
2002............................................................................ 185,799
2003............................................................................ 131,179
------------
1,158,001
Less: Interest.................................................................. 198,507
------------
Present value of net minimum payments........................................... $ 959,494
------------
------------
</TABLE>
F-45
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
4. LONG-TERM DEBT (CONTINUED)
The aggregate future maturities of long-term debt, excluding capitalized
equipment lease obligations, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1999........................................................................... $ 953,500
2000........................................................................... 1,062,000
2001........................................................................... 1,062,000
2002........................................................................... 446,000
2003........................................................................... 11,962,645
Thereafter..................................................................... 376,500
-------------
$ 15,862,645
-------------
-------------
</TABLE>
5. TRANSACTIONS WITH RELATED PARTIES
JEH Eagle paid $150,000 to its Parent for arranging the acquisition
financing to acquire JEH Co.'s business. Such amount is included in deferred
financing costs and is being amortized over the term of the credit facility.
During the fiscal year ended June 30, 1998, the Company received payments on
behalf of JEH Co. in the aggregate amount of $143,197. Such payments are shown
as Due to Related Party at June 30, 1998.
The Company has entered into an agreement pursuant to which its Parent
provides the Company with certain services including (i) managerial, (ii)
strategic planning, (iii) banking negotiations, (iv) investor relations, and (v)
advisory services relating to acquisitions for a five-year term which commenced
in July 1997. The monthly fee, the payment of which is to commence upon the
closing of the Offering and the consummation of the acquisition described in
Note 8, for the foregoing services is $3,000.
The Company leases several of its distribution center facilities and its
executive offices from the President of the Company pursuant to five-year
written leases at annual rentals aggregating approximately $492,000. Rental
payments for these facilities and executive offices aggregated approximately
$485,000 during the year ended June 30, 1998.
During the year ended June 30, 1998, the Company made sales aggregating
$1,018,219 to two entities owned by the son of the Company's President.
Management believes that such sales were made on terms no less favorable than
sales made to independent third parties.
F-46
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
6. INCOME TAXES
Components of the provision for income taxes for the year ended June 30,
1998 are as follows:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ 484,300
State and local................................................. 75,000
Deferred.......................................................... (203,300)
---------
$ 356,000
---------
---------
</TABLE>
A reconciliation of income taxes at the Federal statutory rate to amounts
provided is as follows:
<TABLE>
<S> <C>
Tax provision at statutory rate................................... $ 328,000
State and local income taxes...................................... 50,000
Other--net........................................................ (22,000)
---------
$ 356,000
---------
---------
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Provision for doubtful accounts................................. $ 209,000
Inventory capitalization........................................ 9,500
---------
218,500
Deferred Tax Liability:
Depreciation.................................................... (15,200)
---------
Net deferred tax asset............................................ $ 203,300
---------
---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company is committed to unrelated parties for long-term leases for
property, automotive and data processing equipment. The leases expire on various
dates through 2006. Certain of the leases for property include renewal options
and provide for the payment of taxes and other occupancy costs.
The approximate future minimum rental commitments under these unrelated
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 480,000
2000.............................................................................. 198,000
2001.............................................................................. 143,000
2002.............................................................................. 81,000
2003.............................................................................. 8,000
----------
$ 910,000
----------
----------
</TABLE>
F-47
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the property and equipment under these leases amounted to
approximately $462,000 in fiscal 1998 and includes certain occupancy costs.
During the fiscal year ended June 30, 1998, the Company purchased
approximately 15% of its product lines from one supplier. Since similar products
are available to the Company from other suppliers, the loss of this supplier
would not have a material adverse effect on the business of the Company.
The Company has a 401(k) plan covering eligible employees (the "Plan"). The
Plan provides for contributions at the Company's discretion. No Company
contribution was made to the Plan in fiscal 1998.
8. CONTEMPLATED TRANSACTION WITH RELATED PARTY
In September 1997, as amended, Eagle Supply Group, Inc. ("Eagle"), a
majority-owned subsidiary of the Parent, signed a letter of intent with an
underwriter for an initial public offering (the "Offering").
Upon closing of the Offering, Eagle will acquire all of the issued and
outstanding capital stock of the Company from its Parent. The acquisition will
be accounted for as the combining of two entities under common control, similar
to a pooling of interests, and will not result in any revaluation of the
Company's assets or the creation of goodwill. Upon the consummation of the
acquisition, the Company will become a wholly-owned subsidiary of Eagle.
9. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
YEAR ENDING JUNE 30, OF YEAR PROVISION WRITEOFFS END OF YEAR
- ------------------------------------------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1998....................................... $ -- $ 966,376 $ (416,376) $ 550,000
----- ---------- ----------- -----------
----- ---------- ----------- -----------
</TABLE>
* * * * * *
F-48
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED BALANCE SHEET
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ 107,777
Accounts and notes receivable--trade (net of allowance for doubtful accounts
of $789,000) (Note 2)...................................................... 14,412,093
Inventories (Note 2)......................................................... 8,782,595
Deferred tax asset........................................................... 309,500
Due from related party....................................................... 250,000
Other current assets......................................................... 295,516
----------
Total current assets....................................................... 24,157,481
IMPROVEMENTS AND EQUIPMENT (net of accumulated depreciation and
amortization)................................................................ 3,522,196
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED (net of accumulated
amortization of $193,230).................................................... 2,682,604
DEFERRED FINANCING COSTS....................................................... 212,892
----------
$30,575,173
----------
----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $9,793,367
Accrued expenses and other current liabilities............................... 2,096,484
Due to related party......................................................... 150,446
Current portion of long-term debt (Note 2)................................... 1,216,590
Federal and state income taxes due to Parent................................. 390,250
----------
Total current liabilities.................................................. 13,647,137
LONG-TERM DEBT (Note 2)........................................................ 13,649,312
DEFERRED TAX LIABILITY......................................................... 15,200
----------
Total liabilities.......................................................... 27,311,649
----------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDER'S EQUITY:
Common shares, $.01 par value per share, 3,000 shares authorized, issued and
outstanding................................................................ 30
Additional paid-in capital................................................... 1,349,970
Retained earnings............................................................ 1,913,524
----------
Total shareholder's equity................................................. 3,263,524
----------
$30,575,173
----------
----------
</TABLE>
See notes to unaudited financial statements.
F-49
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
REVENUES........................................................................... $ 31,682,018 $ 26,814,331
COST OF SALES...................................................................... 24,194,001 20,662,091
------------- -------------
7,488,017 6,152,240
------------- -------------
OPERATING EXPENSES (including a provision for doubtful accounts of $237,323 and
$198,549 in 1998 and 1997, respectively)......................................... 4,711,027 4,582,527
DEPRECIATION....................................................................... 191,835 109,516
AMORTIZATION OF EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED................. 22,701 64,118
AMORTIZATION OF DEFERRED FINANCING COSTS........................................... 19,354 19,354
------------- -------------
4,944,917 4,775,515
------------- -------------
INCOME FROM OPERATIONS............................................................. 2,543,100 1,376,725
------------- -------------
OTHER INCOME (EXPENSE):
Interest income.................................................................. 11,729 11,192
Interest expense................................................................. (474,115) (367,381)
------------- -------------
(462,386) (356,189)
------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................................... 2,080,714 1,020,536
PROVISION FOR INCOME TAXES......................................................... 775,000 386,000
------------- -------------
NET INCOME......................................................................... 1,305,714 634,536
RETAINED EARNINGS, BEGINNING OF PERIOD............................................. 607,810 --
------------- -------------
RETAINED EARNINGS, END OF PERIOD................................................... $ 1,913,524 $ 634,536
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited financial statements.
F-50
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENTS OF CASH FLOWS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 1,305,714 $ 634,536
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................. 233,890 192,988
Deferred income taxes......................................................... (91,000) (72,029)
Increase in allowance for doubtful accounts................................... 239,475 198,549
Changes in operating assets and liabilities:
Increase in accounts receivable............................................. (329,192) (2,277,854)
Decrease (increase) in inventories.......................................... 183,867 (58,535)
(Increase) decrease in other current assets................................. (110,030) 535,662
(Decrease) increase in accounts payable..................................... (358,201) 1,673,050
Increase in accrued expenses and other current liabilities.................. 287,056 195,358
(Decrease) increase in federal and state income taxes due to Parent......... (169,050) 458,029
-------------- --------------
Net cash provided by operating activities................................. 1,192,529 1,479,754
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (160,215) (318,731)
Payment for purchase of net assets from JEH Co.................................. -- (1,659,013)
-------------- --------------
Net cash used in investing activities..................................... (160,215) (1,977,744)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt.......................................... 28,965,316 28,889,067
Principal reductions on long-term debt.......................................... (30,921,553) (29,376,663)
Capital contribution from Parent................................................ -- 1,350,000
-------------- --------------
Net cash (used in) provided by financing activities....................... (1,956,237) 862,404
-------------- --------------
NET (DECREASE) INCREASE IN CASH................................................... (923,923) 364,414
CASH, BEGINNING OF PERIOD......................................................... 1,031,700 --
-------------- --------------
CASH, END OF PERIOD............................................................... $ 107,777 $ 364,414
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 474,115 $ 367,381
-------------- --------------
Income taxes paid to Parent..................................................... $ 735,050 $ --
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of JEH Co.:
Fair value of assets acquired................................................. $ -- $ 23,734,747
Liabilities assumed........................................................... -- (8,960,882)
Due from related party........................................................ -- 250,000
Note issued to seller......................................................... -- (864,852)
Bank debt incurred............................................................ -- (12,500,000)
-------------- --------------
Cash paid....................................................................... $ -- $ 1,659,013
-------------- --------------
</TABLE>
See notes to unaudited financial statements.
F-51
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements of JEH/Eagle Supply, Inc. (the "Company"), a
wholly-owned subsidiary of TDA Industries, Inc. ("TDA" or the "Parent") have
been prepared by the Company, which is responsible for their integrity and
objectivity, without audit. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for the fair presentation
of financial position, results of operations and cash flows have been included.
These financial statements, which, to the best of management's knowledge and
belief, were prepared in accordance with generally accepted accounting
principles, should be read in conjunction with the financial statements of the
Company for the fiscal year ended June 30, 1998 and notes thereto included
elsewhere in this Prospectus. Operating results for the interim period are not
necessarily indicative of results for the entire year.
2. LONG-TERM DEBT
At October 31, 1998, long-term debt consists of the following:
<TABLE>
<S> <C>
Revolving credit loan (A)...................................... $9,236,561
Term loan (A).................................................. 2,062,500
Equipment loan (A)............................................. 1,806,500
6% promissory note due July 2002............................... 864,852
Capitalized equipment lease obligations........................ 895,489
----------
14,865,902
Less: Current portion of long-term debt........................ 1,216,590
----------
$13,649,312
----------
----------
</TABLE>
(A) In order to finance the purchase of substantially all of the assets and
business of JEH Co. and to provide for working capital needs, the Company
entered into a loan agreement, last amended on December 11, 1998, for a
credit facility in the aggregate amount of $20 million which is
collateralized by substantially all of the tangible and intangible assets of
the Company. The credit facility has an initial maturity of October 22, 2003
and consists of a $3,000,000 term loan, a $2,475,000 equipment loan, and the
balance in the form of a revolving credit loan. The term loan is payable in
48 equal monthly installments, each in the amount of $62,500; the equipment
loan is payable in equal monthly installments, based on a seventy-six month
amortization schedule, each in the amount of $26,000, with a balloon payment
due on the earlier of August 1, 2004 or the end of the loan agreement's
initial or renewal term. The equipment and revolving credit loans bear
interest at the lender's prime rate, plus one-half percent, or at the London
interbank offered rate, plus two and one-half percent, at the option of the
Company. The term loan bears interest at the lender's prime rate, plus one
and one-half percent, or at the London interbank offered rate, plus three
and one-quarter percent, at the option of the Company. The credit facility
has been guaranteed by the Parent.
3. CONTEMPLATED TRANSACTION WITH RELATED PARTY
In September 1997, as amended, Eagle Supply Group, Inc. ("Eagle"), a
majority-owned subsidiary of the Parent, signed a letter of intent with an
underwriter for an initial public offering (the "Offering").
F-52
<PAGE>
JEH/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOUR MONTHS ENDED OCTOBER 31, 1998 AND 1997
3. CONTEMPLATED TRANSACTION WITH RELATED PARTY (CONTINUED)
Upon closing of the Offering, Eagle will acquire all of the issued and
outstanding capital stock of the Company from its Parent. The acquisition will
be accounted for as the combining of two entities under common control, similar
to a pooling of interests, and will not result in any revaluation of the
Company's assets or the creation of goodwill. Upon the consummation of the
acquisition, the Company will become a wholly-owned subsidiary of Eagle.
*****
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
JEH Company, Inc.
We have audited the accompanying balance sheet of JEH Company, Inc. (a Texas
corporation) as of June 30, 1997, and the related statement of operations and
retained earnings and cash flows for the six months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JEH Company, Inc. as of June
30, 1997, and the results of its operations and its cash flows for the six
months then ended in conformity with generally accepted accounting principles.
/s/Waters, Murray & Associates
August 20, 1997
Mansfield, Texas
F-54
<PAGE>
JEH COMPANY, INC.
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 284,428
Accounts receivable-trade, net of allowance for doubtful accounts of
$2,554,056 (Notes G and K)................................................. 8,127,463
Accounts receivable--related party (Note B).................................. 138,654
Inventories (Notes A and G).................................................. 9,409,302
Other receivables............................................................ 664,696
----------
Total current assets....................................................... 18,624,543
FIXED ASSETS--net of accumulated depreciation (Notes A,D, F and G)............. 2,114,523
OTHER ASSETS (Note E).......................................................... 1,029,648
----------
TOTAL ASSETS................................................................... $21,768,714
----------
----------
LIABILITIES & SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable............................................................. $7,575,628
Accrued expenses............................................................. 1,476,133
Current portion of long-term debt (Note G)................................... 8,450,642
Obligation under capital leases-current portion.............................. 19,299
----------
Total current liabilities.................................................. 17,521,702
----------
LONG-TERM LIABILITIES
Note payable to shareholder (Note B)......................................... 3,486,991
----------
Total long-term liabilities................................................ 3,486,991
----------
TOTAL LIABILITIES.............................................................. 21,008,693
----------
COMMITMENTS AND CONTINGENCIES (Note H)
SHAREHOLDER'S EQUITY
Common shares, $1 par value, 100,000 shares authorized, 1,000 issued and
outstanding................................................................ 1,000
Additional paid in capital................................................... 126,967
Retained earnings............................................................ 632,054
----------
Total shareholder's equity................................................. 760,021
----------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY....................................... $21,768,714
----------
----------
</TABLE>
See accompanying notes and auditor's report
F-55
<PAGE>
JEH COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net sales.......................................................................... $ 28,978,685 $ 32,860,284
Cost of sales...................................................................... 21,354,749 25,775,974
------------- -------------
Gross profit..................................................................... 7,623,936 7,084,310
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 8,331,690 5,887,103
------------- -------------
(Loss) income from operations.................................................... (707,754) 1,197,207
------------- -------------
OTHER INCOME (EXPENSE)
Other income..................................................................... 1,384 6,166
Interest expense................................................................. (472,926) (396,858)
------------- -------------
(471,542) (390,692)
------------- -------------
Net (loss) income.................................................................. (1,179,296) 806,515
RETAINED EARNINGS:
Beginning of period.............................................................. 1,811,350 1,640,461
------------- -------------
End of period.................................................................... $ 632,054 $ 2,446,976
------------- -------------
------------- -------------
</TABLE>
See accompanying notes and auditor's report
F-56
<PAGE>
JEH COMPANY, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................................... $ (1,179,296) $ 806,515
Adjustments to reconcile net (loss) income to cash provided by (used in)
operating activities:
Depreciation and amortization................................................. 277,387 307,471
Gain on sale of assets........................................................ (16,278) (27,570)
Changes in assets and liabilities
Accounts receivable......................................................... 983,397 (2,438,493)
Inventory................................................................... (1,400,333) (1,847,217)
Accounts payable and accrued expenses....................................... 2,814,718 2,799,223
Other assets................................................................ (622,337) 102,860
Related party receivable.................................................... 8,652 (72,453)
-------------- --------------
Total adjustments......................................................... 2,045,206 (1,176,179)
-------------- --------------
Net cash provided by (used in) operating activities........................... 865,910 (369,664)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (435,860) (55,450)
Proceeds from sale of assets.................................................... 42,839 84,200
Increase in other non-current assets............................................ (56,655) (85,572)
-------------- --------------
Net cash used in investing activities......................................... (449,676) (56,822)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt.......................................... 16,848,841 16,217,940
Principal reductions on long-term debt.......................................... (15,943,456) (14,870,984)
Principal borrowings on capital leases.......................................... 8,713 --
Principal reductions on capital leases.......................................... (5,431) (12,245)
Principal reductions on note payable to shareholder............................. (1,238,414) (1,656,448)
-------------- --------------
Net cash used in financing activities......................................... (329,747) (321,737)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 86,487 (748,223)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................... 197,941 1,038,229
-------------- --------------
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 284,428 $ 290,006
-------------- --------------
-------------- --------------
SUPPLEMENTAL INFORMATION
Cash paid for interest expense.................................................. $ 472,926 $ 396,858
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes and auditor's report
F-57
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of JEH Company, Inc. (the
Company), is presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of the
Company's management, who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
The statements of operations and retained earnings and cash flows for the
six months ended June 30, 1996 are unaudited. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for the fair
presentation of results of operations and cash flows have been included. These
unaudited financial statements, which to the best of management's knowledge and
belief, were prepared in accordance with generally accepted accounting
principles, should be read in conjunction with the financial statements of the
Company for the years ended December 31, 1996 and 1995 and the notes thereto
included elsewhere in this Prospectus. Operating results for the interim periods
are not necessarily indicative of results for the entire year.
ORGANIZATION
The Company, a Texas corporation, was incorporated in May 1982. The Company
is engaged primarily in the sale of building materials to roofing contractors.
The Company's home office and primary outlet is in Mansfield, Texas, with other
locations in Texas, Colorado, Virginia, Indiana and Iowa. The accompanying
financial statements are prepared utilizing the accrual method of accounting
whereby revenue is recognized when earned and expenses are recognized when
incurred.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less to
be cash equivalents.
INVENTORIES
Inventories, which consist primarily of roofing materials, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the companies, using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
companies could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES--The carrying amounts of these items are a reasonable estimate of their
fair value.
F-58
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are available.
The carrying amount of this item is a reasonable estimate of fair value.
The fair value estimates presented herein are based on pertinent information
available to management as of June 30, 1997. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
FIXED ASSETS
Transportation equipment, furniture and fixtures, and equipment are carried
at cost. Expenditures for renewals and betterments are capitalized and
maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the useful life of the depreciable asset.
Leasehold improvements are carried at cost and are amortized using the
straight-line method over the estimated useful life of the related asset.
INCOME TAXES
In July 1990, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, the Company does not pay
Federal corporate income taxes on its taxable income. Instead, the shareholder
is liable for individual income taxes on the Company's taxable income. Although
the income recognition timing differences originating before attaining S
corporation status will reverse, they will not generate a tax liability at the
Company level so long as S corporation status is maintained.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for the six months ended June 30, 1996 have been
reclassified to conform to the June 30, 1997 presentation. The reclassifications
have no effect on the results of operations for the six months ended June 30,
1996.
NOTE B--RELATED PARTY TRANSACTIONS
The Company leases its office facilities in Mansfield, Frisco, Mesquite and
Colleyville, Texas, and in Colorado Springs and Henderson, Colorado, from the
Company's shareholder. No long-term lease agreements exist for these sites.
Facility rent paid during the six-month periods ended June 30, 1997 and 1996
amounted to approximately $228,000 and $223,000, respectively.
The Company's financial statements include all costs of doing business.
F-59
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
NOTE B--RELATED PARTY TRANSACTIONS (CONTINUED)
The Company transacts business with other companies which are either owned
by the Company's shareholder, or owned by relatives of the Company's
shareholder.
A summary of these transactions in the six-month period ended June 30, 1997
is as follows:
<TABLE>
<CAPTION>
RELATED
TOTAL SALES RECEIVABLES
----------- ------------
<S> <C> <C>
$ 326,824 $ 138,654
----------- ------------
----------- ------------
</TABLE>
The following is a reconciliation of the activity in the note payable to
shareholder account for the six months ended June 30, 1997:
<TABLE>
<S> <C> <C>
Balance, beginning of period......................... $4,725,405
Principal reductions............................... (1,238,414)
----------
----------
Balance, end of period............................... $3,486,991
----------
----------
</TABLE>
The note payable to shareholder is due on demand. At June 30, 1997, the
interest rate in the note payable to shareholder was 9.75% per annum.
Compensation paid to the Company's sole shareholder during the six-month
periods ended June 30, 1997 and 1996 was approximately $120,000 and $116,000,
respectively.
Related companies participate with the Company in its employee benefit
programs; costs associated with the related companies are reimbursed to the
Company. (See Note I).
NOTE C--CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company sells primarily to
customers in Texas and Colorado.
F-60
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
NOTE C--CONCENTRATION OF CREDIT RISK (CONTINUED)
A summary of these transactions for the six-month period ended June 30, 1997
is as follows:
<TABLE>
<S> <C>
TOTAL SALES:
Texas.......................................................... $17,895,853
Colorado....................................................... 9,161,018
Indiana........................................................ 1,888,289
Virginia....................................................... 33,525
----------
$28,978,685
----------
----------
ACCOUNTS RECEIVABLE--NET:
Texas.......................................................... $5,625,048
Colorado....................................................... 4,501,130
Indiana........................................................ 660,470
Virginia....................................................... 33,525
----------
10,820,173
Less: Related party............................................ (138,654)
Less: Allowance for doubtful accounts.......................... (2,554,056)
----------
$8,127,463
----------
----------
</TABLE>
NOTE D--FIXED ASSETS
Fixed assets, which are stated at cost, at June 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
----------------
<S> <C> <C>
Transportation equipment.................................... $ 2,994,473 5 to 7 years
Furniture & fixtures........................................ 140,716 5 to 7 years
Leasehold improvements...................................... 578,991 5 to 31.5 years
Equipment................................................... 996,755 5 to 10 years
-------------
4,710,935
Less: Accumulated depreciation.............................. (2,596,412)
-------------
$ 2,114,523
-------------
-------------
</TABLE>
F-61
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
NOTE E--OTHER ASSETS
The Company's other assets at June 30, 1997 consist of the following:
<TABLE>
<S> <C>
Cash surrender value of life insurance.......................... $ 808,400
Notes receivable................................................ 189,252
Deposits and prepayments........................................ 31,996
---------
$1,029,648
---------
---------
</TABLE>
The above Cash Surrender Value of Insurance represents the cash value of
several insurance policies carried on the life of the Company's shareholder. The
combined face values of the policies are $10,064,007 of which the Company is the
owner and primary beneficiary.
NOTE F--CAPITAL LEASES
Certain equipment is being held under a number of noncancelable capital
leases with terms ranging from thirty-six to sixty months. These assets are
stated on the balance sheet with equipment and amounted to $29,630. Accumulated
depreciation on these assets amounted to $27,157.
NOTE G--LONG-TERM DEBT
The Company's long-term debt at June 30, 1997 consists of the following:
<TABLE>
<S> <C>
$7,500,000 revolving line of credit to bank, secured by
inventory and accounts receivable; interest payable at 8.25%
per annum; matures in June, 1997, repaid on July 8, 1997...... $7,500,000
Equipment note payable to bank, payable monthly with interest at
9.5% per annum through July, 1997; collateralized by
equipment..................................................... 323,149
Equipment note payable to bank, payable monthly with interest at
9% per annum through July, 1999; collateralized by
equipment..................................................... 366,659
Equipment note payable to bank, payable monthly with interest at
7% per annum through July, 1997; collateralized by
equipment..................................................... 260,834
---------
8,450,642
Less: Current portion........................................... 8,450,642
---------
Long-term portion............................................... $ --
---------
---------
</TABLE>
NOTE H--LEASE COMMITMENTS
The Company leases certain office and warehouse facilities under
noncancelable operating leases which expire on various dates through 2002. Total
rent expense to unrelated third parties for the six-month
F-62
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
NOTE H--LEASE COMMITMENTS (CONTINUED)
periods ended June 30, 1997 and 1996 was approximately $106,000 and $175,000,
respectively. Future minimum annual rentals are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997.......................................................................... $ 269,000
1998.......................................................................... 134,000
1999.......................................................................... 67,000
2001.......................................................................... 67,000
2002.......................................................................... 17,000
----------
$ 554,000
----------
----------
</TABLE>
NOTE I--DEFINED CONTRIBUTION PLAN
Employees of the Company are eligible to be participants in the retirement
plan of JEH Company, Inc. The plan is a non-qualified defined contribution plan
to which the Company contributes an amount equal to 50% of the employee's
contribution up to a total company contribution of $50 per month on after tax
basis. The Company contributed approximately $3,900 and $4,100 in 1997 and 1996,
respectively.
NOTE J--SUBSEQUENT EVENT
In early July 1997, the Company sold its roofing business including most of
its operating assets in exchange for $14,850,000 and the buyer assumed most of
its trade payables and accrued liabilities. A summary of the transaction, which
was effective as of July 1, 1997, is as follows:
<TABLE>
<S> <C> <C>
Total operating assets sold........................ $20,771,000
Debt assumed by purchaser.......................... (8,816,000)
----------
Net assets sold.................................. $11,955,000
----------
----------
Sale price
Cash............................................. $13,850,000
Five-year note................................... 1,000,000
----------
$14,850,000
----------
----------
</TABLE>
In connection with the closing of this transaction, the Company repaid its
notes payable and capital lease obligations to other than related parties
(approximately $8,560,000).
NOTE K--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
PERIOD ENDED BEGINNING RECOVERIES/ BALANCE AT
JUNE 30, OF PERIOD PROVISION (WRITE-OFFS) END OF PERIOD
- --------------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
1996........... $ 181,336 $ 328,060 $ 8,634 $ 518,030
1997........... $ 321,718 $ 2,383,218 $ (150,880) $ 2,554,056
</TABLE>
F-63
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND UNAUDITED JUNE 30, 1996
NOTE K--ALLOWANCE FOR DOUBTFUL ACCOUNTS (CONTINUED)
Management of the Company has historically based its provision for doubtful
accounts on an evaluation of levels of its trade accounts receivable, the ageing
and collection history of such receivables, and the business conditions in each
market area in which the Company operates. In establishing its estimates of the
level of the provision for doubtful accounts required for each reporting period,
management also estimates the value of the collateral and/or the personal
guarantees received from certain customers with past-due balances. The majority
of the allowance for doubtful accounts relates to specific customers with
past-due balances. During the latter part of calendar 1996, certain customer
accounts began to age, and the Company began to experience more difficulty in
collecting its receivables. Accordingly, the Company increased its provision for
doubtful accounts and related allowance for doubtful accounts to $844,235 and
$321,718, respectively, in calendar 1996 from $344,372 and $181,336,
respectively, in 1995. Additionally, write-offs of its customer accounts
increased to $703,853 in 1996 from $334,372 in 1995. The Company realized
increased revenues from its customers in 1996 from business related to storms in
certain of its market areas; however, no such storms occurred in the spring of
1997 in any of the Company's market areas. As a result, the business of certain
of the Company's customers slowed dramatically and receivables continued to
deteriorate. As a result of the foregoing circumstances which changed during the
six-month period ended June 30, 1997 as compared to the latter part of calendar
1996, the level and age of certain customers' accounts had worsened
significantly from prior periods, and other customers who have historically been
current began to pay late and their accounts began to age as well. Accordingly,
management performed a critical assessment of the quality of its receivables and
current business conditions and determined that an increase in the allowance for
doubtful accounts of $2,383,218 at June 30, 1997 was appropriate.
*****
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
JEH Company, Inc.
We have audited the accompanying balance sheet of JEH Company, Inc. (a Texas
corporation) as of December 31, 1996, and the related statements of operations
and retained earnings and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JEH Company, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/Waters, Murray & Associates
August 20, 1997
Mansfield, Texas
F-65
<PAGE>
JEH COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 197,943
Accounts receivable-trade, net of allowance for doubtful accounts of $321,718
(Notes C and G)............................................................ 9,128,164
Accounts receivable--related party (Note B).................................. 130,002
Inventories (Notes A and G).................................................. 8,008,969
Other receivables............................................................ 42,359
----------
Total current assets....................................................... 17,507,437
FIXED ASSETS--NET OF ACCUMULATED DEPRECIATION (NOTES A,D, F AND G)............. 1,982,610
OTHER ASSETS (NOTE E).......................................................... 972,993
----------
TOTAL ASSETS................................................................... $20,463,040
----------
----------
LIABILITIES & SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable............................................................. $8,114,195
Accrued expenses............................................................. 912,071
Current portion of long-term debt (Note G)................................... 4,380,179
Obligation under capital leases-current portion (Note F)..................... 9,942
----------
Total current liabilities.................................................. 13,416,387
----------
LONG-TERM LIABILITIES
Long-term debt less current portion (Note G)................................. 375,856
Obligation under capital leases (Note F)..................................... 6,075
Note payable to shareholder (Note B)......................................... 4,725,405
----------
Total long-term liabilities................................................ 5,107,336
----------
TOTAL LIABILITIES.............................................................. 18,523,723
----------
COMMITMENTS AND CONTINGENCIES (NOTE H)
SHAREHOLDER'S EQUITY
Common shares, $1 par value, 100,000 shares authorized, 1,000 issued and
outstanding................................................................ 1,000
Additional paid in capital................................................... 126,967
Retained earnings............................................................ 1,811,350
----------
Total shareholder's equity................................................... 1,939,317
----------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY....................................... $20,463,040
----------
----------
</TABLE>
See accompanying notes and auditor's report
F-66
<PAGE>
JEH COMPANY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
NET SALES.......................................................................... $ 74,893,485 $ 73,821,881
COST OF SALES...................................................................... 59,142,964 57,422,141
------------- -------------
Gross profit..................................................................... 15,750,521 16,399,740
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 14,818,402 15,984,277
------------- -------------
Income from operations........................................................... 932,119 415,463
------------- -------------
OTHER INCOME (EXPENSE)
Interest income.................................................................. 5,218 11,049
Interest expense................................................................. (766,448) (549,681)
------------- -------------
(761,230) (538,632)
------------- -------------
Net income (loss)................................................................ 170,889 (123,169)
RETAINED EARNINGS:
At beginning of year............................................................. 1,640,461 1,763,630
------------- -------------
At end of year................................................................... $ 1,811,350 $ 1,640,461
------------- -------------
------------- -------------
</TABLE>
See accompanying notes and auditor's report
F-67
<PAGE>
JEH COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 170,889 $ (123,169)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization................................................. 613,169 642,595
Gain on sale of assets........................................................ (32,968) (35,913)
Changes in assets and liabilities
Accounts receivable......................................................... (1,924,680) (1,554,563)
Inventory................................................................... (856,580) (1,640,702)
Accounts payable and accrued expenses....................................... 1,681,862 (108,235)
Other assets................................................................ 292,269 (59,733)
Related party receivable.................................................... 3,474 135,178
-------------- --------------
Total adjustments........................................................... (223,454) (2,621,373)
-------------- --------------
Net cash used in operating activities......................................... (52,565) (2,744,542)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (155,803) (575,982)
Proceeds from sale of assets.................................................... 127,936 114,250
Decrease in notes receivable-related party...................................... -- 523,137
-------------- --------------
Net cash (used in) provided by investing activities........................... (27,867) 61,405
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt.......................................... 38,970,564 29,252,866
Principal reductions on long-term debt.......................................... (39,813,917) (28,298,968)
Principal reductions on capital leases.......................................... (19,019) (44,537)
Principal reductions on note payable to shareholder............................. (3,095,847) (3,084,854)
Borrowings under note payable to shareholder.................................... 3,198,365 5,412,180
-------------- --------------
Net cash (used in) provided by financing activities........................... (759,854) 3,236,687
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............................. (840,286) 553,550
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 1,038,229 484,679
CASH AND CASH EQUIVALENTS, END OF YEAR............................................ $ 197,943 $ 1,038,229
-------------- --------------
-------------- --------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest expense.................................................. $ 766,448 $ 549,681
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes and auditor's report
F-68
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of JEH Company, Inc. (the
Company), is presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of the
Company's management, who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
ORGANIZATION
The Company, a Texas corporation, was incorporated in May 1982. The Company
is engaged primarily in the sale of building materials to roofing contractors.
The Company's home office and primary outlet is in Mansfield, Texas, with other
locations in Texas, Colorado, Virginia, Indiana and Iowa. In 1995, the Company
also had locations in Oklahoma and Kansas. The accompanying financial statements
are prepared utilizing the accrual method of accounting whereby revenue is
recognized when earned and expenses are recognized when incurred.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less to
be cash equivalents.
INVENTORIES
Inventories, which consist primarily of roofing materials, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the companies, using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
companies could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES--The carrying amounts of these items are a reasonable estimate of their
fair value.
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are available.
The carrying amount of this item is a reasonable estimate of fair value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for
F-69
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purposes of these financial statements since that date, and current estimates of
fair value may differ significantly from the amounts presented herein.
FIXED ASSETS
Transportation equipment, furniture and fixtures, and equipment are carried
at cost. Expenditures for renewals and betterments are capitalized and
maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the useful life of the depreciable asset.
Leasehold improvements are carried at cost and are amortized using the
straight-line method over the estimated useful life of the related asset.
INCOME TAXES
In July 1990, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, the Company does not pay
Federal corporate income taxes on its taxable income. Instead, the shareholder
is liable for individual income taxes on the Company's taxable income. Although
the income recognition timing differences originating before attaining S
corporation status will reverse, they will not generate a tax liability at the
Company level so long as S corporation status is maintained.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for the year ended December 31, 1995 have been reclassified
to conform to the December 31, 1996 presentation. The reclassifications have no
effect on the results of operations for the year ended December 31, 1995.
NOTE B--RELATED PARTY TRANSACTIONS
The Company leases its office facilities in Mansfield, Frisco, Mesquite and
Colleyville, Texas, and in Colorado Springs and Henderson, Colorado, from the
Company's shareholder. No long-term lease agreements exist for these sites.
Facility rent paid during each of the years ended December 31, 1996 and 1995
amounted to approximately $428,000 and $331,000, respectively.
The Company's financial statements include all costs of doing business.
The Company transacts business with other companies, which are either owned
by the Company's shareholder, or owned by relatives of the Company's
shareholder.
F-70
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE B--RELATED PARTY TRANSACTIONS (CONTINUED)
A summary of these transactions in each of the years ended December 31, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
RELATED
YEAR ENDED DECEMBER 31, TOTAL SALES RECEIVABLES
- ------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
1996............................................................... $ 992,565 $ 130,002
------------ -----------
------------ -----------
1995............................................................... $ 1,627,855 $ 133,476
------------ -----------
------------ -----------
</TABLE>
The following is a reconciliation of the activity in the note payable to
shareholder account for the year ended December 31, 1996:
<TABLE>
<S> <C>
Balance, beginning of year...................................... $4,622,887
Principal borrowings.......................................... 3,198,365
Principal reductions.......................................... (3,095,847)
---------
Balance, end of year............................................ $4,725,405
---------
---------
</TABLE>
The note payable to shareholder is due on demand. At December 31, 1996, the
interest rate in the note payable to shareholder was 9.75% per annum.
Compensation paid to the Company's sole shareholder during each of the years
ended December 31, 1996 and 1995 was approximately $2,330,000 and $3,988,000,
respectively. Such compensation included a base salary plus a discretionary
bonus.
Related companies participate with the Company in its employee benefit
programs; costs associated with the related companies are reimbursed to the
Company. (See Note I).
NOTE C--CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company sells primarily to
customers in Texas and Colorado.
A summary of these transactions for each of the years ended December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
TOTAL SALES:
Texas.............................................................................. $ 50,972,325 $ 57,104,971
Colorado........................................................................... 20,433,490 16,716,910
Indiana............................................................................ 3,487,670 --
Oklahoma & Kansas.................................................................. -- --
------------- -------------
$ 74,893,485 $ 73,821,881
------------- -------------
------------- -------------
</TABLE>
F-71
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE C--CONCENTRATION OF CREDIT RISK (CONTINUED)
<TABLE>
<CAPTION>
1996
------------
<S> <C>
ACCOUNTS RECEIVABLE--NET:
Texas............................................................................................... $ 4,895,660
Colorado............................................................................................ 4,414,432
Indiana............................................................................................. 269,792
Oklahoma & Kansas................................................................................... --
------------
$ 9,579,884
Less: Related party................................................................................. (130,002)
Less: Allowance for doubtful accounts............................................................... (321,718)
------------
$ 9,128,164
------------
------------
</TABLE>
NOTE D--FIXED ASSETS
Fixed assets, which are stated at cost, consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
------------
<S> <C> <C>
Transportation equipment..................................... $ 2,648,369 5 to 7 years
Furniture & fixtures......................................... 132,003 5 to 7 years
Leasehold improvements....................................... 578,991 5 to 31.5 years
Equipment.................................................... 977,005 5 to 10 years
------------
4,336,368
Less: Accumulated depreciation............................... (2,353,758)
------------
$ 1,982,610
------------
------------
</TABLE>
NOTE E--OTHER ASSETS
The Company's other assets consist of the following:
<TABLE>
<S> <C>
Cash surrender value of life insurance............................ $ 725,647
Note receivable................................................... 212,940
Deposits and prepayments.......................................... 34,406
---------
$ 972,993
---------
---------
</TABLE>
The above Cash Surrender Value of Insurance represents the cash value of
several insurance policies carried on the life of the Company's shareholder. The
combined face values of the policies are $10,064,007 of which the Company is the
owner and primary beneficiary.
F-72
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE F--CAPITAL LEASES
Certain equipment is being held under a number of noncancelable capital
leases with terms ranging from thirty-six to sixty months. These assets are
stated on the balance sheet with equipment and amounted to $126,252. Accumulated
depreciation on these assets amounted to $95,570.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 10,620
1998............................................................................. 6,075
---------
Total lease payments............................................................... 16,695
Less amount representing interest.................................................. 678
---------
Present value of future minimum lease payments..................................... $ 16,017
---------
---------
</TABLE>
This amount is stated on the balance sheet as follows:
<TABLE>
<S> <C>
Obligations under capital leases................................... $ 16,017
Less: Current portion.............................................. (9,942)
---------
Long-term portion.................................................. $ 6,075
---------
---------
</TABLE>
NOTE G--LONG-TERM DEBT
The Company's long-term debt consist of the following:
<TABLE>
<S> <C> <C>
$6,000,000 revolving line of credit to bank, secured
by inventory and accounts receivable; interest
payable at 8.25% per annum; matures in June,
1997............................................... $3,970,618 $4,300,000
Equipment note payable to bank, payable monthly with
interest at 9.5% per annum through June, 1999;
collateralized by equipment........................ 403,274 553,309
Equipment note payable to bank, payable monthly with
interest at 7% per annum through June, 1998;
collateralized by equipment........................ 382,143 617,467
Other note payable................................... -- 8,551
--------- ---------
4,756,035 5,479,327
Less: Current portion................................ 4,380,179 5,091,985
--------- ---------
Long-term portion.................................... $ 375,856 $ 387,342
--------- ---------
--------- ---------
</TABLE>
F-73
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE G--LONG-TERM DEBT (CONTINUED)
Aggregate maturities under this debt for the years subsequent to December 31,
1996, are as follows:
<TABLE>
<S> <C>
1997............................................................ $4,380,179
1998............................................................ 297,976
1999............................................................ 77,880
---------
$4,756,035
---------
---------
</TABLE>
NOTE H--LEASE COMMITMENTS
The Company leases certain office and warehouse facilities under
noncancelable operating leases, which expire on various dates through 2002.
Total rent expense to unrelated third parties for the years ended 1996 and 1995
was approximately $189,000 and $207,000, respectively. Future minimum annual
rentals are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 275,000
1998.............................................................................. 269,000
1999.............................................................................. 135,000
2000.............................................................................. 67,000
2001.............................................................................. 67,000
2002.............................................................................. 17,000
----------
$ 830,000
----------
----------
</TABLE>
NOTE I--DEFINED CONTRIBUTION PLAN
Employees of the Company are eligible to be participants in the retirement
plan of JEH Company, Inc. The plan is a non-qualified defined contribution plan
to which the Company contributes an amount equal to 50% of the employee's
contribution up to a total company contribution of $50 per month on after tax
basis. The Company contributed approximately $5,300 and $9,000 in 1996 and 1995,
respectively.
NOTE J--SUBSEQUENT EVENT
In early July 1997, the Company sold its roofing business including most of
its operating assets in exchange for $14,850,000 and the buyer assumed most of
its trade payables and accrued liabilities.
F-74
<PAGE>
JEH COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE J--SUBSEQUENT EVENT (CONTINUED)
A summary of the transaction, which was effective as of July 1, 1997, is as
follows:
<TABLE>
<S> <C> <C>
Total operating assets sold........................ $20,771,000
Debt assumed by purchaser.......................... (8,816,000)
----------
Net assets sold.................................. $11,955,000
----------
----------
Sale price
Cash............................................. $13,850,000
Five-year note................................... 1,000,000
----------
$14,850,000
----------
----------
</TABLE>
In connection with the closing of this transaction, the Company repaid its
notes payable and capital lease obligations to other than related parties
(approximately $8,560,000).
NOTE K--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
YEAR ENDED BEGINNING BALANCE AT
DECEMBER 31, OF YEAR PROVISION WRITE-OFFS END OF YEAR
- --------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1995........ $ 181,336 $ 334,732 $ (334,732) $ 181,336
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
1996........ $ 181,336 $ 844,235 $ (703,853) $ 321,718
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
*****
F-75
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholder of
Masonry Supply, Inc.
We have audited the accompanying balance sheet of Masonry Supply, Inc. (a Texas
corporation) as of October 21, 1998 and the related statements of operations and
retained earnings and cash flows for the period from July 1, 1998 through
October 21, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Masonry Supply, Inc. as of
October 21, 1998, and the results of its operations and its cash flows for the
period from July 1, 1998 through October 21, 1998 in conformity with generally
accepted accounting principles.
/s/Waters, Murray & Associates
December 10, 1998
Mansfield, Texas
F-76
<PAGE>
MASONRY SUPPLY, INC.
BALANCE SHEET
OCTOBER 21, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 480,160
Accounts receivable-trade, net of allowance for doubtful accounts of $107,388
(Notes C, F and K).......................................................... 1,514,052
Inventories (Notes A and F)................................................... 1,402,341
Other receivables............................................................. 5,250
Prepaid expenses.............................................................. 96,437
---------
Total current assets........................................................ 3,498,240
FIXED ASSETS--NET OF ACCUMULATED DEPRECIATION (NOTES A, D, E AND F)............. 693,444
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED (NET OF AMORTIZATION)........ 90,018
---------
TOTAL ASSETS.................................................................... $4,281,702
---------
---------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable (Note B)..................................................... $ 726,600
Accrued expenses.............................................................. 137,993
Obligation under capital lease-current portion (Note E)....................... 6,045
---------
Total current liabilities................................................... 870,638
LONG-TERM LIABILITIES (NOTE E AND F)............................................ 14,790
---------
TOTAL LIABILITIES............................................................... 885,428
---------
COMMITMENTS AND CONTINGENCIES (NOTES G AND H)
SHAREHOLDER'S EQUITY
Common shares, no par value, 10,000 shares authorized, 1,000 issued and
outstanding................................................................. 1,000
Retained earnings............................................................. 3,395,274
---------
Total shareholder's equity.................................................. 3,396,274
---------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY........................................ $4,281,702
---------
---------
</TABLE>
See accompanying notes and auditor's report
F-77
<PAGE>
MASONRY SUPPLY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIODS FROM JULY 1, 1998 THROUGH OCTOBER 21, 1998 AND
UNAUDITED JULY 1, 1997 THROUGH OCTOBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET SALES............................................................................. $ 3,976,794 $ 4,156,116
COST OF SALES......................................................................... 2,375,820 2,619,523
------------ ------------
1,600,974 1,536,593
OPERATING EXPENSES (INCLUDING A PROVISION FOR DOUBTFUL ACCOUNTS OF $39,507 AND $36,506
FOR 1998 AND 1997, RESPECTIVELY).................................................... 979,797 998,689
------------ ------------
Income from operations.............................................................. 621,177 537,904
------------ ------------
OTHER EXPENSE
Loss from sale of assets............................................................ 9,588 --
Interest expense.................................................................... 10,629 15,634
------------ ------------
20,217 15,634
------------ ------------
Net income.......................................................................... 600,960 522,270
RETAINED EARNINGS:
Beginning of period................................................................. 2,794,314 1,944,095
------------ ------------
End of period....................................................................... $ 3,395,274 $ 2,466,365
------------ ------------
------------ ------------
</TABLE>
See accompanying notes and auditor's report
F-78
<PAGE>
MASONRY SUPPLY, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIODS JULY 1, 1998 THROUGH OCTOBER 21, 1998 AND
UNAUDITED JULY 1, 1997 THROUGH OCTOBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................ $ 600,960 $ 522,270
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization..................................................... 43,078 36,396
Loss on sale of assets............................................................ 9,589 --
Changes in assets and liabilities
Accounts receivable............................................................. 97,622 (203,925)
Inventory....................................................................... (99,676) 146,530
Other assets.................................................................... (28,827) 30,400
Accounts payable and accrued expenses........................................... (344,071) 76,432
----------- -----------
Net cash provided by operating activities....................................... 278,675 608,103
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................. (16,345) (47,765)
----------- -----------
Net cash used in investing activities........................................... (16,345) (47,765)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal reductions on long-term debt................................................ (400,000) (43,306)
Principal reductions on capital lease................................................. (2,050) --
----------- -----------
Net cash used in financing activities........................................... (402,050) (43,306)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................... (139,720) 517,032
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 619,880 112,353
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 480,160 $ 629,385
----------- -----------
----------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest expense........................................................ $ 10,629 $ 15,634
----------- -----------
----------- -----------
</TABLE>
See accompanying notes and auditor's report
F-79
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS JULY 1, 1998 THROUGH OCTOBER 21, 1998
AND UNAUDITED JULY 1, 1997 THROUGH OCTOBER 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Masonry Supply, Inc. (the
"Company"), is presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of the
Company's management, who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
ORGANIZATION
The Company, a Texas corporation, was incorporated in April 1979. The
Company is engaged primarily in the sale of masonry materials to building
contractors. The Company's headquarters and primary outlet is in Mansfield,
Texas, with other locations in Plano, Texas, Mesquite, Texas and Southlake,
Texas.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less to
be cash equivalents.
INVENTORIES
Inventories, which consist primarily of masonry materials, are stated at the
lower of cost or market. Cost is determined using the average cost method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been determined by
the Company, using available market information and appropriate valuation
methodologies. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES--The carrying amounts of these items are a reasonable estimate of their
fair value.
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are available.
The carrying amount of this item is a reasonable estimate of fair value.
The fair value estimates herein are based on pertinent information available
to management as of October 21, 1998. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
F-80
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIODS JULY 1, 1998 THROUGH OCTOBER 21, 1998
AND UNAUDITED JULY 1, 1997 THROUGH OCTOBER 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Transportation equipment, furniture and fixtures, and equipment are carried
at cost. Expenditures for renewals and betterments are capitalized and
maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the useful life of the depreciable asset.
Leasehold improvements are carried at cost and are amortized using the
straight-line method over the estimated useful life of the related asset.
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED ("GOODWILL")
Goodwill is being amortized over 40 years using the straight-line method.
Capitalized lease costs are being amortized on the straight-line basis over the
four-year lease term.
INCOME TAXES
In March, 1989, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, the Company does not pay
Federal corporate income taxes on its taxable income. Instead, the Company's
shareholder is liable for individual income taxes on the Company's taxable
income. Although the income recognition timing differences originating before
attaining S corporation status will reverse, they will not generate a tax
liability at the Company level so long as S corporation status is maintained.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE B--RELATED PARTY TRANSACTIONS
The Company leases its office facilities, showroom and warehouse in
Mansfield, Texas from the Company's shareholder on a month-to-month basis. No
long-term lease agreement exists for this site. Facility rent paid during both
periods presented amounted to approximately $55,700 per year.
There are no amounts due to shareholder at October 21, 1998.
Compensation paid to the Company's shareholder during each of the periods
presented was approximately $177,600 and $157,800 in 1998 and 1997,
respectively.
NOTE C--CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances at several financial institutions.
At times, cash balances and high quality money market instruments in the
Company's accounts may exceed federally insured limits. Financial instruments
that potentially subject the Company to credit risk consist principally of trade
receivables. The Company sells primarily to customers in North Central Texas.
F-81
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIODS JULY 1, 1998 THROUGH OCTOBER 21, 1998
AND UNAUDITED JULY 1, 1997 THROUGH OCTOBER 31, 1997
NOTE D--FIXED ASSETS
Fixed assets, which are stated at cost, at consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
---------------
<S> <C> <C>
Transportation equipment.......................................................... $ 907,303 3 to 7 years
Furniture & fixtures.............................................................. 233,284 5 to 10 years
Leasehold improvements............................................................ 60,958 5 years
Machinery & equipment............................................................. 553,763 5 to 15 years
-------------
1,755,308
Less: Accumulated depreciation.................................................... (1,061,864)
-------------
$ 693,444
-------------
-------------
</TABLE>
NOTE E--CAPITAL LEASES
Certain equipment is being held under a noncancelable capital lease with a
remaining term of 35 months at October 21, 1998. This asset is included in
equipment and amounted to $26,931 at October 21, 1998. Accumulated depreciation
on this asset amounted to $6,421 at October 21, 1998. The following is a
schedule by years of future minimum lease payments under capital leases together
with the present value of the net minimum lease payments:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
------------
<S> <C>
1999............................................................................. $ 5,677
2000............................................................................. 8,677
2001............................................................................. 8,677
2002............................................................................. 2,169
---------
Total lease payments............................................................... 25,200
Less: Amount representing interest............................................... (4,365)
---------
Present value of future minimum lease payments................................... $ 20,835
---------
---------
</TABLE>
This amount is stated on the balance sheet as follows:
<TABLE>
<S> <C>
Obligations uunder capital lease................................. $ 20,835
Less: Current portion............................................ (6,045)
---------
Long-term portion................................................ $ 14,790
---------
---------
</TABLE>
NOTE F--LONG-TERM DEBT
The Company's long-term debt consists of the following:
F-82
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIODS JULY 1, 1998 THROUGH OCTOBER 21, 1998
AND UNAUDITED JULY 1, 1997 THROUGH OCTOBER 31, 1997
NOTE F--LONG-TERM DEBT (CONTINUED)
$1,000,000 revolving line of credit to bank, secured by inventory and
accounts receivable; interest payable at Prime plus .25 (currrently 8.75%);
matures in June 1999. The Line of Credit was withdrawn on October 21, 1998.
NOTE G--LEASE COMMITMENTS
The Company leases certain office and warehouse facilities from unrelated
third parties under noncancelable operating leases that expire on various dates
through 2002. Total rent expense to unrelated third parties for the periods
presented was approximately $37,500 and $45,300 in 1998 and 1997, respectively.
Future minimum annual rentals are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
- ----------------------------------------------------------------------------------
<S> <C>
1999.......................................................................... $ 97,000
2000.......................................................................... 60,000
2001.......................................................................... 46,000
2002.......................................................................... 19,000
----------
$ 222,000
----------
----------
</TABLE>
NOTE H--DEFINED CONTRIBUTION PLAN
Employees of the Company are eligible to participate in the Company's
retirement plan. The plan is a qualified defined contribution plan to which the
Company can contribute a percentage of each employee's compensation up to the
maximum tax-deductible amount. For the periods presented, the Company
contributed approximately $21,300 and $31,000 in 1998 and 1997, respectively.
NOTE I--SUBSEQUENT EVENT
On October 22, 1998, the Company sold its masonry business, including most
of its operating assets, in exchange for $8,000,000 and the buyer's assumption
of most of its liabilities.
A summary of the transaction, which was effective as of July 1, 1998, is as
follows:
<TABLE>
<S> <C> <C>
Total operating assets sold......................... $4,400,827
Debt assumed by purchaser........................... (1,612,249)
----------
Net assets sold................................... $2,788,578
----------
----------
Sale price
Cash.............................................. $6,000,000
Promissory note................................... 2,000,000
---------
$8,000,000
----------
----------
</TABLE>
F-83
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIODS JULY 1, 1998 THROUGH OCTOBER 21, 1998
AND UNAUDITED JULY 1, 1997 THROUGH OCTOBER 31, 1997
NOTE J--ACQUISITION
In May 1997, the Company acquired certain assets and assumed certain
liabilities of a privately held masonry supply business in Mesquite, Texas. The
acquisition was recorded as a purchase and, accordingly, results of operations
of the acquired entity are included in the accompanying statements of
operations. The purchase price was cash of $51,416 and a note for the remaining
balance of $50,000. The transaction gave rise to approximately $100,416 of
goodwill which is being amortized over a forty-year period.
NOTE K--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BALANCE AT OCTOBER 21,
JUNE 30, 1998 PROVISION WRITE-OFFS 1998
- ------------- ----------- ---------- ---------------
<S> <C> <C> <C>
$ 80,302 $ 39,507 $ (12,421) $ 107,388
- ------------- ----------- ---------- ---------------
</TABLE>
* * * * *
F-84
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholder of
Masonry Supply, Inc.
We have audited the accompanying balance sheets of Masonry Supply, Inc. (a Texas
corporation) as of June 30, 1998 and 1997, and the related statements of
operations and retained earnings and cash flows for each of the three years in
the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Masonry Supply, Inc. as of June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/s/Waters, Murray & Associates
September 25, 1998
Mansfield, Texas
F-85
<PAGE>
MASONRY SUPPLY, INC.
BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................... $ 619,880 $ 112,353
Accounts receivable-trade, net of allowance for doubtful accounts of $80,302 in
1998, and $128,086 in 1997 (Notes C, F and K)..................................... 1,615,863 1,219,605
Inventories (Notes A and F)......................................................... 1,302,665 1,272,730
Other receivables................................................................... 1,061 3,569
Prepaid expenses.................................................................... 67,610 102,536
------------ ------------
Total current assets.............................................................. 3,607,079 2,710,793
FIXED ASSETS--NET OF ACCUMULATED DEPRECIATION (NOTES A, D, E AND F)................... 727,178 817,249
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED (NET OF AMORTIZATION).............. 92,606 100,966
------------ ------------
TOTAL ASSETS.......................................................................... $ 4,426,863 $ 3,629,008
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable (Note B)........................................................... $ 952,720 $ 991,555
Accrued expenses.................................................................... 255,944 140,114
Current portion of long-term debt (Note F).......................................... 400,000 552,244
Obligation under capital lease-current portion (Note E)............................. 6,045 --
------------ ------------
Total current liabilities......................................................... 1,614,709 1,683,913
LONG-TERM LIABILITIES (NOTES E AND F)................................................. 16,840 --
------------ ------------
TOTAL LIABILITIES..................................................................... 1,631,549 1,683,913
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES G AND H)
SHAREHOLDER'S EQUITY
Common shares, no par value, 10,000 shares authorized, 1,000 issued and outstanding 1,000 1,000
Retained earnings................................................................... 2,794,314 1,944,095
------------ ------------
Total shareholder's equity........................................................ 2,795,314 1,945,095
------------ ------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY.............................................. $ 4,426,863 $ 3,629,008
------------ ------------
------------ ------------
</TABLE>
See accompanying notes and auditor's report
F-86
<PAGE>
MASONRY SUPPLY, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
NET SALES............................................................. $ 11,960,092 $ 9,101,396 $ 8,441,473
COST OF SALES......................................................... 7,374,319 5,559,856 5,181,174
------------- ------------ ------------
4,585,773 3,541,540 3,260,299
OPERATING EXPENSES (INCLUDING A PROVISION FOR DOUBTFUL ACCOUNTS OF
$109,519, $122,136 AND $50,161 FOR 1998, 1997 AND 1996,
RESPECTIVELY)....................................................... 3,572,243 2,976,883 2,680,578
------------- ------------ ------------
Income from operations.............................................. 1,013,530 564,657 579,721
------------- ------------ ------------
OTHER INCOME (EXPENSE)
Miscellaneous....................................................... (323) 12,659 23,613
Loss from sale of assets............................................ (7,037) (59,691) --
Interest expense.................................................... (43,053) (30,789) (45,358)
------------- ------------ ------------
(50,413) (77,821) (21,745)
------------- ------------ ------------
Net income.......................................................... 963,117 486,836 557,976
RETAINED EARNINGS:
Beginning of year................................................... 1,944,095 1,674,070 1,541,094
Distributions to shareholder........................................ (112,898) (216,811) (425,000)
------------- ------------ ------------
End of year......................................................... $ 2,794,314 $ 1,944,095 $ 1,674,070
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes and auditor's report
F-87
<PAGE>
MASONRY SUPPLY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 963,117 $ 486,836 $ 557,976
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization.......................................... 187,557 154,599 161,115
Loss on sale of assets................................................. 7,037 59,691 --
Changes in assets and liabilities
Accounts receivable.................................................. (393,751) (71,938) (212,368)
Inventory............................................................ (29,935) (185,335) (87,948)
Other assets......................................................... 35,476 (79,593) 3,522
Accounts payable and accrued expenses................................ 76,996 260,612 269,333
----------- ----------- -----------
Net cash provided by operating activities............................ 846,497 624,872 691,630
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (106,272) (402,916) (296,646)
Goodwill on business acquisition......................................... -- (100,416) --
Proceeds from sale of assets............................................. 9,559 63,030 --
----------- ----------- -----------
Net cash used in investing activities................................ (96,713) (440,302) (296,646)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt................................... 400,000 600,000 286,731
Principal borrowings on capital lease.................................... 26,931 -- --
Principal reductions on long-term debt................................... (552,244) (516,544) (229,872)
Principal reductions on capital lease.................................... (4,045) -- --
Distributions to shareholder............................................. (112,898) (216,811) (425,000)
----------- ----------- -----------
Net cash used in financing activities................................ (242,256) (133,355) (368,141)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................. 507,528 51,215 26,843
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................... 112,353 61,138 34,295
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR..................................... $ 619,881 $ 112,353 $ 61,138
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest expense........................................... $ 39,456 $ 30,005 $ 46,089
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes and auditor's report
F-88
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Masonry Supply, Inc. (the
"Company"), is presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of the
Company's management, who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
ORGANIZATION
The Company, a Texas corporation, was incorporated in April 1979. The
Company is engaged primarily in the sale of masonry materials to building
contractors. The Company's headquarters and primary outlet is in Mansfield,
Texas, with other locations in Plano, Texas, Mesquite, Texas and Southlake,
Texas.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less to
be cash equivalents.
INVENTORIES
Inventories, which consist primarily of masonry materials, are stated at the
lower of cost or market. Cost is determined using the average cost method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the company, using available market information and appropriate valuation
methodologies. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES--The carrying amounts of these items are a reasonable estimate of their
fair value.
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are available.
The carrying amount of this item is a reasonable estimate of fair value.
The fair value estimates herein are based on pertinent information available
to management as of June 30, 1998. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
F-89
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Transportation equipment, furniture and fixtures, and equipment are carried
at cost. Expenditures for renewals and betterments are capitalized and
maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the useful life of the depreciable asset.
Leasehold improvements are carried at cost and are amortized using the
straight-line method over the estimated useful life of the related asset.
AMORTIZATION
Goodwill is being amortized over 40 years using the straight-line method.
Capitalized lease costs are being amortized on the straight-line basis over the
four-year lease term.
INCOME TAXES
In March, 1989, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, the Company does not pay
Federal corporate income taxes on its taxable income. Instead, the shareholder
is liable for individual income taxes on the Company's taxable income. Although
the income recognition timing differences originating before attaining S
corporation status will reverse, they will not generate a tax liability at the
Company level so long as S corporation status is maintained.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE B--RELATED PARTY TRANSACTIONS
The Company leases its office facilities in Mansfield, Texas from the
Company's shareholder on a month-to-month basis. No long-term lease agreements
exist for these sites. Facility rent paid during each of the three years ended
June 30, 1998 amounted to approximately $192,000 per year.
The Company transacts business with another company owned by the Company's
shareholder. A summary of these transactions in each of the three years ended
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
TOTAL RELATED
YEAR ENDED JUNE 30, PURCHASES PAYABLES
------------------ -------------- ---------------
<S> <C> <C>
1998.................................................... $ 387,000 $ --
-------------- -------
-------------- -------
1997.................................................... $ 452,000 $ 52,138
-------------- -------
-------------- -------
1996.................................................... $ 304,000 $ 50,007
-------------- -------
-------------- -------
</TABLE>
There are no amounts due to shareholder at June 30, 1998 and 1997,
respectively.
F-90
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NOTE B--RELATED PARTY TRANSACTIONS (CONTINUED)
Compensation paid to the Company's shareholder during each of the years
ended June 30, 1998, 1997, and 1996 was approximately $725,000, $522,000, and
$472,000, respectively. Such compensation included a base salary plus a
discretionary bonus.
NOTE C--CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances at several financial institutions.
At times, cash balances and high quality money market instruments in the
Company's accounts may exceed federally insured limits. Financial instruments
that potentially subject the Company to credit risk consist principally of trade
receivables. The Company sells primarily to customers in North Central Texas.
NOTE D--FIXED ASSETS
Fixed assets, which are stated at cost consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1998 1997 LIVES
------------- ------------- ---------------
<S> <C> <C> <C>
Transportation equipment........................................... $ 952,202 $ 981,121 3 to 7 years
Furniture & fixtures............................................... 232,920 214,873 5 to 10 years
Leasehold improvements............................................. 47,339 47,339 5 years
Machinery & equipment.............................................. 602,704 577,310 5 to 15 years
------------- ------------- ---------------
1,835,165 1,820,643
Less: Accumulated depreciation..................................... (1,107,987) (1,003,394)
------------- -------------
$ 727,178 $ 817,249
------------- -------------
------------- -------------
</TABLE>
NOTE E--CAPITAL LEASES
Certain equipment is being held under a noncancelable capital lease with a
remaining term of 39 months at June 30, 1998. This asset is included in
equipment and amounted to $26,931 in 1998. Accumulated depreciation on this
asset amounted to $5,050 in 1998. The following is a schedule by years of future
minimum lease payments under the capital lease together with the present value
of the net minimum lease payments:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, 1998
------------ ---------
<S> <C>
1999........................................................................... $ 8,677
2000........................................................................... 8,677
2001........................................................................... 8,677
2002........................................................................... 2,169
---------
Total lease payments............................................................... 28,200
Less: Amount representing interest............................................... (5,315)
---------
Present value of future minimum lease payments................................... $ 22,885
---------
---------
</TABLE>
F-91
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NOTE E--CAPITAL LEASES (CONTINUED)
This amount is stated on the balance sheet as follows:
<TABLE>
<S> <C>
Obligations under capital lease.................................... $ 22,885
Less: Current portion.............................................. (6,045)
---------
Long-term portion.................................................. $ 16,840
---------
---------
</TABLE>
NOTE F--LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
$1,000,000 revolving line of credit to bank, secured by inventory and accounts receivable;
interest payable at Prime plus .25 (currrently 8.75%); matures in June, 1999............ $ 400,000 $ 400,000
Equipment notes payable to banks, payable monthly with interest at rates from 7.75% to
8.50% through June, 1998; collateralized by equipment................................... -- 152,244
---------- ----------
400,000 552,244
Less: Current portion..................................................................... 400,000 552,244
---------- ----------
Long-term portion......................................................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
NOTE G--LEASE COMMITMENTS
The Company leases certain office and warehouse facilities from unrelated
third parties under noncancelable operating leases that expire on various dates
through 2002. Total rent expense to unrelated third parties for the years ended
1998, 1997, and 1996 was approximately $106,000, $77,000, and $36,000,
respectively. Future minimum annual rentals are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
<S> <C>
1999........................................................................ $ 97,000
2000........................................................................ 60,000
2001........................................................................ 46,000
2002........................................................................ 19,000
----------
$ 222,000
----------
----------
</TABLE>
NOTE H--DEFINED CONTRIBUTION PLAN
Employees of the Company are eligible to participate in the Company's
retirement plan. The plan is a qualified defined contribution plan to which the
Company can contribute a percentage of each employee's compensation up to the
maximum tax-deductible amount. The Company contributed approximately $124,000,
$126,000 and $91,500 in 1998, 1997 and 1996, respectively.
F-92
<PAGE>
MASONRY SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
NOTE I--SUBSEQUENT EVENT
On October 22, 1998, the Company sold its masonry business, including most
of its operating assets, in exchange for $8,296,000 and the buyer's assumption
of most of its liabilities.
A summary of the transaction, which was effective as of July 1, 1998, is as
follows:
<TABLE>
<S> <C> <C>
Total operating assets sold......................... $4,400,827
Debt assumed by purchaser........................... (1,612,249)
----------
Net assets sold................................... $2,788,578
----------
----------
Sale price
Cash.............................................. $6,000,000
Five-year note.................................... 2,296,000
---------
$8,296,000
----------
----------
</TABLE>
NOTE J--ACQUISITION
In May 1997, the Company acquired certain assets and assumed certain
liabilities of a privately held masonry supply business in Mesquite, Texas. The
acquisition was recorded as a purchase and accordingly, results of operations of
the acquired entity are included in the accompanying statements of operations.
The purchase price was cash of $51,416 and a note for the remaining balance of
$50,000. The transaction gave rise to approximately $100,416 of goodwill which
is being amortized over a forty-year period.
NOTE K--ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
YEAR ENDING BEGINNING BALANCE AT
JUNE 30, OF YEAR PROVISION WRITE-OFFS END OF YEAR
- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1996 $ 103,626 $ 50,161 $ (59,987) $ 93,800
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
1997 $ 93,800 $ 122,136 $ (87,850) $ 128,086
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
1998 $ 128,086 $ 109,519 $ (157,303) $ 80,302
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
* * * * *
F-93
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED BALANCE SHEET
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash.......................................................................... $ 171,339
Accounts receivable--trade (net of allowance for doubtful accounts of $4,000)
(Note 4).................................................................... 1,544,292
Inventories (Note 4).......................................................... 1,180,861
Deferred tax asset............................................................ 1,000
Other current assets.......................................................... 108,930
---------
Total current assets........................................................ 3,006,422
IMPROVEMENTS AND EQUIPMENT (net of accumulated depreciation and amortization)
(Note 3)...................................................................... 665,823
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED (net of accumulated
amortization)................................................................. 5,486,126
DEFERRED FINANCING COSTS........................................................ 109,686
---------
$9,268,057
---------
---------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 754,022
Accrued expenses and other current liabilities................................ 414,877
Current portion of long-term debt (Note 4).................................... 1,270,542
Due to related party (Note 2)................................................. 250,000
Federal and state income taxes due to Parent.................................. 24,000
---------
Total current liabilities................................................... 2,713,441
LONG-TERM DEBT (Note 4)......................................................... 5,281,756
DUE TO PARENT................................................................... 233,318
---------
Total liabilities........................................................... 8,228,515
---------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
SHAREHOLDER'S EQUITY:
Common shares, $.01 par value per share, 3,000 shares authorized, issued and
outstanding................................................................. 30
Additional paid-in capital.................................................... 999,970
Retained earnings............................................................. 39,542
---------
Total shareholder's equity.................................................. 1,039,542
---------
$9,268,057
---------
---------
</TABLE>
See notes to unaudited financial statements.
F-94
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
<TABLE>
<S> <C>
REVENUES.......................................................................... $ 364,684
COST OF SALES..................................................................... 209,124
---------
155,560
---------
OPERATING EXPENSES (including a provision for doubtful accounts of $3,565)........ 68,706
DEPRECIATION...................................................................... 4,858
AMORTIZATION OF EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED................ 3,764
AMORTIZATION OF DEFERRED FINANCING COSTS.......................................... 604
---------
77,932
---------
INCOME FROM OPERATIONS............................................................ 77,628
INTEREST EXPENSE.................................................................. (14,086)
---------
INCOME BEFORE PROVISION FOR INCOME TAXES.......................................... 63,542
PROVISION FOR INCOME TAXES........................................................ 24,000
---------
NET INCOME AND RETAINED EARNINGS.................................................. $ 39,542
---------
---------
</TABLE>
See notes to unaudited financial statements.
F-95
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 39,542
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 9,226
Deferred income taxes....................................................... (1,000)
Increase in allowance for doubtful accounts................................. 3,565
Changes in operating assets and liabilities:
Increase in accounts receivable........................................... (33,805)
Decrease in inventories................................................... 221,480
Increase in other current assets.......................................... (11,493)
Increase in accounts payable.............................................. 27,422
Increase in accrued expenses and other current liabilities................ 35,932
Increase in federal and state income taxes due to Parent.................. 24,000
----------
Net cash provided by operating activities............................... 314,869
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (684)
Payment for purchase of net assets from Masonry Supply, Inc. (See below and
Note 2)..................................................................... (1,519,840)
----------
Net cash used in investing activities................................... (1,520,524)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal borrowings on long-term debt........................................ 89,994
Principal reductions on long-term debt........................................ (713,000)
Note payable--Parent.......................................................... 1,000,000
Capital contribution from Parent.............................................. 1,000,000
----------
Net cash provided by financing activities............................... 1,376,994
----------
NET INCREASE IN CASH............................................................ 171,339
CASH, BEGINNING OF PERIOD....................................................... --
----------
CASH, END OF PERIOD............................................................. $ 171,339
----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of Masonry Supply, Inc.:
Fair value of assets acquired............................................... $9,284,007
Liabilities assumed......................................................... (1,359,698)
Note issued to seller....................................................... (2,045,972)
Due to related party........................................................ (250,000)
Bank debt incurred.......................................................... (4,108,497)
----------
Cash paid..................................................................... $1,519,840
----------
----------
</TABLE>
See notes to unaudited financial statements.
F-96
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The financial statements of MSI/Eagle Supply, Inc. (the "Company"), a
wholly-owned subsidiary of TDA Industries, Inc. ("TDA" or the "Parent") have
been prepared by the Company, which is responsible for their integrity and
objectivity, without audit. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for the fair presentation
of financial position, results of operations and cash flows have been included.
These financial statements, to the best of management's knowledge and belief,
were prepared in accordance with generally accepted accounting principles.
Operating results for the interim period are not necessarily indicative of
results for the entire year.
In October 1998, the Company was formed for the purpose of acquiring the
assets and business of Masonry Supply, Inc. ("MSI Co." or the "Predecessor").
The Company received an initial capital contribution from TDA of $1,000,000 and
a loan from TDA in the principal amount of $1,000,000 (Note 4).
BUSINESS DESCRIPTION--The Company is engaged in the wholesale distribution
of masonry supplies and related products utilized primarily in the construction
industry in Texas. The Company operates in a single industry segment.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined by using the first-in, first-out (FIFO) method.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization of improvements
and equipment are provided principally by straight-line methods at various rates
calculated to extinguish the carrying values of the respective assets over their
estimated useful lives.
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED--Excess cost of
investment over net assets acquired ("goodwill") is being amortized on a
straight-line method over 40 years. Management of TDA has adopted a 40 year
amortization period based on its experience operating other companies in the
same industry segment, a review of the amortization periods adopted by other
companies in the same industry segment and the belief that the excess purchase
price will be recovered over the 40 year period through profitable operations.
DEFERRED FINANCING COSTS--Deferred financing costs are related to the
acquisition financing obtained in connection with the acquisition described in
Note 2 and are being amortized on a straight-line method over the term of the
related debt obligations described in Note 4A.
INCOME TAXES--The Company is included in the consolidated Federal income tax
return of its Parent. Income taxes are calculated on a separate return filing
basis.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards
F-97
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CASH, ACCOUNTS AND NOTES RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES--The carrying amounts of these items are a reasonable estimate of their
fair value.
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are available.
The carrying amount of this item is a reasonable estimate of fair value except
for a 6% note due in October 2000. Such note has a carry value of $1,000,000 and
an estimated fair value of $955,789.
The fair value estimates presented herein are based on pertinent information
available to management as of October 31, 1998. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
CONCENTRATION OF CREDIT RISK--The financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
accounts receivable. The Company grants credit to customers based on an
evaluation of the customer's financial condition and in certain instances
obtains collateral in the form of liens on both business and personal assets of
its customers. Exposure to losses on receivables is principally dependent on
each customer's financial condition. The Company controls its exposure to credit
risks through credit approvals, credit limits and monitoring procedures and
establishes allowances for anticipated losses.
2. ACQUISITION
On October 22, 1998, the Company acquired the business and substantially all
of the assets of Masonry Supply, Inc., engaged in the wholesale distribution of
masonry supplies and related products utilized primarily in the construction
industry. The purchase price, as adjusted, excluding transaction expenses, was
$8,295,972 consisting of $6,250,000 in cash and a five-year, 8% per annum note
in the principal amount of $2,045,972. The purchase price and the note are
subject to further adjustment under certain conditions. Further, the Company is
obligated for potentially substantial additional payments if, among other
factors, the business of the Company attains certain levels of income, as
defined, during the five-year period ending June 30, 2003. More specifically,
MSI Co. or its designee is to receive a percentage of the EBITA or the modified
EBITA (as defined) of the Company (the "MSI EBITA") on a per year,
non-cumulative basis for each of the Company's fiscal years ending on June 30 of
1999 through 2003 (the "Applicable Period"). If the MSI EBITA reaches $2,000,000
and $2,750,000 in the foregoing fiscal years, MSI Co. or its designee is to
receive 25% and 35%, respectively, of that fiscal year's MSI EBITA in excess
F-98
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
2. ACQUISITION (CONTINUED)
of those levels, respectively. Additionally, if the Offering described in Note 7
is consummated prior to October 22, 2003 and in the event certain MSI EBITA
levels are reached for the Company, MSI Co. or its designee will be entitled to
receive (i) $1,000,000 or (ii) $750,000 (either in cash or in common shares of
Eagle Supply Group, Inc. valued at the public offering price) if the MSI EBITA
level is (i) not less than $2,000,000 per year or (ii) less than $2,000,000 but
not less than $1,500,000, respectively. Eagle Supply Group, Inc. will issue
200,000 of its common shares and not pay the foregoing amounts to MSI Co. or its
designee, even if the MSI EBITA does not reach the required levels.
The foregoing transaction was accounted for as a purchase and, accordingly,
the results of the operations acquired from MSI Co. have been included in the
statement of operations from the date of the acquisition. This transaction gave
rise to approximately $5,492,000 of goodwill which is being amortized over a
forty-year period. Management of TDA has adopted a 40 year amortization period
based on its experience operating other companies in the same industry segment,
a review of the amortization periods adopted by other companies in the same
industry segment and the belief that the excess purchase price will be recovered
over the 40 year period through profitable operations. Any additional payments
to which MSI Co. or its designee will be entitled will be accounted for as
additional goodwill which will be amortized over the then remaining forty-year
period.
3. IMPROVEMENTS AND EQUIPMENT
The major classes of improvements and equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
---------------
<S> <C> <C>
Automotive equipment............................................. $ 423,807 3 to 7 years
Furniture, fixtures and equipment................................ 268,202 5 to 15 years
Leasehold improvements........................................... 16,584 5 years
----------
708,593
Less: Accumulated depreciation and amortization.................. 42,770
----------
$ 665,823
----------
----------
</TABLE>
F-99
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Revolving credit loan (A).......................... $ 410,491
Term loan (A)...................................... 3,075,000
8% promissory note due October 2003 (Note 2) 2,045,972
Note payable--Parent (B)........................... 1,000,000
Capitalized equipment lease obligations (C)........ 20,835
---------
6,552,298
Less: Current portion of long-term debt............ 1,270,542
---------
$5,281,756
---------
---------
</TABLE>
- ------------------------
A) In order to finance the purchase of substantially all of the assets and
business of MSI Co. and to provide for working capital needs, the Company
entered into a loan agreement for a credit facility in the aggregate amount
of $9,075,000 which is collateralized by substantially all of the tangible
and intangible assets of the Company. The credit facility has an initial
maturity of October 22, 2003 and consists of a $3,075,000 term loan and the
balance in the form of a revolving credit loan. The term loan is payable in
83 equal monthly installments each in the amount of $37,000 and a final
payment of the then outstanding principal amount. The revolving credit loan
bears interest at the lender's prime rate, plus one-half percent, or at the
London interbank offered rate, plus two and one-half percent, at the option
of the Company. The term loan bears interest at the lender's prime rate,
plus one and one-half percent, or at the London interbank offered rate, plus
three and one-quarter percent, at the option of the Company. The credit
facility has been guaranteed by the Parent.
B) In October 1998, the Parent lent the Company $1,000,000 pursuant to a 6%
two-year note. The note is payable in full in October 2000, and the Parent
has agreed to defer the interest payable on the note until its maturity.
C) Future minimum lease payments for capitalized equipment lease obligations at
October 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- ------------------------------------------------------------------------- ---------
<S> <C>
1999..................................................................... $ 5,677
2000..................................................................... 8,677
2001..................................................................... 8,677
2002..................................................................... 2,169
---------
25,200
Less: Interest........................................................... 4,365
---------
Present value of net minimum payments.................................... $ 20,835
---------
---------
</TABLE>
F-100
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
4. LONG-TERM DEBT (CONTINUED)
The aggregate future maturities of long-term debt, excluding capitalized
equipment lease obligations, are as follows:
<TABLE>
<S> <C>
1999.................................................... $1,270,542
2000.................................................... 650,000
2001.................................................... 1,650,000
2002.................................................... 650,000
2003.................................................... 650,000
Thereafter.............................................. 1,681,756
---------
$6,552,298
---------
---------
</TABLE>
5. TRANSACTIONS WITH RELATED PARTIES
The Company leases its corporate offices, showroom and warehouse in
Mansfield, Texas, from the President of the Company pursuant to a three-year
written lease at an annual rent aggregating approximately $107,000.
6. COMMITMENTS AND CONTINGENCIES
The Company is committed to unrelated parties for long-term leases for
property, automotive and data processing equipment. The leases expire on various
dates through 2002. Certain of the leases for property include renewal options
and provide for the payment of taxes and other occupancy costs.
The approximate future minimum rental commitments under these leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 97,000
2000.............................................................................. 60,000
2001.............................................................................. 46,000
2002.............................................................................. 19,000
----------
$ 222,000
----------
----------
</TABLE>
F-101
<PAGE>
MSI/EAGLE SUPPLY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TDA INDUSTRIES, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD OCTOBER 22, 1998 TO OCTOBER 31, 1998
7. CONTEMPLATED TRANSACTION WITH RELATED PARTY
In September 1997, as amended, Eagle Supply Group, Inc. ("Eagle"), a
majority-owned subsidiary of the Parent, signed a letter of intent with an
underwriter for an initial public offering (the "Offering").
Upon closing of the Offering, Eagle will acquire all of the issued and
outstanding capital stock of the Company from its Parent. The acquisition will
be accounted for as the combining of two entities under common control, similar
to a pooling of interests, and will not result in any revaluation of the
Company's assets or the creation of goodwill. Upon the consummation of the
acquisition, the Company will become a wholly-owned subsidiary of Eagle.
8. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING (WRITEOFFS)/ BALANCE AT
OF PERIOD PROVISION RECOVERIES END OF PERIOD
- ------------- ----------- ----------- -------------
<S> <C> <C> <C>
$ -- $ 3,565 $ -- $ 3,565
----------- ----------- ------
----------- ----------- ------
</TABLE>
******
F-102
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR A SOLICITATION IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF THE COMPANY OR
THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 11
Dilution........................................ 24
Use of Proceeds................................. 26
Capitalization.................................. 29
Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................... 30
Selected Financial Information.................. 36
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 39
The Acquisitions................................ 57
Business........................................ 62
Management...................................... 75
Principal Stockholders.......................... 84
Certain Transactions............................ 85
Description of Securities....................... 92
Shares Eligible for Future Sale................. 95
Underwriting.................................... 96
Selling Securityholders......................... 99
Legal Matters................................... 100
Experts......................................... 100
Additional Information.......................... 100
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
EAGLE SUPPLY GROUP, INC.
2,500,000 SHARES OF
COMMON STOCK AND
2,500,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
[LOGO]
7700 W. Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Atlanta, Georgia
Beverly Hills, California
Boston, Massachusetts
Chicago, Illinois
Clearwater, Florida
Duluth, Georgia
East Boca Raton, Florida
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrook Heights, New Jersey
LaJolla, California
Minneapolis, Minnesota
Naples, Florida
New York, New York
Orlando, Florida
Sarasota, Florida
Tampa, Florida
Tulsa, Oklahoma
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE COVER PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 28, 1998
EAGLE SUPPLY GROUP, INC.
300,000 SHARES OF COMMON STOCK
This Prospectus relates to the potential sale by certain selling
securityholders (the "Selling Securityholders") of 300,000 shares of common
stock (the "Common Stock") of Eagle Supply Group, Inc., a Delaware corporation
(the "Company"). None of the proceeds from the sale of the shares of the
Company's Common Stock by the Selling Securityholders will be received by the
Company. The Company will bear all expenses (other than selling commissions and
fees and expenses of counsel or other advisors to the Selling Securityholders)
in connection with the registration and sale of the Common Stock being offered
by the Selling Securityholders. The Selling Securityholders may not sell or
otherwise dispose of their shares of Common Stock underlying their Warrants for
a period of fifteen months from the date of this Prospectus without the
Underwriter's prior written consent.
The Common Stock will be offered by the Selling Securityholders in
transactions in the over-the-counter market, in negotiated transactions or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices. The Selling Securityholders
may effect such transactions by selling the Common Stock to or through
broker/dealers, and such broker/dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders and/or
the purchasers of the Common Stock for whom such broker/dealers may act as agent
or to whom they sell as principal, or both. The Selling Securityholders may be
deemed to be "underwriters" as defined in the Securities Act of 1933, as amended
(the "Securities Act"). If any broker/dealers are used by the Selling
Securityholders, any commission paid to broker/dealers and, if broker/dealers
purchase any Common Stock as principals, any profits received by such
broker/dealers on the resales of the Securities may be deemed to be underwriting
discounts or commissions under the Securities Act. In addition, any profits
realized by the Selling Securityholders may be deemed to be underwriter
commissions. All costs, expenses and fees in connection with the registration of
the Common Stock offered by Selling Securityholders will be borne by the
Company. Brokerage commissions, if any, attributable to the sale of the Common
Stock will be borne by the Selling Securityholders. See "Selling
Securityholders."
Concurrently with the commencement of this offering, the Company is
offering, by separate Prospectus, 2,500,000 shares of Common Stock and 2,500,000
Warrants (the "Public Offering") through Barron Chase Securities, Inc. (the
"Underwriter"). It is anticipated that the offering by the Selling
Securityholders will not be commenced by any of the Selling Securityholders
unless the Public Offering is successfully completed, as unless it is so
completed there will be no expectation of a market developing for any of the
Company's securities.
Prior to the Public Offering, there has been no public market for the Common
Stock or the Warrants. The Company has applied for the listing of the Common
Stock and the Warrants under the symbols " " and " ", respectively, on
the NASDAQ SmallCap Market ("NASDAQ SmallCap"). There can be no assurance that a
trading market in the Company's Common Stock or Warrants will develop or if
<PAGE>
it does develop that it will be sustained. The closing of the Public Offering is
subject to the simultaneous acquisition by the Company of Eagle Supply, Inc.,
JEH/Eagle Supply, Inc. and MSI/Eagle Supply, Inc.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS,"
COMMENCING ON PAGE 10 AND
"DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
<TABLE>
<S> <C>
Securities Offered........................... 300,000 shares of Common Stock by the Selling
Securityholders. See "Description of
Securities" and "Selling Securityholders."
Common Stock Outstanding.....................
Before Public Offering..................... 5,950,000 shares(1)
After Public Offering...................... 8,450,000 shares(1)(2)
Use of Proceeds.............................. The Company will not receive any cash
proceeds from the Selling Securityholders
offering. See "Use of Proceeds,"
"Capitalization," "Certain Transactions," and
"Selling Securityholders".
Risk Factors................................. Investment in the Securities offered hereby
involves a high degree of risk and immediate
substantial dilution. See "Risk Factors" and
"Dilution."
Proposed NASDAQ SmallCap Symbols:(3)
Common Stock...............................
Warrants................................... W
</TABLE>
- ------------------------
(1) Includes 3,000,000, 300,000 and 250,000 shares of Common Stock to be issued
to TDA, James E. Helzer and Gary L. Howard respectively. See "Certain
Transactions."
(2) Includes the 2,500,000 shares of Common Stock to be issued in the Public
Offering but does not include (i) 375,000 shares of Common Stock, 375,000
Warrants and 375,000 shares of Common Stock underlying such Warrants subject
to the Underwriter's Overallotment Option; (ii) 2,500,000 shares of Common
Stock issuable upon the exercise of the Warrants to be sold in the Public
Offering; (iii) 300,000 shares of Common Stock issuable upon the exercise of
the Selling Securityholders' Warrants; (iv) 500,000 shares of Common Stock
issuable upon the exercise of warrants to be issued to the Underwriter; and
(v) 1,000,000 shares of Common Stock reserved for issuance pursuant to the
Company's stock option plan of which 900,000 shares of Common Stock are
reserved for options to be granted upon completion of the Public Offering.
See "Public Offering," "Management," "Certain Transactions," "Description of
Securities," and "Selling Securityholders."
(3) The proposed trading symbols do not imply that a liquid and active market
will be developed or sustained for the Company's Securities. See "Risk
Factors--Possible Suspension of the Company's Securities from NASDAQ
SmallCap."
8
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
PUBLIC OFFERING
Concurrently with the Selling Securityholder's offering, the Company is
offering 2,500,000 shares of its Common Stock and 2,500,000 Warrants in the
Public Offering through the Underwriter.
USE OF PROCEEDS
The Company will not receive any proceeds from the Selling Securityholders'
offering, although it will receive funds upon the exercise of any of the Selling
Securityholders' Warrants. The net proceeds to the Company from the sale of
2,500,000 shares of Common Stock and 2,500,000 Warrants in the Public Offering
are estimated to be approximately $10,351,000 ($12,023,000 if the Underwriter's
Overallotment Option is exercised in full) after deducting underwriting
commissions and discounts and other expenses of the Public Offering. The Company
expects to use the net proceeds of the Public Offering over the next twelve to
twenty-four months approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
DOLLAR AMOUNT APPROXIMATE
OF NET PERCENTAGE OF
APPLICATION OF NET PROCEEDS PROCEEDS NET PROCEEDS
- ----------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Finance the cash portion of potential acquisitions(1).............................. $ 2,500,000 24%
Additional Eagle, JEH Eagle and MSI Eagle distribution centers(2).................. $ 2,176,000 21%
Reduce Eagle's, JEH Eagle's and MSI Eagle's credit facilities and debt
balances(3)...................................................................... $ 4,100,000 40%
Capital Expenditures(4)............................................................ $ 700,000 7%
Repayment of Private Financing(5).................................................. $ 425,000 4%
Working Capital.................................................................... $ 450,000 4%
-------------- -----
Totals........................................................................... $ 10,351,000 100.0%
</TABLE>
- ------------------------
(1) Represents the approximate amount that may be used to fund the potential
acquisition of businesses in accordance with the Company's current strategy
which is subject to change from time to time.
(2) Represents the approximate amount that may be used to expand Eagle's, JEH
Eagle's and MSI Eagle's operations which is subject to change from time to
time. The Company estimates that the foregoing allocation will be sufficient
to enable Eagle, JEH Eagle and MSI Eagle to establish approximately six new
distribution centers and will be used principally to carry accounts
receivable and purchase inventory. The foregoing allocation excludes the
purchase of trucks, forklifts and similar equipment identified in note (4).
(3) To be used (i) to prepay the unpaid principal and interest due, at the time
of such payment, to MSI Co. pursuant to the five-year note issued by MSI
Eagle in October 1998 to MSI Co. in connection with MSI Eagle's acquisition
of the business and substantially all of the assets of MSI Co. in the
principal amount of $2,046,000, subject to adjustment, bearing interest at
the rate of 8% per year; and (ii) to be used to reduce Eagle's, JEH Eagle's
and MSI Eagle's outstanding balances of revolving credit loan borrowings
under their credit facilities. At October 31, 1998, Eagle had borrowed
approximately $8,748,000 under its credit facility. During Eagle's June 30,
1995 fiscal year, Eagle used its borrowings under its credit facility to
repay approximately $2,326,000 of its indebtedness to TDA and to advance
approximately $3,309,000 to TDA. The remainder of the outstanding balance of
the credit facility was used to fund continuing operations. At October 31,
1998, JEH Eagle had borrowed approximately $13,106,000 under its credit
facility. At October 31, 1998, MSI Eagle had borrowed approximately
$3,485,000 under its credit facility. The Eagle, JEH Eagle and MSI Eagle
revolving credit loans under the credit facilities bear interest, at their
respective options, at the London interbank offered rate ("Libor") plus two
and one-half percent or the lender's prime rate plus one-half percent.
Currently, Eagle, JEH Eagle and MSI Eagle pay interest on their revolving
credit loans based upon both rates. The current annual rates of interest on
their revolving credit loans are 8.25% based on the prime rate
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
26
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
and approximately 7.75% based on Libor. It is anticipated that the
borrowings under the revolving credit facility at the higher interest rate
will be reduced for each of them. Each of Eagle's, JEH Eagle's and MSI
Eagle's credit facilities mature in October 2003. See "The Acquisitions".
(4) To be used for leasehold improvements for existing distribution centers and
to purchase, if necessary, trucks, forklifts and similar equipment to
support additional distribution centers for Eagle, JEH Eagle and MSI Eagle.
(5) To be used to repay approximately $425,000 in principal and interest on
borrowings of $300,000 made by the Company in February 1998 pursuant to
promissory notes issued to TDA ($150,000) and two other stockholders of the
Company and on borrowings made by the Company in August 1998 pursuant to a
promissory note issued to TDA in the principal amount of $100,000. The
February 1998 notes bear interest at the rate of 15% per year through June
30, 1998 and 6% per year after that date. The notes issued in February 1998
mature on the earlier of thirty months after issuance or the closing of the
Public Offering. The note issued to TDA in August 1998 bears interest at the
rate of 6% per year and matures on the earlier of two years after issuance
or the closing of the Public Offering. The proceeds from the issuance of the
foregoing notes have and are being used to pay certain expenses relating to
the Public Offering, legal fees and expenses in connection with seeking the
listing of the Company's securities on NASDAQ and the Acquisitions.
The Company currently estimates that the net proceeds of the Public Offering
will be sufficient to fund its planned operations, including the cash portion of
potential acquisitions, if any, and expansion efforts for approximately twelve
to twenty-four months from the date of this Prospectus. The net proceeds may be
sufficient for a greater or lesser period of time depending on the extent of the
Company's expansion efforts and on the number of acquisitions, if any, that the
Company consummates during the next twelve to twenty-four months and the portion
of the purchase price of such acquisitions paid in cash. In addition, the
Company may require additional financing prior to or following such period if
Eagle, JEH Eagle or MSI Eagle suffer losses or if the Company effects the
acquisition of a business that subsequently suffers losses. The Company has no
commitments or arrangements for any such additional financing and there can be
no assurance that the Company will be able to obtain additional financing on
terms acceptable to the Company or at all. If required, the Company may seek to
finance the purchase price of acquisitions by purchase money indebtedness,
asset-based financing and/or issuances of its own securities; and to open
additional Eagle, JEH Eagle and MSI Eagle distribution centers by obtaining
short-term vendor inventory financing (inventory purchased on extended payment
terms), asset-based financing and/ or equipment leasing/financing. As each
potential acquisition will be individually negotiated, the Company is unable to
estimate the cash or other portions of a potential acquisition's purchase price.
In the event additional financing is unavailable to the Company, the Company may
be materially adversely affected.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Public Offering. Future events, as well as changes in
economic, regulatory or competitive conditions or the Company's business or
Eagle's, JEH Eagle's or MSI Eagle's business and the results of the Company's,
Eagle's, JEH Eagle's or MSI Eagle's activities may make shifts in the allocation
of funds within the described categories or to other purposes necessary or
desirable. In the event the Company is unable to fund the cash portion of
potential acquisitions with the net proceeds allocated above, Eagle, JEH Eagle
or MSI Eagle suffer losses or the Company completes an acquisition that
subsequently suffers losses, the Company may draw upon the net proceeds of the
Public Offering allocated to expand the number of Eagle's, JEH Eagle's or MSI
Eagle's distribution centers, purchase equipment to support that expansion
and/or working capital. The Company estimates that the net proceeds of the
Public Offering allocated to expand the number of Eagle's, JEH Eagle's and MSI
Eagle's distribution centers and to support that expansion will be sufficient to
establish approximately six new distribution centers at an average cost of
approximately $415,000 for each new distribution center. In the event the per
distribution center costs are greater than estimated, Eagle, JEH Eagle and MSI
Eagle may establish less than six new distribution
27
<PAGE>
centers, the Company may seek vendor financing of inventory, asset-based
financing and/or equipment leasing/financing, or draw upon the net proceeds of
the Public Offering allocated to working capital. In the event the per
distribution center costs are less than estimated, a portion of the net proceeds
of the Public Offering allocated for such purposes will be reallocated to
finance acquisitions or for working capital. In order to conduct its proposed
expansion, the Company intends to use a significant portion of the net proceeds
of the Public Offering for the acquisition of businesses or assets that are
consistent with the Company's current strategy, which is subject to change from
time to time. With the exception of the Acquisitions, the Company does not
currently have any agreements, commitments or arrangements with respect to any
proposed acquisitions nor has it identified or negotiated with any potential
acquisition candidates, and there can be no assurance that any acquisitions will
be consummated. Except for the Acquisitions, the Company has no present
intention to use the net proceeds of the Public Offering to acquire assets from
any of its affiliates.
Prior to expenditure, proceeds will be invested principally in high grade,
short-term, interest-bearing investments. Any proceeds received upon exercise of
the Overallotment Option or any of the Warrants will be used to finance
potential acquisitions or for working capital. There can be no assurance that
the Overallotment Option or any of the Warrants will be exercised.
28
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
SELLING SECURITYHOLDERS
The Registration Statement of which this Prospectus forms a part also covers
the offering of 300,000 shares of Common Stock underlying a like number of
Warrants owned by the Selling Securityholders. The resale of such securities by
the Selling Securityholders is subject to prospectus delivery and other
requirements of the Securities Act.
The Company's securities are being offered by the following Selling
Securityholders in the amounts set forth below.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK OF COMMON STOCK
SELLING BENEFICIALLY REGISTERED
SECURITYHOLDER OWNED(1) HEREIN(2)
- ---------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Nina Allen.................................................................. 50,000 25,000
William C. Bossung.......................................................... 50,000 25,000
James A. Croson............................................................. 50,000 25,000
D&R Partnership............................................................. 50,000 25,000
Eugene Geller............................................................... 25,000 12,500
Warren & Marianne Gilbert................................................... 50,000 25,000
HiTel Group, Inc............................................................ 100,000 50,000
Paul Schmidt................................................................ 62,500 31,250
Harry Falterbauer........................................................... 50,000 25,000
Florence & Eric Stein....................................................... 50,000 25,000
William Tonyes.............................................................. 50,000 25,000
Kenneth Zengage............................................................. 12,500 6,250
</TABLE>
- ------------------------
(1) The number of shares of Common Stock beneficially owned herein as set forth
above includes equal amounts of shares of Common Stock and shares of Common
Stock issuable on the exercise of Warrants.
(2) Such shares of Common Stock are receivable upon exercise of the Selling
Securityholders' Warrants.
After the completion of the sale by the respective Selling Securityholders
of the number of shares of Common Stock set forth opposite their names in the
second column above, none of the Selling Securityholders will beneficially own
1% or greater of shares of the Company's Common Stock.
The foregoing persons and entities have agreed not to sell, transfer,
hypothecate or otherwise dispose of, for a period of fifteen months from the
date of this Prospectus, an aggregate of 300,000 shares of Common Stock, 300,000
Warrants and the 300,000 shares of Common Stock underlying said Warrants which
are the subject of the Selling Securityholders' offering without the
Underwriter's prior written consent. The Underwriter does not anticipate that it
will release any of the Selling Securityholders except under extraordinary
circumstances that are not presently forseeable.
The shares of the Company's Common Stock underlying such Warrants may be
sold from time to time directly by the Selling Securityholders. Alternatively,
the Selling Securityholders may from time to time offer such securities through
underwriters, dealers or agents. The distribution of securities by the Selling
Securityholders may be effected in one or more transactions that may take place
in the over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such shares as principals, at market prices prevailing at the time
of sale. Commissions may be paid by the Selling Securityholders in connection
with such sales. The Selling Securityholders and intermediaries through whom
such securities are sold may be deemed "underwriters" within the meaning of the
Securities Act with respect to the securities offered, and any profits realized
or
96
<PAGE>
commissions received may be deemed underwriting compensation. The Company will
derive proceeds from exercises of the Warrants but will not derive any proceeds
from the sale of the Company's securities by the Selling Securityholders. There
can be no assurance that any of the Selling Securityholders' Warrants will be
exercised.
At a time an offer of securities is made by or on behalf of a Selling
Securityholder, it is the Company's intent that a prospectus be distributed
setting forth, based upon information provided by the Selling Securityholder,
the number of securities being offered and the terms of the offering, including
the name or names of any underwriters, dealers or agents, if any, the purchase
price paid by any underwriter for securities purchased from the Selling
Securityholder and any discounts, commissions or concessions allowed or
re-allowed or paid to dealers, and the proposed selling price to the public.
Sales of securities by the Selling Securityholders could have an adverse
effect on the market prices of the securities offered pursuant to the Public
Offering.
LEGAL MATTERS
The validity of the issuances of the securities offered hereby will be
passed upon for the Company by Gusrae, Kaplan & Bruno, New York, New York.
EXPERTS
The balance sheets of the Company as of June 30, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for the years ended June 30, 1998 and 1997 and the period May 1,
1996 (inception) to June 30, 1996 appearing in this Prospectus and Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein and has been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The balance sheets of Eagle Supply, Inc. as of June 30, 1998 and 1997 and
the related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended June 30, 1998 appearing in
this Prospectus and Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and has been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The balance sheet of JEH/Eagle Supply, Inc. as of June 30, 1998 and the
related consolidated statement of operations, shareholder's equity and cash
flows for the year ended June 30, 1998 appearing in this Prospectus and
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
has been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The balance sheets of the JEH Company for the six months ended June 30, 1997
and years ended December 31, 1996 and 1995 and the related statements of
operations and cash flows for the six months ended June 30, 1997 and each of the
years in the two year period ended December 31, 1996 appearing in this
Prospectus and Registration Statement have been audited by Waters, Murray &
Associates, independent auditors, as set forth in their report thereon appearing
elsewhere herein and has been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The balance sheets of Masonry Supply, Inc. as of October 21, 1998, June 30,
1998 and 1997 and the related consolidated statements of operations, equity and
cash flows for each of the period July 1, 1998 to October 21, 1998 and the three
years ended June 30, 1998 appearing in this Prospectus and Registration
Statement have been audited by Waters, Murray & Associates, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
have been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
97
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Washington, D.C. office of the Commission a
Registration Statement under the Securities Act with respect to the Securities
offered by this Prospectus. This Prospectus does not contain all the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and this offering, reference is made to
the Registration Statement, including the exhibits filed therewith, which may be
inspected without charge or copies made at prescribed rates from the Commission
at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 or at
its Northeast Regional Office located at Seven World Trade Center, New York, New
York 10048. Statements contained in the Prospectus as to the contents of any
contract or other document are not necessarily complete and reference is made to
each such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
Upon effectiveness of the Registration Statement, of which this Prospectus
forms a part, the Company will be subject to the reporting requirements of the
Exchange Act and in accordance therewith will file reports and other information
with the Commission. Reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at the following addresses: Northeast Regional
Office, Seven World Trade Center, New York, New York 10048; and Midwest Regional
Office, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a website that contains reports, proxies and information
statements and other information regarding issuers that file electronically with
the Commission. The Commission's website is located at http://www.sec.gov.
98
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR A SOLICITATION IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF THE COMPANY OR
THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 11
Dilution........................................ 24
Public Offering................................. 26
Use of Proceeds................................. 26
Capitalization.................................. 29
Unaudited Pro Forma Condensed
Consolidated Financial Statements............... 30
Selected Financial Information.................. 36
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 39
The Acquisitions................................ 57
Business........................................ 62
Management...................................... 75
Principal Stockholders.......................... 84
Certain Transactions............................ 85
Description of Securities....................... 92
Shares Eligible for Future Sale................. 95
Selling Securityholders......................... 96
Legal Matters................................... 97
Experts......................................... 97
Additional Information.......................... 98
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
EAGLE SUPPLY GROUP, INC.
- ---------------------------------
300,000 SHARES OF COMMON STOCK
- ---------------------------------
---------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this offering, all of which are to be paid by the
Registrant, in connection with the issuance and distribution of the Securities
being registered, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee....................................... $ 11,315.00
NASD and NASDAQ Fees....................................... 15,800.00
Printing and Engraving Expenses............................ 130,000.00*
Accounting Fees and Expenses............................... 275,000.00*
Legal Fees and Expenses.................................... 300,000.00*
Blue Sky Fees and Expenses................................. 50,000.00*
Transfer and Warrant Agent Fees and Expenses............... 7,500.00*
Miscellaneous Expenses..................................... 6,385.00*
------------
Subtotal................................................... 796,000.00
Underwriter's Non Accountable Expense Allowance............ 384,375.00(1)
------------
Total...................................................... $1,180,375.00
------------
------------
</TABLE>
- ------------------------
(1) Assumes no exercise of overallotment option.
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In general, Section 145 of the Delaware General Corporation Law provides
that persons who are officers or directors of a corporation may be indemnified
by the corporation for acts performed in their capacities as such. The
Registrant's By-Laws authorize indemnification in accordance with and to the
extent permitted by said statute.
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification to the fullest extent permitted by law.
Reference is also made to Section 6 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold the following securities within the past three
years:
A.
<TABLE>
<CAPTION>
DATE PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- --------- -------------------------- -------------------------- -----------------
<C> <S> <C> <C>
05/17/96 TDA Industries, Inc. 2,000,000 shares of $ 200.00
Common Stock
06/06/96 Steven R. Andrews 100,000 shares of Common $ 10.00
Stock
</TABLE>
II-1
<PAGE>
In June and July 1996, the Company sold, to the persons and entities
identified below, the securities of the Company for the consideration indicated
opposite their names:
B.
<TABLE>
<CAPTION>
PERSON/ENTITY NUMBER OF SECURITIES CONSIDERATION
- ------------------------------- ------------------------------------------------------------- -----------------
<S> <C> <C>
Nina Allen..................... One Unit of the Company's Securities* $ 25,000.00
William C. Bossung............. One Unit of the Company's Securities* 25,000.00
James A. Croson................ One Unit of the Company's Securities* 25,000.00
D&R Partnership................ One Unit of the Company's Securities* 25,000.00
Eugene Geller.................. One Half of a Unit of the Company's Securities* 12,500.00
Warren & Marianne Gilbert One Unit of the Company's Securities* 25,000.00
HiTel Group, Inc. Two Units of the Company's Securities* 50,000.00
Paul Schmidt One and One-Fourth of a Unit of the Company's Securities* 31,250.00
Donald & Linda Silpe One Unit of the Company's Securities* 25,000.00
Florence & Eric Stein One Unit of the Company's Securities* 25,000.00
William Tonyes One Unit of the Company's Securities* 25,000.00
Ken Zengage One Fourth of a Unit of the Company's Securities* 6,250.00
-----------------
TOTAL $300,000.00
-----------------
-----------------
</TABLE>
- ------------------------
* Each Unit consisting of 25,000 shares of Common Stock and 25,000 Redeemable
Common Stock Purchase Warrants.
C. Upon closing of the within Public Offering, the Company will acquire all
of the outstanding equity securities of Eagle Supply, Inc. ("Eagle"), JEH/Eagle
Supply, Inc. ("JEH Eagle") and MSI/Eagle Supply, Inc. ("MSI Eagle") for
3,000,000 shares of the Company's Common Stock.
C.1 On July 1, 1997, JEH Eagle acquired the business and substantially all
of the assets of JEH Co. In connection with the foregoing, among other things,
if this Public Offering is completed prior to June 30, 2002 and in the event
certain EBITDA (as defined) levels are reached for JEH Eagle during the period
from July 1, 1997 through the date of consummation of the Public Offering, JEH
Co. or its designee will be entitled to receive (i) $1,000,000 or (ii)
$1,350,000 (either in cash or in shares of the Company's Common Stock valued at
the Public Offering price) if the EBITDA level is (i) less than $3,800,000 per
year but not less than $3,600,000 per year, or (ii) not less than $3,800,000 per
year, respectively. The Company will issue 300,000 shares of Common Stock and
not pay the foregoing amounts to James E. Helzer in fulfillment of the
obligation set forth in the immediately preceding sentence, even if the EBITDA
does not reach the required levels.
C.2 On October 22, 1998, MSI Eagle acquired the business and substantially
all of the assets of MSI Co. In connection with the foregoing, among other
things, if this Public Offering is completed prior to October 22, 2003 and in
the event certain EBITA (as defined) levels are reached for MSI Eagle, MSI Co.
or its designee will be entitled to receive (i) $1,000,000 or (ii) $750,000
(either in cash or in shares of the Company's Common Stock valued at the Public
Offering price) if the MSI EBITA levels is (i) not less than $2,000,000 per year
or (ii) less than $2,000,000 but not less than $1,500,000 per year,
respectively. The Company will issue 200,000 shares of its Common Stock, and not
pay the foregoing amounts, to Gary L. Howard, as MSI Co.'s designee, in
fulfillment of the obligation set forth in the immediately preceding sentence,
even if the MSI EBITA does not reach the required levels. Additionally, at MSI
Co.'s option, upon consummation of the Public Offering, it may exchange up to
$2,000,000 of the principal amount of a promissory note issued to it for shares
of the Company's Common Stock valued at the Public Offering price. MSI Co. has
advised the Company that it intends to exchange $250,000 of such note for 50,000
shares of Common Stock of the Company upon consummation of the Public Offering.
These transactions were exempt from registration under the Securities Act of
1933, as amended (the "Act"), under Section 4(2) of that Act as not involving a
public offering, and as to those sales set forth under subsection B above,
reliance is placed upon Rule 506 of Regulation D and Section 4(6) of the Act.
II-2
<PAGE>
No underwriter was engaged by the Company in connection with the issuances
described above. The recipients of all of the foregoing securities represented
that such securities were being acquired for investment and not with a view to
the distribution thereof. In addition, the certificates evidencing such
securities bear restrictive legends.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBITS
(A)
- -----------
<C> <S>
1.1 (Revised) Forms of Underwriting Agreement and Selected Dealers Agreement(2)
3.1 Registrant's Articles of Incorporation(2)
3.1(A) Amendment to Registrant's Articles of Incorporation(2)
3.2 Registrant's By-Laws(2)
4.1 (Revised) Form of Underwriter's Warrant Agreement with Form of Warrant Certificate(2)
4.2 (Revised) Form of Financial Advisory Agreement to be entered into by and between the Registrant and the
Underwriter(2)
4.3 (Revised) Form of Merger and Acquisition Agreement to be entered into by and between the Registrant and
the Underwriter(2)
4.4 Form of Common Stock Certificate(2)
4.5 Form of Redeemable Stock Purchase Warrants delivered to Selling Securityholders(2)
4.6 (Revised) Form of Redeemable Common Stock Purchase Warrants (2)
4.7 Form of Warrant Agreement between Registrant and Continental Stock Transfer & Trust Company(2)
5.1 Opinion of Gusrae, Kaplan & Bruno(3)
10.1 (Revised) Form of Stock Purchase Agreement between the Registrant and TDA Industries, Inc. ("TDA")(1)
10.2 Form of Employment Agreement between Registrant and Douglas P. Fields(2)
10.3 Form of Employment Agreement between Registrant and Frederick M. Friedman(2)
10.4 Eagle Supply, Inc. Mortgage and Note regarding its Birmingham, Alabama, Distribution Center(2)
10.5 Eagle Supply, Inc. Mortgage, Deed and Purchase Agreement regarding its Pensacola, Florida, Distribution
Center(2)
10.6 Eagle Supply, Inc. Lease, as Amended, regarding its former distribution center located in Fort
Lauderdale, Florida(2)
10.7 Eagle Supply, Inc. Credit Facility(2)
10.7(A) Amendment to Eagle Supply, Inc. Credit Facility and Equipment Note(2)
10.8 (Revised) Form of Lease to be entered into with wholly-owned subsidiary of TDA(2)
10.9 Registrant's Stock Option Plan(1)
10.10 Form of Administrative Services Agreement to be entered into by and between Registrant and TDA(2)
10.11 Asset Purchase Agreement among JEH/Eagle Supply, Inc. (formerly known as JEH Acquisition Corp.), James
E. Helzer and others(2)
10.12 JEH/Eagle Supply, Inc. Credit Facility(2)
10.12(A) Amendment to JEH/Eagle Supply, Inc. Credit Facility and Equipment Note(2)
10.13 JEH/Eagle Supply, Inc. Employment Agreement with Douglas P. Fields, as amended(2)
10.14 JEH/Eagle Supply, Inc. Employment Agreement with Frederick M. Friedman, as amended(2)
10.15 JEH/Eagle Supply, Inc. Employment Agreement with James E. Helzer(2)
10.16 JEH/Eagle Supply, Inc. Employment Agreement with E.G. Helzer(2)
10.17 JEH/Eagle Supply, Inc. Strategic Services Agreement with TDA Industries, Inc., as amended(2)
10.17(A) Second Amendment to JEH/Eagle Supply, Inc. Strategic Services Agreement with TDA Industries, Inc.(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
(A)
- -----------
<C> <S>
10.18 JEH/Eagle Supply, Inc. Leases with James E. Helzer for premises located in:
(A) Henderson, Colorado(2)
(B) Colorado Springs, Colorado(2)
(C) Mansfield, Texas(2)
(D) Colleyville, Texas(2)
(E) Frisco, Texas(2)
(F) Mesquite, Texas(2)
10.19 Asset Purchase Agreement among MSI/Eagle Supply, Inc., Masonry Supply, Inc., Gary L. Howard and
others(1)
10.20 Promissory Note to Masonry Supply, Inc. from MSI/Eagle Supply, Inc.(1)
10.21 Purchase and Non-Competition Agreement among MSI/Eagle Supply, Inc., Gary L. Howard and others(1)
10.22 Security Agreement between Masonry Supply, Inc. and MSI/Eagle Supply, Inc.(1)
10.23 Promissory Note issued to TDA Industries, Inc. by MSI/Eagle Supply, Inc.(1)
10.24 MSI/Eagle Supply, Inc. Credit Facility(1)
10.25 MSI/Eagle Supply, Inc. Revolving Credit Note(1)
10.26 MSI/Eagle Supply, Inc. Term Note(1)
10.27 Surety Agreement by TDA Industries, Inc. regarding Exhibit 10.24
10.28 Subordination Agreements regarding Exhibit 10.24 by:
(A) TDA Industries, Inc.(1)
(B) Masonry Supply, Inc.(1)
10.29 Employment Agreement between MSI/Eagle Supply, Inc. and Gary L. Howard(1)
10.30 MSI/Eagle Supply, Inc. lease with Mr. and Mrs. Gary L. Howard for premises located in Mansfield,
Texas(1)
10.31 Registrant's Promissory Note to TDA Industries, Inc.(1)
10.32 Amendment to JEH/Eagle, Inc. Credit Facility(1)
10.33 Amendment to Eagle Supply, Inc. Credit Facility(1)
12.1 Computation of Additional Shares(1)
23.1 Consent of Gusrae, Kaplan & Bruno (to be included in Exhibit 5.1)(3)
23.2 Consent of Deloitte & Touche LLP(1)
23.3 Consent of Paul D. Finkelstein(2)
23.4 Consent of John E. Smircina(2)
23.5 Consent of George Skakel III(2)
23.6 Consent of Waters, Murray & Associates(1)
23.7 Consent of James E. Helzer(2)
</TABLE>
- ------------------------
(1) Filed herewith.
(2) Previously filed.
(3) To be Filed by Amendment.
All other schedules are omitted, as the required information is either
inapplicable or presented in the financial statements or related notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-4
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(5) The undersigned registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of New York, State of New York, on the 23rd day of December, 1998.
<TABLE>
<S> <C> <C>
By: /s/ DOUGLAS P. FIELDS
-----------------------------------------
Douglas P. Fields,
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board of
/s/ DOUGLAS P. FIELDS Directors, Chief
- ------------------------------ Executive Officer and December 23, 1998
Douglas P. Fields Director (Principal
Executive Officer)
Executive Vice President,
/s/ FREDERICK M. FRIEDMAN Treasurer, Secretary and
- ------------------------------ Director (Principal December 23, 1998
Frederick M. Friedman Financial and Accounting
Officer)
/s/ STEVEN R. ANDREWS
- ------------------------------ Director December 23, 1998
Steven R. Andrews
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 (Revised) Forms of Underwriting Agreement and Selected Dealers Agreement(2)
3.1 Registrant's Articles of Incorporation(2)
3.1(A) Amendment to Registrant's Articles of Incorporation(2)
3.2 Registrant's By-Laws(2)
4.1 (Revised) Form of Underwriter's Warrant Agreement with Form of Warrant Certificate(2)
4.2 (Revised) Form of Financial Advisory Agreement to be entered into by and between the Registrant and the
Underwriter(2)
4.3 (Revised) Form of Merger and Acquisition Agreement to be entered into by and between the Registrant and
the Underwriter(2)
4.4 Form of Common Stock Certificate(2)
4.5 Form of Redeemable Stock Purchase Warrants delivered to Selling Securityholders(2)
4.6 (Revised) Form of Redeemable Common Stock Purchase Warrants (2)
4.7 Form of Warrant Agreement between Registrant and Continental Stock Transfer & Trust Company(2)
5.1 Opinion of Gusrae, Kaplan & Bruno(3)
10.1 (Revised) Form of Stock Purchase Agreement between the Registrant and TDA Industries, Inc. ("TDA")(1)
10.2 Form of Employment Agreement between Registrant and Douglas P. Fields(2)
10.3 Form of Employment Agreement between Registrant and Frederick M. Friedman(2)
10.4 Eagle Supply, Inc. Mortgage and Note regarding its Birmingham, Alabama, Distribution Center(2)
10.5 Eagle Supply, Inc. Mortgage, Deed and Purchase Agreement regarding its Pensacola, Florida, Distribution
Center(2)
10.6 Eagle Supply, Inc. Lease, as Amended, regarding its former distribution center located in Fort
Lauderdale, Florida(2)
10.7 Eagle Supply, Inc. Credit Facility(2)
10.7(A) Amendment to Eagle Supply, Inc. Credit Facility and Equipment Note(2)
10.8 (Revised) Form of Lease to be entered into with wholly-owned subsidiary of TDA(2)
10.9 Registrant's Stock Option Plan(1)
10.10 Form of Administrative Services Agreement to be entered into by and between Registrant and TDA(2)
10.11 Asset Purchase Agreement among JEH/Eagle Supply, Inc. (formerly known as JEH Acquisition Corp.), James
E. Helzer and others(2)
10.12 JEH/Eagle Supply, Inc. Credit Facility(2)
10.12(A) Amendment to JEH/Eagle Supply, Inc. Credit Facility and Equipment Note(2)
10.13 JEH/Eagle Supply, Inc. Employment Agreement with Douglas P. Fields, as amended(2)
10.14 JEH/Eagle Supply, Inc. Employment Agreement with Frederick M. Friedman, as amended(2)
10.15 JEH/Eagle Supply, Inc. Employment Agreement with James E. Helzer(2)
10.16 JEH/Eagle Supply, Inc. Employment Agreement with E.G. Helzer(2)
10.17 JEH/Eagle Supply, Inc. Strategic Services Agreement with TDA Industries, Inc., as amended(2)
10.17(A) Second Amendment to JEH/Eagle Supply, Inc. Strategic Services Agreement with TDA Industries, Inc.(2)
10.18 JEH/Eagle Supply, Inc. Leases with James E. Helzer for premises located in:
(A) Henderson, Colorado(2)
(B) Colorado Springs, Colorado(2)
(C) Mansfield, Texas(2)
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
(D) Colleyville, Texas(2)
(E) Frisco, Texas(2)
(F) Mesquite, Texas(2)
10.19 Asset Purchase Agreement among MSI/Eagle Supply, Inc., Masonry Supply, Inc., Gary L. Howard and
others(1)
10.20 Promissory Note to Masonry Supply, Inc. from MSI/Eagle Supply, Inc.(1)
10.21 Purchase and Non-Competition Agreement among MSI/Eagle Supply, Inc., Gary L. Howard and others(1)
10.22 Security Agreement between Masonry Supply, Inc. and MSI/Eagle Supply, Inc.(1)
10.23 Promissory Note issued to TDA Industries, Inc. by MSI/Eagle Supply, Inc.(1)
10.24 MSI/Eagle Supply, Inc. Credit Facility(1)
10.25 MSI/Eagle Supply, Inc. Revolving Credit Note(1)
10.26 MSI/Eagle Supply, Inc. Term Note(1)
10.27 Surety Agreement by TDA Industries, Inc. regarding Exhibit 10.24
10.28 Subordination Agreements regarding Exhibit 10.24 by:
(A) TDA Industries, Inc.(1)
(B) Masonry Supply, Inc.(1)
10.29 Employment Agreement between MSI/Eagle Supply, Inc. and Gary L. Howard(1)
10.30 MSI/Eagle Supply, Inc. lease with Mr. and Mrs. Gary L. Howard for premises located in Mansfield,
Texas(1)
10.31 Registrant's Promissory Note to TDA Industries, Inc.(1)
10.32 Amendment to JEH/Eagle, Inc. Credit Facility(1)
10.33 Amendment to Eagle Supply, Inc. Credit Facility(1)
12.1 Computation of Additional Shares(1)
23.1 Consent of Gusrae, Kaplan & Bruno (to be included in Exhibit 5.1)(3)
23.2 Consent of Deloitte & Touche LLP(1)
23.3 Consent of Paul D. Finkelstein(2)
23.4 Consent of John E. Smircina(2)
23.5 Consent of George Skakel III(2)
23.6 Consent of Waters, Murray & Associates(1)
23.7 Consent of James E. Helzer(2)
</TABLE>
- ------------------------
(1) Filed herewith.
(2) Previously filed.
(3) To be Filed by Amendment.
ii
<PAGE>
Exhibit 10.1
PURCHASE AGREEMENT
Purchase Agreement (the "Agreement") made this day of ,
1999, by and between TDA Industries, Inc., a New York corporation, with an
office at 122 East 42nd Street, Suite 1116, New York, New York 10168
(hereinafter the "Seller"), and Eagle Supply Group, Inc., a Delaware
corporation, with an office at 122 East 42nd Street, Suite 1116, New York,
New York 10168 (hereinafter the "Buyer").
WITNESSETH:
WHEREAS, Seller is the owner of all the issued and outstanding capital
stock of (a) Eagle Supply, Inc., a Florida corporation, with an office at 1451
Channelside Drive, Tampa, Florida 33629 (hereinafter "Eagle"), (b) JEH/Eagle
Supply, Inc., a Delaware corporation, with an office at 2500 U.S. Highway 287,
P.O. Box 463, Mansfield, Texas 76068 (hereinafter "JEH Eagle"), and (c)
MSI/Eagle Supply, Inc., a Delaware corporation, with an office at 2090 U.S.
Highway 157 N, Mansfield, Texas 76063 (hereinafter "MSI Eagle"); and
WHEREAS, Seller hereby agrees to sell and deliver to Buyer, and Buyer
agrees to purchase, all of the issued and outstanding capital stock of Eagle,
JEH Eagle and MSI Eagle; and
WHEREAS, Buyer has filed a registration statement on Form S-1 (such
registration statement and the financial statements contained therein and all
amendments and exhibits thereto are hereinafter referred to as the "Registration
Statement") for an underwritten public offering of its equity securities
pursuant to which it will derive gross proceeds of not less than $12,800,000
(the "Public Offering").
NOW, THEREFORE, in consideration of the promises and the
representations, warranties, covenants and agreements contained in this
Agreement, each of the parties hereto hereby agrees as follows:
ARTICLE I
RECITALS
Recitals. The parties confirm that each of the foregoing
recitations are true and correct in all respects and are incorporated herein.
<PAGE>
ARTICLE II
THE EAGLE SHARES, JEH EAGLE SHARES AND MSI EAGLE SHARES
Eagle Shares, JEH Eagle Shares and MSI Eagle Shares. Seller shall sell
to Buyer (a) Five Hundred Ninety Three (593) restricted shares of Eagle's common
stock (the "Eagle Shares"), (b) Three Thousand (3,000) restricted shares of JEH
Eagle's common stock (the "JEH Eagle Shares") and (c) Three Thousand (3,000)
restricted shares of MSI Eagle's Common Stock (the "MSI Eagle Shares"),
representing all of the issued and outstanding capital stock of Eagle, JEH Eagle
and MSI Eagle, respectively, for the consideration specified in Article IV
below.
ARTICLE III
CLOSING
The Closing. Simultaneously with a closing of the Public Offering, the
closing of this Agreement and the transactions contemplated hereby (the
"Closing") are to take place simultaneously with the delivery of the documents
evidencing consideration for the transactions contemplated herein as set forth
in Article IV below at the law offices of David A. Carter, Esq., 2300 Glades
Road, Suite 210W, Boca Raton, Florida 33431, or at such location as the parties
hereto may agree upon. The date upon which the Closing occurs is herein referred
to as the "Closing Date".
ARTICLE IV
CONSIDERATION
4.1 Eagle Shares, JEH Eagle Shares and MSI Eagle Shares. At the
Closing, the Seller will deliver to Buyer certificates for the Eagle Shares,
JEH Eagle Shares and MSI Eagle Shares duly executed by each of their authorized
officers in proper form for transfer to Buyer.
4.2 Buyer's Shares. At the Closing, the Buyer will deliver to Seller
certificate(s) representing 3,000,000 shares of Buyer's common stock ($.0001 par
value per share), duly executed by its authorized officers and in proper form
for transfer to Seller (the "Buyer's Shares").
4.3 Book Value. At the Closing, Eagle, JEH Eagle and MSI Eagle will
have a combined book value of not less than $1,000,000 (net of the cancellation
of indebtedness of Seller to Eagle as set forth in Section 4.4 below). In the
event Eagle, JEH Eagle and MSI Eagle do not have a combined book value of at
least $1,000,000 (as determined by the internal financial records of each of
Eagle, JEH Eagle and MSI Eagle to be reviewed and determined within forty-five
(45) days after the Closing) at the Closing, Seller agrees to
2
<PAGE>
deliver to Eagle, JEH Eagle and/or MSI Eagle, within forty-five (45) days after
the Closing, sufficient funds by certified check or wire transfer to achieve the
foregoing $1,000,000 book value requirement as of the Closing Date.
4.4 Dividend. At the Closing, the parties agree to cause Eagle to
cancel, by way of a non-cash dividend, all indebtedness of Seller to Eagle (the
"Dividend").
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
5.1 Representations and Warranties of Seller. Except as and/or to
the extent disclosed in the Registration Statement for the Public Offering as
filed with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), true copies of which
Registration Statement have been and/or will be delivered by Seller to Buyer
as a material inducement to Buyer to execute and perform its obligations
under this Agreement, Seller represents and warrants to Buyer as of the date
hereof, as follows:
A. Organization and Good Standing--Compliance. Eagle,
JEH Eagle and MSI Eagle are duly organized, validly existing and in good
standing under the laws of their respective states of incorporation, with full
power and authority to own or lease and operate each of their properties and
assets, material to the operation of each of their businesses, and to carry on
each of their businesses as presently being conducted, and have obtained all
licenses, permits or other authorizations and have taken all actions required by
applicable law or governmental regulations, material to the operation of each of
their businesses, to conduct each of their businesses. Seller has received no
notice of, and does not know of, any violation of any applicable regulation,
ordinance or other law, order, or governmental requirement, material to the
operation of each of their businesses. True copies of the Articles of
Incorporation and By-Laws certified by the Secretaries of Eagle, JEH Eagle and
MSI Eagle, and true copies of all corporate minutes of Eagle, JEH Eagle and MSI
Eagle have been made available to or delivered to Buyer, including all
amendments thereto.
B. Eagle's Capitalization. Eagle's total authorized capital
stock is Fifteen Hundred (1,500) shares of common stock (par value $100.00 per
share), of which Five Hundred Ninety Three (593) shares of common stock are
issued and outstanding.
C. JEH Eagle's Capitalization. JEH Eagle's total authorized
capital stock is Three Thousand (3,000) shares of common stock (par value $.01
per share), all of which shares are issued and outstanding.
3
<PAGE>
D. MSI Eagle's Capitalization. MSI Eagle's total authorized
capital stock is Three Thousand (3,000) shares of common stock (par value $.01
per share), all of which shares are issued and outstanding.
E. Liens and Encumbrances. There are no liens, encumbrances,
pledges, probational agreements or claims of any nature against the Eagle
Shares, JEH Eagle Shares or MSI Eagle Shares to be delivered to Buyer by Seller.
F. Securities Law. The Eagle Shares, JEH Eagle Shares and MSI
Eagle Shares are validly issued, fully paid and non-assessable and were offered
and sold in accordance with applicable federal and state securities laws or
applicable exceptions thereunder, and there are no preemptive rights in respect
thereof. There are no outstanding options, warrants, rights, calls, puts,
commitments, plans or other agreements of any character providing for the
purchase or issuance of any authorized but unissued capital stock of Eagle,
JEH Eagle or MSI Eagle.
G. Financial Statements. Eagle's, JEH Eagle's and MSI
Eagle's financial statements contained in the Registration Statement
represent accurately and fairly the financial condition and results of the
operations of Eagle, JEH Eagle and MSI Eagle at the respective dates or for
the respective periods covered thereby in accordance with generally accepted
accounting principles applied on a consistent basis or in accordance with the
descriptions relating to such financial statements as set forth in the
Registration Statement.
H. Books and Records. The books and records of Eagle, JEH
Eagle and MSI Eagle reflect all of the material debts, liabilities and
obligations of any nature (whether absolute, accrued or otherwise, and
whether due or to become due) of Eagle, JEH Eagle and MSI Eagle at the dates
thereof. There are no contingent liabilities of Eagle, JEH Eagle or MSI Eagle
of a material nature, other than as reflected in such books and records and
the Registration Statement, and none of Eagle, JEH Eagle or MSI Eagle have
given any guarantees of the obligations of any other person or entity other
than as reflected in the Registration Statement.
I. Absence of Undisclosed Liabilities. None of Eagle, JEH
Eagle or MSI Eagle have any material liabilities, whether accrued, absolute,
contingent, or otherwise, including without limitation, tax liabilities due
or to become due, and whether incurred in respect of or measured by either of
their incomes except as reflected in the Registration Statement or incurred
subsequent to the date of the financial statements set forth in the
Registration Statement in the ordinary course of either of their businesses.
Seller does not know or have reasonable grounds to know of any basis for the
assertion against Eagle, JEH Eagle or MSI
4
<PAGE>
Eagle of any material liability not fully reflected in the Registration
Statement or reserved against.
J. Title to Properties. Eagle, JEH Eagle and MSI Eagle each
have good and marketable title to their respective assets, including those
reflected in the Registration Statement (except as may be sold, exchanged or
otherwise disposed of in the ordinary course of business). None of Eagle's, JEH
Eagle's or MSI Eagle's assets are subject to any material security interest,
mortgage, pledge, lien, encumbrance, or charge except as disclosed in the
Registration Statement as securing specified liabilities set forth therein.
K. Subsidiaries. None of Eagle, JEH Eagle or MSI Eagle
have any material subsidiaries or material interest in any other corporation,
firm, partnership or other entity.
L. Power and Authority. Seller has full power to sell and
deliver the Eagle Shares, JEH Eagle Shares and MSI Eagle Shares upon the
terms set forth herein. There is no agreement to issue any additional shares
of Eagle, JEH Eagle or MSI Eagle or to redeem, purchase or otherwise acquire
any of the Eagle Shares, JEH Eagle Shares or MSI Eagle Shares. Upon delivery
of the Eagle Shares, JEH Eagle Shares and MSI Eagle Shares, the Buyer will
receive good and marketable title thereto, free and clear of all liens,
encumbrances, equities and claims whatsoever and subject only to the
restrictions of state and federal securities laws.
M. Tax Returns and Payments. Each of Eagle, JEH Eagle and
MSI Eagle have duly filed all tax returns, tax reporting forms and reports
required to be filed by each of them, and have paid all taxes, assessments,
governmental charges and payments to third party payors which were due and
payable. None of Eagle, JEH Eagle or MSI Eagle has entered into any
agreement, waiver or other arrangement providing for an extension of time
with respect to the filing of any tax return or the payment or assessment of
any tax, governmental charge, deficiency or third party payment relating to
any of them. Each of Eagle, JEH Eagle and MSI Eagle have withheld from each
payment to each of their employees the amount of all taxes (including but not
limited to United States federal income taxes, applicable state and municipal
income taxes, Federal Insurance Contribution Act contributions and all other
mandated employee taxes or contributions) legally required to be withheld
therefrom and has paid the same to the proper tax receiving offices, except
for such amounts withheld but not yet payable, if any.
N. Tax Returns. Each of Eagle, JEH Eagle and MSI Eagle
have duly filed all reports or returns required to be filed with governmental
authorities relating in any manner to their respective properties, which the
failure to file may materially adversely affect the operation of their
respective businesses.
5
<PAGE>
O. Insurance. Each of Eagle, JEH Eagle and MSI Eagle
maintains in full force and effect all policies of insurance and any renewals
thereof and has given all notices and presented all claims, if any, under all
policies of insurance when due, except as reflected in the Registration
Statement.
P. Mortgages, Liens and Encumbrances. None of Eagle, JEH
Eagle or MSI Eagle have mortgaged, pledged, hypothecated or otherwise
encumbered any of its assets, tangible or intangible, material to the
operation of its business, except as set forth in the Registration Statement.
Q. No Asset Sale. None of Eagle, JEH Eagle or MSI Eagle
has entered into or agreed to enter into any agreement or arrangement
granting any rights to purchase any of its assets material to the operation
of its business other than in the ordinary course of its respective business.
R. Capital Expenditures. None of Eagle, JEH Eagle or MSI
Eagle has made any commitment for capital expenditures of a material nature
that is not in the ordinary course of its respec-tive business.
S. Material Agreements. None of Eagle, JEH Eagle or MSI
Eagle has entered into, become a party to, waived any right under, amended or
cancelled any material contract, agreement or commitment nor has there been
any material defaults thereunder except as reflected in the Registration
Statement or except in the ordinary course of its respective business.
T. Material Obligations. Each of Eagle, JEH Eagle and MSI
Eagle has paid all of its respective material obligations to third parties,
including vendors, in a timely manner in the ordinary course of business.
U. No Financial Changes. Since the respective dates of the
financial statements contained in the Registration Statement, there has been
no material change in the condition or general affairs of Eagle, JEH Eagle or
MSI Eagle, financial or otherwise, other than as contemplated by this
Agreement or reflected in the Registration Statement.
V. No Suits Pending or Imminent. Except as may be
immaterial to Eagle, JEH Eagle or MSI Eagle, their respective businesses,
financial condition and results of operations, there are no actions at law or
equity or administrative proceedings pending or threatened against Eagle, JEH
Eagle or MSI Eagle in which Eagle, JEH Eagle or MSI Eagle is a plaintiff,
defendant, petitioner, indemnifier, or respondent, or in which it is
anticipated that Eagle, JEH Eagle or MSI Eagle will join or be joined as a
party.
6
<PAGE>
W. Copies of Tax Returns. Seller has delivered to Buyer
true and correct copies of each federal and state tax return (or outstanding
extension, if any) filed by (i) Eagle during the period of time commencing on
July 1, 1993 through the Closing of this Agreement, (ii) JEH Eagle during the
period of time commencing with its corporate existence through the Closing of
this Agreement and (iii) MSI Eagle during the period of time commencing with
its corporate existence through the Closing of this Agreement.
X. Compliance with Law. The business and operations of
Eagle, JEH Eagle and MSI Eagle have been and are being conducted in
accordance with all applicable laws, rules and regulations.
Y. No Default of Contracts, Employee Obligations,
Contractual Obligations or Organizational Documents. None of the contracts,
or obligations or liabilities, material to Eagle's, JEH Eagle's or MSI
Eagle's business operations, is in default. All such contracts are valid and
binding obligations of the parties thereto in accordance with their
respective terms, there have been no amendments or modifications thereto not
reflected in the books and records of either Eagle, JEH Eagle or MSI Eagle,
and there are no known material liabilities of the parties thereto arising
from any breach of or default in any provision thereof by any party thereto
except as may be disclosed in the books and records of Eagle, JEH Eagle or
MSI Eagle or in the Registration Statement. None of Eagle, JEH Eagle or MSI
Eagle is in default under any agreement, contract or instrument, material to
its business operations, which require services to be performed, and no claim
of default has been made or threatened by or against Eagle, JEH Eagle or MSI
Eagle with respect to any such agreement, contract or instrument. None of
Eagle, JEH Eagle or MSI Eagle is in violation of its Articles of
Incorporation, By-Laws or other organizational documents.
Z. Agreement Creating Default or Acceleration. Except as
reflected in the Registration Statement or contemplated by this Agreement,
the execution, delivery and performance of this Agreement and of each and
every agreement, document and instrument and the consummation of the
transactions contemplated hereby and thereby do not and will not (i)
constitute a breach or default (or an occurrence which by lapse of time
and/or by the giving of notice would constitute a breach or default) under
any agreement, lease, license, franchise, contract or commitment to which
Seller, Eagle, JEH Eagle or MSI Eagle is a party or by which any of them or
their properties or assets is bound; (ii) result in the creation or the
imposition of any lien, encumbrance, security interest or charge in favor of
any other party upon any of the properties or assets of Seller, Eagle, JEH
Eagle or MSI Eagle; or (iii) result in the cancellation or termination of, or
the acceleration of the performance of any obligations or of any indebtedness
under any contract, agreement, commitment, indenture, mortgage, note, bond,
license or other instrument or obligation to which Seller, Eagle,
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JEH Eagle or MSI Eagle is now a party or by which Seller, Eagle, JEH Eagle or
MSI Eagle or any of their respective properties or assets may be bound or
affected.
5.2 Investment Intent. Seller is acquiring Buyer's shares for its
own account, for investment only and not with a view to the distribution or
resale thereof. Seller and its officers and directors have such knowledge and
experience in financial and business matters that they are capable of
evaluating the merits and risks of Seller's purchasing the Buyer's Shares;
and Seller understands that none of the Buyer's Shares have been registered
for resale under the Act. Seller is fully aware of the fact that Buyer is
relying upon this investment representation, and Seller hereby represents
that it will not pledge, hypothecate, offer, sell, transfer, assign or
otherwise dispose of the Buyer's Shares except in compliance with the
provisions of the Act.
Seller acknowledges that the certificate(s) for the Buyer's Shares will
be legended to indicate that the Buyer's Shares represented thereby have not
been registered under the Act, the Buyer's Shares were acquired for investment
and may not be pledged, hypothecated, sold or transferred in the absence of a
registration statement effective under the Act for said shares or an opinion of
counsel satisfactory to Buyer that registration is not required under the Act,
and that "stop transfer" instructions with respect to the Buyer's Shares will be
maintained by the transfer agent for Buyer and/or on Buyer's stock transfer
records.
5.3 Accuracy of Representations. To the best of Seller's knowledge
and belief, no representation or warranty in this Article V or elsewhere in
this Agreement, or in any certificate or document furnished or to be
furnished by Seller pursuant hereto, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements contained herein or therein not misleading. To the best of
Seller's knowledge and belief, all facts have been disclosed in the
Registration Statement regarding matters that would materially adversely
affect Eagle, JEH Eagle, MSI Eagle or any of their business operations.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER
6. Representations and Warranties of Buyer. Except as disclosed in
the Registration Statement, as a material inducement to Seller to execute and
perform its obligations under this Agreement, Buyer represents and warrants
to Seller as of the date hereof as follows:
A. Investment Intent. Buyer is acquiring the Eagle Shares,
JEH Eagle Shares and MSI Eagle Shares for its own account, for investment
only and not with a view to the distribution or
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resale thereof. Buyer (and its officers and directors) have such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of purchasing the Eagle Shares, the JEH Eagle Shares and
the MSI Eagle Shares; and Buyer understands that none of the Eagle Shares, the
JEH Eagle Shares and the MSI Eagle Shares have been registered for resale under
the Act. Buyer is fully aware of the fact that Seller is selling the Eagle
Shares, the JEH Eagle Shares and the MSI Eagle Shares in reliance upon the
exemption provided in Section 4(2) of the Act and is relying upon this
investment representation, and Buyer hereby represents that it will not pledge,
hypothecate, offer, sell, transfer, assign or otherwise dispose of the Eagle
Shares, the JEH Eagle Shares or the MSI Eagle Shares except in compliance with
the provisions of the Act.
Buyer acknowledges that the certificate(s) for the Eagle
Shares, the JEH Eagle Shares and the MSI Eagle Shares will be legended to
indicate that such shares represented thereby have not been registered under the
Act, as amended, such shares were acquired for investment and may not be
pledged, hypothecated, sold or transferred in the absence of a registration
statement effective under the Act for the Eagle Shares, the JEH Eagle Shares and
the MSI Eagle Shares or an opinion of counsel that registration is not required
under the Act, and that "stop transfer" instructions with respect to such shares
will be maintained by the transfer agent for Eagle, JEH Eagle and/or MSI Eagle
and on Eagle's, JEH Eagle's and MSI Eagle's stock transfer records.
B. Agreement Creating Default or Acceleration. The
execution, delivery and performance of this Agreement and of each and every
agreement, document and instrument and the consummation of the transactions
contemplated hereby and thereby do not and will not (i) constitute a breach
or default (or an occurrence which by lapse of time and/or by the giving of
notice would constitute a breach or default) under any agreement, lease,
license, franchise, contract or commitment to which Buyer is subject or party
or by which its properties or assets are bound; (ii) result in the creation
or the imposition of any lien, encumbrance, security interest or charge in
favor of any other party upon any of Buyer's properties or assets; or (iii)
result in the cancellation or termination of, or the acceleration of the
performance of any obligations or of any indebtedness under any contract,
agreement, commitment, indenture, mortgage, note, bond, license or other
instrument or obligation to which Buyer is now a party or by which Buyer or
its properties or assets may be bound or affected, except as reflected in the
Registration Statement or contemplated by this Agreement.
C. Authority of Buyer. Buyer has full power and authority
to enter into this Agreement and to perform each and every obligation
hereunder.
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D. Accuracy of Representations. To the best of Buyer's
knowledge and belief, no representation or warranty in this Article VI, the
Registration Statement or elsewhere in this Agreement, or in any certificate
or document furnished or to be furnished by Buyer pursuant hereto, contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained herein or therein not misleading.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS
Survival of Representations and Warranties. All the representations,
warranties, covenants and agreements made by Buyer, Eagle, JEH Eagle, MSI Eagle
and Seller in this Agreement (including statements contained in any exhibit,
certificate or other instrument delivered by or on behalf of any party hereto or
in connection with the transactions contemplated hereby) shall survive for a
period of two years following the consummation of the Agreement. No performance
or execution of this Agreement in whole or in part by any party hereto, no
course of dealing between or among the parties hereto or any delay or failure on
the part of any party in exercising any rights hereunder or at law or in equity,
and no investigation by any party hereto shall operate as a waiver of any rights
of such party, except to the extent expressly waived in writing by such party.
ARTICLE VIII
CLOSING OBLIGATIONS OF THE PARTIES
8.1 Documents to be Delivered to Buyer by Seller. At the Closing,
Seller shall deliver or cause the following to be delivered to Buyer:
(A) Certificates representing the Eagle Shares, JEH Eagle
Shares and MSI Eagle Shares;
(B) All books, records, minute books, ledgers, instruments,
agreements, contracts, tax returns and all other documents of whatsoever
description of, relating to or concerning Eagle, JEH Eagle and MSI Eagle;
(C) A copy of certified resolutions of Seller's Board of
Directors authorizing the execution and delivery of this Agreement; and
(D) A certificate executed by Seller's chief financial
officer affirming the estimated amount of the combined book value of Eagle,
JEH Eagle and MSI Eagle at the Closing Date.
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8.2 Documents to be Delivered to Seller by Buyer.
(A) Certificates representing the Buyer's Shares;
(B) A copy of certified resolutions of Buyer's Board of
Directors authorizing the execution and delivery of this Agreement;
(C) A Certificate executed by Buyer's Chief Executive
Officer that a closing of the Public Offering is occurring simultaneous with
the Closing of this transaction; and
(D) Documents, satisfactory to the Seller, confirming the
Dividend identified in Section 4.4.
ARTICLE IX
POST CLOSING OBLIGATIONS
9.1 Seller agrees to indemnify Eagle for any payments that Eagle is
obligated to make in connection with the properties identified on Schedule I
in excess of Eagle's lease obligations to Seller or any of its subsidiaries,
all as set forth in the Registration Statement.
9.2 Seller will fulfill its obligations, if any, as set forth in
Section 4.3. and shall deliver to Buyer, not later than forty-five (45) days
after the Closing, a certificate executed by Seller's chief financial officer
affirming the amount of the combined book value of Eagle, JEH Eagle and MSI
Eagle at the Closing Date.
ARTICLE X
MISCELLANEOUS
10.1 Entire Agreement--Amendments. This Agreement and any
agreements or instruments executed pursuant hereto or concurrently herewith
contain the entire agreement between the parties hereto with respect to the
transactions contemplated by this Agreement and supersede all prior
agreements, writings, negotiations and understandings. This Agreement
contains all of the covenants, representations, warranties and agreements
between the parties with respect to the subject matter of this Agreement, and
each party to this Agreement acknowledges that no representations,
warranties, covenants, inducements, promises or agreements, oral or
otherwise, have been made by any party, or anyone acting on behalf of any
party, which are not embodied herein, and no other or prior agreement,
statement, representation, warranty or covenant not contained in this
Agreement shall be binding or valid.
10.2 Headings. The headings or captions in this Agreement are for
convenience and reference only and do not form a part hereof
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and do not in any way modify, interpret or construe the intent of the parties
or affect any to the provisions of this Agreement.
10.3 Binding on Successors. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
legal representatives, successors and assigns.
10.4 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original and the counterparts shall together
constitute one and the same agreement, binding each of the parties hereto,
notwithstanding that all of the parties are not signatory to the original or
the same counterpart; however, no party shall be bound by this Agreement
until and unless all parties have executed this Agreement.
10.5 Waiver. Any provision of this Agreement which may be waived
by a corporate party hereto may be waived (but only in writing) by any duly
authorized officer thereof. No waiver shall be deemed a continual waiver or
waivers with respect to any subsequent breach or default, whether of a
similar or different nature, unless expressly so stated in writing.
10.6 Governing Law and Venue. The validity, construction and
interpretation of this Agreement shall be governed by the laws of the State
of New York and the proper venue and jurisdiction shall be the Supreme Court
of the State of New York, New York County or the United States District
Courts located in the Southern District of New York or the Middle District of
Florida, Tampa Division.
10.7 Further Acts. At any time and from time to time, on and after
the Closing Date, any party shall, at the request of any other party, perform
or cause to be performed and execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered all such further acts, deeds,
assignments and documents as may be necessary or desirable to more fully
consummate the transactions contemplated by this Agreement.
10.8 Notices. All notices and other communications required or
permitted under the terms of this Agreement shall be in writing and shall be
deemed given (1) upon hand delivery, or (2) ten days after deposit of the
same by U.S. certified mail, return receipt requested, first class postage
and certification fees prepaid and correctly addressed to the other party at
the addresses set forth in the first Section hereof.
10.9 Waiver of Jury Trial. Each of the parties hereto hereby
knowingly, voluntarily, and intentionally waives any rights it may have to a
trial by jury in respect of any litigation based hereon or arising out of,
under or in connection with this Agreement.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
SELLER:
TDA INDUSTRIES, INC.
By:
-------------------------------------------
BUYER:
EAGLE SUPPLY GROUP, INC.
By:
-------------------------------------------
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SCHEDULE I
(to the Purchase Agreement by and between
TDA Industries, Inc. and Eagle Supply Group, Inc.)
1. Property located at 3380 S.W. 11th Avenue, Fort Lauderdale, Florida 33334.
2. Property located at 239 Snow Drive, Birmingham, Alabama 35209.
<PAGE>
Exhibit 10.9
STOCK OPTION PLAN
OF
EAGLE SUPPLY GROUP, INC.
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan") is
designed to provide an incentive to employees (including directors and officers
who are employees) and to consultants and directors who are not employees of
Eagle Supply Group, Inc., a Delaware corporation (the "Company"), or any of its
Subsidiaries (as defined in Paragraph 19), and to offer an additional inducement
in obtaining the services of such persons. The Plan provides for the grant of
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options which do not qualify as ISOs ("NQSOs"), but the Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph
12, the aggregate number of shares of common stock, $.0001 par value per share,
of the Company ("Common Stock") for which options may be granted under the Plan
shall not exceed 1,000,000. Such shares of Common Stock may, in the discretion
of the Board of Directors of the Company (the "Board of Directors"), consist
either in whole or in part of authorized but unissued shares of Common Stock or
shares of Common Stock held in the treasury of the Company. Subject to the
provisions of Paragraph 13, any shares of Common Stock subject to an option
which for any reason expires, is canceled or is terminated unexercised or which
ceases for any reason to be exercisable shall again become available for the
granting of options under the Plan. The Company shall at all times during the
term of the Plan reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board of Directors or a committee of the Board of Directors consisting of not
less than two directors (collectively, the "Committee"). A majority of the
members of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present, and any acts
approved in writing by all members without a meeting, shall be the acts of the
Committee.
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Subject to the express provisions of the Plan, the Committee shall have
the authority, in its sole discretion, to determine the employees who shall be
granted Employee Options and the consultants who shall be granted Consultant
Options and the Non-Employee Directors who shall be granted Non-Employee
Director Options (all as defined in Paragraph 19); the times when options shall
be granted; whether an Employee Option shall be an ISO or a NQSO; the number of
shares of Common Stock to be subject to each option; the term of each option;
the date each option shall become exercisable; whether an option shall be
exercisable in whole, in part or in installments and, if in installments, the
number of shares of Common Stock to be subject to each installment, whether the
installments shall be cumulative, the date each installment shall become
exercisable and the term of each installment; whether to accelerate the date of
exercise of any option or installment; whether shares of Common Stock may be
issued upon the exercise of an option as partly paid and, if so, the dates when
future installments of the exercise price shall become due and the amounts of
such installments; the exercise price of each option; the form of payment of the
exercise price, whether to restrict the sale or other disposition of the shares
of Common Stock acquired upon the exercise of an option and, if so, whether to
waive any such restriction; whether to subject the exercise of all or any
portion of an option to the fulfillment of contingencies as specified in the
contract referred to in Paragraph 11 (the "Contract"), including without
limitation, contingencies relating to entering into a covenant not to compete
with the Company, any of its Subsidiaries or a Parent (as defined in Paragraph
19), to financial objectives for the Company, any of its Subsidiaries or a
Parent, a division of any of the foregoing, a product line or other category,
and/or the period of continued employment of the optionee with the Company, any
of its Subsidiaries or a Parent, and to determine whether such contingencies
have been met; whether an optionee is Disabled (as defined in Paragraph 19); the
amount, if any, necessary to satisfy the Company's obligation to withhold taxes
or other amounts; the fair market value of a share of Common Stock; to construe
the respective Contracts and the Plan; with the consent of the optionee, to
cancel or modify an option, provided, that the modified provision is permitted
to be included in an option granted under the Plan on the date of the
modification, and further, provided, that in the case of a modification (within
the meaning of Section 424(h) of the Code) of an ISO, such option as modified
would be permitted to be granted on the date of such modification under the
terms of the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any option granted under the Plan or any Contract shall be
determined unilaterally by the Committee in its sole discretion. The
determinations of the Committee on the matters referred to in this Paragraph 3
shall be conclusive and binding on the parties.
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No member or former member of the Committee shall be liable for any
action, failure to act or determination made in good faith with respect to the
Plan or any option hereunder. In addition, the Company shall indemnify and hold
harmless each member and former member of the Committee and their respective
successors, assigns, heirs and personal representatives from and against any
liability, loss, claim, damage and expense (including without limitation
attorneys' fees and expenses) incurred in connection therewith by reason of any
action, failure to act or determination made in good faith under or in
connection with the Plan or any option hereunder to the fullest extent permitted
with respect to directors under the Company's certificate of incorporation,
by-laws or applicable law.
4. ELIGIBILITY. The Committee may from time to time, in its sole
discretion, consistent with the purposes of the Plan, grant (a) Employee Options
to employees (including officers and directors who are employees) of the Company
or any of its Subsidiaries, (b) Consultant Options to consultants to the Company
or any of its Subsidiaries, and (c) Non-Employee Director Options to
Non-Employee Directors. Such options granted shall cover such number of shares
of Common Stock as the Committee may determine, in its sole discretion;
provided, however, that the maximum number of shares subject to Employee Options
that may be granted to any individual during any calendar year under the Plan
(the "162(m) Maximum") shall not exceed 250,000 shares; and further, provided,
that the aggregate market value (determined at the time the option is granted in
accordance with Paragraph 5) of the shares of Common Stock for which any
eligible employee may be granted ISOs under the Plan or any other plan of the
Company, or of a Parent or a Subsidiary of the Company, which are exercisable
for the first time by such optionee during any calendar year shall not exceed
$100,000. Such limitation shall be applied by taking ISOs into account in the
order in which they were granted. Any option (or the portion thereof) granted in
excess of such amount shall be treated as a NQSO.
5. EXERCISE PRICE. The exercise price of the shares of Common Stock
under each option shall be determined by the Committee in its sole discretion;
provided, however, that the exercise price of an ISO shall not be less than the
fair market value of the Common Stock subject to such option on the date of
grant; and further, provided, that if, at the time an ISO is granted, the
optionee owns (or is deemed to own under Section 424(d) of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, of any of its Subsidiaries or of a Parent, the exercise
price of such ISO shall not be less than 110% of the fair market value of the
Common Stock subject to such ISO on the date of grant.
The fair market value of a share of Common Stock on any day shall be
(a) if the principal market for the Common Stock is a national securities
exchange, the average of the highest and lowest
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<PAGE>
sales prices per share of Common Stock on such day as reported by such exchange
or on a composite tape reflecting transactions on such exchange, (b) if the
principal market for the Common Stock is not a national securities exchange and
the Common Stock is quoted on The Nasdaq Stock Market ("Nasdaq"), and (i) if
actual sales price information is available with respect to the Common Stock,
the average of the highest and lowest sales prices per share of Common Stock on
such day on Nasdaq, or (ii) if such information is not available, the average of
the highest bid and lowest asked prices per share of Common Stock on such day on
Nasdaq, or (c) if the principal market for the Common Stock is not a national
securities exchange and the Common Stock is not quoted on Nasdaq, the average of
the highest bid and lowest asked prices per share of Common Stock on such day as
reported on the OTC Bulletin Board Service or by National Quotation Bureau,
Incorporated or a comparable service; provided, however, that if clauses (a),
(b) and (c) of this Paragraph are all inapplicable, or if no trades have been
made or no quotes are available for such day, the fair market value of the
Common Stock shall be determined by the Board by any method consistent with
applicable regulations adopted by the Treasury Department relating to stock
options.
6. TERM. The term of each option granted pursuant to the Plan shall be
such term as is established by the Committee, in its sole discretion; provided,
however, that the term of each ISO granted pursuant to the Plan shall be for a
period not exceeding 10 years from the date of grant thereof, and further,
provided, that if, at the time an ISO is granted, the optionee owns (or is
deemed to own under Section 424(d) of the Code) stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company, of
any of its Subsidiaries or of a Parent, the term of the ISO shall be for a
period not exceeding five years from the date of grant. Options shall be subject
to earlier termination as hereinafter provided.
7. EXERCISE. An option (or any part or installment thereof), to the
extent then exercisable, shall be exercised by giving written notice to the
Company at its principal office stating which option is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the Contract permits installment
payments) (a) in cash or by certified check or (b) if the applicable Contract
permits, with previously acquired shares of Common Stock having an aggregate
fair market value on the date of exercise (determined in accordance with
Paragraph 5) equal to the aggregate exercise price of all options being
exercised, or with any combination of cash, certified check or shares of Common
Stock.
The Committee may, in its sole discretion, permit payment of the
exercise price of an option by delivery by the optionee of a properly executed
notice, together with a copy of his irrevocable
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<PAGE>
instructions to a broker acceptable to the Committee to deliver promptly to the
Company the amount of sale or loan proceeds sufficient to pay such exercise
price. In connection therewith, the Company may enter into agreements for
coordinated procedures with one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of an
option shall not have the rights of a stockholder with respect to such shares of
Common Stock until the date of issuance of a stock certificate to him for such
shares; provided, however, that until such stock certificate is issued, any
optionee using previously acquired shares of Common Stock in payment of an
option exercise price shall continue to have the rights of a stockholder with
respect to such previously acquired shares.
In no case may a fraction of a share of Common Stock be purchased or
issued under the Plan.
8. TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, any holder of an Employee Option or
Consultant Option whose relationship with the Company, its Parent and
Subsidiaries as an employee or a consultant has terminated for any reason (other
than the death or Disability of the Optionee) may exercise such option, to the
extent exercisable on the date of such termination, at any time within three
months after the date of termination, but not thereafter and in no event after
the date the option would otherwise have expired; provided, however, that if
such relationship is terminated either (a) for cause, or (b) without the consent
of the Company, such option shall terminate immediately.
For the purposes of the Plan, an employment relationship shall be
deemed to exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation for purposes
of Section 422(a) of the Code. As a result, an individual on military, sick
leave or other bona fide leave of absence shall continue to be considered an
employee for purposes of the Plan during such leave if the period of the leave
does not exceed 90 days, or, if longer, so long as the individual's right to
reemployment with the Company (or a related corporation) is guaranteed either by
statute or by contract. If the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed by statute or by contract,
the employment relationship shall be deemed to have terminated on the 91st day
of such leave.
Except as may otherwise be expressly provided in the applicable
Contract, Employee Options and Consultant Options granted under the Plan shall
not be affected by any change in the status of the optionee so long as the
optionee continues to be an employee of, or a consultant to, the Company, or any
of the Subsidiaries or a Parent (regardless of having changed from one to the
other or
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<PAGE>
having been transferred from one corporation to another).
Except as may otherwise be expressly provided in the applicable
Contract, the holder of a Non-Employee Director Option whose directorship with
the Company has terminated for any reason other than his death or Disability may
exercise such option, to the extent exercisable on the date of such termination,
at any time within three months after the date of termination, but not
thereafter and in no event after the date the option would otherwise have
expired; provided, however, that if his directorship shall be terminated for
cause, such option shall terminate immediately.
Nothing in the Plan or in any option granted under the Plan shall
confer on any optionee any right to continue in the employ of, or as a
consultant to, the Company, any of its Subsidiaries or a Parent, or as a
director of the Company, or interfere in any way with any right of the Company,
any of its Subsidiaries or a Parent to terminate the optionee's relationship at
any time for any reason whatsoever without liability to the Company, any of its
Subsidiaries or a Parent.
9. DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be
expressly provided in the applicable Contract, if an optionee dies (a) while he
is an employee of, or consultant to, the Company, any of its Subsidiaries or a
Parent, (b) within three months after the termination of such relationship
(unless such termination was for cause or without the consent of the Company) or
(c) within one year following the termination of such relationship by reason of
his Disability, his Employee Option or Consultant Option may be exercised, to
the extent exercisable on the date of his death, by his Legal Representative (as
defined in Paragraph 19) at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have
expired.
Except as may otherwise be expressly provided in the applicable
Contract, any optionee whose relationship as an employee of, or consultant to,
the Company, its Parent and Subsidiaries has terminated by reason of such
optionee's Disability may exercise his Employee Option or Consultant Option, to
the extent exercisable upon the effective date of such termination, at any time
within one year after such date, but not thereafter and in no event after the
date the option would otherwise have expired.
Except as may otherwise be expressly provided in the applicable
Contract, if an optionee dies (a) while he is a director of the Company, (b)
within three months after the termination of his directorship with the Company
(unless such termination was for cause) or (c) within one year after the
termination following the termination of his directorship by reason of
Disability, his Non-Employee Director Options may be exercised, to the extent
exercisable on the date of his death, by his Legal Representative at any
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<PAGE>
time within one year after death, but not thereafter and in no event after the
date the option would otherwise have expired. Except as may otherwise be
expressly provided in the applicable Contract, an optionee whose directorship
with the Company has terminated by reason of Disability, may exercise his
Non-Employee Director Options, to the extent exercisable on the effective date
of such termination, at any time within one year after such date, but not
thereafter and in no event after the date the option would otherwise have
expired.
10. COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its
sole discretion, as a condition to the exercise of any option that either (a) a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued upon
such exercise shall be effective and current at the time of exercise, or (b)
there is an exemption from registration under the Securities Act for the
issuance of the shares of Common Stock upon such exercise. Nothing herein shall
be construed as requiring the Company to register shares subject to any option
under the Securities Act or to keep any Registration Statement effective or
current.
The Committee may require, in its sole discretion, as a condition to
the exercise of any option that the optionee execute and deliver to the Company
his representations and warranties, in form, substance and scope satisfactory to
the Committee, which the Committee determines are necessary or convenient to
facilitate the perfection of an exemption from the registration requirements of
the Securities Act, applicable state securities laws or other legal requirement,
including without limitation that (a) the shares of Common Stock to be issued
upon the exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or distribution
thereof, and (b) any subsequent resale or distribution of shares of Common Stock
by such optionee will be made only pursuant to (i) a Registration Statement
under the Securities Act which is effective and current with respect to the
shares of Common Stock being sold, or (ii) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall prior to any offer of sale or sale of such shares of Common
Stock provide the Company with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution.
In addition, if at any time the Committee shall determine, in its sole
discretion, that the listing or qualification of the shares of Common Stock
subject to such option on any securities exchange, Nasdaq or under any
applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with,
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the granting of an option or the issue of shares of Common Stock thereunder,
such option may not be exercised in whole or in part unless such listing,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provision of the Plan, in the event of a stock dividend, recapitalization,
merger in which the Company is the surviving corporation, split-up, combination
or exchange of shares or the like which results in a change in the number or
kind of shares of Common Stock which is outstanding immediately prior to such
event, the aggregate number and kind of shares subject to the Plan, the
aggregate number and kind of shares subject to each outstanding option and the
exercise price thereof, and the 162(m) Maximum shall be appropriately adjusted
in the same manner as the number and kind of shares of a stockholder of the
Company who owned the same number and kind of shares immediately prior to such
event, and the exercise price of the options shall be adjusted so that the
aggregate exercise price of each outstanding unexercised option remains the
same. Notwithstanding the foregoing, such adjustment may provide for the
elimination of fractional shares which might otherwise be subject to options
without payment therefor. Such adjustments shall be made by the Board of
Directors, whose determination shall be conclusive and binding on all parties.
In the event of (a) the liquidation or dissolution of the Company, or
(b) a merger in which the Company is not the surviving corporation or a
consolidation, any outstanding options shall terminate upon the earliest of any
such event, unless other provision is made therefor in the transaction.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the
Board of Directors on December 16, 1998. No option may be granted under the Plan
after December 16, 2008. The Board of Directors, without further approval of the
Company's stockholders, may at any time suspend or terminate the Plan, in whole
or in part, or amend it from time to time in such respects as it may deem
advisable, including, without limitation, in order that ISOs granted hereunder
meet the requirements for "incentive stock options" under the Code, to comply
with the provisions of Rule 16b- 3 of the Securities Exchange Act of 1934,
Section 162(m) of the Code, or any change in applicable law, regulations,
rulings or interpretations of administrative agencies; provided, however, that
no amendment shall be effective without the requisite prior or subsequent
stockholder approval which would (a) except as contem-
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plated in Paragraph 12, increase the maximum number of shares of Common Stock
for which options may be granted under the Plan or the 162(m) Maximum, (b) to
the extent required by Rule 16b-3, materially increase the benefits accruing to
participants under the Plan or (c) change the eligibility requirements to
receive options hereunder. No termination, suspension or amendment of the Plan
shall, without the consent of the holder of an existing and outstanding option
affected thereby, adversely affect his rights under such option. The power of
the Committee to construe and administer any options granted under the Plan
prior to the termination or suspension of the Plan nevertheless shall continue
after such termination or during such suspension.
14. NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan
shall be transferable otherwise than by will or the laws of descent and
distribution, and options may be exercised, during the lifetime of the optionee,
only by the optionee or his Legal Representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment or similar process, and any such attempted
assignment, transfer, pledge, hypothecation or disposition shall be null and
void ab initio and of no force or effect.
15. WITHHOLDING TAXES. The Company may withhold (a) cash, (b) subject
to any limitations under Rule 16b-3, shares of Common Stock to be issued with
respect thereto having an aggregate fair market value on the exercise date
(determined in accordance with Paragraph 5), or (c) any combination thereof, in
an amount equal to the amount which the Committee determines is necessary to
satisfy the Company's obligation to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant or exercise of an option,
its disposition, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company such
amount, in cash, promptly upon demand. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments have been made.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend
or legends upon the certificates for shares of Common Stock issued upon exercise
of an option under the Plan and may issue such "stop transfer" instructions to
its transfer agent in respect of such shares as it determines, in its
discretion, to be necessary or appropriate to (a) prevent a violation of, or to
perfect an exemption from, the registration requirements of the Securities Act
and any applicable state securities laws, (b) implement the provisions of the
Plan or any agreement between the Company and the optionee with respect to such
shares of Common Stock, or (c) permit the Company to determine the occurrence of
a "disqualifying disposition", as described in Section 421(b) of the
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Code, of the shares of Common Stock issued or transferred upon the exercise of
an ISO granted under the Plan.
The Company shall pay all issuance taxes with respect to the issuance
of shares of Common Stock upon the exercise of an option granted under the Plan,
as well as all fees and expenses incurred by the Company in connection with such
issuance.
17. USE OF PROCEEDS. The cash proceeds from the sale of shares of
Common Stock pursuant to the exercise of options under the Plan shall be added
to the general funds of the Company and used for such corporate purposes as the
Board of Directors may determine.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may, without further approval by the stockholders, substitute new
options for prior options of a Constituent Corporation (as defined in Paragraph
19) or assume the prior options of such Constituent Corporation.
19. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Constituent Corporation" shall mean any corporation which
engages with the Company, any of its Subsidiaries or a Parent in a
transaction to which Section 424(a) of the Code applies (or would apply if
the option assumed or substituted were an ISO), or any Parent or any
Subsidiary of such corporation.
(b) "Consultant Option" shall mean a NQSO granted pursuant to
the Plan to a person who, at the time of grant, is a consultant to the
Company or a Subsidiary of the Company, and at such time is neither a common
law employee of the Company or any of its Subsidiaries nor a director of the
Company.
(c) "Disability" shall mean a permanent and total disability
within the meaning of Section 22(e)(3) of the Code.
(d) "Employee Option" shall mean an option granted pursuant to
the Plan to an individual who, at the time of grant, is an employee of the
Company or any of its Subsidiaries.
(e) "Legal Representative" shall mean the executor,
administrator or other person who at the time is entitled by law to exercise
the rights of a deceased or incapacitated optionee with respect to an option
granted under the Plan.
(f) "Non-Employee Director" shall mean a person who is a
director of the Company, but is not a common law employee of the Company, any
of its Subsidiaries or a Parent.
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(g) "Non-Employee Director Option" shall mean a NQSO granted
pursuant to the Plan to a person who, at the time of the grant, is a
Non-Employee Director.
(h) "Parent" shall have the same definition as "parent
corporation" in Section 424(e) of the Code.
(i) "Subsidiary" shall have the same definition as "subsidiary
corporation" in Section 424(f) of the Code.
20. GOVERNING LAW; CONSTRUCTION. The Plan, such options as may be
granted hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.
Neither the Plan nor any Contracts shall be construed or interpreted
with any presumption against the Company by reason of the Company causing the
Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
21. PARTIAL INVALIDITY. The invalidity, illegality or unenforceability
of any provision in the Plan or any Contract shall not affect the validity,
legality or enforceability of any other provision, all of which shall be valid,
legal and enforceable to the fullest extent permitted by applicable law.
22. STOCKHOLDER APPROVAL. The Plan shall be subject to approval by the
affirmative vote of a majority of the shares present in person or by proxy and
entitled to vote thereon at the next duly held meeting of the Company's
stockholders at which a quorum is present. No options granted hereunder may be
exercised prior to such approval; provided, however, that the date of grant of
any option shall be determined as if the Plan had not been subject to such
approval. Notwithstanding the foregoing, if the Plan is not approved by a vote
of the stockholders of the Company on or before December 31, 1998, the Plan and
any options granted hereunder shall terminate.
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Exhibit 10.19
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "AGREEMENT") is made on the 22 day of
October, 1998, by and among MSI/EAGLE SUPPLY, INC., a Delaware corporation
("Buyer"), MASONRY SUPPLY, INC., a Texas corporation ("SELLER,") and GARY L.
HOWARD, the sole shareholder of Seller ("SHAREHOLDER"). PATTI L. HOWARD, spouse
of Shareholder ("MRS. HOWARD") has joined in this Agreement for the purposes set
forth below. TUSA, INC., a Texas corporation ("TUSA"), has joined in this
Agreement for the purposes set forth below.
RECITALS
A. Seller is a wholesale and retail seller of masonry materials and
supplies and related products and supplies for commercial and residential
applications, with operations at four primary locations in Texas (the
"BUSINESS").
B. Buyer intends to buy, and Seller intends to sell and assign to Buyer,
the Business and all of Seller's assets, other than certain excluded
non-operating assets specified herein (the "ACQUIRED BUSINESS"), upon the terms
and conditions of this Agreement.
C. Shareholder owns all of the issued and outstanding shares of stock of
Seller and will benefit substantially from the transactions under this
Agreement. In return for such benefits, Shareholder is willing to enter into
this Agreement for the purposes set forth below.
D. Shareholder owns all of the issued and outstanding shares of stock of
TUSA and, but for the joinder of TUSA in this Agreement, Buyer would not have
entered into this Agreement which will benefit Shareholder.
E. Mrs. Howard acknowledges that she will receive a substantial financial
benefit from the transactions under this Agreement. Accordingly, she is willing
to, and does hereby, enter into this Agreement for the purposes of joining in
any and all representations, warranties, covenants and agreements of Shareholder
under this Agreement.
OPERATIVE TERMS
In consideration of the mutual promises, Buyer, Seller, Shareholder, TUSA
and Mrs. Howard agree as follows:
1. PURCHASED ASSETS; EXCLUDED ASSETS; ASSUMED LIABILITIES.
1.1 PURCHASED ASSETS. Subject to the terms and conditions of this
Agreement, on the Closing Date (as defined in Section 4.1), Seller will sell and
assign to Buyer, and Buyer will purchase from Seller, the Business, all of
Seller's operating assets and all other assets used or useful in connection with
the Business (other than the Excluded Assets, as defined in Section 1.2),
including, without limitation:
<PAGE>
(a) the equipment, vehicles, rolling stock, racks, furniture,
fixtures, fixed assets and leasehold improvements including, without
limitation, those items described in EXHIBIT 1.1(A);
(b) inventories of masonry materials and supplies and related
products and supplies with respect to the Business which are held for
resale (the "INVENTORY");
(c) accounts, manufacturers rebates, and notes receivable held by
Seller and notes, bonds and other evidences of indebtedness of and rights
to receive payments from any person held by or owed to Seller (the
"ACCOUNTS RECEIVABLE"), including, without limitation, those described in
SCHEDULE 5.20(B), other than those listed accounts which were totally
written off as of the Effective Time, and all of Seller's rights in
collateral that secures any or all of the Accounts Receivable or other
indebtedness owed to Seller;
(d) prepaid expenses and security deposits described in EXHIBIT
1.1(D) and all other current assets related to or required in the Business;
(e) all of Seller's rights under the real property leases attached
hereto as SCHEDULE 5.11(B) (the "THIRD PARTY LEASES");
(f) all of Seller's rights under the equipment leases and contracts
attached as SCHEDULE 5.11(C) (the "LEASES AND CONTRACTS");
(g) telephone numbers;
(h) goodwill, customer lists, assumed names, intellectual property
including, without limitation, the trade names, trademarks and service
marks described in SCHEDULE 5.15;
(i) computer hardware and software, and all of Seller's rights under
software licenses;
(j) cash and cash equivalents;
(k) assignable licenses and permits;
(l) business insurance policies including, without limitation, all
proceeds and rights to proceeds with respect thereto (the "BUSINESS
INSURANCE POLICIES");
(m) choses in action, claims, demands and rights in favor of Seller
other than Seller's rights under this Agreement;
(n) books and records; and
(o) all other tangible and intangible assets related to the Business.
Such assets, other than the Excluded Assets, as defined in Section 1.2, are
collectively called the
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"PURCHASED ASSETS." The Purchased Assets will be sold free and clear of all
security interests, liens, claims, encumbrances, restrictions, reservations,
charges or matters of a like kind (the "ENCUMBRANCES"), except for the items
described in EXHIBIT 1.1 (the "PERMITTED ENCUMBRANCES").
1.2 EXCLUDED ASSETS. The sale and purchase under this Agreement shall not
include the following assets (the "EXCLUDED ASSETS"):
(a) Seller's corporate minute books and tax returns (copies of which
shall be made available to Buyer upon request);
(b) payments representing the Purchase Price, as defined in Section
2.1, and rights of Seller under this Agreement and any instruments or
agreements given by, or entered into with, Buyer pursuant to this
Agreement;
(c) Seller's accounts receivable which have been totally written off
as of the Effective Time; and
(d) the other excluded assets listed on EXHIBIT 1.2(D) (the "OTHER
EXCLUDED ASSETS").
1.3 ASSUMED LIABILITIES. At the Closing, Buyer shall assume:
(a) The accounts payable and accrued expenses of Seller, as of the
Closing Date, that (i) are accrued by Seller in the ordinary course of the
Business, consistent with generally accepted accounting principles
("GAAP"), including trade payables and all accrued expenses related to the
operation and conduct of the Business (including, without limitation,
income taxes payable on the Interim Earnings, as defined in Section 4.3,
and wages payable to Seller's employees, but not including any obligation
under any Benefit Plan, as defined in Section 5.13 or any liability for
state or federal income or franchise taxes accrued as of the Effective Time
which are not paid prior to the Closing), (ii) are not owed to TUSA or
Shareholder (or any Affiliate, as defined in Section 11.1, of Seller, TUSA
or Shareholder) and (iii) did not arise under or pursuant to any contract,
arrangement or relationship with TUSA or Shareholder (or any Affiliate of
Seller, TUSA or Shareholder); and
(b) the obligations of Seller that accrue after the Effective Time,
as defined in Section 4.1, under the Third Party Leases and the Leases and
Contracts, but not as the result of any breach thereof by Seller or act or
omission of Seller that with notice, the passage of time, or both, would
constitute a breach thereof by Seller.
(collectively, the "ASSUMED LIABILITIES"), but in no event shall the Assumed
Liabilities include any liabilities arising out of any tortious acts or any
violations of law, rule or regulation by Seller, Shareholder or any of Seller's
employees, agents, Affiliates or contractors. Except for the Assumed
Liabilities, Buyer will not assume any contracts, leases, debts, obligations or
liabilities of Seller, or arising out of the ownership or operation of the
Business, whether express or implied, contingent or otherwise, or resulting from
any violation of law, rule or regulation, or arising out of any act,
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omission or transaction of Seller, TUSA, Shareholder or Mrs. Howard.
1.4 REAL PROPERTY LEASES. At the Closing, as defined in Section 4.1,
Shareholder (or Shareholder and Mrs. Howard, in the event that Shareholder and
Mrs. Howard are co-owners or own the property as community property), as
landlord, and Buyer, as tenant, shall enter into a real estate lease with
respect to the following facility:
Masonry Supply, Inc.
2090 Highway 157 N.
Mansfield, TX 76063
(the "MANSFIELD FACILITY")
The lease with respect to such facility (the "SHAREHOLDER LEASE") shall be
in the form of, and shall contain the terms set forth in, EXHIBIT 1.4. The
premises leased under the Third Party Leases and the Shareholder Lease are
individually and collectively called the "LEASED PREMISES."
1.5 EMPLOYMENT AGREEMENT. At the Closing, Buyer, as employer, and
Shareholder, as employee, shall enter into an employment agreement under which
Shareholder shall be employed as president of Buyer, which employment agreement
shall be in the form of, and shall contain the terms set forth in, EXHIBIT 1.5
(the "HOWARD EMPLOYMENT AGREEMENT").
1.6 INITIAL PUBLIC OFFERING. If (a) within five (5) years after the
Closing Date, a company controlled by TDA Industries, Inc. ("TDA") files a
Registration Statement (as hereinafter defined) that is declared effective by
the Securities and Exchange Commission (the "SEC") which registers the common
stock of TDA's roofing supply business (the "ROOFING COMPANY") for sale in
connection with an underwritten initial public offering of the Roofing Company's
common stock resulting in gross offering proceeds of at least Ten Million
Dollars ($10,000,000.00) (the "IPO"), (b) the operations of the Acquired
Business are part of the Roofing Company's operation (i) at the time the
Registration Statement is declared effective by the SEC, or (ii) within one (1)
year after the Registration Statement is declared effective by the SEC and
within five (5) years after the Closing Date, and (c) the Acquired Business
earnings before interest, federal income taxes, and amortization of goodwill
("EBITA") from the Effective Time to the effective date of such filing are:
(i) not less than Two Million Dollars ($2,000,000.00) each year (the
"FIRST ALTERNATIVE"); or
(ii) less than Two Million Dollars ($2,000,000.00) each year but not
less than One Million Five Hundred Thousand Dollars
($1,500,000.00) per year (the "SECOND ALTERNATIVE");
(or, in the case of the First Alternative or Second Alternative, not less than a
seasonally adjusted portion of such amount for any partial fiscal year based on
seasonal differences in the Acquired Business EBITA for the thirty-six (36)
months preceding such effective date of such filing), then Buyer shall cause
Seller or its designee to receive One Million Dollars ($1,000,000.00), if the
First Alternative is met, or Seven Hundred Fifty Thousand Dollars ($750,000.00),
if the Second
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Alternative is met, payable, at the option of the Roofing Company, either in
cash or in common stock of the Roofing Company valued at the price at which such
common stock is sold in the IPO (the "IPO PRICE"). Such common stock, if
delivered to Seller or its designee pursuant to this Section 1.6, shall be
unregistered and appropriately legended (or registered if issued pursuant to an
effective Registration Statement) and issued subject to all normal and customary
agreements typically entered into among the recipient of such common stock, the
underwriters, the Roofing Company, and its principal shareholders entered into
in connection with the IPO, and to a lock-up agreement limited to no more than
24 months from the effective date of the IPO at the discretion of the
underwriters of such IPO, or any greater period of time that may be required by
any regulatory agency, share exchange, or NASDAQ, and subject to compliance with
any requirements or restrictions arising under any applicable state or federal
securities laws or regulations. In the event that Seller or its designee
provides the Roofing Company notice at least thirty (30) days prior to the
anticipated effective date of the IPO that it would prefer to receive the
Roofing Company common stock rather than cash, Buyer shall use reasonable
efforts to cause such stock to be issued to Seller or its designee (subject to
the approval of the underwriters of such IPO and subject to compliance by all
relevant parties with any requirements or restrictions arising under any
applicable state or federal securities laws or regulations). Buyer can give no
assurance that any IPO will ever be consummated or that the value of any shares
of stock issued pursuant to the provisions of Section 1.6 or Section 2.1(b)
hereof would be maintained.
For purposes of this Section, "REGISTRATION STATEMENT" means a registration
statement filed by the Roofing Company with the SEC under the Securities Act of
1933, as amended (the "SECURITIES ACT"), in connection with a public offering of
the Roofing Company's common stock (other than a registration statement filed on
Form S-4 or Form S-8, or any form substituting therefor). The rights of Seller
under the provisions in Section 1.6 and Section 2.1(b) hereof regarding the
possible issuance of stock of the Roofing Company shall be contingent upon
compliance by all relevant parties with all state and federal securities laws
and regulations applicable on the date hereof, at the time such rights are
exercised and at all other times as determined by counsel for all involved
parties and any regulatory agencies having jurisdiction thereover.
For purposes of this Section, the EBITA calculation shall not be charged
with any amortization of goodwill, financing cost or interest cost relating to
the acquisition of the Acquired Business. In the event of acquisitions or the
financing of new branch locations which become part of the business operations
of the Acquired Business in the future, amortization of goodwill expense or
interest expense on borrowed funds relating only to those acquisitions or new
branch locations shall be charged. All costs related to the acquisition of the
Acquired Business shall be (or be deemed to be) capitalized expenses.
1.7 TUSA NON-COMPETE AGREEMENT. At the Closing, TUSA, Shareholder, Mrs.
Howard and Buyer shall enter into the Purchase and Non-Competition Agreement in
the form of, and containing the terms set forth in, EXHIBIT 1.7 (the
"NON-COMPETE AGREEMENT") pursuant to which TUSA will agree (a) not to compete
with Buyer and the Acquired Business, (b) to help facilitate the direct purchase
by Buyer of all steel and other products and supplies heretofore sold by TUSA to
Seller in connection with the Acquired Business, (c) to disclose to Buyer the
names of
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TUSA's customers and accounts which have heretofore purchased products from TUSA
of the type reasonably related to the Acquired Business, and (d) to assign to
Buyer all goodwill of TUSA in its business reasonably related to the Acquired
Business.
2. PURCHASE PRICE AND PAYMENT; ALLOCATION; AND SALES AND TRANSFER TAXES.
2.1 PURCHASE PRICE AND PAYMENT.
(a) The purchase price for the Purchased Assets, subject to
adjustment under the terms of this Agreement (the "PURCHASE PRICE"), shall be
Eight Million Dollars ($8,000,000.00) (the "TENTATIVE PURCHASE PRICE")and shall
be increased by the Adjustment Amount, as defined in Section 2.2, if the
Adjustment Amount is a positive number, or shall be reduced by the Adjustment
Amount, if the Adjustment Amount is a negative number. At the Closing, the
Tentative Purchase Price, after applying the credits and adjustments provided
for in this Agreement (the "ADJUSTED TENTATIVE PURCHASE PRICE"), shall be
payable as follows: (a) Buyer shall pay to Seller, by wire transfer in
immediately available United States funds, the sum of Six Million Dollars
($6,000,000.00) (the "CLOSING CASH AMOUNT"); and (b) Buyer shall issue to
Seller, Buyer's Secured Non-Negotiable Promissory Note, in the form of, and
containing the terms set forth in, EXHIBIT 2.1(B)(1) to this Agreement for the
balance of the Adjusted Tentative Purchase Price (the "PROMISSORY NOTE"). The
Promissory Note shall be secured pursuant to a Security Agreement in the form
of, and containing the terms set forth in, EXHIBIT 2.1(B)(2) (the "SECURITY
AGREEMENT"). Seller shall subordinate its lien and the Promissory Note to
Buyer's other secured financings and third-party borrowings and shall execute
and deliver such subordination agreements as may be requested at the Closing or
thereafter by Buyer's other unaffiliated lenders.
(b) Up to Two Million Dollars ($2,000,000.00) of the principal amount
of the Promissory Note shall be exchangeable at the option of Seller into common
stock of the Roofing Company in the event that the Acquired Business is part of
the Roofing Company which consummates the IPO (as defined in Section 1.6) at any
time during the five years after the Closing Date or becomes a part of the
Roofing Company within one year after the consummation of the IPO and within
five years after the Closing Date. The right to make the aforesaid exchange of
up to Two Million Dollars ($2,000,000.00) of the principal amount of the
Promissory Note shall be available at the time of the consummation of the IPO
(or at the time that the Acquired Business becomes part of the Roofing Company,
if that occurs within one year after the consummation of such IPO and within
five years after the Closing Date) at a price equal to the IPO Price. If the
aforesaid exchange is made, in whole or in part, the shares of stock of the
Roofing Company acquired shall be unregistered and appropriately legended and
subject to all normal and customary agreements among the recipient of such
common stock, the underwriters, the Roofing Company, and its principal
shareholders entered into in connection with the IPO, and to a lock-up agreement
limited to no more than 24 months from the effective date of the IPO at the
discretion of the underwriters of such IPO, or any greater period of time that
may be required by any regulatory agency, share exchange, or NASDAQ, and subject
to compliance with any requirements or restrictions arising under any applicable
state or federal securities laws or regulations, and all other normal terms and
conditions. If the Roofing Company advises Seller that the Acquired Business
may become part of the Roofing Company upon the proposed consummation of such
proposed IPO
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more than sixty (60) days prior to the anticipated effective date of such
proposed IPO, Seller's right to make an exchange for stock under this Section
shall be contingent upon Seller's giving the Roofing Company notice of Seller's
intent to exercise its right to exchange for stock (and the portion of the
Promissory Note to be so exchanged) not later than fifty (50) days prior to the
anticipated effective date of such proposed IPO.
In the event that the IPO is consummated, Buyer shall prepay the
outstanding principal and any accrued interest on the Promissory Note within 120
days of the consummation of the IPO. Upon payment of the Promissory Note,
Seller's right to make an exchange for shares of common stock of the Roofing
Company sold in the IPO under the terms of this Section 2.1(b) shall terminate.
Buyer can give no assurance that any IPO will ever be consummated or that the
value of any shares of stock issued pursuant to the provisions of Section 1.6 or
Section 2.1(b) hereof would be maintained. The provisions in Section 1.6 and
Section 2.1(b) hereof regarding the possible issuance of stock of the Roofing
Company shall be available only if and to the extent that attorneys for all
parties involved as well as all regulatory agencies having jurisdiction
thereover find that each provision is consistent with all state and federal
securities laws and regulations applicable on the date hereof, at the time such
rights are exercised and at all other times.
2.2 ADJUSTMENT AMOUNT. The Adjustment Amount (which may be a positive or
negative number) will be equal to (a) the amount of the Acquired Net Assets, as
defined in this Section below, less the amount of the Permitted Distributions,
as defined in Section 7.1 (but excluding from the amount of the Permitted
Distributions payments by Seller during the Interim Period (as defined in
Section 4.3(a)) to Shareholder of up to (i) $10,000 a week as salary and (ii)
$16,000 a month as rent on the Mansfield Facility), minus (b) Two Million Four
Hundred Thousand Dollars ($2,400,000.00). For purposes of this Agreement, the
"ACQUIRED NET ASSETS" means (i) the tangible net book value of the Purchased
Assets as of the Effective Time as determined on the Effective Date Balance
Sheet, as defined in Section 2.3(a), minus (ii) the accrued liabilities of
Seller (exclusive of any liability or obligation of Seller for state or federal
income or franchise taxes which are not paid prior to the Closing) as of the
Effective Time, as determined on the Effective Date Balance Sheet, all as
adjusted in accordance with this Agreement and determined as set forth in
Section 2.3(a).
2.3 ADJUSTMENT PROCEDURE.
(a) Seller will prepare and shall cause Waters, Murray & Associates
("W&M"), Seller's independent certified public accountants, to audit the balance
sheet of Seller at June 30, 1998 (the "EFFECTIVE DATE BALANCE SHEET"), prepared
in accordance with GAAP, and to compute the Acquired Net Assets. Buyer's
independent certified public accountants, Deloitte & Touche LLP ("D&T") and
representatives of Buyer shall review the audit conducted by W&M. Seller and
Shareholder will arrange for D&T's and Buyer's representatives to have full
access to the W&M audit workpapers and files. The depreciated value of various
tangible personal property purchased by Seller and currently used in the
Acquired Business which were not reflected properly on the books of Seller prior
to the Effective Time (including, without limitation, certain angle iron cutting
equipment at each branch location) shall be included in the calculation of the
Acquired Net Assets (consistent with the requirements of GAAP). In conducting
the audit of the Effective Date Balance
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Sheet, if W&M determines that the depreciated value of the fixed assets stated
on the balance sheet of Seller prior to the Effective Time is overstated, then
Seller shall have the right to review the depreciated value of certain fixed
assets purchased more than five years ago and still used in the Acquired
Business but not reflected on Seller's financial statements and to add their
depreciated value to the net fixed asset account (consistent with GAAP) to make
up for any such additional depreciation allowance deemed required by W&M.
Seller shall deliver the Effective Date Balance Sheet and the computation of the
Acquired Net Assets to Buyer at the Closing. If, within thirty (30) days
following delivery to Buyer of the Effective Date Balance Sheet and the
computation of the Acquired Net Assets, Buyer has not given Seller notice of
Buyer's objection to the Effective Date Balance Sheet or the computation of the
Acquired Net Assets (such notice, if given, must contain a statement of the
basis of Buyer's objection), then the Effective Date Balance Sheet and the
computation of the Acquired Net Assets, shall be deemed to have been finally
determined for purposes of this Agreement, and the Acquired Net Assets as so
determined will be used in computing the Adjustment Amount. If Buyer gives such
notice of an objection, then the matters as to which Buyer has objected will be
submitted to D&T and W&M (the "ACCOUNTANTS") for resolution, and the Accountants
shall attempt to resolve such matters and determine the Acquired Net Assets. If
the Accountants are unable to agree as to the resolution of such matters and
determine the Acquired Net Assets within thirty (30) days after such matters are
submitted to the Accountants, the Accountants shall select another "Big Five"
accounting firm (New York City or Dallas office) (the "OTHER ACCOUNTANTS") which
will resolve such matters and determine the Acquired Net Assets. Each party
will furnish to the Accountants (and, if applicable, the Other Accountants) such
workpapers and other documents and information relating to the disputed matters
as the Accountants or the Other Accountants may request and are available to
that party (or its independent public accountants), and each party will be
afforded the opportunity to present to the Accountants and the Other Accountants
any material relating to such disputed issues and to discuss such issues with
the Accountants and the Other Accountants. The resolution of such issues under
this Section 2.3(a) by the Accountants or Other Accountants, as the case may be,
as set forth in a notice delivered to both parties by the Accountants or Other
Accountants shall be deemed to be a final determination thereof for purposes of
this Agreement, shall be binding and conclusive on the parties, and the Acquired
Net Assets, as finally determined by the Accountants or Other Accountants, will
be used in computing the Adjustment Amount. Buyer and Seller shall each bear
one-half of the fees of the Other Accountants in connection with the resolution
or attempted resolution of the disputed matters.
(b) On the tenth business day following the final determination of
the Acquired Net Assets under Section 2.3(a) and the Adjustment Amount:
(i) if the Purchase Price is greater than the sum of the Closing
Cash Amount and the original principal amount of the
Promissory Note, Buyer shall pay the difference to Seller
(up to Two Hundred Fifty Thousand Dollars ($250,000.00)) by
wire transfer in immediately available United States funds
(the "ADDITIONAL CASH PAYMENT"), and if such difference
exceeds Two Hundred Fifty Thousand Dollars ($250,000.00),
the Promissory Note shall be amended by Seller and Buyer by
adding such excess to the original principal amount of the
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Promissory Note; or
(ii) if the Purchase Price is less than the sum of the Closing
Cash Amount and the original principal amount of the
Promissory Note, Seller shall pay (and Shareholder shall
cause Seller to pay) (A) the difference to Buyer (up to Two
Hundred Fifty Thousand Dollars ($250,000.00)) by wire
transfer in immediately available United States funds, and
(B) if such difference exceeds Two Hundred Fifty Thousand
Dollars ($250,000.00), the Promissory Note shall be amended
by Seller and Buyer by reducing the original principal
amount of the Promissory Note by the amount of such excess.
2.4 CONTINGENT PAYMENTS.
(a) BASED ON EBITA. Buyer shall pay to Seller or its designee, as
additional consideration for the sale of the Purchased Assets, the applicable
percentage set forth below of the EBITA of the Acquired Business, on an annual
non-cumulative basis, for each of the fiscal years ending June 30, 1999 through
June 30, 2003:
EBITA FOR PERCENTAGE OF EBITA TO
FISCAL YEAR BE PAID TO SELLER OR
----------- ITS DESIGNEE
------------
Less than $2,000,000.00 0%
$2,000,000.00 - $2,750,000.00 25%
More than $2,750,000.00 35%
For purposes of this Section, the EBITA of the Acquired Business shall not
be charged with any amortization of goodwill, financing cost or interest cost
relating to the purchase of the Acquired Business. In the event of acquisitions
or the financing of new branch locations which become part of the business
operations of the Acquired Business in the future, amortization of goodwill
expense or interest expense related to borrowed funds relating only to those
acquisitions or new branch locations shall be charged. All costs related to the
acquisition of the Acquired Business shall be (or deemed to be) capitalized
expenses. The EBITA of the Acquired Business shall be conclusively determined
annually by Buyer's independent certified public accountants. The contingent
payments of Purchase Price payable pursuant to this Section 2.4(a) is not
contingent upon the employment of Shareholder or any other party to this
Agreement.
(b) BASED ON UNCOLLECTIBILITY OF ACCOUNTS RECEIVABLE.
The bad debt reserve as shown on the Effective Date Balance Sheet shall be
allocated to the specific accounts receivable which are shown thereon in
accordance with SCHEDULE 2.4(B) attached hereto. Accounts receivable with a
face amount up to the amount of the bad debt reserve therefor
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as shown on the Effective Date Balance Sheet and which arose on or before the
Effective Time and which are acquired by Buyer on the Closing Date and are
subsequently written-off as uncollectible by Buyer, shall be reconveyed to
Seller by Buyer without charge or encumbrance at the time such write-off occurs,
and the face amount of all such accounts receivable reconveyed to Seller (the
"RETURNED ACCOUNTS") net of any bad debt reserve allocated to the Returned
Accounts on the Effective Date Balance Sheet shall be an adjustment to the
Purchase Price. If the amount of the Returned Accounts as of the first
anniversary of the Effective Time exceeds the bad debt reserve allocated to such
Returned Accounts, the original principal amount of the Promissory Note shall be
decreased by such difference. If the amount of the Returned Accounts as of the
first anniversary of the Effective Time is less than such bad debt reserve, the
original principal amount of the Promissory Note shall be increased by such
difference. Any increase or decrease in the amount of interest payable under
the Promissory Note resulting from such adjustment shall be added to or credited
against the first interest payment due after the determination of such
adjustment.
2.5 ALLOCATIONS. The consideration for the Purchased Assets will be
allocated in accordance with the Allocation of Purchase Price Agreement in the
form of, and containing the terms set forth in, EXHIBIT 2.5. Such allocations
will be conclusive and binding on Seller and Buyer for state and federal income
tax purposes, and Seller and Buyer will report such allocations to the Internal
Revenue Service as required by Section 1060 of the Internal Revenue Code of
1986, as amended, and the regulations with respect to that Section.
2.6 SALES AND TRANSFER TAXES. Buyer shall pay all sales and other
transfer taxes and fees arising out of the sale and assignment of the Purchased
Assets to Buyer. Seller shall pay all documentary and other excise taxes with
respect to the Promissory Note and any amendments thereto.
3. CASUALTY AND CONDEMNATION.
3.1 RISK OF LOSS. Until the Closing, the risk of loss or damage to the
Purchased Assets shall be borne by Seller, and if the Purchased Assets or any
portion thereof are stolen or are damaged or destroyed by fire or other casualty
before the Closing and can be restored, repaired or replaced substantially in
the same condition as exists on the date of this Agreement, within ninety (90)
days after such casualty, Seller shall so restore, and Shareholder shall cause
Seller to restore, such Purchased Assets, and the Closing Date shall be delayed
accordingly; but if such uninsured portion of the cost of restoration, repair or
replacement exceeds One Hundred Thousand Dollars ($100,000.00) (and Seller
refuses to restore, repair or replace such Purchased Assets), or such
restoration, repair or replacement cannot be completed within such period, this
Agreement, at the option of Buyer, shall be deemed terminated.
If Buyer elects to purchase the Purchased Assets even though the Purchased
Assets are not restored, repaired or replaced, or the uninsured portion of the
cost of restoration, repair or replacement exceeds One Hundred Thousand Dollars
($100,000.00), Buyer shall be entitled to the benefits of any insurance on the
Purchased Assets to the extent required for such restoration, repair or
replacement. Seller shall not be required to restore, repair or replace the
stolen, damaged or destroyed Purchased Assets if the uninsured portion shall
cost more than One Hundred Thousand
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Dollars ($100,000.00) or if it will take longer than ninety (90) days to
complete, but, if Buyer elects to go forward with the purchase, Buyer will
receive a credit against the Purchase Price at the Closing for such uninsured
portion of the loss and the restoration and an assignment by Seller of all of
its rights under insurance policies with respect to the stolen, damaged or
destroyed Purchased Assets and all other rights and claims for damages with
respect to such stolen property, damage or destruction.
3.2 CONDEMNATION. If at any time prior to the Closing, the real property
of which the Leased Premises are a part, or any portion thereof, is taken by
eminent domain or if any preliminary steps in any taking by eminent domain of
such real property or the Leased Premises, or any portion thereof, occurs prior
to the Closing, Buyer may, at its option, within ten (10) days after receipt of
notice or knowledge thereof, terminate this Agreement. Seller shall give Buyer
notice of any such taking and all steps preliminary thereto as soon as Seller
becomes aware of them. If Buyer does not elect to so terminate this Agreement,
this Agreement shall remain in full force and effect, and Seller or Shareholder
(or Shareholder and Mrs. Howard), as the case may be, shall in such event turn
over or credit to Buyer at the Closing all monies received or to be received by
Seller or Shareholder (or Shareholder and Mrs. Howard), as the case may be, by
reason of such taking, and Seller or Shareholder (or Shareholder and Mrs.
Howard), as the case may be, shall assign to Buyer all of Seller's or
Shareholder's (or Shareholder's and Mrs. Howard's) right, title and interest in
and to any awards (and rights or claims to any such awards) that may be made for
such taking and any additional money that may be payable thereunder.
4. CLOSING.
4.1 CLOSING; CLOSING DATE; AND EFFECTIVE TIME. Subject to the terms and
conditions of this Agreement, the closing of the transactions contemplated by
this Agreement (the "CLOSING") will occur at 9:00 a.m. local time at the offices
of Jackson Walker L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202, on
October 22, 1998 or on such other date as may be agreed upon in writing by
Seller and Buyer (the "CLOSING DATE"). The sale and purchase under this
Agreement shall, contingent upon the completion of the Closing, be effective as
of 12:01 a.m. on July 1, 1998 (the "EFFECTIVE TIME"), and all transactions with
respect to the Acquired Business after the Effective Time shall be for Buyer's
benefit.
4.2 ACTIONS TO BE TAKEN AT THE CLOSING. At the Closing, the parties will
take all of the following actions and deliver all of the following documents:
(a) Seller will deliver to Buyer the following documents, in each
case in a form acceptable to Buyer in its sole discretion:
(i) a Bill of Sale with respect to the tangible Purchased
Assets, transferring to Buyer good and marketable title in
and to such Purchased Assets, free and clear of all
Encumbrances and other matters except for the Permitted
Encumbrances applicable thereto;
(ii) an assignment to Buyer of the Accounts Receivable and all
other indebtedness owed to Seller and all collateral
securing any or all of
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such Accounts Receivable and all other indebtedness owed
to Seller;
(iii) assignments of all of Seller's rights under the Third
Party Leases;
(iv) assignments of all of Seller's rights under the Leases
and Contracts;
(v) assignments of all of the other Purchased Assets;
(vi) estoppel certificates and consents to assignment signed
by each party (other than Seller) with respect to each of
the Third Party Leases and the Leases and Contracts that
Buyer is taking by assignment under the terms of this
Agreement;
(vii) any subordination agreements required to be delivered
prior to Closing in accordance with Section 2.1;
(viii) the closing statement signed by Seller;
(ix) certificates issued by the Comptroller of Public Accounts
of the State of Texas to the effect that Seller is in
good standing with respect to the payment of franchise,
sales and use taxes in the State of Texas;
(x) certificates of title for each of the motor vehicles
included in the Purchased Assets duly assigned to Buyer,
together with appropriate applications to transfer title
thereto to Buyer, duly executed by Seller; and
(xi) such other instruments, documents and papers to transfer
and vest in Buyer good and marketable title in and to the
Purchased Assets free and clear of all Encumbrances
except for the Permitted Encumbrances applicable thereto.
(b) Seller will give Buyer exclusive possession of the Purchased
Assets.
(c) TUSA and Buyer will enter into the Non-Compete Agreement.
(d) TUSA will deliver the documents of assignment required by the
Non-Compete Agreement.
(e) Buyer will pay the Closing Cash Amount and deliver to Seller the
Promissory Note and Security Agreement in accordance with SECTION 2.1.
(f) Buyer will deliver to Seller the closing statement signed by
Buyer.
(g) Buyer and Shareholder shall enter into the Howard Employment
Agreement.
(h) Shareholder (or Shareholder and Mrs. Howard), as the case may be,
and
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Buyer shall enter into the Shareholder Lease.
(i) Seller, Shareholder, TUSA and Mrs. Howard, on the one hand, and
Buyer, on the other hand, shall take such other actions and shall execute
and deliver such other instruments, documents and certificates as are
required by the terms of this Agreement or as may be reasonably requested
by the other party or parties in connection with the consummation of the
transactions contemplated by this Agreement.
4.3 DISTRIBUTION OF INTERIM EARNINGS.
(a) The operations of the Acquired Business from the Effective Time
to the Closing Date (the "INTERIM PERIOD") shall be for the account of
Buyer. The pretax earnings of the Acquired Business during the Interim
Period, but not including any earnings or income resulting from the sale of
the Purchased Assets to Buyer or otherwise arising out of the transactions
contemplated by this Agreement, as determined in accordance with GAAP
applied consistently with the accounting principles applied in the
preparation of the 1998 Financial Statements, as defined in Section 5.7
(the "INTERIM EARNINGS"), shall be distributed as follows:
(i) one-half of the Interim Earnings shall be paid by Buyer
to Seller and Buyer shall receive a credit for such
amount as a prepayment of principal on the Promissory
Note; and
(ii) one-half of the Interim Earnings shall be retained by
Buyer.
(b) Buyer shall be responsible for the payment of all federal and
state income taxes on the Interim Earnings and shall hold Seller and
Shareholder harmless therefrom.
(c) The determination of the Interim Earnings shall be made by W&M
and Buyer's internal auditors within thirty (30) days after the Closing
Date. In the event W&M and Buyer's internal auditors cannot agree on such
determination, Buyer and Seller shall engage the Other Accountants, whose
determination shall be conclusive and binding on the parties. The
distributions described in Section 4.3(a) shall be made immediately upon
the final determination of the Interim Earnings.
5. REPRESENTATIONS AND WARRANTIES OF SELLER, TUSA, SHAREHOLDER AND MRS.
HOWARD. Seller, Shareholder and Mrs. Howard, jointly and severally, represent
and warrant to Buyer as follows (and TUSA also makes the representations and
warranties as to TUSA set forth in this SECTION 5):
5.1 ORGANIZATION. Seller and TUSA each is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Texas.
Seller and TUSA each has full power to own its assets and to conduct its
business as presently conducted. Neither Seller nor TUSA is required to be
qualified or authorized to transact business as a foreign corporation in any
state or jurisdiction.
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5.2 AUTHORITY. Seller and TUSA each has all requisite power and authority
to execute and enter into this Agreement and all other agreements and
instruments contemplated hereby to be executed and delivered by Seller and TUSA
at the Closing (together with the agreements required to be executed by
Shareholder pursuant to this Agreement, the "SELLER DOCUMENTS") and to perform
their respective obligations hereunder and thereunder. The execution, delivery
and performance by each of Seller and TUSA of this Agreement and the Seller
Documents to which it is a party have been duly authorized by all necessary
action, corporate or otherwise, by Seller and TUSA and the stockholders of
Seller and TUSA, as the case may be. This Agreement has been duly executed and
delivered by Seller, TUSA, Shareholder and Mrs. Howard and is the legal, valid
and binding agreement of Seller, TUSA, Shareholder and Mrs. Howard, enforceable
against Seller, TUSA, Shareholder and Mrs. Howard, respectively, in accordance
with its terms. The Seller Documents will be, when executed and delivered by
Seller, Shareholder or TUSA, as the case may be, the legal, valid and binding
agreements of Seller, Shareholder or TUSA, as the case may be, enforceable
against Seller, Shareholder or TUSA, as the case may be, in accordance with
their respective terms.
5.3 TITLE AND CONDITION.
(a) The Purchased Assets are owned solely by Seller, and Seller has
good, assignable and marketable title to the Purchased Assets. Attached to
this Agreement as SCHEDULE 5.3(A) is a true, correct and complete list of
Seller's creditors as of September 30, 1998, including, without limitation,
its secured creditors and other creditors having liens on any of its
assets. At the Closing, Buyer shall receive from Seller good, assignable
and marketable title to the Purchased Assets, free and clear of any and all
Encumbrances other than the Permitted Encumbrances.
(b) The tangible Purchased Assets (excluding, for purposes of this
Section 5.3, the Inventory) are in good condition and repair, ordinary wear
and tear excepted. There are no patent or latent defects regarding the
Purchased Assets or the Leased Premises, or any portion thereof, including,
without limitation, burial grounds, archaeological deposits, sink holes, or
other on-site conditions which could reduce the fair market value thereof.
5.4 PURCHASED ASSETS. The Purchased Assets constitute all of the assets
and properties owned by Seller that are used or useful in connection with the
Business.
5.5 NO VIOLATION. Except for the consent of the lessors under the Third
Party Leases and the Leases and Contracts and the consent of Miguel Chavez
regarding the assignment of his covenant not to compete with Seller, neither the
execution or delivery of this Agreement or any of the Seller Documents nor the
consummation of the transactions contemplated hereby or thereby, including,
without limitation, the transfer and assignment of the Purchased Assets to
Buyer, will conflict with or result in the breach of any term or provision of,
or constitute a default under, or result in the creation of, any Encumbrances
upon any of the Purchased Assets pursuant to, or give any third party the right
to accelerate any obligation under, any article provision, bylaw, agreement,
contract, lease, indenture, deed of trust, instrument, order, law or regulation
to which Seller or TUSA is a party or by which Seller, TUSA or any of the
Purchased Assets is in any way
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bound or obligated.
5.6 GOVERNMENT CONSENTS. No consent, approval, order or authorization of,
or registration, qualification, designation, declaration or filing with, any
governmental authority is required on the part of Seller, TUSA, Shareholder or
Mrs. Howard in connection with the transactions contemplated by this Agreement.
5.7 FINANCIAL STATEMENTS AND CONDITION.
(a) Seller has delivered to Buyer:
(i) the unaudited balance sheet of Seller as at June 30, 1996
and the audited balance sheet of Seller as at June 30, 1997, and the
related audited statements of operations and retained earnings, and cash
flows for each of the years then ended (the A1996 AND 1997 FINANCIAL
STATEMENTS");
(ii) an audited balance sheet of Seller as at June 30, 1998
(I.E., the Effective Date Balance Sheet) and the related audited statements
of income and retained earnings and cash flows for the year then ended,
including, without limitation, the notes thereto, together with the report
thereon of W&M (the "1998 FINANCIAL STATEMENTS"); and
(iii) unaudited balance sheets as at December 31, 1996 and 1997
and as at September 30, 1998 (the "UNAUDITED BALANCE SHEETS") and the
related unaudited statements of income and retained earnings for the
calendar years 1996 and 1997 and for the nine-month period ended September
30, 1998 (the "UNAUDITED FINANCIAL STATEMENTS").
(b) Each of the financial statements described in this Section, and
the notes thereto, fairly present the financial condition, the results of
operations, and the cash flows of Seller as at the respective dates of, and
for the periods referred to in, such financial statements, all in
accordance with GAAP, subject, in the case of the Unaudited Financial
Statements, to (i) normal recurring year-end adjustments (the effect of
which will not, individually or in the aggregate, be material) and (ii) the
absence of notes (that, if presented, would not differ materially from
those included in the Effective Date Balance Sheet). The financial
statements referred to in this Section 5.7 reflect the consistent
application of GAAP throughout the periods involved. No financial
statements of any entity other than Seller are required by GAAP to be
included in the financial statements of Seller.
(c) The Acquired Net Assets, as of the Effective Time and as of the
Closing Date, less any Permitted Distributions (but excluding from the
amount of the Permitted Distributions payments by Seller during the Interim
Period to Shareholder of up to (i) $10,000 a week as salary and (ii)
$16,000 a month as rent on the Mansfield Facility), is not, and will not
be, less than Two Million Four Hundred Thousand Dollars ($2,400,000.00),
and, as of the Closing Date, the tangible net book value of the Acquired
Business shall equal the sum of the Acquired Net Assets, less any Permitted
Distributions, plus the Interim Earnings, as defined in Section 4.3.
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(d) The Interim Earnings are greater than zero.
(e) Since the Effective Time, Seller has not paid more than $16,000
per month as rent for the use of the Mansfield Facility.
5.8 ABSENCE OF MATERIAL ADVERSE CHANGE. Since June 30, 1998 there has not
been:
(a) any material adverse change in the financial condition, results
of operations, business, business prospects, personnel, assets or
liabilities (contingent or otherwise) of Seller;
(b) any dividend declared or paid or distribution made, directly or
indirectly to Shareholder or any Affiliate of Seller, Shareholder or Mrs.
Howard (except for Permitted Distributions as defined in Section 7.1), or
any redemption or repurchase of Seller's capital stock;
(c) any increase in salary or wages, or payment of any bonus,
commission or other compensation to any of the officers, directors,
employees or agents of Seller except as is shown on SCHEDULE 5.12;
(d) any pending or threatened labor disputes or other labor problems
relating to any employees of Seller;
(e) any default (including, without limitation, any event that, with
the giving of notice or passage of time, or otherwise, would cause a
default), termination or threatened termination under, or amendment to, any
agreement, contract, lease, instrument or license to which Seller is a
party or that is applicable to any portion of the Purchased Assets;
(f) any casualty loss, theft, damage or destruction of any of the
Purchased Assets which has resulted, either singly or in the aggregate, in
a loss of Ten Thousand Dollars ($10,000.00) or more, whether or not covered
by insurance;
(g) any condemnation or eminent domain proceeding and, to the
knowledge of Seller or Shareholder, there has been no threatened
condemnation or eminent domain proceeding affecting any of the Purchased
Assets or the Leased Premises;
(h) any sale, assignment or transfer of any assets of Seller, except
in the ordinary course of Seller's business and consistent with its past
practices or except for Permitted Distributions;
(i) any waiver by Seller of any material rights related to Seller or
any of the Purchased Assets;
(j) any other transactions, agreements, contracts or commitments
entered into by Seller or Shareholder affecting Seller or any of the
Purchased Assets, except in the ordinary course of Seller's business and
consistent with its past practices or except for Permitted Distributions;
or
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(k) any agreement or understanding to do or resulting in any of the
foregoing.
In addition, since the Effective Time Seller has conducted the Acquired
Business in accordance with the requirements of Section 7.1.
5.9 LITIGATION; INVESTIGATIONS. SCHEDULE 5.9 hereto contains:
(a) a detailed description of all pending (or, to the knowledge of
Seller or Shareholder, threatened) lawsuits, claims, administrative
charges, complaints, proceedings or investigations by any person or
governmental authority against or relating to Seller or any of the
Purchased Assets or to which Seller or any of the Purchased Assets is
subject;
(b) any judgment, order, writ, injunction or decree to which Seller
is subject, or relating to any of the Purchased Assets or the business or
operations of Seller; and
(c) a detailed description of all lawsuits, claims, administrative
proceedings or investigations pending (or, to the knowledge of Seller or
Shareholder, threatened), within the preceding six (6) years, against
Seller, with respect to any of the Purchased Assets or the business or
operations of Seller other than those lawsuits arising out of traffic
accidents which were fully covered by insurance and finally settled.
5.10 COMPLIANCE WITH LAWS AND OTHER REQUIREMENTS. Seller complies with and
has at all times complied with, and the Purchased Assets and Leased Premises and
the use, operation and maintenance thereof by Seller comply with and have at all
times complied with, and neither Seller nor any of the Purchased Assets and
Leased Premises nor the use, operation or maintenance thereof by Seller is in
violation or contravention of, any applicable (including, without limitation,
any tax, environmental, health, safety or employment) statute, law, ordinance,
decree, order, rule or regulation of any governmental or administrative or
quasi-governmental authority, agency or body.
(a) NOTICES OF VIOLATION. Seller has not received any notices during
the last six (6) years from any governmental agency or body claiming any
such violation or contravention other than minor traffic and vehicle
regulatory violations. There are no agreements with, or commitments to,
any governmental, administrative, or quasi-governmental authority, agency
or body affecting or binding on Seller, or with respect to the Purchased
Assets or Leased Premises, in any manner. There is no proposal pending or
threatened for public improvement, assessment, paving agreement, road
expansion or improvement agreement, utility moratorium, use moratorium,
improvement moratorium, or legal, administrative, or other proceeding or
governmental investigation or requirement, formal or informal, pending or,
to the knowledge of Seller or Shareholder, threatened which affects or may
affect the Purchased Assets or the Leased Premises, or which adversely
affects or may affect Seller's ability to perform hereunder, or any other
charge or expense upon or related to the Purchased Assets or the Leased
Premises.
(b) TAXES/ASSESSMENTS. There are no taxes, fees, or assessments of
any kind or nature whatsoever which are presently due or, to the knowledge
of Seller or Shareholder, which will or may become due with respect to the
Purchased Assets or Leased Premises
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except for ad valorem real property taxes for the current calendar year
which are not yet due and payable. None of the Leased Premises, nor any
portion thereof, is within a "special assessment district" and, to the
knowledge of Seller or Shareholder, no application has been made or
submitted by anyone for the creation thereof or annexation thereby which
affects or may affect any of the Leased Premises.
(c) ZONING AND LAND USE LAWS. Each of the Leased Premises has the
appropriate zoning and other land use classifications, licenses, permits
and authorizations for the current use being made thereof by Seller. There
are no laws, rules, regulations or ordinances or modifications with respect
to zoning or land use in effect or, to the knowledge of Seller or
Shareholder, proposed, which restrict or prevent, or will restrict or
prevent, the use of the Purchased Assets or Leased Premises in
substantially the same manner as such Purchased Assets or Leased Premises,
as the case may be, are currently being used by Seller and as and have been
used by Seller during the preceding twelve (12) months ("BUYER'S INTENDED
USE"); and, further, none of the parcels comprising the Leased Premises
constitutes any non-conforming use.
(d) ADVERSE RESTRICTIONS AND RIGHTS. There are no existing
easements, rights-of-way, or restrictions other than existing zoning and
government regulations affecting the Leased Premises which could adversely
affect or prohibit the use of any of the Leased Premises for Buyer's
Intended Use.
(e) THIRD-PARTY RIGHTS/ENCUMBRANCES. No party other than Buyer has
any right or option to acquire the Purchased Assets or any portion thereof.
(f) ENVIRONMENTAL COMPLIANCE. (i) None of the real property currently
or previously owned, leased, managed, operated or otherwise utilized by
Seller is on any federal or state "Superfund" list or has ever been the
site of any activity or condition that would violate any federal, state,
local or other environmental statute, law, ordinance, decree, order, rule
or regulation, past or present, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"), the Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901 ET SEQ. ("ARCRA"), the Clean Air
Act, 42 U.S.C. '' 7401 ET SEQ., the Clean Water Act of 1977, 33 U.S.C. ''
1251 the Toxic Substances Control Act, 15 U.S.C. '' 2601 ET SEQ., or any
other federal, state, or local laws relating to air pollution, water
pollution, noise control, or the handling, discharge, disposal, or
recovery, either on-site or off-site (collectively referred to as
"ENVIRONMENTAL LAWS"), of any toxic or hazardous materials, substances,
wastes or other contaminants (including, without limitation, biohazardous
waste), petroleum products or their derivatives (collectively referred to
as "POLLUTANTS"); (ii) no Pollutants have been handled, stored, recycled,
or disposed of (other than supplies and inventories handled, stored,
recycled or disposed of in the ordinary course of business and in
compliance with all applicable laws) or leaked or spilled on, or have
otherwise contaminated, any of the Leased Premises, or any other real
property currently or previously owned, leased or used by Seller, or would
give rise to a cleanup or remediation obligation under or threatened
violation of any such Environmental Law; (iii) to the best of Seller's or
Shareholder's knowledge, the improvements on the Leased Premises contain no
asbestos-containing materials; (iv) to the
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best of Seller's or Shareholder's knowledge, no electrical transformers,
fluorescent light fixtures with ballast or other equipment containing PCB's
are or were located in the Leased Premises at any time during or prior to
Seller's use thereof; (v) none of the Leased Premises has been used as a
landfill; (vi) there are no incinerators, above or below ground storage
tanks (other than one above-ground fuel tank located on each of the Leased
Premises), septic tanks or cesspools on any of the Leased Premises; and
(vii) Seller has not arranged for the disposal of any Pollutant off the
Leased Premises which would subject Seller or Buyer to liability under any
Environmental Laws.
(g) WASTE DISPOSAL. Seller has disposed of all toxic or hazardous
waste in compliance with the Environmental Laws.
(h) LICENSES. There are no proceedings or investigations pending or,
to the knowledge of Seller or Shareholder, threatened, that could result in
a termination, revocation, suspension or probation with respect to any of
Seller's licenses, permits or authorizations.
5.11 CERTAIN CONTRACTS. The following Schedules to this Agreement contain
true, correct and complete copies of the following agreements, contracts,
leases, instruments, arrangements and commitments (and all amendments,
supplements and modifications thereto) (and, where indicated below, detailed
descriptions of the terms of unwritten agreements, contracts, leases,
instruments, arrangements, and commitments) relating to Seller or by which
Seller or any of the Purchased Assets is in any way bound or obligated:
(a) all supply agreements, contracts or arrangements (SCHEDULE
5.11(A)),
(b) all real estate leases relating to property owned, occupied or
utilized by Seller (the "REAL ESTATE LEASES") (SCHEDULE 5.11(B));
(c) all equipment leases relating to equipment utilized by Seller
(the "EQUIPMENT LEASES") (SCHEDULE 5.11(C));
(d) all agreements with any present director, officer, employee,
agent, representative or affiliate of Seller not otherwise set forth in
SCHEDULE 5.12 (SCHEDULE 5.11(D)),
(e) all insurance policies, or binders and certificates of insurance
in the case of policies not yet received by Seller, relating to the
Purchased Assets, the Leased Premises, or the Business (all of which
policies are in full force and effect) (SCHEDULE 5.11(E).
(f) all profit-sharing, pension, stock option, severance, retirement,
bonus, deferred compensation, group life and health insurance or other
employee benefit plans, trusts, agreements and arrangements, personnel
policies, and employee handbooks, whether or not legally binding, covering
or provided to any employees of Seller (SCHEDULE 5.11(F));
(g) all other agreements, contracts, leases, instruments,
arrangements and
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commitments relating to or affecting Seller or the Purchased Assets or any
interest therein that are not otherwise disclosed in the above-referenced
Schedules (SCHEDULE 5.11(G)); and
(h) detailed descriptions of the terms of any unwritten agreements,
contracts, leases, instruments, arrangements, or commitments and a list of
proposed agreements, contracts, leases, instruments, arrangements, or
commitments not otherwise referenced in this Section 5.11. (SCHEDULE
5.11(H)).
All of such agreements, contracts, leases, instruments, arrangements, and
commitments referred to above are valid, binding and in full force and effect
and enforceable in accordance with their respective terms and conditions.
Seller has performed all obligations to be performed by it under all such
agreements, contracts, leases, instruments, arrangements and commitments, and
there is no existing default or event of default or event that, with notice or
lapse of time or both, would constitute a default thereunder. There has been no
termination or threatened termination or notice of termination, or default under
any such agreement, contract, lease, instrument, arrangement or commitment.
5.12 EMPLOYEES. SCHEDULE 5.12 hereto contains a true, correct and complete
listing of all of the employees of Seller as of the Effective Time and as of the
date hereof, their current respective positions or job classifications, and
their current respective wage scales or salaries, as the case may be, and other
compensation and benefits. SCHEDULE 5.12 also contains Seller's unemployment
tax rate. Since the Effective Time, Shareholder has not received compensation
from Seller in excess of the rate of Ten Thousand Dollars ($10,000.00) per week.
5.13 EMPLOYEE BENEFIT PLANS. Buyer shall not be subject to any liability
with respect to, or resulting from the termination by Seller of any of its
employees from, any profit-sharing, 401 (k), pension, stock option, vacation
pay, sick pay, personal leave, severance pay, retirement, bonus, deferred
compensation, group life and health insurance or other employee benefit plan,
agreement or commitment of Seller ("BENEFIT PLAN"), whether or not legally
binding, or resulting from the employment by Buyer of any such employee, and
Buyer shall not be responsible for any liability whatsoever under any such
Benefit Plan. Seller does not contribute or have an obligation to contribute to
any multi-employer plan within the meaning of Section 3(37) or 400(a)(3) of
ERISA on behalf of Seller's employees.
5.14 LABOR MATTERS.
(a) Seller has no collective bargaining, union or labor agreements,
contracts or other arrangements with any group of employees, labor union or
employee representatives;
(b) Neither Seller nor Shareholder has any knowledge of any
organization effort currently being made or threatened by or on behalf of
any labor union with respect to employees of Seller;
(c) there are no labor controversies, strikes, work stoppages or
slowdowns pending or, to the knowledge of Seller or Shareholder,
threatened, against Seller;
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(d) there is no written or oral contract with any of Seller's
employees that cannot be terminated without liability; and
(e) there are no pending or, to the knowledge of Seller or
Shareholder, threatened, lawsuits, proceedings or claims against Seller by
any employees or former employees of Seller with respect to employment
matters of any kind.
5.15 INTANGIBLE RIGHTS. SCHEDULE 5.15 contains a list and copy of all
intangible property relating to the Purchased Assets or Seller or owned by,
licensed by or licensed to Seller, or in which Seller otherwise claims a right,
including, without limitation, all patents, copyrights, trademarks, service
marks, trade names, assumed names, "dba's", fictitious names and registrations
or applications therefor, and trade secrets (collectively, the "INTANGIBLE
RIGHTS") other than user licenses for off-the-shelf computer programs. Any
registrations or applications for the trademarks, service marks, trade names,
brand names and copyrights set forth in SCHEDULE 5.15 are in Seller's name only.
Seller owns and has the right to use all franchises, trademarks, service marks,
assumed names, "dba's", fictitious names, and trade names set forth on SCHEDULE
5.15 in the geographic areas in which such marks and names are currently being
used. Neither any portion of the Intangible Rights nor Seller's ownership or
use thereof infringes on the property rights of any other person nor, to the
knowledge of Seller or Shareholder, do the rights of any other person infringe
on any of the Intangible Rights. No claim, demand or allegations of
infringement relating to the ownership or use of any of the Intangible Rights
set forth in SCHEDULE 5.15 has been received by Seller or Shareholder or, to the
knowledge of Seller or Shareholder, made by any person. Seller has no assumed
names in the State of Texas or any of its counties.
5.16 INSURANCE.
(a) Except as disclosed in SCHEDULE 5.9, there are no pending claims
under any of the policies required to be described in SCHEDULE 5.11(E), and
no events have occurred which would give rise to a right to pursue a claim
under any such policy or arrangement.
(b) There are no outstanding requirements or recommendations which
have been communicated to Seller by any current insurer or underwriter with
respect to Seller's assets or the Business or otherwise which requires or
recommends changes in the conduct of the Business or requires or recommends
any changes, repairs or other work to be done with respect to the Business
or any of Seller's assets.
(c) Seller has not received (i) any refusal of insurance coverage or
any notice that a defense will be afforded under a reservation of rights or
(ii) any notice of cancellation or any other indication that any insurance
policy is no longer in full force or effect or will not be renewed or that
the issuer of any policy is not willing or able to perform its obligations
thereunder.
(d) Seller has paid all premiums due, and has otherwise performed all
of its obligations, under each insurance policy to which Seller is a party
or that provides coverage to Seller or with respect to the Acquired
business or Purchased Assets.
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(e) Seller has given notice to the insurer of all claims that may be
insured thereby.
(f) Seller has no self-insurance plans or arrangements in effect.
5.17 SHAREHOLDERS AND INTERESTS IN COMPETITORS. Shareholder owns all of
the issued and outstanding shares of stock of Seller and TUSA and no other
person or entity has any rights in or option to acquire any shares of stock,
warrants or other equity interests in Seller or TUSA or to exercise voting or
other rights as to any of Seller's or TUSA's shares of stock. Except for
beneficial ownership of not more than 5% of the outstanding equity securities of
publicly-held companies, and except for TUSA, neither Seller nor Shareholder,
nor Mrs. Howard, nor any member of the immediate family of Shareholder or Mrs.
Howard, nor any officer or director of Seller, nor any person or entity
controlling, controlled by or under common control with Seller or Shareholder
owns, directly or indirectly, an interest in any person or entity that is a
competitor, customer, supplier or landlord of Seller or that otherwise has
business dealings with Seller.
5.18 TAXES. Seller has: (a) filed, when due, with all applicable
governmental agencies, all tax returns, estimates, reports and statements
required to be filed by it, all of which are true and correct; and (b) paid all
taxes required to be paid by it as reflected on such returns, estimates, reports
or statements, or otherwise required to be paid by Seller, including, without
limitation, all income, sales, use, property and transfer taxes, levies, duties,
licenses, registration fees and charges of any nature whatsoever and worker's
compensation and unemployment taxes, and including, without limitation, all
additions or additional amounts thereto, and interest and penalties thereon.
Seller has withheld all taxes required to be withheld under applicable tax laws
and regulations, and such withholdings have either been paid, when due, to the
respective governmental agencies or have been properly set aside in accounts for
such purposes and will be paid, when due, to the applicable governmental
agencies.
5.19 NO OTHER AGREEMENTS. Except as disclosed on SCHEDULE 5.19, neither
Seller, Shareholder nor Mrs. Howard has entered into any agreement, commitment
or understanding with any other person with respect to the sale, transfer, lease
or other disposition of all or any portion of the Purchased Assets (except for
sales, transfers or leases in the ordinary course of Seller's business and
consistent with its past practices since July 1, 1995 (the "PAST PRACTICES")) or
with respect to a sale, encumbrance or transfer of any stock of Seller.
5.20 ACCOUNTS RECEIVABLE.
(a) All Accounts Receivable of Seller that are, or will be, reflected
on the Effective Date Balance Sheet or the Unaudited Balance Sheets (except
to the extent of collections thereof) represent, and all Accounts
Receivable that will be reflected on the accounting records of Seller as of
the Closing Date (the "INTERIM PERIOD ACCOUNTS RECEIVABLE") will represent,
valid obligations in favor of Seller arising from sales actually made by
Seller in the ordinary course of the Business. Unless paid prior to the
Closing Date, the Accounts Receivable, including, without limitation, the
Interim Period Accounts Receivable, will be as of the Closing Date
collectible in full net of the reserves with respect thereto shown on the
Effective Date Balance Sheet or on SCHEDULE 5.20(B) without any set-
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off, in the ordinary course. There is no contest, claim, or right of
set-off, or, to the best of Seller's and Shareholder's knowledge, any
threatened contest, claim or right of set-off, or circumstances that with
notice, the lapse of time or both, could result in such a contest, claim or
right of set-off (other than with respect to returns of merchandise in the
ordinary course of the Business), with respect to any Accounts Receivable,
including, without limitation, the Interim Period Accounts Receivable, or
under any contract with any obligor of any Accounts Receivable, including,
without limitation, the Interim Period Accounts Receivable.
(b) SCHEDULE 5.20(B) contains a complete and accurate list of all
Accounts Receivable as of September 30, 1998, which list sets forth the
aging of such Accounts Receivable and describes any collateral that secures
payment of any Accounts Receivable.
(c) No account debtor has withheld payment or threatened to withhold
payment of any Accounts Receivable or Interim Period Accounts Receivable
and, to the best of Seller's and Shareholder's knowledge, none of Seller's
account debtors is insolvent or has filed or had filed against it a
petition in bankruptcy or similar petition and, to the best of Seller's and
Shareholder's knowledge, there are no circumstances that could lead to such
insolvency or bankruptcy filing or similar petition.
5.21 INVENTORY. All Inventory of Seller, whether or not reflected in the
Effective Date Balance Sheet or the unaudited balance sheet at September 30,
1998 consists of a quality and quantity usable and saleable in the ordinary
course of the Business, except for obsolete items and items of below-standard
quality, all of which have been written off or written down to net realizable
value in the Effective Date Balance Sheet. All Inventory not written off has
been valued on Seller's books and records at Seller's net cost, which does not
exceed net realizable value on a first in, first out basis. The quantities of
each item of the Inventory are reasonable with respect to the needs of the
Business.
5.22 NO UNDISCLOSED LIABILITIES. Except for the Assumed Liabilities,
Seller has no liabilities or obligations of any nature (whether known or unknown
and whether absolute, accrued, contingent, or otherwise) for which Buyer will or
could be liable.
5.23 SOLVENCY. Neither Seller nor TUSA is now insolvent, nor will it be
rendered insolvent by any of the transactions contemplated by this Agreement.
In addition, immediately after giving effect to the consummation of the
transactions contemplated by this Agreement (a) each of Seller and TUSA will be
able to pay its debts as they become due, (b) the property of each of Seller and
TUSA does not and will not constitute unreasonably small capital, and Seller and
TUSA will not have unreasonably small capital and will not have insufficient
capital with which to conduct its present or proposed business, and (c) taking
into account all pending and threatened litigation, final judgments against
Seller or TUSA in connection with actions for money damages are not reasonably
anticipated to be rendered at a time when, or in amounts such that, Seller or
TUSA will be unable to satisfy any such judgments promptly in accordance with
their terms (taking into account the maximum probable amount of such judgments
in any such actions and the earliest reasonable time at which such judgments
might be rendered) as well as all other obligations of Seller or TUSA. The cash
available to Seller or TUSA, after taking into account all other
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anticipated uses of the cash of Seller or TUSA, will be sufficient to pay all
such judgments promptly in accordance with their terms. For purposes of this
Section, "insolvent" means that the sum of the present fair saleable value of
Seller's or TUSA's assets, as the case may be, does not and will not exceed its
debts and other probable liabilities, and the term "debts" includes any legal
liability of Seller or TUSA, whether matured or unmatured, liquidated or
unliquidated, absolute, fixed or contingent, disputed or undisputed or secured
or unsecured.
5.24 CUSTOMERS AND SUPPLIERS. SCHEDULE 5.24 lists:
(a) each customer that purchased $10,000 or more in goods or services from
Seller or TUSA in calendar year 1997 and for the period from January 1, 1998 to
September 30, 1998, including the customer name and amount purchased in each of
such periods; and
(b) each supplier from whom Seller or TUSA purchased $100,000 or more in
goods or services in calendar year 1997 and for the period from January 1, 1998
to September 30, 1998, including the supplier name and amount purchased by
Seller or TUSA in each of such periods.
5.25 YEAR 2000 COMPLIANCE.
(a) Other than their accounting software, Seller's and TUSA's
computer systems and applications are Year 2000 compliant (that is, such
systems and applications will be able to perform date sensitive functions
prior to, on and after December 31, 1999).
(b) To the knowledge of each of Seller, TUSA and Shareholder, each
present supplier, vendor or service provider that is material to the
Acquired Business will be Year 2000 compliant, as described in Section
5.25(a), with respect to its own computer systems and applications, except
to the extent that a failure by any supplier, vendor or service provider to
be so Year 2000 compliant could not reasonably be expected to have a
material adverse effect upon the financial condition, results of
operations, business or business prospects of the Acquired Business.
5.26 NO MISREPRESENTATIONS. The representations, warranties and statements
made by Seller, Shareholder and Mrs. Howard in or pursuant to this Agreement and
the Exhibits and Schedules hereto are true, complete and correct in all respects
and do not contain any untrue statement of a material fact or omit to state any
material fact necessary to make any such representation, warranty or statement,
under the circumstances in which it was made, not misleading. Seller and
Shareholder have disclosed to Buyer all material events, conditions or facts
known to either or both of them that affect the condition or could affect the
condition (financial or otherwise), business or prospects of Seller or the
Acquired Business. None of the information supplied or to be supplied by Seller
or Shareholder for inclusion in any registration statement (or any amendments
thereto) to be filed with the SEC by Buyer or any of its affiliates under the
Securities Act or the Securities Exchange Act of 1934 (the "EXCHANGE ACT") in
connection with Seller, Shareholder, the Acquired Business or the transactions
contemplated by this Agreement (for purposes of this Section and Section 8.10,
the "REGISTRATION STATEMENT"), or any other document to be filed with any
regulatory authority in connection with Seller, Shareholder, the Acquired
Business or the transactions contemplated hereby will, when any such
Registration Statement
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becomes effective or any such other document is filed, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein not misleading.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to
Seller, as of the Closing Date, as follows:
6.1 ORGANIZATION. Buyer is a corporation duly organized, validly existing
and with active status under the laws of the State of Delaware. Buyer has full
power to own its properties and to conduct its business as presently conducted.
6.2 AUTHORITY. Buyer has all requisite corporate power and authority to
execute and enter into this Agreement and all other agreements and instruments
contemplated hereby to be executed and delivered by Buyer (the "BUYER
DOCUMENTS") and to perform its obligations hereunder and thereunder. The
execution, delivery and performance by Buyer of this Agreement and the Buyer
Documents have been duly authorized by all necessary action, corporate or
otherwise, by Buyer, and this Agreement has been duly executed and delivered and
is, and the Buyer Documents will be, when executed and delivered by Buyer, the
legal, valid and binding agreements of Buyer, enforceable against Buyer in
accordance with their respective terms, except to the extent that the same may
be limited by insolvency, bankruptcy, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity.
6.3 NO VIOLATION. Neither the execution or delivery of this Agreement or
any of the Buyer Documents nor the consummation of the transactions contemplated
hereby or thereby conflict with or result in the breach of any term or provision
of, or constitute a default under, or give any third party the right to
accelerate any obligation under, any charter provision, bylaw, agreement,
contract, lease, indenture, deed of trust, instrument, order, law, or regulation
to which Buyer is a party or by which Buyer or any of its assets or properties
is in any way bound or obligated.
7. SELLER'S COVENANTS. Seller covenants and agrees as follows, and
Shareholder and Mrs. Howard, jointly and severally, covenant to cause Seller to
perform such covenants and agreements (all of which covenants and agreements by
Seller, Shareholder and Mrs. Howard shall be conditions to Buyer's obligations
hereunder):
7.1 CONDUCT OF BUSINESS. From the Effective Time to the Closing, Seller
shall:
(a) except for the making of Permitted Distributions as defined
below, operate in the ordinary course of its business and consistent with
the Past Practices;
(b) use its best efforts to preserve its goodwill and the goodwill of
its customers, franchisors, lessors, suppliers, employees, tenants,
governmental authorities and others having dealings with Seller;
(c) maintain its books of account and records in the usual, regular
and ordinary manner and consistent with its past practices, and furnish
Buyer with a copy of each of
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Seller's monthly unaudited financial statements within fifteen (15)
business days after the end of the calendar month to which such financial
statements relate;
(d) maintain all licenses, permits, authorizations, certificates,
qualifications, registrations and other governmental approvals that are
required for Seller to carry on its business in good standing;
(e) make capital expenditures and other expenditures necessary for
the maintenance of the Purchased Assets and the Business;
(f) maintain all existing insurance policies and surety bonds,
letters of credit, guaranties and similar instruments and commitments now
in place for the benefit of Seller, the Business or the Purchased Assets;
(g) not assume or incur any liabilities or obligations not in the
ordinary course of its business and consistent with the Past Practices;
(h) not increase the salary, wages, bonus, commission or other
compensation of any officer, director, employee, agent or representative of
Seller or enter into or amend any profit sharing, pension, stock option,
vacation pay, sick pay, personal leave, severance, retirement, bonus,
deferred compensation, group life and health insurance or other employee
benefit or employee benefit plan, trust agreement or arrangement affecting
any such person, or any compensation, separation or consultation agreement
with any such person; and
(i) make no payment or distribution, directly or indirectly, to
Shareholder or any Affiliate of Seller, Shareholder or Mrs. Howard, other
than the payments or distributions described in EXHIBIT 7.1(I) (the
"PERMITTED DISTRIBUTIONS").
7.2 FULFILLMENT OF CONDITIONS. Seller and Shareholder shall take all
reasonable steps (including, without limitation, the payment of reasonable fees
and expenses related thereto) that are within their power to cause to be
fulfilled the conditions precedent to Buyer's, Seller's or Shareholder's
obligations to consummate the transactions contemplated hereby. Neither Seller
nor Shareholder shall take any action that would cause the conditions to the
obligations of the parties to effect the transactions contemplated hereby not to
be fulfilled including, without limitation, taking or causing to be taken any
action that would cause the representations and warranties made by Seller, TUSA,
Shareholder and Mrs. Howard herein not to be true, correct and accurate in all
material respects as of the Closing.
7.3 ACCESS AND INFORMATION. Seller shall permit Buyer and its authorized
representatives to have reasonable access, during normal business hours, to:
(a) Seller's assets and all its books, records and documents of or
relating to Seller and its assets, liabilities and obligations, and Seller
shall furnish to Buyer such information, financial records and other
documents with respect to Seller's assets, liabilities and obligations and
Seller's operations and business as Buyer shall reasonably request; and
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(b) Seller's officers, directors, employees, agents, accountants,
auditors, franchisors, lessors, customers and suppliers, for consultation
or verification of any information obtained by Buyer, and Seller shall use
reasonable efforts to cause such persons or entities to cooperate with
Buyer in such consultation and in verifying such information.
Notwithstanding the foregoing, Buyer shall be entitled to rely on the
representations and warranties of Seller, Shareholder and Mrs. Howard as if no
investigation had been made.
7.4 LEGAL OR GOVERNMENTAL ACTIONS. If Seller is notified of any legal or
governmental or administrative act or proceeding instituted against or with
respect to Seller, the Purchased Assets, the Leased Premises, or any portion
thereof prior to the Closing, Seller shall promptly give notice thereof to
Buyer.
7.5 UPDATE OF REPRESENTATIONS AND WARRANTIES. Between the date of this
Agreement and the Closing Date, Seller shall give notice to Buyer promptly upon
Seller's or Shareholder's becoming aware of (a) any inaccuracy or breach of a
representation or warranty set forth in Section 5 or in any Exhibit or Schedule
hereto, or (b) any event or state of facts that, if it had occurred or existed
on or prior to the date of this Agreement, would have caused any such
representation or warranty to be inaccurate, and any such notice shall describe
such inaccuracy, event or state of facts in detail.
7.6 COBRA AND HIPAA COMPLIANCE. Seller shall comply fully with the
provisions of the Consolidated Omnibus Budget Reconciliation Act ("COBRA") and
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") with
respect to Seller's employees whose employment with Seller will terminate in
connection with the transactions under this Agreement.
7.7 PAYMENT OF LIABILITIES. Seller shall pay or otherwise satisfy in the
ordinary course all of Seller's trade payables and shall fully pay or otherwise
satisfy all other claims or liabilities relating to the assets of the Business
other than the Assumed Liabilities.
7.8 CHANGE OF SELLER'S NAME. Immediately following the Closing, Seller shall
change its name to a name which does not include "Masonry Supply" or "MSI" and
is otherwise not confusingly similar to Buyer's current name or "MSI/Eagle
Supply, Inc."
7.9 CERTIFICATE OF INTERIM EARNINGS AND DISTRIBUTIONS. Within thirty (30)
days after the Closing Date, Seller shall furnish to Buyer a certificate setting
forth (a) the Interim Earnings and certifying that such Interim Earnings (i)
have been determined in accordance with GAAP applied consistently with the
accounting principles applied in the preparation of the 1998 Financial
Statements and (ii) fairly present the pretax earnings of the Acquired Business
for the Interim Period and (b) all payments and distributions made by Seller to
Shareholder or any Affiliate of Seller, Shareholder or Mrs. Howard during the
Interim Period, including, without limitation, all Permitted Distributions.
8. CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of Buyer under this
Agreement are subject to the satisfaction at or prior to the Closing of the
following conditions, but compliance with any of such conditions may be waived
by Buyer in writing:
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8.1 REPRESENTATIONS AND WARRANTIES TRUE; CONDITIONS SATISFIED. All
representations and warranties of Seller, TUSA and Shareholder contained in this
Agreement (including, without limitation, the Exhibits and Schedules hereto)
(without giving effect to any updating or corrective information furnished
pursuant to Section 7.5 of this Agreement or otherwise), shall be true and
correct in all material respects at and as of the Closing with the same effect
as though such representations and warranties were made at and as of the
Closing; Seller, TUSA and Shareholder shall have performed and complied with all
of the covenants and agreements and satisfied all of the conditions required by
this Agreement to be performed, complied with or satisfied by any or all of them
at or prior to the Closing; and Buyer shall have received certificates to the
foregoing effect from the president of Seller and from Shareholder.
8.2 LITIGATION. There shall be no pending or threatened litigation in any
court or any proceeding before or by any administrative or governmental
authority to restrain or prohibit or obtain damages or other relief with respect
to this Agreement or the consummation of the transactions contemplated hereby or
as a result of which Buyer could be deprived of any of the material benefits of
the transactions contemplated hereby.
8.3 CLOSING DOCUMENTS. Seller shall have executed and delivered the
documents and items required of Seller in Section 4.2.
8.4 MISCELLANEOUS CONSENTS. Seller shall have secured all contractual and
other third party consents required in connection with the transactions
contemplated by this Agreement in form and substance satisfactory to Buyer.
8.5 EMPLOYEES. Buyer shall have hired such of Seller's employees as Buyer
may desire, in its sole discretion, to hire.
8.6 EXCLUSIVE POSSESSION. Seller shall have delivered to Buyer exclusive
possession of the Purchased Assets, the Leased Premises and the equipment
described in the Leases and Contracts.
8.7 LICENSES AND CONSENTS. Buyer shall have secured all necessary
governmental certificates, approvals, consents and authorizations to purchase
the Purchased Assets and to operate the Purchased Assets and the Leased Premises
for Buyer's Intended Use.
8.8 ACQUISITION REVIEW. The results of Buyer's investigation of Seller,
the Business, the Purchased Assets, the Leased Premises, Seller's operations and
financial condition shall be acceptable to and approved by Buyer in its sole
discretion.
8.9 OPINION OF COUNSEL. Buyer shall have received an opinion letter from
counsel to Seller and Shareholder in the form attached as EXHIBIT 8.9.
8.10 CONSENT LETTERS. Buyer shall have received, in the form of, and
containing the terms set forth in, EXHIBIT 8.10, letters from Seller and W&M,
respectively, agreeing to consent to the inclusion, in any Registration
Statement, of the 1996 and 1997 Financial Statements, and the 1998 Financial
Statements and the opinions of W&M with respect thereto.
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8.11 EMPLOYMENT AGREEMENTS. Buyer and Shareholder shall have entered into
the Howard Employment Agreement.
8.12 NON-COMPETE AGREEMENT. Buyer and TUSA shall have entered into the
Non-Compete Agreement.
8.13 NO MATERIAL ADVERSE CHANGE. Since June 30, 1998, there shall not have
been any material adverse change in the financial condition, results of
operations, business, business prospects, personnel, assets or liabilities
(contingent or otherwise) of Seller or TUSA.
8.14 INTERIM EARNINGS. The Interim Earnings shall have been greater than
zero.
8.15 NO CONFLICT. Neither the consummation nor the performance of any of
the transactions contemplated under this Agreement will directly or indirectly
(with or without notice, lapse of time, or both) contravene or conflict with, or
result in a material violation of, or cause Buyer or any Affiliate of Buyer to
suffer any adverse consequence under any law, regulation, rule or order, whether
in effect or proposed.
9. CONDITIONS TO OBLIGATIONS OF SELLER AND SHAREHOLDER. The obligations of
Seller and Shareholder under this Agreement are subject to the satisfaction at
or prior to the Closing of the following conditions, but compliance with any of
such conditions may be waived by Seller in writing:
9.1 REPRESENTATIONS AND WARRANTIES TRUE; CONDITIONS SATISFIED. All
representations and warranties of Buyer contained in this Agreement shall be
true and correct in all material respects at and as of the Closing with the same
effect as though such representations and warranties were made at and as of the
Closing; Buyer shall have performed and complied with all the covenants and
agreements and satisfied all the conditions required by this Agreement to be
performed, complied with or satisfied by it at or prior to the Closing; and
Seller shall have received a certificate to the foregoing effect from the chief
executive officer or a vice president of Buyer.
9.2 LITIGATION. There shall be no pending or threatened litigation in any
court or any proceeding before or by any administrative or governmental
authority to restrain or prohibit or obtain damages or other relief with respect
to this Agreement or the consummation of the transactions contemplated hereby or
as a result of which Seller could be deprived of any of the material benefits of
the transactions contemplated hereby.
9.3 OPINION OF COUNSEL. Seller shall have received an opinion letter from
Buyer's counsel in the form attached as EXHIBIT 9.3.
9.4 NO CONFLICT. Neither the consummation nor the performance of any of
the transactions contemplated under this Agreement will directly or indirectly
(with or without notice, lapse of time, or both) contravene or conflict with, or
result in a material violation of, or cause Seller or any Affiliate of Seller to
suffer any adverse consequence under, any law, regulation, rule or order,
whether in effect or proposed.
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10. JOINDER OF MRS. HOWARD. Whether or not elsewhere explicitly provided in
this Agreement, each representation, warranty, covenant and agreement of
Shareholder in this Agreement shall be deemed to have been made by Shareholder
and Mrs. Howard jointly and severally.
11. COVENANT NOT TO COMPETE. Seller and Shareholder hereby, jointly and
severally, agree as follows:
11.1 NONCOMPETITION. For a period of five (5) years following the Closing
Date, neither Seller nor Shareholder, nor any person or entity directly or
indirectly owning, owned by, controlling, controlled by or under common
ownership or control with (individually, an "AFFILIATE" and collectively,
"AFFILIATES") Seller or Shareholder, shall, directly or indirectly, on its, his
or their own behalf or on behalf of any competitor of Buyer: (a) engage (whether
as owner, partner, stockholder, joint venturer, manager, employee, investor or
otherwise) in the sale, at wholesale or retail, of any masonry materials or
supplies or other building products or supplies (the "RESTRICTED BUSINESS") in
all counties of the State of Texas and of any other state in which Seller is
transacting business on the Closing Date (the "REFERENCE DATE") or in which
Seller has transacted business at any time during the two years preceding the
Reference Date, and in all areas in the United States in which Buyer transacts
business during such five (5) year period described above (collectively, the
"MARKET"); (b) affiliate with, or own or have a proprietary interest of any kind
in, any business or firm that owns, manages or operates a business that sells at
wholesale or retail any masonry materials or supplies or other building products
or supplies anywhere within the Market; or (c) alone or acting with others,
employ or attempt to employ or solicit for any employment competitive with
Buyer, any of Buyer's employees, whether or not such employees worked for Seller
prior to the Closing, or alone or acting with others, influence or seek to
influence any employee to leave Buyer's employment. Seller and Shareholder also
covenant, jointly and severally, that at no time shall any or either of them
disparage Buyer, any of its affiliated entities, or any of the employees,
directors or officers of Buyer or any of its affiliated entities.
11.2 PAYMENT FOR COVENANTS. As additional consideration to Shareholder for
his covenants under Section 11.1, Buyer shall pay at the Closing One Hundred
Dollars ($100.00) to Shareholder.
11.3 REMEDIES; CURTAILMENT. Seller and Shareholder each agrees that a
breach or violation of the covenants in Section 11.1 by Seller or Shareholder
shall entitle Buyer, as a matter of right, to an injunction issued by any court
of competent jurisdiction, restraining any further or continued breach or
violation of such covenants. Such right to an injunction shall be cumulative
and in addition to, and not in lieu of, any other remedies to which Buyer may be
entitled. Further, during any period in which Seller or Shareholder is in
breach of any of such covenants, the time period of such covenant shall be
extended for an amount of time that Seller or Shareholder is in breach hereof.
In the event of a breach by Seller or Shareholder of the covenants under Section
11.1, without limiting Buyer's remedies with respect to such breach, including,
without limitation, equitable remedies, Buyer shall not be required to make, and
Seller or its designee shall have no right to receive, any further payments
under this Agreement or with respect to any of the transactions described in
this Agreement.
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The covenants contained in Section 11.1 will be construed as ancillary to
and independent of any other provision of this Agreement, and the existence of
any claim or cause of action of Seller or Shareholder against the Buyer or any
officer, director, or shareholder of Buyer, whether predicated on this Agreement
or otherwise, shall not constitute a defense to the enforcement by Buyer of the
covenants contained in Section 11.1.
The parties to this Agreement agree that the limitations contained in
Section 11.1 with respect to geographic area, duration and scope of activity are
reasonable. However, if any court shall determine that the geographic area,
duration or scope of activity of any restriction contained in SECTION 11.1 is
unenforceable, it is the intention of the parties that such restrictive covenant
set forth herein shall not thereby be terminated but shall be deemed amended to
the extent required to render it valid and enforceable.
11.4 ASSIGNABILITY. The benefit of the covenants in this Section 11 are
freely assignable by Buyer.
12. INDEMNIFICATION.
12.1 BUYER'S RIGHT TO INDEMNIFICATION. SELLER, SHAREHOLDER AND MRS.
HOWARD, JOINTLY AND SEVERALLY, SHALL INDEMNIFY AND HOLD BUYER AND ITS OFFICERS,
DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS AND REPRESENTATIVES (THE "INDEMNIFIED
PARTIES") HARMLESS FROM ANY AND ALL LIABILITIES, OBLIGATIONS, CLAIMS,
CONTINGENCIES, DAMAGES, JUDGMENTS, FINES, PENALTIES, AMOUNTS PAID IN SETTLEMENT,
COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL COURT COSTS AND
REASONABLE ATTORNEYS' FEES AND DISBURSEMENTS), WHETHER AS A RESULT OF DIRECT
CLAIMS OR THIRD PARTY CLAIMS (ALOSSES"), THAT THE INDEMNIFIED PARTIES OR ANY OF
THEM MAY SUFFER OR INCUR AS A RESULT OF OR RELATING TO: (A) THE BREACH OR
INACCURACY, OR ANY ALLEGED BREACH OR INACCURACY, OF ANY OF THE REPRESENTATIONS,
WARRANTIES, COVENANTS OR AGREEMENTS MADE BY SELLER, TUSA, SHAREHOLDER OR MRS.
HOWARD HEREIN (WITHOUT GIVING EFFECT TO ANY UPDATING OR CORRECTIVE INFORMATION
FURNISHED PURSUANT TO SECTION 7.5 OF THIS AGREEMENT OR OTHERWISE) OR IN ANY
ASSIGNMENT, BILL OF SALE, LEASE OR OTHER INSTRUMENT, DOCUMENT OR PAPER DELIVERED
PURSUANT TO THIS AGREEMENT; (B) ANY LAWSUIT, CLAIM OR PROCEEDING OF ANY NATURE
(OTHER THAN LAWSUITS, CLAIMS OR PROCEEDINGS BROUGHT TO ENFORCE OR COLLECT ANY
ASSUMED LIABILITY) ARISING OUT OF ANY ACT OR TRANSACTION OCCURRING PRIOR TO THE
CLOSING OR ARISING OUT OF FACTS OR CIRCUMSTANCES THAT EXISTED AT OR PRIOR TO THE
CLOSING; (C) ANY INCOME, FRANCHISE, SALES, USE, TRANSFER (INCLUDING, WITHOUT
LIMITATION, MOTOR VEHICLE TRANSFER), EXCISE OR OTHER TAX ARISING UPON THE
CONSUMMATION OF THE PURCHASE AND SALE OF THE PURCHASED ASSETS HEREUNDER OR
ARISING OUT OF OR RESULTING FROM THE OPERATIONS OF SELLER, ANY TRANSACTION OR
ACTIVITY OF SELLER, OR ANY INCOME DERIVED BY SELLER (OTHER THAN THE ASSUMED
LIABILITIES AND SUCH ITEMS BUYER HAS AGREED TO PAY UNDER THIS AGREEMENT); (D)
ANY WAGES, SALARIES, VACATION PAY, SICK PAY, OR PERSONAL LEAVE, OR ACCRUALS WITH
RESPECT THERETO (OTHER THAN THE ASSUMED LIABILITIES), OR OTHER COMPENSATION,
LIABILITIES, OBLIGATIONS, CLAIMS OR CONTINGENCIES OF ANY NATURE DUE OR PAYABLE
AT ANY TIME WHATSOEVER TO ANY CURRENT OR FORMER DIRECTOR, OFFICER, EMPLOYEE,
AGENT OR REPRESENTATIVE OF SELLER, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS
UNDER ANY BENEFIT PLAN OR ARISING PURSUANT TO THE WORKER ADJUSTMENT AND
RETRAINING NOTIFICATION ACT (THE "WARN ACT") (OTHER THAN THE ASSUMED
LIABILITIES); (E) ANY CONTAMINATION ON OR UNDER THE LEASED PREMISES OR IN ANY OF
THE PURCHASED ASSETS CAUSED BY ANYONE (OTHER THAN BUYER OR ITS AGENTS OR
EMPLOYEES) ON OR
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PRIOR TO THE CLOSING DATE, OR ANY LIABILITY OR OBLIGATION FOR REMEDIATION OR
CLEAN-UP OF ENVIRONMENTAL CONDITIONS AS A RESULT OF SELLER'S OPERATIONS, WHETHER
ON OR UNDER THE LEASED PREMISES OR ELSEWHERE, OR THE ACTIVITIES OF ANY PERSON
(OTHER THAN BUYER) ON OR UNDER THE LEASED PREMISES; (F) THE CONDUCT OF SELLER'S
BUSINESS AND OPERATIONS (OTHER THAN THE ASSUMED LIABILITIES); (G) ANY FAILURE OF
SELLER TO COMPLY WITH ANY FEDERAL, STATE OR LOCAL LAW, REGULATION, RULING OR
ORDINANCE, OR ANY OTHER LEGAL REQUIREMENT, INCLUDING, WITHOUT LIMITATION,
SELLER'S FAILURE TO COMPLY WITH COBRA, HIPAA OR THE WARN ACT; (H) NONCOMPLIANCE
BY BUYER OR SELLER WITH THE BULK TRANSFER PROVISIONS OF THE UNIFORM COMMERCIAL
CODE (OR ANY SIMILAR LAW) OF ANY STATE IN CONNECTION WITH THE SALE AND TRANSFER
OF THE PURCHASED ASSETS TO BUYER OTHER THAN WITH RESPECT TO THE ASSUMED
LIABILITIES; AND (I) ANY LIABILITIES OR OBLIGATIONS OF SELLER NOT BEING
EXPRESSLY ASSUMED BY BUYER PURSUANT TO THIS AGREEMENT.
SELLER, SHAREHOLDER AND MRS. HOWARD, JOINTLY AND SEVERALLY, SHALL BE
RESPONSIBLE HEREUNDER FOR, AND SHALL INDEMNIFY THE INDEMNIFIED PARTIES FROM AND
AGAINST, ANY AND ALL SUCH LOSSES WHETHER OR NOT IT IS ALLEGED OR PROVEN THAT THE
LOSSES AROSE OUT OF OR RESULTED FROM THE SOLE OR CONCURRENT NEGLIGENCE OR GROSS
NEGLIGENCE OF ANY INDEMNIFIED PARTY, OR THE SOLE OR CONCURRENT STRICT LIABILITY
IMPOSED ON ANY INDEMNIFIED PARTY, OR THE SOLE OR CONCURRENT LIABILITY IMPOSED
VICARIOUSLY ON ANY INDEMNIFIED PARTY, UNDER ANY FEDERAL OR STATE STATUTES OR
REGULATIONS, AT COMMON LAW OR OTHERWISE; PROVIDED, HOWEVER, THAT SELLER,
SHAREHOLDER AND MRS. HOWARD SHALL NOT BE RESPONSIBLE HEREUNDER FOR ANY LOSSES
TO THE EXTENT THEY ARE FINALLY ADJUDICATED BY A COURT OF COMPETENT JURISDICTION
TO HAVE RESULTED SOLELY FROM THE INDEMNIFIED PARTY'S INTENTIONAL MISCONDUCT.
SELLER, SHAREHOLDER AND MRS. HOWARD, JOINTLY AND SEVERALLY, SHALL
INDEMNIFY, DEFEND, AND HOLD HARMLESS THE INDEMNIFIED PARTIES AGAINST ALL LOSSES
IN CONNECTION WITH ANY CLAIM, ACTION, SUIT, PROCEEDING, OR INVESTIGATION,
WHETHER CIVIL OR CRIMINAL, ADMINISTRATIVE, OR INVESTIGATIVE ARISING OUT OF OR
UNDER THE FEDERAL SECURITIES LAWS OR ANY STATE BLUE SKY OR SECURITIES LAWS BASED
IN WHOLE OR IN PART ON (I) ANY UNTRUE STATEMENT OR ALLEGED UNTRUE STATEMENT OF A
MATERIAL FACT CONTAINED IN THE REGISTRATION STATEMENTS AND OTHER DOCUMENTS
DESCRIBED IN SECTIONS 1.6 AND 5.26 (INCLUDING, WITHOUT LIMITATION, ANY AMENDMENT
OR SUPPLEMENT TO SUCH REGISTRATION STATEMENTS OR DOCUMENTS), (II) ANY OMISSION
OR ALLEGED OMISSION TO STATE IN SUCH REGISTRATION STATEMENTS OR DOCUMENTS A
MATERIAL FACT REQUIRED TO BE STATED THEREIN OR NECESSARY TO MAKE THE STATEMENTS
THEREIN NOT MISLEADING, OR (III) ANY VIOLATION BY SELLER OR SHAREHOLDER OF THE
FEDERAL SECURITIES LAWS OR ANY STATE BLUE SKY OR SECURITIES LAWS IN CONNECTION
WITH SUCH REGISTRATION STATEMENTS OR DOCUMENTS.
IN THE EVENT THAT SELLER, SHAREHOLDER OR MRS. HOWARD IS IN BREACH OF ANY OF
ITS, HIS OR HER REPRESENTATIONS, WARRANTIES, COVENANTS OR AGREEMENTS UNDER THIS
AGREEMENT, BUYER SHALL HAVE THE RIGHT, WITHOUT LIMITING ANY OF ITS OTHER
REMEDIES, WHETHER UNDER THIS AGREEMENT OR OTHERWISE, TO SET OFF, AGAINST ANY
PAYMENTS DUE FROM BUYER TO SELLER OR SHAREHOLDER, WHETHER UNDER THE PROMISSORY
NOTE OR OTHERWISE, THE AMOUNT OF ANY CLAIMS BY OR LOSSES OF BUYER WITH RESPECT
TO SUCH BREACH.
NOTWITHSTANDING THE PROVISIONS OF THIS SECTION 12.1, IN THE ABSENCE OF
FRAUD OR BAD FAITH, SELLER, SHAREHOLDER AND MRS. HOWARD SHALL NOT BE OBLIGATED
TO INDEMNIFY AND HOLD THE INDEMNIFIED PARTIES HARMLESS WITH RESPECT TO ANY
AMOUNTS THAT ARE TAKEN INTO ACCOUNT IN
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DETERMINING THE ADJUSTMENT AMOUNT.
12.2 SELLER'S RIGHT TO INDEMNIFICATION. BUYER SHALL INDEMNIFY AND HOLD
SELLER AND ITS OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS AND
REPRESENTATIVES HARMLESS FROM ANY AND ALL LOSSES THAT THEY OR ANY OF THEM MAY
SUFFER OR INCUR AS A RESULT OF OR RELATING TO THE BREACH OR INACCURACY, OR ANY
ALLEGED BREACH OR INACCURACY, OF ANY OF THE REPRESENTATIONS, WARRANTIES,
COVENANTS OR AGREEMENTS MADE BY BUYER HEREIN.
12.3 NOTICE OF THIRD PARTY CLAIMS. THE PARTY SEEKING INDEMNIFICATION
HEREUNDER (INDIVIDUALLY, THE "INDEMNITEE" AND COLLECTIVELY, "INDEMNITEES") WITH
RESPECT TO ANY THIRD PARTY CLAIM SHALL PROMPTLY, AND IN ANY EVENT WITHIN 30 DAYS
AFTER NOTICE TO IT (NOTICE TO INDEMNITEE BEING THE SERVICE OF PROCESS UPON
INDEMNITEE OF ANY LEGAL ACTION, OR RECEIPT OF ANY CLAIM IN WRITING) OF ANY CLAIM
AS TO WHICH IT ASSERTS A RIGHT TO INDEMNIFICATION, GIVE NOTICE TO THE PARTY FROM
WHOM INDEMNIFICATION IS SOUGHT WITH RESPECT TO SUCH CLAIM; PROVIDED, HOWEVER,
THAT FAILURE TO GIVE SUCH NOTICE WILL NOT RELIEVE THE INDEMNIFYING PARTY OF ANY
LIABILITY THAT IT MAY HAVE TO INDEMNITEE, EXCEPT TO THE EXTENT THAT THE
INDEMNIFYING PARTY DEMONSTRATES THAT THE DEFENSE OF SUCH CLAIM IS PREJUDICED BY
THE INDEMNITEE'S FAILURE TO GIVE SUCH NOTICE.
12.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made under this Agreement by Seller, Shareholder and Mrs. Howard, or
Buyer, as the case may be, will survive the Closing.
12.5 LIMITATIONS. Notwithstanding anything to the contrary contained in
this Agreement, in no event shall the aggregate amount of liability of Seller,
Shareholder and Mrs. Howard for breaches of representation or warranty under
this Agreement exceed the sum of Five Million Five Hundred Fifty Thousand
Dollars ($5,550,000.00).
12.6 FLOOR FOR INDEMNIFICATION. Notwithstanding anything to the contrary
in this Agreement, except for the obligations under Section 12.1 with respect to
breaches of the representations and warranties of Seller, Shareholder and Mrs.
Howard contained in Sections 5.1, 5.2, 5.3(a), 5.10 and 5.18 (the "EXEMPT
INDEMNIFICATION OBLIGATIONS"), Seller, Shareholder and Mrs. Howard, as the
indemnitors (the "INDEMNITORS"), will not have any obligation until the
aggregate of all Losses payable by the Indemnitors to the Indemnitees exceeds
Twenty-Four Thousand Dollars ($24,000.00)(the "FLOOR"). Upon the aggregate of
all Losses payable by the Indemnitors (except the Exempt Indemnification
Obligations) exceeding the Floor, Seller, Shareholder and Mrs. Howard, jointly
and severally, will be liable to the Indemnitees, on a dollar-for-dollar basis,
for the amount above the Floor.
With respect to Losses payable in connection with Exempt Indemnification
Obligations, Seller, Shareholder and Mrs. Howard, jointly and severally, will be
liable for all of such Losses from the first dollar in any event.
The Adjustment Amount will not constitute a claim under the indemnification
provisions of this Agreement, and will not be subject to the Floor.
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13. TERMINATION.
13.1 EVENTS OF TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated and abandoned:
(a) at any time prior to the Closing by mutual written consent of
Buyer and Seller;
(b) subject to Section 13.2 below, by either Seller or Buyer if a
condition to its performance hereunder shall not be satisfied or waived in
writing at or prior to the Closing;
(c) by Buyer if a final, non-appealable judgment has been entered
against it or its affiliates restraining, prohibiting, declaring illegal or
awarding substantial damages in connection with the transactions
contemplated hereby;
(d) by Seller if a final, non-appealable judgment has been entered
against it restraining, prohibiting, declaring illegal or awarding
substantial damages in connection with the transactions contemplated
hereby;
(e) by Seller or Buyer, if the Closing does not occur on or before
October 31, 1998; or
(f) by Buyer pursuant to other Sections of this Agreement permitting
Buyer to terminate this Agreement.
13.2 LIMITATION ON RIGHT TO TERMINATE. A party shall not be permitted to
exercise any right of termination pursuant to Section 13.1(b) above if the event
giving rise to the termination right shall be due to the material and willful
failure of the party seeking to terminate this Agreement to perform or observe
any of the covenants or agreements set forth herein to be performed or observed
by such party.
13.3 RIGHTS UPON TERMINATION. If this Agreement is terminated as permitted
under this Section 13, such termination shall be without liability of or to any
party to this Agreement (except pursuant to this Section 13 and to Sections
14.3, 14.4, 14.5 and 14.6, which shall survive such termination). In any such
event, except as otherwise expressly provided in this Agreement, all parties
hereto shall thereupon be relieved of all further obligations to each other
hereunder.
If Seller or Shareholder, on the one hand, or Buyer, on the other hand,
fails to perform any of its or his obligations under this Agreement, then the
other party or parties may elect (a) to terminate this Agreement whereupon all
parties hereto shall be released from any further obligations hereunder, (b) to
seek specific performance of the other party's or parties' obligations
hereunder, or (c) to pursue any and all other remedies available at law or in
equity.
14. MISCELLANEOUS.
14.1 NOTICES. All notices that are required or may be given pursuant to
the terms of this
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Agreement shall be in writing and shall be sufficient in all respects if given
in writing and delivered personally or by a recognized courier service or by
registered or certified mail, postage prepaid, to the parties at the following
addresses (or to the attention of such other person or to such other address as
any party shall provide to the other parties by notice in accordance with this
Section):
IF TO BUYER: MSI/Eagle Supply, Inc.
c/o TDA Industries, Inc.
122 East 42nd Street, Suite 1116
New York, NY 10168
Attention: Douglas P. Fields,
Chief Executive Officer
WITH COPY TO: Carlton, Fields, Ward,
Emmanuel, Smith & Cutler, P.A.
P.O. Box 3239
Tampa, Florida 33601
(if by mail)
or
One Harbour Place, 5th Floor
Tampa, Florida 33602
(if by hand delivery)
Attention: Nathaniel L. Doliner,
Attorney at Law
IF TO SELLER OR TUSA: Masonry Supply, Inc.
2090 Highway 157 North
Mansfield, Texas 76063
(prior to the Closing Date)
Attention: Mr. Gary L. Howard, President
or
c/o Mr. Gary L. Howard
20 Woodland Court
Mansfield, TX 76063
(on or after the Closing Date)
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WITH COPY TO: Raymond Meeks, Attorney at Law
1000 N. Walnut Creek Drive, Suite C
Mansfield, Texas 76063
IF TO SHAREHOLDER OR c/o Mr. Gary L. Howard
MRS. HOWARD: 20 Woodland Court
Mansfield, TX 76063
WITH COPY TO: Raymond Meeks, Attorney at Law
1000 N. Walnut Creek Drive, Suite C
Mansfield, Texas 76063
Any such notice under this Section shall be deemed to have been given and
received on the day it is personally delivered or delivered by a recognized
courier service or, if mailed, on the fifth day after it is mailed.
14.2 FURTHER ASSURANCES. Each party hereto agrees to execute, without
unreasonable delay, any and all documents and to perform such other acts as may
be reasonably necessary or expedient to further the purposes of this Agreement
and the transactions contemplated hereby. In connection with taking such
actions, each party will provide the other with the same assurances regarding
authority, validity and the other matters to which reference is made in
Section 5 and Section 6 hereof.
14.3 PUBLICITY. Neither Seller nor Shareholder shall issue or make, or
cause to be issued or made, any press release or public announcement or
disclosure concerning the transactions contemplated hereby without the advance
approval in writing of the form and substance thereof by Buyer, unless such
announcement is required by applicable legal requirements.
14.4 ATTORNEYS' FEES. In the event of a dispute between or among the
parties with respect to this Agreement, the prevailing party or parties shall be
entitled to recover the prevailing party's (or parties') reasonable attorneys'
fees and costs, whether incurred during trial, on appeal or in bankruptcy
proceedings.
14.5 EXPENSES. Except as otherwise stated herein, each of the parties
hereto shall, whether or not the transactions contemplated hereby are
consummated, bear its own attorneys', accountants', auditors' or other fees,
costs and expenses incurred in connection with the negotiation, execution and
performance of this Agreement or any of the transactions contemplated hereunder.
In the event the Closing occurs, Buyer shall pay all of the expenses and fees
payable to W&M for its audit of the 1996 and 1997 Financial Statements and the
1998 Financial Statements.
14.6 BROKERS. Seller, Shareholder and Mrs. Howard, jointly and severally,
(a) represent to Buyer that neither Seller nor Shareholder has incurred nor will
incur any liability for brokerage fees, finder's fees or agent's commissions, in
connection with this Agreement or the transactions
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contemplated hereby, and (b) agree that they will indemnify and hold harmless
Buyer against all claims for fees, commissions and costs of any broker, finder
or agent engaged by or for any or all of them in connection with the
negotiation, execution or consummation of this Agreement or the transactions
contemplated by this Agreement.
Buyer represents to Seller and Shareholder that Buyer has not incurred and
will not incur any liability for brokerage fees, finders' fees or agent's
commissions in connection with this Agreement or the transactions contemplated
hereby, and Buyer agrees that it will indemnify and hold harmless Seller and
Shareholder against any claims for fees, commissions and costs of any broker,
finder or agent engaged by Buyer in connection with the negotiation, execution
or consummation of this Agreement or the transactions contemplated by this
Agreement.
14.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts for the convenience of the parties hereto, all of which together
shall constitute one and the same instrument.
14.8 ASSIGNMENT; AND NO THIRD PARTY BENEFICIARIES. This Agreement and all
of the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned or delegated by any of Seller, Shareholder or Buyer without
the prior written consent of the other party or parties; provided, however, that
notwithstanding the foregoing, Buyer may assign this Agreement to any related or
affiliated entity of Buyer or any lender to Buyer. Any assignment or delegation
made in violation of this Agreement shall be null and void. This Agreement is
not intended to confer upon any person (including, without limitation,
employees, customers or suppliers of Seller or Buyer) other than the parties
hereto and any permitted assignee, any rights or remedies hereunder. Nothing in
this Agreement shall be construed to imply any admission of liability or
obligation to any person except the parties to this Agreement.
14.9 ENTIRE AGREEMENT. This Agreement and the documents attached as
Exhibits and Schedules hereto or expressly contemplated hereby contain the
entire understanding of the parties relating to the subject matter contained
herein and supersede all prior written or oral and all contemporaneous oral
agreements and understandings relating to the subject matter hereof. This
Agreement cannot be modified or amended except in writing signed by the party
against whom enforcement is sought.
14.10 EXHIBITS AND SCHEDULES. All Exhibits and Schedules to this
Agreement are incorporated herein by reference and made a part hereof.
14.11 GOVERNING LAW. This Agreement shall be governed by, and
construed and interpreted in accordance with, the substantive laws of the State
of New York without giving effect to any conflict-of-laws rule or principle that
might result in the application of the laws of another jurisdiction.
14.12 JURISDICTION, VENUE AND WAIVER OF JULY TRIAL. Any action or
proceeding seeking to enforce any provision of, or based on any right arising
out of, this Agreement may be brought
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against any of the parties in the courts of the State of New York, or, if it has
or can acquire jurisdiction, in the United States District Court for the
Southern District of New York, or the Middle District of Florida, and each of
the parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue therein. If neither the United States District Court for the Southern
District of New York nor the United States District Court for the Middle
District of Florida has or can acquire jurisdiction, then any action or
proceeding seeking to enforce any provision of, or based on any right arising
out of, this Agreement, shall be resolved by binding arbitration before a panel
of three neutral arbitrators in Atlanta, Georgia, or such other mutually agreed
venue under the rules of the American Arbitration Association. THE PARTIES
HERETO ACKNOWLEDGE THAT THE TIME AND EXPENSE REQUIRED FOR TRIAL BY JURY EXCEED
THE TIME AND EXPENSE FOR A BENCH TRIAL AND HEREBY WAIVE, TO THE EXTENT PERMITTED
BY LAW, TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
14.13 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. All representations, warranties, covenants and agreements made by
the parties hereto in this Agreement or in any certificate or other document
delivered pursuant hereto shall survive the execution of this Agreement and the
Closing.
14.14 HEADINGS. The descriptive headings of the Sections and
Subsections hereof are inserted for convenience only and do not constitute a
substantive portion of this Agreement.
14.15 INVALIDITY. In the event that any provision of this Agreement is
determined to be invalid or unenforceable, such invalidity or unenforceability
shall not affect the validity or enforceability of any other provision of this
Agreement.
14.16 WAIVER. The waiver by any party hereto of any breach, default,
misrepresentation or breach of warranty or covenant hereunder must be in writing
and shall not be deemed to extend to any prior or subsequent breach, default,
misrepresentation or breach of warranty or covenant hereunder and shall not
affect in any way any rights arising by virtue of any such prior or subsequent
occurrence.
14.17 CERTAIN CONSENTS. In the event any of the Leases and Contracts
(individually, a "LEASE" or a "CONTRACT") requires consent to its assignment and
such consent is not obtained prior to the Closing, and Buyer agrees in writing
to proceed with the Closing despite the absence of such consent, then until such
consent has been obtained or the applicable Lease or Contract terminates, the
Lease or Contract shall not be deemed assigned to Buyer but instead Buyer shall
be deemed to be Seller's subcontractor or the parties shall make such other
arrangements as necessary to assure Buyer the benefits of the Lease or Contract.
In that event, Buyer shall perform all obligations of Seller under the
applicable Lease or Contract (except any obligations arising out of a default
prior to the Closing Date or event prior to the Closing Date which with notice,
lapse of time or both would constitute such a default), and Buyer shall be
entitled to all benefits from such Lease or Contract. Seller, Shareholder, and
Mrs. Howard, jointly and severally, shall indemnify Buyer with respect to all
Losses of Buyer resulting from or arising out of the failure of Seller to obtain
such consent.
38
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day first above written.
WITNESSES:
MSI/EAGLE SUPPLY, INC.
a Delaware corporation ("Buyer")
By: /s/ Douglas P. Fields
----------------------------------
Douglas P. Fields
Chief Executive Officer
MASONRY SUPPLY, INC.
a Texas corporation ("Seller")
By: /s/ Gary L. Howard
----------------------------------
Gary L. Howard
President
/s/ Gary L. Howard
---------------------------------------
GARY L. HOWARD, individually
("Shareholder")
/s/ Patti L. Howard
---------------------------------------
PATTI L. HOWARD, individually
("MRS. HOWARD")
TUSA, INC.
a Texas corporation ("TUSA")
By: /s/ Gary L. Howard
----------------------------------
Gary L. Howard
President
39
<PAGE>
Exhibit 10.20
SECURED NON-NEGOTIABLE PROMISSORY NOTE
$2,045,972.00 Dallas, Texas
October 22, 1998
FOR VALUE RECEIVED, MSI/EAGLE SUPPLY, INC., a Delaware corporation
("Maker"), promises to pay to MASONRY SUPPLY, INC., a Texas corporation
("Holder"), at 20 Woodland Court, Mansfield, Texas 76063, or at such other place
as the Holder may designate in writing, the principal sum of Two Million
Forty-Five Thousand Nine Hundred Seventy-Two Dollars ($2,045,972.00) in lawful
money of the United States of America with interest thereon from July 1, 1998 at
the "Interest Rate", as hereinafter provided.
This Note is given pursuant to Section 2.1(a) of that certain Asset
Purchase Agreement dated October 22, 1998 by and between, inter alia, Holder, as
seller, and Maker, as buyer (the "Purchase Agreement"), and shall be subject to
adjustment and setoff as provided in the Purchase Agreement.
The "Interest Rate" hereunder shall be eight percent (8%) per annum.
Interest shall be calculated on the daily unpaid principal balance hereof for
the actual number of days elapsed in the interest payment period over a year of
365 days. Interest accrued hereunder shall be due and payable in arrears on the
first business day of January 1999 and on the first business day of each
calendar quarter thereafter until the principal balance has been paid.
The principal hereof shall be due and payable (i) in consecutive quarterly
payments, each in the amount of Fifty Thousand Dollars ($50,000.00) (the
"Quarterly Payments") commencing on the first business day of January 1999 and
on the first business day of each calendar quarter thereafter, and (ii) by a
final balloon payment of all of the remaining unpaid principal balance and
interest thereon on October 22, 2003.
In the event the principal amount of this Note is adjusted pursuant to
Sections 2.3(b) or 2.4(b) of the Purchase Agreement, such adjustment shall be
deemed made as of the original date of this Note and the amount of any
overpayment or underpayment of interest resulting from such principal adjustment
shall be deducted from or added to, as appropriate, the first Quarterly Payment
due after the determination of the amount of any such adjustment in the
principal amount.
Except for any prepayment of the principal required to be made in
accordance with the Purchase Agreement or the Employment Agreement of even date
herewith between Maker and Gary L Howard, all payments hereunder shall be
applied first toward interest and then toward the principal balance hereof.
This Note may be prepaid in whole or in part without penalty, together with
interest to date of payment only.
Should any amount of principal and/or interest not be paid when it is due
and such failure shall continue for a period of fifteen (15) days following
written notice thereof to Maker from
<PAGE>
Holder, the entire unpaid principal sum evidenced by this Note with all accrued
interest shall, at the option of the Holder, become immediately due and may be
collected forthwith. It is further agreed that failure of the Holder to exercise
this right of accelerating the maturity of this Note, or any indulgence granted
from time to time, shall in no event be considered as a waiver of such right of
acceleration or estop the Holder from exercising such right in the future.
Any amount of principal and/or interest not paid when due shall thereafter
bear interest at the rate of ten percent (10%) per annum. Should it become
necessary to collect the indebtedness evidenced by this Note through an
attorney, by legal proceedings or otherwise, Maker shall be liable to Holder for
all costs of collection, including, without limitation, reasonable attorneys'
fees for legal services rendered in connection therewith, including, without
limitation, reasonable fees and costs incurred in litigation and in
administrative and bankruptcy proceedings and appeals therefrom, and shall pay
such sums to Holder upon demand.
It is the intent of all parties to this transaction to abide by any and all
interest limitations of any applicable usury law and it is expressly agreed that
the Holder shall not be allowed or entitled to collect any interest (or any sum
which is considered interest by law) which is in excess of any legal rate
applicable hereto. Should any amount be collected hereunder which would cause
the interest to exceed said lawful rate, such part of said amount in excess of
the lawful rate shall automatically be credited to principal, or, if all
principal amounts have been paid, shall be refunded to the Maker.
This Note is the "Note" referenced in and secured by that certain
Subordinate Security Agreement dated of even date herewith by and between Maker
and Holder.
Maker hereby waives presentment, demand, protest and notice of any kind
(including, without limitation, notice of acceleration of, and intention to
accelerate, the maturity of this Note) in connection with this Note.
This Note shall be governed by and construed in accordance with the law of
the State of New York.
NEITHER HOLDER, MAKER OR OTHER PERSON OR ENTITY LIABLE FOR THE INDEBTEDNESS
EVIDENCED HEREBY, NOR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE
OF HOLDER, MAKER OR ANY SUCH OTHER PERSON OR ENTITY SHALL SEEK A JURY TRIAL IN
ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER LITIGATION PROCEDURE BASED
UPON OR ARISING OUT OF THIS NOTE, ANY RELATED INSTRUMENT OR AGREEMENT, ANY
COLLATERAL FOR THE PAYMENT HEREOF OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR
AMONG SUCH PERSONS OR ENTITIES, OR ANY OF THEM. NEITHER HOLDER, MAKER OR ANY
SUCH OTHER PERSON OR ENTITY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A
JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY
DISCUSSED BY THE PARTIES HERETO, AND THE PROVISIONS HEREOF
2
<PAGE>
SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR
REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE
FULLY ENFORCED IN ALL INSTANCES.
IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered
on the date first above written.
MAKER:
MSI/EAGLE SUPPLY, INC.,
a Delaware corporation
By:/s/ Douglas P. Fields, CEO
--------------------------------
Douglas P. Fields
Chief Executive Officer
This Note and the indebtedness payable hereunder is subordinate to any and all
present and future indebtedness of Maker to (a) Fleet Capital Corporation and
its successors and assigns and (b) any and all present and future indebtedness
of Maker to any other financial institution or other institutional lender.
3
<PAGE>
Exhibit 10.21
PURCHASE AND NON-COMPETITION AGREEMENT
THIS PURCHASE AND NON-COMPETITION AGREEMENT (this "AGREEMENT") is made on
the 22nd day of October, 1998, by and among TUSA, INC., a Texas corporation
("SELLER"), GARY L. HOWARD, the sole shareholder of Seller ("SHAREHOLDER")
PATTI L. HOWARD, individually ("MRS. HOWARD") and MSI/EAGLE SUPPLY, INC., a
Delaware corporation ("BUYER").
RECITALS
A. Seller, among its other activities, is in the business of purchasing
certain steel products and other products and supplies and reselling them to
Masonry Supply, Inc., a Texas corporation ("MSI") (the "BUSINESS").
B. Buyer, MSI, Shareholder, Mrs. Howard, spouse of Shareholder, and
Seller have entered into an Asset Purchase Agreement dated the 22nd day of
October, 1998 (the "ASSET PURCHASE AGREEMENT") pursuant to which MSI has agreed
to sell to Buyer, and Buyer has agreed to purchase from MSI, MSI's business as a
wholesale and retail seller of masonry materials and supplies and related
products and supplies for commercial and residential applications (the "MSI
BUSINESS"), including the Purchased Assets, as defined in the Asset Purchase
Agreement, with respect to the MSI Business.
C. Seller and Shareholder acknowledge that the Asset Purchase Agreement
and this Agreement represent an integrated transaction and that Buyer would not
have entered into the Asset Purchase Agreement but for the agreement of Seller
to enter into this Agreement.
D. Shareholder owns all of the issued and outstanding shares of stock of
Seller and MSI and will benefit substantially from the transactions under the
Asset Purchase Agreement and this Agreement. In return for such benefits,
Shareholder is willing to enter into this Agreement for the purposes set forth
below.
E. Mrs. Howard acknowledges that she will receive a substantial financial
benefit from the transactions under the Asset Purchase Agreement and this
Agreement. Accordingly, she is willing to, and does hereby, enter into this
Agreement for the purposes set forth below.
OPERATIVE TERMS
In consideration of the mutual promises, Buyer, Seller, Shareholder and
Mrs. Howard agree as follows:
1. PURCHASED ASSETS.
1.1. Seller hereby sells and assigns to Buyer, and Buyer hereby
purchases from Seller, the following assets which constitute all of the
operating assets of the Business:
(a) goodwill, customer lists, supplier lists and vendor lists;
and
(b) choses in action, claims, demands, and rights in favor of
Seller
<PAGE>
(other than Seller's rights under this Agreement) with
respect to the Business; and
(c) books and records of the Business.
Such assets are collectively called the "SELLER BUSINESS ASSETS". The
Seller Business Assets are being sold free and clear of all security interests,
liens, claims, encumbrances, restrictions, reservations, charges or matters of
any kind (the "ENCUMBRANCES"). Seller is not selling to Buyer, and Buyer is not
purchasing from Seller, any assets of Seller other than the Seller Business
Assets.
1.2. Buyer does not assume any contracts, leases, debts, obligations
or liabilities of Seller, or arising out of the ownership or operation of Seller
or the Business, whether express or implied, contingent or otherwise, or
resulting from any violation of law, rule or regulation, or arising out of any
act, omission or transaction of Seller, MSI, Shareholder or Mrs. Howard.
Seller, Shareholder and Mrs. Howard, jointly and severally, shall indemnify and
hold Buyer and its directors, officers, employees, affiliates, successors and
assigns harmless with respect to all of such contracts, leases, debts,
obligations and liabilities.
2. PURCHASE PRICE AND PAYMENT; SALES AND TRANSFER TAXES.
2.1. PURCHASE PRICE AND PAYMENT. The purchase price for the Seller
Business Assets is One Hundred Dollars ($100.00) (the "PURCHASE PRICE") Buyer
has paid the Purchase Price to Seller upon execution of this Agreement, and
Seller hereby acknowledges the receipt and sufficiency of the Purchase Price.
2.2 SALES AND TRANSFER TAXES. Seller shall pay all sales and other
transfer taxes and fees, if any, arising out of the sale and assignment of the
Seller Business Assets to Buyer.
3. REPRESENTATIONS AND WARRANTIES OF SELLER, SHAREHOLDER AND MRS. HOWARD.
Seller, Shareholder and Mrs. Howard, jointly and severally, represent and
warrant to Buyer as follows:
3.1. REPRESENTATIONS AND WARRANTIES IN ASSET PURCHASE AGREEMENT.
Seller, Shareholder and Mrs. Howard re-affirm all of the representations
and warranties of and with respect to Seller set forth in the Asset
Purchase Agreement.
3.2. TITLE. The Seller Business Assets are owned solely by Seller,
and Seller has good, assignable and marketable title to the Seller Business
Assets. Buyer is hereby receiving from Seller, and Seller is hereby
transferring to Buyer, good, assignable and marketable title to the Seller
Business Assets, free and clear of any and all Encumbrances.
3.3. SELLER BUSINESS ASSETS. The Seller Business Assets constitute
all of the assets and properties owned by Seller that are used or useful in
connection with the Business.
3.4. NO UNDISCLOSED LIABILITIES. Seller has no liabilities or
obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent or otherwise)
2
<PAGE>
for which Buyer will or could be liable.
3.5. NO MISREPRESENTATIONS. The representations, warranties and
statements made by Seller, Shareholder and Mrs. Howard in or pursuant to
this Agreement, and the Exhibits and Schedules hereto, are true, complete
and correct in all respects and do not contain any untrue statement of a
material fact or omit to state any material fact necessary to make any such
representation, warranty or statement, under the circumstances in which it
was made, not misleading. Seller and Shareholder have disclosed to Buyer
all material events, conditions or facts known to either or both of them
that affect or could affect the Business or the Seller Business Assets.
4. COVENANT NOT TO COMPETE. Seller and Shareholder hereby, jointly and
severally, agree as follows:
4.1 NONCOMPETITION. For a period of five (5) years after June 30,
1998, neither Seller nor Shareholder, nor any person or entity directly or
indirectly owning, owned by, controlling, controlled by or under common
ownership or control with ("AFFILIATES"). Seller or Shareholder, shall,
directly or indirectly, on its, his or their own behalf or on behalf of any
competitor of Buyer: (a) engage (whether as owner, partner, stockholder,
joint venturer, manager, employee, investor or otherwise) in the purchase
and sale of any steel products or other materials or supplies of the same
or similar types to those that Seller has been purchasing and reselling to
MSI (the "RESTRICTED BUSINESS") in all counties of the State of Texas, in
all other areas in which MSI is transacting business at June 30, 1998 (the
"REFERENCE DATE") or in which MSI has transacted business at any time
during the two years preceding the Reference Date, and in all areas in the
United States in which Buyer transacts business during such five (5) year
period described above (collectively, the "Market"); (b) affiliate with, or
own or have a proprietary interest of any kind in, any business or firm
that owns, manages or operates a business that purchases and sells any
steel products or related materials or supplies anywhere within the Market;
or (c) alone or acting with others, employ or attempt to employ or solicit
for any employment competitive with Buyer, any of Buyer's employees,
whether or not such employees worked for MSI on or prior to the Closing, as
defined in the Asset Purchase Agreement, or alone or acting with others,
influence or seek to influence any employee to leave Buyer's employment.
Seller and Shareholder also covenant, jointly and severally, that at no
time shall either of them disparage Buyer, any of its affiliated entities,
or any of the employees, directors or officers of Buyer or any of its
affiliated entities.
4.2 PAYMENT FOR COVENANTS. As additional consideration to
Shareholder for his covenants under SECTION 4.1, Buyer has paid to
Shareholder the sum of One Hundred Dollars ($100.00), the receipt and
adequacy of which are acknowledged by Shareholder.
4.3 REMEDIES; CURTAILMENT. Each of Seller and Shareholder agrees
that a breach or violation of the covenants in SECTION 4.1 by Seller or
Shareholder shall entitle Buyer, as a matter of right, to an injunction,
issued by any court of competent jurisdiction, restraining any further or
continued breach or violation of such covenants. Such right to an
injunction shall be cumulative and in addition to, and not in lieu of, any
other remedies to
3
<PAGE>
which Buyer may be entitled. Further, during any period in which Seller or
Shareholder is in breach of any of such covenants, the time period of such
covenant shall be extended for an amount of time that Seller or Shareholder
is in breach hereof.
The covenants contained in SECTION 4.1 will be construed as ancillary
to and independent of any other provision of this Agreement, and the
existence of any claim or cause of action of Seller or Shareholder against
Buyer or any officer, director, or shareholder of Buyer, whether predicated
on this Agreement or otherwise, shall not constitute a defense to the
enforcement by Buyer of the covenants contained in SECTION 4.1.
The parties to this Agreement agree that the limitations contained in
SECTION 4.1 with respect to geographic area, duration and scope of activity
are reasonable. However, if any court shall determine that the geographic
area, duration or scope of activity of any restriction contained in SECTION
4.1 is unenforceable, it is the intention of the parties that such
restrictive covenant set forth herein shall not thereby be terminated but
shall be deemed amended to the extent required to render it valid and
enforceable.
4.4 ASSIGNABILITY. The benefit of the covenants in this SECTION 4
are freely assignable by Buyer.
5. MISCELLANEOUS.
5.1 NOTICES. All notices that are required or may be given pursuant
to the terms of this Agreement shall be in writing and shall be sufficient
in all respects if given in writing and delivered personally or by a
recognized courier service or by registered or certified mail, postage
prepaid, to the parties at the following addresses (or to the attention of
such other person or to such other address as any party shall provide to
the other parties by notice in accordance with this Section):
IF TO BUYER: MSI/Eagle Supply, Inc.
c/o TDA Industries, Inc.
122 East 42nd Street, Suite 1116
New York, NY 10168
Attention: Douglas P. Fields,
Chief Executive Officer
4
<PAGE>
WITH COPY TO: Carlton, Fields, Ward,
Emmanuel, Smith & Cutler, P.A.
P.O. Box 3239
Tampa, Florida 33601
(if by mail)
or
One Harbour Place, 5th Floor
Tampa, Florida 33602
(if by hand delivery)
Attention: Nathaniel L. Doliner,
Attorney at Law
IF TO SELLER: TUSA, Inc.
2090 Highway 157 North
Mansfield, Texas 76063
(prior to the Closing Date)
or
20 Woodland Court
Mansfield, Texas 76063
(on or after the Closing Date)
Attention: Mr. Gary L. Howard, President
WITH COPY TO: Raymond Meeks, Attorney at Law
1000 N. Walnut Creek Drive, Suite C
Mansfield, Texas 76063
IF TO SHAREHOLDER OR 20 Woodland Court
MRS. HOWARD: Mansfield, Texas 76063
WITH COPY TO: Raymond Meeks, Attorney at Law
1000 N. Walnut Creek Drive, Suite C
Mansfield, Texas 76063
Any such notice under this Section shall be deemed to have been given
and received on the day it is personally delivered or delivered by a
recognized courier service or, if mailed, on the fifth day after it is
mailed.
5.2 FURTHER ASSURANCES. Each party hereto agrees to execute, without
unreasonable delay, any and all documents and to perform such other acts as
may be reasonably necessary or expedient to further the purposes of this
Agreement and the transactions contemplated hereby. Without limiting the
generality of the foregoing, Seller, Shareholder and Mrs. Howard, jointly
and severally, shall use their best efforts to help facilitate the direct
purchase by Buyer of all steel and other products and supplies heretofore
purchased and sold by Seller to MSI in connection with the Business and the
MSI Business.
5.3 ATTORNEYS' FEES. In the event of a dispute between or among the
parties with respect to this Agreement, the prevailing party or parties
shall be entitled to recover the
5
<PAGE>
prevailing party's (or parties') reasonable attorneys' fees and costs,
whether incurred during trial, on appeal or in bankruptcy proceedings.
5.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts for the convenience of the parties hereto, all of which
together shall constitute one and the same instrument.
5.5 ASSIGNMENT; AND NO THIRD PARTY BENEFICIARIES. This Agreement and
all of the provisions hereof shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and permitted
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned or delegated by any of Seller,
Shareholder or Buyer without the prior written consent of the other party
or parties; provided, however, that notwithstanding the foregoing, Buyer
may assign this Agreement to any related or affiliated entity of Buyer or
any lender to Buyer. Any assignment or delegation made in violation of
this Agreement shall be null and void. This Agreement is not intended to
confer upon any person (including, without limitation, suppliers of
Seller) other than the parties hereto and any permitted assignee, any
rights or remedies hereunder. Nothing in this Agreement shall be construed
to imply any admission of liability or obligation to any person except the
parties to this Agreement.
5.6 ENTIRE AGREEMENT. This Agreement and the documents attached as
Exhibits and Schedules hereto contain the entire understanding of the
parties relating to the subject matter contained herein and supersede all
prior written or oral and all contemporaneous oral agreements and
understandings relating to the subject matter hereof. This Agreement
cannot be modified or amended except in writing signed by the party against
whom enforcement is sought.
5.7 EXHIBITS AND SCHEDULES. All Exhibits and Schedules to this
Agreement are incorporated herein by reference and made a part hereof.
5.8 GOVERNING LAW. This Agreement shall be governed by, and
construed and interpreted in accordance with, the substantive laws of the
State of New York without giving effect to any conflict-of-laws rule or
principle that might result in the application of the laws of another
jurisdiction.
5.9 JURISDICTION, VENUE AND WAIVER OF JULY TRIAL. Any action or
proceeding seeking to enforce any provision of, or based on any right
arising out of, this Agreement may be brought against any of the parties in
the courts of the State of New York, or, if it has or can acquire
jurisdiction, in the United States District Court for the Southern District
of New York, or the Middle District of Florida, and each of the parties
consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection
to venue therein. If neither the United States District Court for the
Southern District of New York nor the United States District Court for the
Middle District of Florida has or can acquire jurisdiction, then any action
or proceeding seeking to enforce any provision of, or based on any right
arising out of, this Agreement, shall be resolved by binding arbitration
before a panel of three neutral arbitrators in Atlanta,
6
<PAGE>
Georgia, or such other mutually agreed venue under the rules of the
American Arbitration Association. THE PARTIES HERETO ACKNOWLEDGE THAT THE
TIME AND EXPENSE REQUIRED FOR TRIAL BY JURY EXCEED THE TIME AND EXPENSE FOR
A BENCH TRIAL AND HEREBY WAIVE, TO THE EXTENT PERMITTED BY LAW, TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY.
5.10 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. All representations, warranties, covenants and agreements made
by the parties hereto in this Agreement or in any certificate or other
document delivered pursuant hereto shall survive the execution of this
Agreement.
5.11 HEADINGS. The descriptive headings of the Sections and
Subsections hereof are inserted for convenience only and do not constitute
a substantive portion of this Agreement.
5.12 INVALIDITY. In the event that any provision of this Agreement is
determined to be invalid or unenforceable, such invalidity or
unenforceability shall not affect the validity or enforceability of any
other provision of this Agreement.
5.13 WAIVER. The waiver by any party hereto of any breach, default,
misrepresentation or breach of warranty or covenant hereunder must be in
writing and shall not be deemed to extend to any prior or subsequent
breach, default, misrepresentation or breach of warranty or covenant
hereunder and shall not affect in any way any rights arising by virtue of
any such prior or subsequent occurrence.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day first above written.
MSI/EAGLE SUPPLY, INC.
a Delaware corporation ("BUYER")
By: /s/ Douglas P. Fields
------------------------------
Douglas P. Fields
Chief Executive Officer
7
<PAGE>
TUSA, INC.
a Texas corporation ("SELLER")
By: /s/ Gary L. Howard
--------------------------------
Name: Gary L. Howard
Title: President
/s/ Gary L. Howard
-------------------------------------
GARY L. HOWARD, individually
("SHAREHOLDER")
/s/ Patti L. Howard
-------------------------------------
PATTI L. HOWARD, individually
("MRS. HOWARD")
8
<PAGE>
Exhibit 10.22
SUBORDINATE SECURITY AGREEMENT
THIS SUBORDINATE SECURITY AGREEMENT ("AGREEMENT") is made this 22nd day of
October, 1998, by and between MASONRY SUPPLY, INC., a Texas corporation
("SECURED PARTY"), and MSI/EAGLE SUPPLY, INC., a Delaware corporation ("DEBTOR")
RECITALS
A. Pursuant to that certain Asset Purchase Agreement dated October 22,
1998 ("PURCHASE AGREEMENT"), Debtor has acquired from Secured Party certain
assets for a purchase price payable in part in cash with the remainder payable
by delivery of a certain Secured Non-Negotiable Promissory Note of even date
herewith in the original principal amount of Two Million Forty-Five Thousand
Nine Hundred Seventy-Two and No/100 Dollars ($2,045,972.00) (together with any
and all amendments, modifications, extensions, renewals and replacements
thereof, the "NOTE").
B. Pursuant to the Purchase Agreement, Debtor has agreed to secure the
payment of the Note by the assets acquired by Debtor from Secured Party pursuant
to the Purchase Agreement, as hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Debtor and Secured Party agree as
follows:
AGREEMENT
1. SECURITY.
(a) For the purposes of securing payment of the Note, Debtor hereby
grants, transfers, assigns and gives to Secured Party a subordinate
security interest in all of the inventory, accounts and accounts receivable
of Debtor, whether existing now or in the future, and all proceeds thereof
("COLLATERAL").
(b) Secured Party hereby agrees that the security interest of Secured
Party in the Collateral created hereby and the indebtedness and other
obligations of Debtor to Secured Party evidenced by the Note and Purchase
Agreement are and shall remain subject and inferior to (i) the security
interests of Senior Lender (as defined below) and any successors and
assigns of Senior Lender in the Collateral created by the Senior Credit and
Security Agreement (as defined below) and any and all modifications,
amendments, replacements, renewals and substitutions thereof, and any and
all present and future indebtedness of Debtor to Senior Lender and any
successors and assigns of Senior Lender secured by the Senior Credit and
Security Agreement and any and all modifications, amendments, replacements,
renewals and substitutions thereof, and (ii) any and all other security
interests of Senior Lender and any other financial institution or
institutional lender, and any and all other present and future indebtedness
of Debtor to Senior Lender or any other
<PAGE>
financial institution or institutional lender (Senior Lender and any such
other financial institution or institutional lender are hereinafter
collectively called "SECURED PARTY") Further, Secured Party hereby waives
and relieves Senior Lender and any other Senior Party from any and all
obligations of marshalling in connection with the realization thereby
against the Collateral or any other security for the indebtedness or other
obligations owed by Debtor to Senior Lender or any other Senior Party; and
Secured Party hereby agrees that the aforesaid subordination of lien and
indebtedness shall continue and shall not be impaired notwithstanding any
modification or amendment of the Senior Credit and Security Agreement and
all related instruments, documents and agreements, or any other instrument,
document or agreement evidencing any other security interests of Senior
Lender or any other Senior Party or any other indebtedness of Debtor to
Senior Lender or any other Senior Party, any release or impairment of the
Collateral by Senior Lender or any other Senior Party or any release of any
guarantor or other obligor for the indebtedness of Debtor to Senior Lender
or to any other Senior Party. This paragraph may be relied upon by Senior
Lender and any successors and assigns of Senior Lender and by any other
Senior Party and may not be amended in any manner without the express
written consent of Senior Lender and any successors and assigns of Senior
Lender and by any other Senior Party. Further, Secured Party hereby agrees
to enter into any subordination agreement required to further effect the
foregoing as may be reasonably requested by Senior Lender and any
successors or assigns of Senior Lender and by any other Senior Party.
2. REPRESENTATIONS AND WARRANTIES. Debtor hereby represents and warrants
to Secured Party as follows:
(a) Debtor has the full right and power to transfer, assign and grant
a security interest in the Collateral to Secured Party in the manner and
pursuant to the terms set forth in this Agreement, subject to a first
priority security interest in the Collateral in favor of Fleet Capital
Corporation ("SENIOR LENDER") created pursuant to that certain Loan and
Security Agreement dated October 22, 1998, by and between Senior Lender and
Debtor, as amended from time to time ("SENIOR CREDIT AND SECURITY
AGREEMENT").
(b) Debtor is not a party to any contract, agreement, note or other
instrument under the terms of which the execution or performance by Debtor
of this Agreement will be a default. Neither the execution nor performance
of this Agreement by Debtor will result in a violation of any statute,
order, writ, injunction, judgment or decree of any court or governmental
authority applicable to Debtor.
3. COVENANTS. Debtor covenants and agrees that so long as any portion of
the indebtedness and obligations secured hereby remains unpaid, Debtor shall:
(a) Join with Secured Party in executing one or more financing
statements pursuant to the Uniform Commercial Code of the State of Texas,
and any other jurisdiction as required by law, in form and substance
satisfactory to Secured Party. Debtor hereby authorizes Secured Party to
file financing statements, continuation statements or other appropriate
filings signed only by Secured Party in all places where necessary to
protect or continue Secured Party's subordinate security interest in the
Collateral in all jurisdictions
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where such authorization is permitted by law.
(b) Make full and timely payment of the Note secured hereby when due.
(c) Give Secured Party all information it may reasonably request with
respect to the Collateral. All information furnished to Secured Party by
Debtor shall be complete and accurate in all material respects.
4. EVENTS OF DEFAULT. The occurrence of any one or more of the following
events shall constitute an "Event of Default" hereunder:
(a) Failure of Debtor to pay any and all sums due pursuant to the
Note and the continuance of such failure after the passage of any
applicable period of grace or cure provided therein.
(b) Failure of Debtor to perform any and all of the covenants,
agreements and provisions contained in this Agreement within thirty (30)
days following written notice from Secured Party to Debtor of such failure
in performance.
5. REMEDIES. Upon the occurrence of any Event of Default, Secured Party
shall have the following rights and remedies:
(a) To declare immediately due and payable, at its option and without
demand or notice of any kind, the Note and reduce the same to judgment.
(b) To exercise any one or more of the rights and remedies given a
secured party under any and all laws governing this Agreement.
(c) To require Debtor to assemble the Collateral at Debtor's expense
and make it available to Secured Party at a place to be designated by
Secured Party, which is reasonably convenient to both parties. Subject to
the rights of any Senior Party, Secured Party shall have the right to take
immediate possession of the Collateral and may enter any of the premises of
Debtor, with or without force or process of law, and to keep and store the
same on the premises until sold. Secured Party shall have the right to bid
on its own behalf at any public sale of the Collateral and/or, to the
extent permitted by applicable law, at any private sale. Out of the
proceeds of any such sale, Secured Party shall retain an amount equal to
all costs and charges, including reasonable attorneys' fees and costs
(including, without limitation, reasonable attorneys' fees and costs
incurred in any litigation, bankruptcy, mediation or arbitration
proceedings, and any appeals therefrom) and reasonable costs and charges
for pursuing, reclaiming, seeking to reclaim, taking, keeping, removing,
storing, advertising such Collateral for sale and selling the Collateral
and all other reasonable charges and expenses in connection therewith. Any
balance of such proceeds shall be applied upon the indebtedness and
obligations secured hereby and, in the event of deficiency, Debtor shall
remain liable to Secured Party.
(d) The rights and remedies of Secured Party provided under this
Agreement
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are cumulative and are in addition to any rights and remedies which it may
otherwise have under law, and the rights and remedies of Secured Party
hereunder or otherwise provided at law are cumulative and none is
exclusive.
6. MISCELLANEOUS.
(a) This Agreement shall not obligate Secured Party to perform or
discharge any of Debtor's obligations, duties or liabilities under or with
respect to the Collateral assigned hereby. Should Secured Party incur any
such liability, loss or damage, the amounts thereof, including reasonable
attorneys' fees and costs (including, but not limited to, any reasonable
attorneys' fees and costs incurred in any litigation, bankruptcy, mediation
or arbitration proceedings, and any appeals therefrom) shall be secured
hereby, and Debtor shall reimburse Secured Party for such amounts.
(b) This Agreement shall be governed by, and construed in accordance
with, the law of the State of New York without application of its
principles regarding the conflict of laws.
(c) This Agreement shall be binding upon Debtor and its successors
and assigns and shall inure to the benefit of Secured Party and its
successors and assigns.
IN WITNESS WHEREOF, Secured Party and Debtor have duly executed this
Agreement on the date set forth above.
SECURED PARTY:
MASONRY SUPPLY, INC.,
a Texas corporation
By: /s/ Gary L. Howard
-------------------------------------
Gary L. Howard
President
DEBTOR:
MSI/EAGLE SUPPLY, INC.,
a Delaware corporation
By: /s/ Douglas P. Fields
-------------------------------------
Douglas P. Fields
Chief Executive Officer
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Exhibit 10.23
PROMISSORY NOTE
$1,000,000.00 Dallas, Texas
October 22, 1998
FOR VALUE RECEIVED, the undersigned, MSI/EAGLE SUPPLY, INC., a Delaware
corporation ("MAKER"), promises to pay to the order of TDA INDUSTRIES, INC., a
New York corporation ("LENDER"), in lawful money of the United States of
America, in immediately available funds, at 122 East 42nd Street, New York, New
York 06830 or at such other location as the Lender may designate from time to
time, the principal sum of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00), or so
much thereof as may be advanced and remain outstanding, together with interest
thereon, as described below.
1. INTEREST.
(a) INTEREST RATE. Interest shall accrue on the average daily
outstanding principal balance hereof from the date of advancement thereof at a
fixed rate of six percent (6%) per annum, based upon a year of 360 days and
actual days elapsed.
(b) MAXIMUM AMOUNT OF INTEREST. It is the intention of Maker and
Lender to conform strictly to the interest law applicable to this loan
transaction. Accordingly, it is agreed that notwithstanding any provisions to
the contrary in this Note, or in any of the documents relating hereto, the
aggregate of all interest and any other charges or consideration constituting
interest under the applicable interest law that is taken, reserved, contracted
for, charged or received under this Note or under any of the other aforesaid
agreements or otherwise in connection with this loan transaction shall under no
circumstances exceed the maximum amount of interest allowed by the interest law
applicable to this loan transaction. If any excess of interest in such respect
is provided for, in this Note or in any of the documents securing payment hereof
or otherwise relating hereto, then, in such event, (i) the provisions of this
paragraph shall govern and control, (ii) neither Maker nor Maker's heirs, legal
representatives, successors or assigns shall be obligated to pay the amount of
such interest to the extent that it is in excess of the maximum amount of
interest allowed by the interest law applicable to this loan transaction, (iii)
any excess shall be deemed a mistake and cancelled automatically and, if
theretofore paid, shall be credited on this Note by Lender (or if this Note
shall have been paid in full, refunded to Maker), and (iv) the effective rate of
interest shall be automatically subject to reduction to the maximum legal rate
of interest allowed under such interest law as now or hereafter construed by
courts of appropriate jurisdiction. To the extent permitted by the interest law
applicable to this loan transaction, all sums paid or agreed to be paid to
Lender for the use, forbearance or detention of the indebtedness evidenced
hereby shall be amortized, prorated, allocated and spread throughout the full
term of this Note.
2. DEFINED TERM. As used herein, the term "Business Day" shall mean any
day on which the Lender's offices are open for business. Unless specifically
denoted "Business Days" herein, references to "Days" shall mean calendar days.
<PAGE>
3. PAYMENT TERMS.
(a) Payments of interest due hereunder shall be due and payable in
arrears in quarterly installments commencing on the first day of January, 1999
and on the first day of each calendar quarter thereafter until the principal
amount is paid in full.
(b) The entire principal balance hereof, together with all accrued
and unpaid interest, shall be due and payable in full on October 22, 2000.
4. PREPAYMENT. The principal amount of this Note may be prepaid in whole
or in part at any time.
5. EVENT OF DEFAULT. The failure by Maker to make timely any payment due
hereunder shall constitute an event of default. Notwithstanding any term herein
to the contrary, upon the occurrence of an event of default, Lender shall have
the right to demand immediate payment of the entire outstanding principal
balance hereof, together with all accrued and unpaid interest and charges
thereon.
6. DEFAULT RATE. Upon any event of default, and continuing until the
event of default is cured, the outstanding principal of this Note and all other
indebtedness evidenced hereby shall bear interest at a rate per annum,
calculated on the basis of a 360-day year and days actually elapsed, equal to
ten percent (10%) payable on demand, which rate shall apply as well before as
after judgment.
7. MISCELLANEOUS.
(a) If any payment of principal or interest on this Note shall become
due on a Saturday, Sunday or on any other day on which banks in New York, New
York, are not open for business, such payment shall be made on the immediately
preceding Business Day.
(b) Maker hereby waives presentment, demand, protest and notice of
any kind in connection with this Note.
(c) This Note shall bind Maker and its successors and assigns, and
the benefits hereof shall inure to the benefit of Lender and its successors and
assigns. All references herein to the "Maker" and "Lender" shall be deemed to
apply to the Maker and Lender, respectively, and their respective successors and
assigns.
(d) This Note, for all purposes, shall be governed by, and construed
in accordance with, the law of the State of New York without regard to its
principles regarding the conflict of law which would require the application of
the law of another jurisdiction. In the event any provision of this Note shall
be prohibited or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without invalidating
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<PAGE>
the remainder of such provision or the remaining provisions of this Note.
8. JURY TRIAL WAIVER. NO PARTY TO THIS PROMISSORY NOTE OR ANY ASSIGNEE,
SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF A PARTY SHALL SEEK A JURY TRIAL IN
ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION PROCEDURE BASED
UPON OR ARISING OUT OF THIS PROMISSORY NOTE, ANY RELATED AGREEMENT OR
INSTRUMENT, ANY OTHER COLLATERAL FOR THE INDEBTEDNESS SECURED HEREBY OR THE
DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG THE PARTIES, OR ANY OF THEM. NO
PARTY OR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF A PARTY
SHALL SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN
WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN
WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE
PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO
PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE
PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
IN WITNESS WHEREOF, Maker has executed this Note on the date first above
written.
MSI/EAGLE SUPPLY, INC.,
a Delaware corporation
By: /s/ Douglas P. Fields
---------------------------------
Douglas P. Fields
Chief Executive Officer
This Note and the indebtedness payable hereunder is subordinate to any and all
present and future indebtedness of Maker to (a) Fleet Capital Corporation and
its successors and assigns and (b) any and all present and future indebtedness
of Maker to any other financial institution or other institutional lender.
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Exhibit 10.24
MSI/EAGLE SUPPLY, INC., AS BORROWER
LOAN AND SECURITY AGREEMENT
Dated as of October 22, 1998
$9,075,000
FLEET CAPITAL CORPORATION, AS LENDER
TABLE OF CONTENTS
SECTION 1. CREDIT FACILITY. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REVOLVING CREDIT LOANS.. . . . . . . . . . . . . . . . . . . . . 1
1.2 TERM LOAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2. INTEREST, FEES AND CHARGES . . . . . . . . . . . . . . . . . . . 2
2.1 INTEREST.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 CLOSING FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 COLLATERAL MONITORING FEE. . . . . . . . . . . . . . . . . . . . 4
2.4 UNUSED AVAILABILITY FEE. . . . . . . . . . . . . . . . . . . . . 4
2.5 AUDIT AND APPRAISAL FEES . . . . . . . . . . . . . . . . . . . . 4
2.6 CAPITAL ADEQUACY CHANGE. . . . . . . . . . . . . . . . . . . . . 5
2.7 REIMBURSEMENT OF EXPENSES. . . . . . . . . . . . . . . . . . . . 6
2.8 BANK CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.9 COLLECTION CHARGES . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3. LOAN ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . 7
3.1 MANNER OF BORROWING REVOLVING CREDIT LOANS . . . . . . . . . . . 7
3.2 PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.3 PREPAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.4 APPLICATION OF PAYMENTS AND COLLECTIONS. . . . . . . . . . . . .12
3.5 ALL LOANS TO CONSTITUTE ONE OBLIGATION . . . . . . . . . . . . .12
3.6 LOAN ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.7 STATEMENTS OF ACCOUNT. . . . . . . . . . . . . . . . . . . . . .12
SECTION 4. TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . .13
4.1 TERM OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . .13
4.2 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . .13
SECTION 5. SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . .14
5.1 SECURITY INTEREST IN COLLATERAL. . . . . . . . . . . . . . . . .14
5.2 LIEN PERFECTION; FURTHER ASSURANCES. . . . . . . . . . . . . . .15
5.3 KEY MAN LIFE INSURANCE . . . . . . . . . . . . . . . . . . . . .15
SECTION 6. COLLATERAL ADMINISTRATION. . . . . . . . . . . . . . . . . . . .15
6.1 LOCATION OF COLLATERAL . . . . . . . . . . . . . . . . . . . . .15
6.2 INSURANCE OF COLLATERAL. . . . . . . . . . . . . . . . . . . . .15
6.3 PROTECTION OF COLLATERAL . . . . . . . . . . . . . . . . . . . .16
6.4 ADMINISTRATION OF ACCOUNTS.. . . . . . . . . . . . . . . . . . .16
6.5 ADMINISTRATION OF INVENTORY. . . . . . . . . . . . . . . . . . .18
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6.6 RECORDS AND SCHEDULES OF EQUIPMENT . . . . . . . . . . . . . . .18
6.7 PAYMENT OF CHARGES . . . . . . . . . . . . . . . . . . . . . . .18
SECTION 7. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . .19
7.1 GENERAL REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . .19
7.2 CONTINUOUS NATURE OF REPRESENTATIONS AND WARRANTIES. . . . . . .25
7.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . .25
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS. . . . . . . . . . . . . . .25
8.1 AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . .25
8.2 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . .28
8.3 SPECIFIC FINANCIAL COVENANTS.. . . . . . . . . . . . . . . . . .32
SECTION 9. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . .32
9.1 DOCUMENTATION. . . . . . . . . . . . . . . . . . . . . . . . . .32
9.2 NO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . .35
9.3 OTHER LOAN DOCUMENTS . . . . . . . . . . . . . . . . . . . . . .35
9.4 ADJUSTED AVAILABILITY. . . . . . . . . . . . . . . . . . . . . .35
9.5 NO LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . .35
9.6 VENDOR CHECKS. . . . . . . . . . . . . . . . . . . . . . . . . .35
9.7 RENT REDUCTION . . . . . . . . . . . . . . . . . . . . . . . . .36
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT. . . . . . . .36
10.1 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . .36
10.2 ACCELERATION OF THE OBLIGATIONS. . . . . . . . . . . . . . . . .38
10.3 OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . .39
10.4 REMEDIES CUMULATIVE; NO WAIVER . . . . . . . . . . . . . . . . .40
SECTION 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .40
11.1 POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . . . . . .40
11.2 INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .41
11.3 MODIFICATION OF AGREEMENT; SALE OF INTEREST. . . . . . . . . . .41
11.4 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . .42
11.5 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . .42
11.6 CUMULATIVE EFFECT, CONFLICT OF TERMS . . . . . . . . . . . . . .42
11.7 EXECUTION IN COUNTERPARTS. . . . . . . . . . . . . . . . . . . .42
11.8 NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
11.9 LENDER'S CONSENT . . . . . . . . . . . . . . . . . . . . . . . .44
11.10 CREDIT INQUIRIES . . . . . . . . . . . . . . . . . . . . . . . .44
11.12 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . .44
11.13 INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . .44
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11.14 GOVERNING LAW; CONSENT TO FORUM. . . . . . . . . . . . . . . . .44
11.15 WAIVERS BY BORROWER. . . . . . . . . . . . . . . . . . . . . . .45
11.16 PARTIES TO ACT IN A COMMERCIALLY REASONABLE MANNER . . . . . . .46
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LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made as of this 22nd day of October,
1998, by and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island
corporation with an office at 200 Glastonbury Blvd., Glastonbury, Connecticut
06033, and MSI/EAGLE SUPPLY, INC. ("Borrower"), a Delaware corporation with its
executive office and principal place of business at 122 East 42nd Street, Suite
1116, New York, NY 10168. Capitalized terms used in this Agreement have the
meanings assigned to them in Appendix A, General Definitions. Accounting terms
not otherwise specifically defined herein shall be construed in accordance with
GAAP consistently applied.
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lender agrees to make a Total Credit Facility of up to Nine Million
Seventy-Five Thousand Dollars ($9,075,000) available upon Borrower's request
therefor, as follows:
1.1 REVOLVING CREDIT LOANS..1 REVOLVING CREDIT LOANS.
1.1.1 LOANS AND RESERVES. Lender agrees, for so long as no
Default or Event of Default exists, to make Revolving Credit Loans to Borrower
from time to time, as requested by Borrower in the manner set forth in
subsection 3.1.1 hereof, up to a maximum principal amount at any time
outstanding equal to the Borrowing Base at such time less reserves, if any.
Lender shall have the right to establish reserves in such amounts, and with
respect to such matters, as Lender shall deem necessary or appropriate, against
the amount of Revolving Credit Loans which Borrower may otherwise request under
this subsection 1.1.1, including, without limitation, with respect to (i) price
adjustments, damages, unearned discounts, returned products or other matters for
which credit memoranda are issued in the ordinary course of Borrower's business;
(ii) shrinkage, spoilage and obsolescence of Inventory; (iii) slow moving
Inventory, (iv) other sums chargeable against Borrower's Loan Account as
Revolving Credit Loans under any section of this Agreement; (v) amounts owing by
Borrower to any Person to the extent secured by a Lien (other than a Permitted
Lien) on, or trust over, any Collateral of Borrower; and (vi) such other
matters, events, conditions or contingencies as to which Lender, in its sole
credit judgment, determines reserves should be established from time to time
hereunder.
1.1.2 OVERADVANCES. Lender may in its sole discretion make
Revolving Credit Loans to Borrower as requested by Borrower in accordance with
the terms of subsection 3.1.1 hereof at a time when the unpaid balance of
Revolving Credit Loans exceeds, or would exceed with the making of any such
Revolving Credit Loan, the Borrowing Base (any such loan being herein referred
to individually as an "Overadvance" and collectively as "Overadvances"). All
Overadvances shall be repaid on demand, shall be secured by all of the
Collateral and shall bear interest as provided in this Agreement for Revolving
Credit Base Rate Loans.
<PAGE>
1.1.3 USE OF PROCEEDS. The Revolving Credit Loans shall be used
for Borrower's general working capital needs in a manner consistent with the
provisions of this Agreement and applicable law, as well as initially to fund
the acquisition of certain assets from Masonry Supply, Inc. in accordance with
the terms of the Asset Purchase Agreement.
1.2 TERM LOAN. Lender agrees to make a Term Loan to Borrower on the
Closing Date in the principal amount of $3,075,000, which shall be repaid in
successive monthly installments in accordance with the terms of the Term Note.
The monthly payments under the Term Loan shall be based on a seven-year
amortization schedule with each installment due and payable on the first day of
each month, commencing on December 1, 1998, followed by a final installment
which shall be due and payable on the earlier to occur of the end of the seven
year term, the end of the Original Term or Renewal Term (as applicable), or the
termination of this Agreement. The Term Loan shall be secured by all of the
Collateral.
SECTION 2. INTEREST, FEES AND CHARGES
2.1 INTEREST.
2.1.1 REVOLVING CREDIT INTEREST:
(a) RATE OPTIONS. At the time of each Revolving
Credit Loan under the Revolving Credit Facility, and thereafter from time to
time, Borrower shall have the right, subject to the terms and conditions of this
Agreement and provided no Default or Event of Default has occurred, to designate
to Lender in writing that all, or a portion of the Revolving Credit Loans shall
bear interest at either the (i) Revolving Credit LIBOR Rate or (ii) Revolving
Credit Base Rate. Interest on each portion thereof shall accrue and be paid at
the time and rate applicable to the respective option selected by Borrower or
otherwise governing under the terms of this Agreement. If for any reason the
Revolving Credit LIBOR Rate option is unavailable, or Borrower does not
designate that the Revolving Credit LIBOR Rate should apply, the Revolving
Credit Base Rate shall apply. The rate of interest on Revolving Credit Base
Rate Loans shall increase or decrease by an amount equal to any increase or
decrease in the Base Rate effective as of the opening of business on the day
that any such change in the Base Rate occurs.
(b) REVOLVING CREDIT LIBOR RATE OPTION. Provided no
Default or Event of Default has occurred, and subject to the provisions of
Section 2.1.1 (a)(i) if Borrower desires to have the Revolving Credit LIBOR Rate
apply to all or a portion of the Revolving Credit Loans, Borrower shall give
Lender a written irrevocable request no later than 11:00 A.M. Eastern time on
the third (3rd) Business Day prior to the requested borrowing date specifying
(i) the date the Revolving Credit LIBOR Rate shall apply (which shall be a
Business Day), (ii) the Interest Period, and (iii) the amount to be subject to
the Revolving Credit LIBOR Rate provided
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that such amount shall be an integral multiple of Two Hundred Fifty Thousand
Dollars ($250,000.00).
2.1.2 TERM INTEREST:
(a) RATE OPTIONS. On the Closing Date, and thereafter
from time to time, Borrower shall have the right, subject to the terms and
conditions of this Agreement, and provided no Default or Event of Default has
occurred, to designate to Lender in writing that all, or a portion of the
outstanding principal balance of the Term Loan shall bear interest at either the
(i) Term LIBOR Rate, or (ii) Term Base Rate. Interest on each portion thereof
shall accrue and be paid at the time and rate applicable to the respective
option selected by Borrower or otherwise governing under the terms of this
Agreement. If for any reason an option is unavailable, Borrower may designate
another option. If Borrower does not elect any such option or, if, for any
reason the Term LIBOR Rate is not available, the Term Loan shall bear interest
at the Term Base Rate. The rate of interest on the Term Base Rate Loans shall
increase or decrease by an amount equal to any increase or decrease in the Base
Rate, effective as of the opening of business on the date that any such change
in the Base Rate occurs.
(b) TERM LIBOR RATE OPTION. Provided no Default or
Event of Default has occurred, and subject to the provisions of
Section 2.1.2(a)(i) if Borrower desires to have the Term LIBOR Rate apply to all
or a portion of the Term Loan, Borrower shall give Lender a written irrevocable
request no later than 11:00 A.M. Eastern Time on the third (3rd) Business Day
prior to the requested borrowing date specifying (i) the date the Term LIBOR
Rate shall apply (which shall be a Business Day), (ii) the Interest Period, and
(iii) the amount of the Loan to be subject to the Term LIBOR Rate; provided that
such amount shall be an integral multiple of Two Hundred Fifty Thousand Dollars
($250,000.00).
2.1.3 DEFAULT RATE OF INTEREST. Upon and after the occurrence
of an Event of Default, and during the continuation thereof, the principal
amount of the Loans shall bear interest at a rate per annum equal to two percent
(2%) above the rate applicable with respect to Base Rate Loans.
2.1.4 COMPUTATION OF INTEREST AND FEES. Interest, fees and
collection charges hereunder shall be calculated daily and shall be computed on
the actual number of days elapsed over a year consisting of three hundred and
sixty (360) days.
2.1.5 MAXIMUM INTEREST. In no event whatsoever shall the
aggregate of all amounts deemed interest hereunder and charged or collected
pursuant to the terms of this Agreement exceed the highest rate permissible
under any law which a court of competent jurisdiction shall, in a final
determination, deem applicable hereto. If any provisions of this Agreement are
in contravention of any such law, such provisions shall be deemed amended to
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conform thereto. To the extent the laws of the State of Texas may apply to this
Agreement, notwithstanding anything herein to the contrary, if at any time the
applicable interest rate, together with all fees and charges which are treated
as interest under applicable law (collectively the "Charges"), as provided for
herein or in any other document executed in connection herewith, or otherwise
contracted for, charged, received, taken or reserved by Lender, shall exceed the
maximum lawful rate (the "Maximum Rate") which may be contracted for, charged,
taken, received or reserved by Lender in accordance with applicable law, the
rate of interest payable on the Loans, together with all Charges payable to
Lender, shall be limited to the Maximum Rate. For purposes of Texas law, the
term "MAXIMUM RATE" means the maximum rate of nonusurious interest permitted
from day to day by applicable law, including as to Article 5069, Vernon's Texas
Civil Statutes (and as the same may be incorporated by reference in other Texas
statutes), but otherwise without limitation, that rate based upon the "weekly
ceiling".
2.2 CLOSING FEE. Borrower shall pay to Lender a closing fee of
$75,000, which shall be fully earned and nonrefundable on the Closing Date and
shall be paid concurrently with the initial Loans hereunder.
2.3 COLLATERAL MONITORING FEE. Borrower shall pay to Lender each
month, in arrears, on the first day of the following month, a collateral
monitoring fee of $1,000, which fee shall be pro-rated for any month during
which this Agreement is in effect for less than a full month.
2.4 UNUSED AVAILABILITY FEE. Borrower shall pay to Lender an unused
availability fee, which shall be payable in arrears on the first Business Day of
each calendar month hereafter. The unused availability fee shall equal
one-quarter of one percent (1/4%) per annum of the amount by which the Revolving
Credit Limit exceeds the average daily amount of the Revolving Credit Loans
outstanding during the immediately preceding month; provided however that until
such time as the aggregate outstanding balance of all Revolving Credit Loans
exceeds $4,000,000, the unused availability fee shall be calculated based on the
amount during each month by which Four Million Dollars ($4,000,000) exceeds the
average daily amount of the Revolving Credit Loans outstanding during such
month. Such fee shall be pro-rated for any month during which this Agreement is
in effect for less than a full month.
2.5 AUDIT AND APPRAISAL FEES. Borrower shall pay to Lender audit and
appraisal fees from time to time in connection with Lender's periodic audits and
appraisals of Borrower's books and records and such other matters as Lender
shall deem appropriate, plus all out-of-pocket expenses incurred by Lender in
connection with such audits and appraisals. Such audit and appraisal fees shall
be calculated at the rate of $500 for each member of Lender's field examination
staff engaged in any such audit and appraisal for each day during which such
examination is being conducted and, absent the occurrence and continuance of an
Event of Default, such audits and appraisals shall be conducted not more than
three (3) times during each twelve (12) month period, commencing as of the
Closing Date. Audit fees shall be payable on
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the first day of the month following the date of issuance by Lender of a request
for payment thereof to Borrower. Upon Borrower's request, Lender shall provide
to Borrower in reasonable detail the back-up and support of any out-of-pocket
expenses referred to herein.
2.6 CAPITAL ADEQUACY CHANGE. If Lender shall have determined that
the adoption of any law, rule or regulation regarding capital adequacy, or any
change therein or in the interpretation or application thereof, or compliance by
Lender with any request or directive regarding capital adequacy (whether or not
having the force of law) from any central bank or governmental authority (each
such law, rule, regulation, request or directive a "Capital Adequacy Rule"),
does or shall have the effect of reducing the rate of return on Lender's capital
as a consequence of its obligations hereunder to a level below that which Lender
could have achieved but for such adoption, change or compliance (taking into
consideration Lender's policies with respect to capital adequacy) by a material
amount, then from time to time, after submission by Lender to Borrower of a
written demand therefor (a "Capital Adequacy Demand"), the Borrower shall pay to
Lender such additional amount or amounts (each a "Capital Adequacy Amount", it
being understood that Capital Adequacy Amount may include an increase in the
Applicable Interest Rate Margin) as will compensate Lender for such reduction.
A certificate of Lender claiming entitlement to payment as set forth above shall
be conclusive in the absence of manifest error. Such certificate shall set
forth the nature of the occurrence giving rise to such reduction, the additional
Capital Adequacy Amount or Amounts to be paid to Lender, and the method by which
such Capital Adequacy Amounts were determined. In determining such Capital
Adequacy Amount, Lender may use any reasonable averaging and attribution method.
2.6.1 TERMINATION OF AGREEMENT FOLLOWING CAPITAL ADEQUACY
DEMAND. At its option, Borrower may elect to terminate this Agreement following
its receipt of a Capital Adequacy Demand, PROVIDED Borrower gives Lender notice
of such election not more than thirty (30) days following its receipt of such
Capital Adequacy Demand, and PROVIDED, further, that so long as the effective
date of such termination and the payment and satisfaction in full of all
Obligations occurs within one hundred and eighty (180) days from the date of
such notice, Borrower shall not be obligated to pay any of the charges described
in subsection 4.2.3, it being understood, however, that until such effective
date of termination and the payment and satisfaction in full of all Obligations,
Borrower shall continue to be obligated to pay Lender for each Capital Adequacy
Amount theretofore requested by Lender pursuant to a Capital Adequacy Demand.
2.6.2 SUBSEQUENT CHANGE IN CAPITAL ADEQUACY RULES. In the
event that any Capital Adequacy Rule, the adoption or change in or compliance by
Lender with which shall have resulted in a Capital Adequacy Demand, shall be
revised subsequent to the date of such Capital Adequacy Demand, such that, in
Lender's determination, its rate of return on capital shall be improved to a
level more favorable than the rate of return which, as a result of the initial
change in such Capital Adequacy Rule, precipitated such Capital Adequacy Demand,
then, in
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such event, effective promptly following such determination, PROVIDED Borrower
shall not have theretofore given to Lender a notice of election to terminate in
accordance with subsection 2.6.1: (i) in the case of a Capital Adequacy Demand
to increase the Applicable Interest Rate Margin, Lender shall reduce the
Applicable Interest Rate Margin by a percentage; and (ii) in the case of a
Capital Adequacy Demand for payment of a fee or other charge, Lender shall
rebate to Borrower a portion of such payment, in each case which Lender shall
determine to be reasonably commensurate with the improvement in Lender's rate of
return on capital caused by the subsequent revision to the Capital Adequacy
Rule. Notwithstanding anything hereinabove to the contrary, Lender shall have
no obligation whatsoever to make any such adjustment to the Applicable Interest
Rate Margin, or to otherwise rebate any Capital Adequacy Amount to Borrower, at
any time on or after: (i) the occurrence and continuance of an Event of Default;
(ii) the date of Borrower's notice of election to terminate in accordance with
subsection 2.6.1; or (iii) the effective date of termination of this Agreement.
2.7 REIMBURSEMENT OF EXPENSES. If, at any time or times regardless
of whether or not an Event of Default then exists, Lender or any Participating
Lender incurs reasonable legal or reasonable accounting expenses or any other
reasonable costs or reasonable out-of-pocket expenses in connection with (i) the
negotiation and preparation of this Agreement or any of the other Loan
Documents, any amendment of or modification of this Agreement or any of the
other Loan Documents; (ii) the administration of this Agreement or any of the
other Loan Documents and the transactions contemplated hereby and thereby; (iii)
any litigation, contest, dispute, suit, proceeding or action (whether instituted
by Lender, Borrower or any other Person) in any way relating to the Collateral,
this Agreement or any of the other Loan Documents or Borrower's affairs; (iv)
any attempt to enforce any rights of Lender or any Participating Lender against
Borrower or any other Person which may be obligated to Lender by virtue of this
Agreement or any of the other Loan Documents, including, without limitation, the
Account Debtors; or (v) any attempt to inspect, verify, protect, preserve,
restore, collect, sell, liquidate or otherwise dispose of or realize upon the
Collateral; then all such reasonable legal and reasonable accounting expenses
and other reasonable costs and reasonable out of pocket expenses of Lender shall
be charged to Borrower. All amounts chargeable to Borrower under this Section
2.7 shall be Obligations secured by all of the Collateral, shall be payable on
demand to Lender or to such Participating Lender, as the case may be, and shall
bear interest from the date such demand is made until paid in full at the rate
applicable to Base Rate Loans from time to time. Borrower shall also reimburse
Lender for reasonable expenses incurred by the Lender in its administration of
the Collateral to the extent and in the manner provided in Section 6 hereof.
2.8 BANK CHARGES Borrower shall pay to Lender, on demand, any and
all fees, costs or expenses which Lender or any Participating Lender pays to a
bank or other similar institution (including, without limitation, any fees paid
by the Lender to any Participating Lender) arising out of or in connection with
(i) the forwarding to Borrower or any other Person on behalf of Borrower, by
Lender or any Participating Lender, proceeds of Loans and (ii) the depositing
for
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collection, by Lender or any Participating Lender, of any check or item of
payment received or delivered to Lender or any Participating Lender on account
of the Obligations.
2.9 COLLECTION CHARGES. If items of payment are received by Lender
at a time when there are no Loans outstanding, such items of payment shall be
subject to a collection charge equal to two (2) days' interest on the amount
thereof at the rate then applicable to Revolving Credit Base Rate Loans, which
collection charges shall be payable on the first Business Day of each month.
SECTION 3. LOAN ADMINISTRATION
3.1 MANNER OF BORROWING REVOLVING CREDIT LOANS. Borrowings under the
Credit Facility established pursuant to Section 1 hereof shall be as follows:
3.1.1 REVOLVING CREDIT LOAN REQUESTS. A request for a
Revolving Credit Loan shall be made, or shall be deemed to be made, in the
following manner: (i) Borrower shall give Lender same day notice, no later than
11:00 A.M. (Eastern time) of such day, of its intention to borrow a Revolving
Credit Base Rate Loan, and at least three (3) Business Days prior notice of its
intention to borrow a Revolving Credit LIBOR Rate Loan, in which notice Borrower
shall specify the amount of the proposed borrowing and the proposed borrowing
date; PROVIDED, however, that no such request may be made at a time when there
exists a Default or an Event of Default and (ii) the becoming due of any amount
required to be paid under this Agreement, whether as interest or for any other
Obligation, shall be deemed irrevocably to be a request for a Revolving Credit
Loan on the due date in the amount required to pay such interest or other
Obligation. As an accommodation to Borrower, Lender may permit telephone
requests for Revolving Credit Loans and electronic transmittal of instructions,
authorizations, agreements or reports to Lender by Borrower. Unless Borrower
specifically directs Lender in writing not to accept or act upon telephonic or
electronic communications from Borrower, Lender shall have no liability to
Borrower for any loss or damage suffered by Borrower as a result of Lender's
honoring any requests, executions of any instructions, authorizations or
agreements or reliance on any reports communicated to it telephonically or
electronically and purporting to have been sent to Lender by Borrower, and
Lender shall have no duty to verify the origin of any such communication or the
authority of the person sending it. Each notice of borrowing shall be
irrevocable by and binding on Borrower, and if such notice requests the
borrowing of a LIBOR Rate Loan, such notice shall state the Interest Period with
respect thereto. Borrower, at its option, may choose Base Rate Loans or LIBOR
Rate Loans, provided that any LIBOR Rate Loan shall be in a minimum amount of
$250,000, and PROVIDED, FURTHER, that the right of Borrower to choose any LIBOR
Rate Loan is subject to the provisions of subsection 3.1.4.
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3.1.2 DISBURSEMENT. Borrower hereby irrevocably authorizes
Lender to disburse the proceeds of each Revolving Credit Loan requested, or
deemed to be requested, pursuant to this subsection 3.1.2. as follows: (i) the
proceeds of each Revolving Credit Loan requested under subsection 3.1.1(i) shall
be disbursed by Lender via wire transfer, in the case of the initial borrowing,
in accordance with the terms of the written disbursement letter from Borrower,
and in the case of each subsequent borrowing, by wire transfer to such bank
account as may be agreed upon by Borrower and Lender from time to time or
elsewhere if pursuant to a written direction from Borrower; and (ii) the
proceeds of each Revolving Credit Loan requested under subsection 3.1.1(ii)
shall be disbursed by Lender by way of direct payment of the relevant interest
or other Obligation.
3.1.3 AUTHORIZATION. Borrower hereby irrevocably authorizes
Lender, in Lender's sole discretion, to advance to Borrower, and to charge to
Borrower's Loan Account hereunder as a Revolving Credit Loan, a sum sufficient
to pay all interest accrued on the Obligations during the immediately preceding
month and to pay all costs, fees and expenses at any time owed by Borrower to
Lender hereunder.
3.1.4 NOTICE OF CONTINUATION AND NOTICE OF CONVERSION.
(a) Subject to the provisions of subsection 3.1.4(c),
Borrower may elect to maintain any borrowing consisting of LIBOR Rate Loans, or
any portion thereof, as a LIBOR Rate Loan by selecting a new Interest Period for
such borrowing, which new Interest Period shall commence on the last day of the
then existing Interest Period. Each selection of a new Interest Period (a
"Continuation") shall be made on three (3) Business Days' prior notice, given by
Borrower to Lender not later than 11:00 A.M. (Eastern time) on the third (3rd)
Business Day preceding the date of any proposed Continuation. If the Borrower
elects to maintain more than one borrowing consisting of LIBOR Rate Loans by
combining such borrowings into one borrowing and selecting a new Interest Period
pursuant to this subsection, each of the borrowings so combined shall consist of
Loans having Interest Periods ending on the same date provided that Borrower may
not combine Revolving Credit LIBOR Rate Loans and Term LIBOR Loans with each
other. If the Borrower shall fail to select a new Interest Period for any
borrowing consisting of LIBOR Rate Loans in accordance with this subsection,
such LIBOR Rate Loans will automatically convert into corresponding Base Rate
Loans.
(b) Subject to the provisions of subsection 3.1.4 (c),
Borrower may, on three (3) Business Days' prior notice given to Lender, convert
the entire amount of or a portion of all Loans of the same Type into Loans of
another Type (a "Conversion"), PROVIDED, that no Default or Event of Default
shall have occurred and be continuing, and PROVIDED, further, that any
Conversion of any LIBOR Rate Loans into Base Rate Loans may only be made on the
last day of the Interest Period for such LIBOR Rate Loans, and upon Conversion
of any Base Rate Loans into LIBOR Rate Loans, Borrower shall pay accrued
interest to the date of Conversion on
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the principal amount converted on the first day of the following month. Each
such notice shall be given not later than 11:00 A.M. (Eastern time) on the third
(3rd) Business Day preceding the date of any proposed Conversion. Each
Conversion shall be in an aggregate amount of not less than $500,000. Borrower
may elect to convert the entire amount of or a portion of all Loans of the same
Type comprising more than one borrowing into Loans of another Type by combining
such borrowings into one borrowing consisting of Loans of such other Type;
PROVIDED, HOWEVER, that if the borrowings so combined consist of LIBOR Rate
Loans, such LIBOR Rate Loans shall have Interest Periods ending on the same date
and provided further that Borrower may not combine Revolving Credit Loans and
all or a portion of the Term Loans with each other.
(c) Notwithstanding anything contained in clauses (a) and (b)
above to the contrary:
(i) In the event that Borrower shall have requested a
LIBOR Rate Loan(s) in accordance with the terms hereof and Lender shall have
reasonably determined that Eurodollar deposits equal to the amount of the
principal of the requested LIBOR Rate Loan and for the Interest Period specified
are unavailable, impractical or unlawful, or that the rate based on the LIBOR
Rate will not adequately and fairly reflect the cost of funds of the LIBOR Rate
Loan applicable to the specified Interest Period, of making or maintaining the
principal amount of the requested LIBOR Rate Loan specified by Borrower during
the Interest Period specified, or that by reason of circumstances affecting
Eurodollar markets, adequate and reasonable means do not exist for ascertaining
the rate based on the LIBOR Rate applicable to the specified Interest Period,
Lender shall promptly give notice of such determination to Borrower that the
rate based on the LIBOR Rate is not available. A reasonable determination by
Lender hereunder shall be conclusive evidence of the correctness of the fact and
amount of such additional costs or unavailability, absent manifest error. Upon
such a determination, (A) the right of Borrower to select, continue or convert
to, or maintain a LIBOR Rate Loan at the rate based on the LIBOR Rate shall be
suspended until Lender shall have notified Borrower that such conditions shall
have ceased to exist, and (B) the requested LIBOR Rate Loans shall accrue
interest as if such Loans were Base Rate Loans.
(ii) The LIBOR Rate may be automatically adjusted by
Lender on a prospective basis to take into account the additional or increased
cost of maintaining any necessary reserves for Eurodollar deposits or increased
costs due to changes in applicable law or regulation or the interpretation
thereof by Lender based on the Federal Reserve Board's or any other applicable
agency's or governing body's directive, mandate or interpretation, occurring
subsequent to the commencement of the then applicable Interest Period, including
but not limited to changes in tax laws (except changes of general applicability
in corporate income tax laws) and changes in the reserve requirements imposed by
the Board of Governors of the Federal Reserve System (or any successor or other
applicable governing body), excluding the Reserve Percentage and any Reserve
which has resulted in a payment pursuant to Section 2.6 below, that increase the
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cost to Lender of funding the LIBOR Rate Loans. Lender shall promptly give
Borrower notice of such a determination and adjustment, which determination
shall be conclusive absent manifest error.
(iii) There shall not be outstanding at any one
time more than an aggregate of six (6) LIBOR Rate Loans.
(d) Each notice of Continuation or Conversion shall be
irrevocable and binding on Borrower. In the case of (i) any borrowing of a
Loan, Continuation or Conversion that the related notice of borrowing, notice of
Continuation or notice of Conversion specifies is to be comprised of LIBOR Rate
Loans, or (ii) any payment of principal of, or Conversion or Continuation of,
any LIBOR Rate Loan made other then on the last day of the Interest Period for
such Loan as a result of a payment, prepayment, Conversion or Continuation of
such Loan or acceleration of the maturity of any of the Obligations pursuant to
Section 10 hereof, or for any other reason, then in any such case, upon Lender's
demand, Borrower shall pay to Lender and indemnify Lender from and against (i)
any loss, cost or expense incurred by Lender as a result of any failure to
fulfill, on or before the date for such borrowing, Continuation or Conversion,
the applicable conditions set forth in Section 9 hereof, and (ii) any additional
losses, costs or expenses which Lender may reasonably incur as a result of such
payment, including, without limitation in each such case, any loss (excluding
loss of anticipated profits), cost or expense incurred by reason of the
liquidation or redeployment of deposits or other funds acquired by Lender to
fund the LIBOR Rate Loans to be made as part of such borrowing, Continuation or
Conversion.
3.1.5 BORROWING BASE CERTIFICATES. Borrower shall give Lender
a Borrowing Base Certificate on a monthly basis; provided that if Borrower's
Availability is, at any time, less than $250,000, Borrower shall give Lender a
Borrowing Base Certificate on such more frequent basis as Lender may request.
3.2 PAYMENTS. Except where evidenced by notes or other instruments
issued or made by Borrower to Lender specifically containing payment provisions
which are in conflict with this Section 3.2 (in which event the conflicting
provisions of said notes or other instruments shall govern and control), the
Obligations shall be payable as follows:
3.2.1 PRINCIPAL.
(a) Principal payable on account of Revolving Credit
Loans shall be payable by Borrower to Lender immediately upon the earliest of
(i) the receipt by Lender or Borrower of any proceeds of any of the Collateral
other than Equipment, to the extent of said proceeds, (ii) the occurrence of an
Event of Default in consequence of which Lender elects to accelerate the
maturity and payment of the Obligations, or (iii) termination of this Agreement
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pursuant to Section 4 hereof; PROVIDED, however, that if an Overadvance shall
exist at any time, Borrower shall, on demand, repay the Overadvance.
(b) Principal payable on account of the Term Loan
shall be payable by Borrower as set forth in Sections 1.2, Section 3.3.3 and the
corresponding Term Note.
3.2.2 INTEREST. Interest accrued on all Loans shall be due on
the earliest of (i) the first calendar day of each month (for the immediately
preceding month), computed through the last calendar day of the preceding month,
(ii) the occurrence of an Event of Default in consequence of which Lender elects
to accelerate the maturity and payment of the Obligations, or (iii) termination
of this Agreement pursuant to Section 4 hereof.
3.2.3 COSTS, FEES AND CHARGES. Costs, fees and charges payable
pursuant to this Agreement shall be payable by Borrower as and when provided in
Section 2 hereof, to Lender or to any other Person designated by Lender in
writing.
3.2.4 OTHER OBLIGATIONS. The balance of the Obligations
requiring the payment of money, if any, shall be payable by Borrower to Lender
as and when provided in this Agreement, the Other Agreements or the Security
Documents, or on demand, whichever is earlier.
3.3 PREPAYMENTS.
3.3.1 Except for dispositions of Inventory permitted by Section
8.2.7, if Borrower sells any of the Collateral or if any of the Collateral is
lost or destroyed or taken by condemnation, Borrower shall pay to Lender, unless
otherwise agreed to by Lender, or as otherwise expressly authorized by this
Agreement, as and when received by Borrower and as a mandatory prepayment of the
outstanding Loans, until paid and satisfied in full, a sum equal to the proceeds
(including insurance proceeds) received by Borrower from such sale, loss or
destruction. Any such prepayment shall be applied first to the Term Loan in the
inverse order of maturity and then to the Revolving Credit Loans; provided that
if such Loan is accruing interest at the LIBOR Based Rate, such prepayment shall
be delivered to Lender as and when received by Borrower but applied at the end
of the applicable Interest Period.
3.3.2 LIBOR RATE LOANS. No portion of the LIBOR Rate Loans may
be prepaid during an Interest Period unless Borrower first satisfies in full its
obligations under Section 3.1.4(d) above arising from such prepayment.
3.3.3 EXCESS CASH FLOW RECAPTURE. Borrower shall, on an annual
basis, within ten (10) Business Days of delivery to Lender of Borrower's annual
consolidated financial statement, pursuant to Section 8.1.2(i), prepay the Term
Loan in an amount equal to forty percent
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(40%) of Borrower's Excess Cash Flow ("Excess Cash Flow Payments"). All Excess
Cash Flow Payments shall be applied to the Term Loan as determined by Lender in
the inverse order of maturity.
3.4 APPLICATION OF PAYMENTS AND COLLECTIONS3.4 APPLICATION OF
PAYMENTS AND COLLECTIONS. All items of payment received by Lender by 12:00
noon, New York City time, on any Business Day shall be deemed received on that
Business Day. All items of payment received after 12:00 noon, New York City
time, on any Business Day shall be deemed received on the following Business
Day. For the purpose of computing interest hereunder, all items of payment
received by Lender shall be deemed applied by Lender on account of the
Obligations (subject to final payment of such items) on the first Business Day
after receipt (or deemed receipt) by Lender of good funds in Lender's account
located in Chicago, Illinois, or such other account as to which Lender may
advise Borrower in writing. Borrower irrevocably waives the right to direct the
application of any and all payments and collections at any time or times
hereafter received by Lender from or on behalf of Borrower, and Borrower does
hereby irrevocably agree that Lender shall have the continuing exclusive right
to apply and reapply any and all such payments and collections received at any
time or times hereafter by Lender or its agent against the Obligations, in such
manner as Lender may deem advisable, notwithstanding any entry by Borrower upon
any of its books and records. If as the result of collections of Accounts as
authorized by subsection 6.4.6 hereof a credit balance exists in the Loan
Account, such credit balance shall not accrue interest in favor of Borrower, but
shall be available to Borrower at any time or times for so long as no Default or
Event of Default exists.
3.5 ALL LOANS TO CONSTITUTE ONE OBLIGATION. The Loans shall
constitute one general Obligation of Borrower, and shall be secured by Lender's
Lien upon all of the Collateral.
3.6 LOAN ACCOUNT. Lender shall enter all Loans as debits to the Loan
Account and shall also record in the Loan Account all payments made by Borrower
on any Obligations and all proceeds of Collateral which are paid to Lender, and
may record therein, in accordance with customary accounting practice, other
debits and credits, including interest and all charges and expenses properly
chargeable to Borrower.
3.7 STATEMENTS OF ACCOUNT. Lender will account to Borrower monthly
with a statement of Loans, charges and payments made pursuant to this Agreement,
and such account rendered by Lender shall be deemed final, binding and
conclusive upon Borrower unless Lender is notified by Borrower in writing to the
contrary within thirty (30) days of the date such accounting is mailed to
Borrower. Such notice shall only be deemed an objection to those items
specifically objected to therein.
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SECTION 4. TERM AND TERMINATION
4.1 TERM OF AGREEMENT. Subject to Lender's right to cease making
Loans to Borrower upon or after the occurrence of any Default or Event of
Default, this Agreement shall be in effect for a period of five (5) years from
the date hereof, through and including October 21, 2003 (the "Original Term"),
and this Agreement shall automatically renew itself for one (1) year periods
thereafter (the "Renewal Terms"), unless (a) the party which elects not to renew
this Agreement gives at least one hundred and eighty (180) days written notice
thereof to the other party prior to the expiration of the Original Term (or the
then current Renewal Term, as the case may be) or (b) this Agreement shall be
sooner terminated as provided in Section 4.2 hereof.
4.2 TERMINATION.
4.2.1 TERMINATION BY LENDER. Lender may terminate this
Agreement without notice at any time on or after the occurrence of an Event of
Default.
4.2.2 TERMINATION BY BORROWER. Upon at least ninety (90) days
prior written notice to Lender, Borrower may, at its option, terminate this
Agreement; PROVIDED, however, no such termination shall be effective until
Borrower has paid all of the Obligations in immediately available funds. Any
notice of termination given by Borrower shall be irrevocable unless Lender
otherwise agrees in writing, and Lender shall have no obligation to make any
Loans on or after the termination date stated in such notice. Borrower may
elect to terminate this Agreement in its entirety only. No section of this
Agreement or Type of Loan available hereunder may be terminated singly.
4.2.3 TERMINATION CHARGES. At the effective date of any
termination of this Agreement by Borrower pursuant to subsection 4.2.2 hereof,
Borrower shall pay to Lender (in addition to the then outstanding principal,
accrued interest and other charges owing under the terms of this Agreement and
any of the other Loan Documents) as liquidated damages for the loss of the
bargain and not as a penalty, an amount equal to two percent (2%) of the Total
Credit Facility if termination occurs during the period from the Closing Date
through and including October 21, 1999, one percent (1%) of the Total Credit
Facility if termination occurs during the period from October 22, 1999 through
and including October 21, 2000, and one-half of one percent (1/2%) of the Total
Credit Facility if termination occurs during the period from October 22, 2000
through and including October 21, 2001. Notwithstanding anything hereinabove to
the contrary, no termination charge shall be payable under any of the following
circumstances: (a) if termination of this Agreement occurs pursuant to and in
accordance with the terms of subsection 2.6.1; or (b) if termination of this
Agreement occurs after October 22, 2001, but on or before the last day of the
Original Term or on the last day of any Renewal Term.
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4.2.4 EFFECT OF TERMINATION. All of the Obligations shall be
immediately due and payable upon the termination date stated in any notice of
termination of this Agreement. All undertakings, agreements, covenants,
warranties and representations of Borrower contained in the Loan Documents shall
survive any such termination, and Lender shall retain its Liens in the
Collateral and all of its rights and remedies under the Loan Documents
notwithstanding such termination until Borrower has paid the Obligations to
Lender, in full, in immediately available funds, together with the applicable
termination charge, if any. Notwithstanding the payment in full of the
Obligations, Lender shall not be required to terminate its security interests in
the Collateral unless, with respect to any loss or damage Lender may incur as a
result of dishonored checks or other items of payment received by Lender from
Borrower or any Account Debtor and applied to the Obligations, Lender shall, at
its option, (i) have received a written agreement executed by Borrower and by
any Person whose loans or other advances to Borrower are used in whole or in
part to satisfy the Obligations, indemnifying Lender from any such loss or
damage; or (ii) have retained such monetary reserves and Liens on the Collateral
for such period of time as Lender, in its reasonable discretion, may deem
necessary to protect Lender from any such loss or damage.
SECTION 5. SECURITY INTERESTS
5.1 SECURITY INTEREST IN COLLATERAL. To secure the prompt payment
and performance to Lender of the Obligations, Borrower hereby grants to Lender a
continuing Lien upon all of the following Property and interests in such
Property of Borrower, whether now owned or existing or hereafter created,
acquired or arising and wheresoever located:
(i) Accounts;
(ii) Inventory;
(iii) Equipment;
(iv) General Intangibles;
(v) Deposit Accounts, Investment Property, money market
accounts and security entitlements, of every nature wherever located;
(vi) All monies, checks, notes and instruments of any kind,
now or at any time or times hereafter, in the possession or under the control of
Lender or a bailee or Affiliate of Lender;
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(vii) All books and records (including, without limitation,
customer lists, credit files, computer programs, print-outs, and other computer
materials and records) of Borrower pertaining to any of (i) through (vi) above;
and
(viii) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (i) through (vii)
above, including, without limitation, proceeds of and unearned premiums with
respect to insurance policies insuring any of the Collateral;
5.2 LIEN PERFECTION; FURTHER ASSURANCES. Borrower shall execute such
UCC-1 financing statements as are required by the Code and such other
instruments, assignments or documents as are necessary to perfect Lender's Lien
upon any of the Collateral and shall take such other action as may be required
to perfect or to continue the perfection of Lender's Lien upon the Collateral.
Unless prohibited by applicable law, Borrower hereby authorizes Lender to
execute and file any such financing statement on Borrower's behalf. The parties
agree that a carbon, photographic or other reproduction of this Agreement shall
be sufficient as a financing statement and may be filed in any appropriate
office in lieu thereof. At Lender's request, Borrower shall also promptly
execute or cause to be executed and shall deliver to Lender any and all
documents, instruments and agreements deemed necessary by Lender to give effect
to or carry out the terms or intent of the Loan Documents, including without
limitation delivery of all vehicle titles and appropriate documentation
necessary to have Lender's first lien noted thereon.
5.3 KEY MAN LIFE INSURANCE. As additional security for the payment
and performance to Lender of all Obligations, Borrower shall cause to be
assigned to Lender, and maintained at all times, a Key Man Life Insurance policy
on the life of Gary Howard, in an amount equal to at least $2,000,000.
SECTION 6. COLLATERAL ADMINISTRATION
6.1 LOCATION OF COLLATERAL. All Collateral, other than Inventory in
transit, will at all times be kept by Borrower at one or more of the business
locations set forth in Exhibit 6.1 hereto and shall not, without the prior
written approval of Lender, be moved therefrom except, prior to an Event of
Default and Lender's acceleration of the Obligations in consequence thereof, for
sales of Inventory in the ordinary course of business.
6.2 INSURANCE OF COLLATERAL. Borrower shall maintain and pay for
insurance upon all Collateral wherever located and with respect to Borrower's
business, covering casualty, hazard, public liability, flood and such other
risks in such amounts and with such insurance companies as are reasonably
satisfactory to Lender. Borrower shall deliver the originals or copies of such
policies to Lender with lender's loss payable endorsements, in form satisfactory
to Lender, naming Lender as sole loss payee, assignee or additional insured, as
appropriate. Each policy of
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insurance or endorsement shall contain a clause requiring the insurer to give
not less than (30) days prior written notice to Lender in the event of
cancellation of the policy for any reason whatsoever and a clause specifying
that the interest of Lender shall not be impaired or invalidated by any act or
neglect of Borrower or the owner of the Property or by the occupation of the
premises for purposes more hazardous than are permitted by said policy. If
Borrower fails to provide and pay for such insurance, Lender may, at its option,
but shall not be required to, procure the same and charge the Borrower therefor.
Borrower agrees to deliver to Lender, promptly as rendered, true copies of all
reports made in any reporting forms to insurance companies.
6.3 PROTECTION OF COLLATERAL. All expenses of protecting, storing,
warehousing, insuring, handling, maintaining and shipping the Collateral, any
and all excise, property, sales, and use taxes imposed by any state, federal or
local authority on any of the Collateral or in respect of the sale thereof shall
be borne and paid by Borrower. If Borrower fails to promptly pay any portion
thereof when due, Lender may, at its option, but shall not be required to, pay
the same and charge Borrower therefor. Lender shall not be liable or
responsible in any way for the safekeeping of any of the Collateral or for any
loss or damage thereto (except for reasonable care in the custody thereof while
any Collateral is in Lender's actual possession) or for any diminution in the
value thereof, or for any act or default of any warehouseman, carrier,
forwarding agency or other person whomsoever, but the same shall be at
Borrower's sole risk.
6.4 ADMINISTRATION OF ACCOUNTS.
6.4.1 RECORDS, SCHEDULES AND ASSIGNMENTS OF ACCOUNTS. Borrower
shall keep accurate and complete records of its Accounts and all payments and
collections thereon and shall submit to Lender on such periodic basis as Lender
shall request a sales and collections report for the preceding period, in form
satisfactory to Lender. On or before the fifteenth day of each month from and
after the date hereof, Borrower shall deliver to Lender, in form acceptable to
Lender, a detailed aged trial balance of all Accounts existing as of the last
day of the preceding month, specifying the names, addresses, face value, dates
of invoices and due dates for each Account Debtor obligated on an Account so
listed ("Schedule of Accounts"), and, upon Lender's request therefor, copies of
proof of delivery and the original copy of all documents, including, without
limitation, repayment histories and present status reports relating to the
Accounts so scheduled and such other matters and information relating to the
status of then existing Accounts as Lender shall reasonably request. In
addition, if at any time following the Closing Date, Accounts in an aggregate
face amount in excess of Two Hundred Fifty Thousand Dollars ($250,000) become
ineligible because they fall within one of the specified categories of
ineligibility set forth in the definition of Eligible Accounts or otherwise
established by Lender, Borrower shall notify Lender of such occurrence on the
first Business Day following such occurrence and the Borrowing Base shall
thereupon be adjusted to reflect such occurrence. If requested by Lender,
Borrower shall execute and deliver to Lender formal written assignments of
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all of its Accounts weekly or daily, which shall include all Accounts that have
been created since the date of the last assignment, together with copies of
invoices or invoice registers related thereto.
6.4.2 DISCOUNTS, ALLOWANCES, DISPUTES. If Borrower grants any
discounts, allowances or credits that are not shown on the face of the invoice
for the Account involved, Borrower shall report such discounts, allowances or
credits, as the case may be, to Lender as part of the next required Schedule of
Accounts. If any amounts due and owing in excess of Fifty Thousand Dollars
($50,000) are in dispute between Borrower and any Account Debtor, Borrower shall
provide Lender with written notice thereof at the time of submission of the next
Schedule of Accounts, explaining in detail the reason for the dispute, all
claims related thereto and the amount in controversy. Upon and after the
occurrence of an Event of Default which continues without cure for a period of
fifteen (15) days, Lender shall have the right to settle or adjust all disputes
and claims directly with the Account Debtor and to compromise the amount or
extend the time for payment of the Accounts upon such terms and conditions as
Lender may deem advisable, and to charge the deficiencies, costs and expenses
thereof, including attorneys' fees, to Borrower.
6.4.3 TAXES. If an Account includes a charge for any tax
payable to any governmental taxing authority, Lender is authorized, in its sole
discretion, to pay the amount thereof to the proper taxing Authority for the
account of Borrower and to charge Borrower therefor; PROVIDED, however, that
Lender shall not be liable for any taxes to any governmental taxing authority
that may be due by Borrower.
6.4.4 ACCOUNT VERIFICATION. Whether or not a Default or an
Event of Default has occurred, any of Lender's officers, employees or agents
shall have the right, at any time or times hereafter, in the name of Lender, any
designee of Lender or Borrower, to verify the validity, amount or any other
matter relating to any Accounts by mail, telephone, telegraph or otherwise.
Borrower shall cooperate fully with Lender in an effort to facilitate and
promptly conclude any such verification process.
6.4.5 MAINTENANCE OF DOMINION ACCOUNT. Borrower shall maintain
a Dominion Account pursuant to a tripartite arrangement among Borrower, Lender
and a bank or banks as may be selected by Borrower and acceptable to Lender.
Such arrangement shall include such terms and conditions as are acceptable to
Lender. All funds deposited in the Dominion Account shall immediately become
the property of Lender, and Borrower shall obtain the agreement by such banks in
favor of Lender to waive any offset rights against the funds so deposited.
Lender assumes no responsibility for such arrangement, including, without
limitation, any claim of accord and satisfaction or release with respect to
deposits accepted by any bank thereunder.
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6.4.6 COLLECTION OF ACCOUNTS; PROCEEDS OF COLLATERAL. To
expedite collection, Borrower shall endeavor in the first instance to make
collection of its Accounts for Lender. All remittances received by Borrower on
account of Accounts, together with the proceeds of any other Collateral, shall
be held as Lender's property by Borrower as trustee of an express trust for
Lender's benefit, and Borrower shall immediately deposit same in kind in the
Dominion Account, except as otherwise permitted in this Agreement. Lender
retains the right at all times after the occurrence of a Default or an Event of
Default to notify Account Debtors that Accounts have been assigned to Lender and
to collect Accounts directly in its own name and to charge the collection costs
and expenses, including reasonable attorneys' fees to Borrower. Lender has no
duty to protect, insure, collect or realize upon the Accounts or preserve rights
therein.
6.5 ADMINISTRATION OF INVENTORY.
6.5.1 RECORDS AND REPORTS OF INVENTORY. Borrower shall keep
accurate and complete records of its Inventory. Borrower shall furnish to
Lender Inventory reports in form and detail satisfactory to Lender at such times
as Lender may request, but at least once each month, not later than the
twentieth day of such month. Borrower shall conduct a physical inventory no
less frequently than annually and shall provide to Lender a report based on each
such physical inventory promptly thereafter, together with such supporting
information as Lender shall request.
6.5.2 RETURNS OF INVENTORY. If at any time or times hereafter
any Account Debtor returns any Inventory to Borrower, the shipment of which
generated an Account on which such Account Debtor is obligated in excess of
Twenty Five Thousand Dollars ($25,000), Borrower shall immediately notify Lender
of the same, specifying the reason for such return and the location, condition
and intended disposition of the returned Inventory.
6.6 RECORDS AND SCHEDULES OF EQUIPMENT. Borrower shall keep accurate
records, itemizing and describing the kind, type, quality, quantity and value of
its Equipment, and shall furnish Lender with a current schedule containing the
foregoing information on at least an annual basis and more often if requested by
Lender. Immediately on request therefor by Lender, Borrower shall deliver to
Lender any and all evidence of ownership, if any, of any of the Equipment.
6.7 PAYMENT OF CHARGES. All amounts chargeable to Borrower under
Section 6 hereof shall be Obligations secured by all of the Collateral, shall be
payable on demand and shall bear interest from the date such advance was made
until paid in full at the rate applicable to Base Rate Loans from time to time.
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SECTION 7. REPRESENTATIONS AND WARRANTIES
7.1 GENERAL REPRESENTATIONS AND WARRANTIES. To induce Lender to
enter into this Agreement and to make advances hereunder, Borrower warrants,
represents and covenants to Lender that:
7.1.1 ORGANIZATION AND QUALIFICATION. Each of Borrower and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Each of
Borrower and its Subsidiaries is duly qualified and is authorized to do business
and is in good standing as a foreign corporation in each state or jurisdiction
listed on Exhibit 7.1.1 hereto and in all other states and jurisdictions where
the character of its business or the nature of its activities make such
qualification necessary.
7.1.2 CORPORATE POWER AND AUTHORITY. Each of Borrower and its
Subsidiaries is duly authorized and empowered to enter into, execute, deliver
and perform this Agreement and each of the other Loan Documents to which it is a
party. The execution, delivery and performance of this Agreement and each of
the other Loan Documents have been duly authorized by all necessary corporate
action and do not and will not (i) require any consent or approval of the
shareholders of Borrower or any of its Subsidiaries; (ii) contravene Borrower's
or any of its Subsidiaries' charter, articles or certificate of incorporation or
bylaws; (iii) violate, or cause Borrower or any of its Subsidiaries to be in
default under, any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award in effect having
applicability to Borrower or any of its Subsidiaries; (iv) result in a breach of
or constitute a default under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which Borrower or any of its
Subsidiaries is a party or by which it or its Properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any Lien
(other than Permitted Liens) upon or with respect to any of the Properties now
owned or hereafter acquired by Borrower or any of its Subsidiaries.
7.1.3 LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and
each of the other Loan Documents when delivered under this Agreement will be, a
legal, valid and binding obligation of each of Borrower and its Subsidiaries
enforceable against it in accordance with its respective terms.
7.1.4 CAPITAL STRUCTURE. Exhibit 7.1.4 hereto states (i) the
correct name of each of the Subsidiaries of Borrower, its jurisdiction of
incorporation and the percentage of its Voting Stock owned by Borrower, (ii) the
name of each of Borrower's corporate or joint venture Affiliates and the nature
of the affiliation, (iii) the number, nature and holder of all outstanding
Securities of Borrower and each Subsidiary of Borrower and (iv) the number of
authorized, issued and treasury shares of Borrower and each Subsidiary of
Borrower. Borrower has good title to all of the shares it purports to own of
the stock of each of its Subsidiaries, free and clear in
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each case of any Lien other than Permitted Liens. All such shares have been
duly issued and are fully paid and non-assessable. There are no outstanding
options to purchase, or any rights or warrants to subscribe for, or any
commitments or agreements to issue or sell, or any Securities or obligations
convertible into, or any powers of attorney relating to, shares of the capital
stock of Borrower or any of its Subsidiaries. There are no outstanding
agreements or instruments binding upon any of Borrower's shareholders relating
to the ownership of its shares of capital stock.
7.1.5 CORPORATE NAMES. Neither Borrower nor any of its
Subsidiaries has been known as or used any corporate, fictitious or trade names
except those listed on EXHIBIT 7.1.5 hereto. Except as set forth on EXHIBIT
7.1.5, neither Borrower nor any of its Subsidiaries has been the surviving
corporation of a merger or consolidation or acquired all or substantially all of
the assets of any Person.
7.1.6 BUSINESS LOCATIONS, AGENT FOR PROCESS. Each of
Borrower's and its Subsidiaries' executive offices and other places of business
are as listed on EXHIBIT 6.1 hereto. During the preceding one (1) year period,
neither Borrower, Masonry Supply, Inc. nor any of their Subsidiaries has had an
office, place of business or agent for service of process other than as listed
on EXHIBIT 6.1. Except as shown on EXHIBIT 6.1, no Inventory is stored with a
bailee, warehouseman or similar party, nor is any Inventory consigned to any
Person.
7.1.7 TITLE TO PROPERTIES, PRIORITY OF LIENS. Each of Borrower
and its Subsidiaries has good, indefeasible and marketable title to and fee
simple ownership of, or valid and subsisting leasehold interests in, all of its
real Property, and good title to all of the Collateral and all of its other
Property, in each case, free and clear of all Liens except Permitted Liens.
Borrower has paid or discharged all lawful claims which, if unpaid, might become
a Lien against any of Borrower's Properties that is not a Permitted Lien.
Except with respect to those Permitted Liens described in Section 8.2.5(iv), and
in Section 8.2.5(vi) and (vii) which specifically and expressly provide
otherwise, the Liens granted to Lender under Section 5 hereof are first priority
perfected Liens.
7.1.8 ACCOUNTS. Lender may rely, in determining which Accounts
are Eligible Accounts, on all statements and representations made by Borrower
with respect to any Account or Accounts. Unless otherwise indicated in writing
to Lender, with respect to each Account:
(i) It is genuine and in all respects what it purports
to be, and it is not evidenced by a judgment;
(ii) It arises out of a completed, bona fide sale and
delivery of goods or rendition of services by Borrower in the ordinary course of
its business and in accordance with the terms and conditions of all purchase
orders, contracts or other documents relating thereto and forming a part of the
contract between Borrower and the Account Debtor;
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(iii) It is for a liquidated amount maturing as stated
in the duplicate invoice covering such sale or rendition of services, a copy of
which has been furnished or is available to Lender;
(iv) Such Account, and Lender's security interest
therein, is not, and will not (by voluntary act or omission of the Borrower) be
in the future, subject to any offset, Lien, deduction, defense, dispute,
counterclaim or any other adverse condition known to Borrower (or with respect
to which Borrower should reasonably have had such knowledge), except for a
dispute resulting in returned goods where such dispute is deemed by Lender to be
immaterial, and each such Account is absolutely owing to Borrower and is not
contingent in any respect or for any reason;
(v) Borrower has made no agreement with any Account
Debtor thereunder for any extension, compromise, settlement or modification of
any such Account or any deduction therefrom, except discounts or allowances
which are granted by Borrower in the ordinary course of its business for prompt
payment and which are reflected in the calculation of the net amount of each
respective invoice related thereto and are reflected in the Schedules of
Accounts submitted to Lender pursuant to Section 6.4 hereof;
(vi) There are no facts, events or occurrences which in
any way impair the validity or enforceability of any Accounts or tend to reduce
the amount payable thereunder from the face amount of the invoice and statements
delivered to Lender with respect thereto;
(vii) To the best of Borrower's knowledge, the Account
Debtor thereunder (i) had the capacity to contract at the time any contract or
other document giving rise to the Account was executed and (ii) such Account
Debtor is Solvent; and
(viii) To the best of Borrower's knowledge, there are no
proceedings or actions which are threatened or pending against any Account
Debtor thereunder which might result in any material adverse change in such
Account Debtor's financial condition or the collectibility of such Account.
7.1.9 EQUIPMENT. The Equipment is in good operating condition
and repair, and all necessary replacements of and repairs thereto shall be made
so that the value and operating efficiency of the Equipment shall be maintained
and preserved, reasonable wear and tear excepted.
7.1.10 FINANCIAL STATEMENTS, FISCAL YEAR. Borrower has caused to be
furnished to Lender year end audited financial statements for Masonry Supply,
Inc. as of June 30, 1996, June 30, 1997 and June 30, 1998, along with true and
complete copies of the management letter(s) delivered in conjunction therewith.
Borrower shall deliver to Lender the Effective Date Balance
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Sheet (as defined in the Asset Purchase Agreement), on the Closing Date. The
fiscal year of Borrower and each of its Subsidiaries ends on June 30 of each
year.
7.1.11 FULL DISCLOSURE. The financial statements referred to in
subsection 7.1.10 hereof do not (to the best of Borrower's knowledge), nor does
this Agreement or any other written statement of Borrower to Lender, contain any
untrue statement of a material fact or omit a material fact necessary to make
the statements contained therein or herein not misleading. There is no fact
which Borrower has failed to disclose to Lender in writing which materially
affects adversely or, so far as Borrower can now foresee, will materially affect
adversely the Property, business, prospects, profits or condition (financial or
otherwise) of Borrower or any of its Subsidiaries or the ability of Borrower or
its Subsidiaries to perform this Agreement or the other Loan Documents.
7.1.12 SOLVENT FINANCIAL CONDITION. Each of Borrower and its
Subsidiaries is now, and, after giving effect to the Loans to be made, at all
times will be, Solvent.
7.1.13 SURETY OBLIGATIONS. Neither Borrower nor any of its
Subsidiaries is obligated as surety or indemnitor under any surety or similar
bond or other contract nor has Borrower or any of its Subsidiaries issued or
entered into any agreement to assure payment, performance or completion of
performance of any undertaking or obligation of any other Person.
7.1.14 TAXES. Borrower's federal tax identification number is
58-2420412. The federal tax identification number of each of Borrower's
Subsidiaries is shown on Exhibit 7.1.14 hereto. Borrower and each of its
Subsidiaries has filed all federal, state and local tax returns and other
reports it is required by law to file and has paid, or made provision for the
payment of, all taxes, assessments, fees, levies and other governmental charges
upon it, its income and property as and when such taxes, assessments, fees,
levies and charges are due and payable, unless and to the extent any thereof are
being actively contested in good faith and by appropriate proceedings, and
Borrower maintains reasonable reserves on its books therefor. The provision for
taxes on the books of Borrower and its Subsidiaries is adequate for all years
not closed by applicable statutes, and for its current fiscal year.
7.1.15 BROKERS. There are no claims for brokerage commissions,
finder's fees or investment banking fees in connection with the transactions
contemplated by this Agreement.
7.1.16 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Each of
Borrower and its Subsidiaries owns or possesses all the patents, trademarks,
service marks, trade names, copyrights and licenses necessary for the present
and planned future conduct of its business without any known conflict with the
rights of others. All such patents, trademarks, service marks, tradenames,
copyrights, licenses and other similar rights are listed on Exhibit 7.1.16
hereto.
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7.1.17 GOVERNMENTAL CONSENTS. Each of Borrower and its
Subsidiaries has, and is in good standing with respect to, all governmental
consents, approvals, licenses, authorizations, permits, certificates,
inspections and franchises necessary to continue to conduct its business as
heretofore or proposed to be conducted by it and to own or lease and operate its
Property as now owned or leased and operated by it.
7.1.18 COMPLIANCE WITH LAWS. Each of Borrower and its
Subsidiaries has duly complied with, and its Property, business operations and
leaseholds are in compliance in all material respects with, the provisions of
all federal, state and local laws, rules and regulations applicable to Borrower
or such Subsidiary, as applicable, its Property or the conduct of its business,
and there have been no citations, notices or orders of noncompliance issued to
Borrower or any of its Subsidiaries under any such law, rule or regulation.
Each of Borrower and its Subsidiaries has established and maintains an adequate
monitoring system to insure that it remains in compliance with all federal,
state and local laws, rules and regulations applicable to it. No Inventory has
been produced in violation of the Fair Labor Standards Act (29 U.S.C. Section
201 ET SEQ.), as amended.
7.1.19 RESTRICTIONS. Neither Borrower nor any of its
Subsidiaries is a party or subject to any contract, agreement or charter or
other corporate restriction which materially and adversely affects its business
or the use or ownership of any of its Property. Neither Borrower nor any of its
Subsidiaries is a party or subject to any contract or agreement which restricts
its right or ability to incur Indebtedness, other than as set forth on Exhibit
7.1.19 hereto, none of which prohibit the execution of or compliance with this
Agreement or the other Loan Documents by Borrower or any of its Subsidiaries, as
applicable.
7.1.20 LITIGATION. Except as set forth on Exhibit 7.1.20
hereto, there are no actions, suits, proceedings or investigations pending, or,
to the knowledge of Borrower, threatened, against or affecting Borrower or any
of its Subsidiaries, or the business, operations, Property, prospects, profits
or condition of Borrower or any of its Subsidiaries. Neither Borrower nor any
of its Subsidiaries is in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or arbitration
board or tribunal.
7.1.21 NO DEFAULTS. No event has occurred and no condition
exists which would, upon or after the execution and delivery of this Agreement
or Borrower's performance hereunder, constitute a Default or an Event of
Default. Neither Borrower nor any of its Subsidiaries is in default, and no
event has occurred and no condition exists which constitutes, or which with the
passage of time or the giving of notice or both would constitute, a default in
the payment of any Indebtedness to any Person for Money Borrowed.
7.1.22 LEASES. Exhibit 7.1.22(a) hereto is a complete listing
of all capitalized leases of Borrower and its Subsidiaries, and Exhibit
7.1.22(b) hereto is a complete listing of all
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operating leases of Borrower and its Subsidiaries. Each of Borrower and its
Subsidiaries is in full compliance with all of the terms of each of its
respective capitalized and operating leases.
7.1.23 PENSION PLANS. Except as disclosed on Exhibit 7.1.23
hereto, neither Borrower nor any of its Subsidiaries has any Plan. Borrower and
each of its Subsidiaries is in full compliance with the requirements of ERISA
and the regulations promulgated thereunder with respect to each Plan. No fact
or situation that could result in a material adverse change in the financial
condition of Borrower or any of its Subsidiaries exists in connection with any
Plan. Neither Borrower nor any of its Subsidiaries has any withdrawal liability
in connection with a Multiemployer Plan.
7.1.24 TRADE RELATIONS. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower or any of its Subsidiaries and any
customer or any group of customers whose purchases individually or in the
aggregate are material to the business of Borrower or any of its Subsidiaries,
or with any material supplier, and there exists no present condition or state of
facts or circumstances which would materially affect adversely Borrower or any
of its Subsidiaries or prevent Borrower or any of its Subsidiaries from
conducting such business after the consummation of the transaction contemplated
by this Agreement in substantially the same manner in which it has heretofore
been conducted.
7.1.25 LABOR RELATIONS. Except as described on Exhibit 7.1.25
hereto, neither Borrower nor any of its Subsidiaries is a party to any
collective bargaining agreement. There are no material grievances, disputes or
controversies with any union or any other organization of Borrower's or any of
its Subsidiaries' employees, or threats of strikes, work stoppages or any
asserted pending demands for collective bargaining by any union or organization.
7.1.26 ENVIRONMENTAL MATTERS: Except as disclosed on Exhibit
"7.1.26" attached hereto and made a part hereof, Borrower has no knowledge:
(a) of the presence of any Hazardous Substances on any
of the real property where Borrower conducts operations or has its personal
property; or
(b) of any on-site spills, releases, discharges,
disposal(s) or storage of Hazardous Substances that have occurred or are
presently occurring on any of such real property or where any Collateral is
located; or
(c) of any spills, releases, discharges or disposal(s)
of Hazardous Substances that have occurred or are presently occurring on any
other real property as a result of the conduct, action or activities of
Borrower.
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As used herein, the term "Hazardous Substances" means any substances defined or
designated as hazardous or toxic waste, hazardous or toxic material, hazardous
or toxic substance or similar term, by any environmental statute, rule or
regulation of any governmental entity presently in effect and applicable to such
real property.
7.2 CONTINUOUS NATURE OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty contained in this Agreement and in the other Loan
Documents shall be continuous in nature and shall remain accurate, complete and
not misleading at all times during the term of this Agreement, except for
changes in the nature of Borrower's or its Subsidiaries' business or operations
that would render the information in any exhibit attached hereto either
inaccurate, incomplete or misleading, so long as Lender has consented to such
changes or such changes are expressly permitted by this Agreement.
7.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of Borrower contained in this Agreement or any of the other Loan
Documents shall survive the execution, delivery and acceptance thereof by Lender
and the parties thereto and the closing of the transactions described therein or
related thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
8.1 AFFIRMATIVE COVENANTS. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
8.1.1 VISITS AND INSPECTIONS. Permit representatives of
Lender, from time to time, as often as may be reasonably requested, but only
during normal business hours, to visit and inspect the Property of Borrower and
each of its Subsidiaries, inspect, audit and make extracts from its books and
records, and discuss with its officers, its employees and its independent
accountants, Borrower's and each of its Subsidiaries' business, assets,
liabilities, financial condition, business prospects and results of operations.
8.1.2 FINANCIAL STATEMENTS. Keep, and cause each Subsidiary to
keep, adequate records and books of account with respect to its business
activities in which proper entries are made in accordance with sound financial
and business practices, in a manner consistent with the information previously
provided to Lender, reflecting all its financial transactions, and cause to be
prepared and furnished to Lender the following:
(i) not later than one hundred and twenty (120) days
after the close of each fiscal year of Borrower, unqualified audited financial
statements of Borrower and its Subsidiaries as of the end of such year, on a
Consolidated and consolidating basis, certified by a
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firm of independent certified public accountants of recognized standing selected
by Borrower but acceptable to Lender (except for a qualification with respect to
(A) the reasonableness of fees, charges or credits between or among Borrower,
Parent or any Affiliates or (B) changes in accounting principles with which the
accountants concur);
(ii) not later than forty-five (45) days after the end
of each fiscal month hereafter (other than the first and last fiscal month of
each fiscal year, as to which Borrower shall have no obligation to deliver to
Lender financial statements as at and for the end of such fiscal months),
unaudited interim financial statements of Borrower and its Subsidiaries as of
the end of such month and of the portion of Borrower's fiscal year then elapsed,
on a Consolidated and consolidating basis, certified by the chief financial
officer of Borrower as fairly presenting the Consolidated financial position and
results of operations of Borrower and its Subsidiaries for such month and period
subject only to changes from audit and year-end adjustments and except that such
statements need not contain notes;
(iii) promptly after the sending or filing thereof, as
the case may be, copies of any proxy statements, financial statements or reports
which Borrower has made available to its Public shareholders and copies of any
regular, periodic and special reports or registration statements which Borrower
files with the Securities and Exchange Commission or any governmental authority
which may be substituted therefor, or any national securities exchange;
(iv) promptly after the filing thereof, copies of any
annual report to be filed with ERISA in connection with each Plan; and
(v) such other data and information (financial and
otherwise) as Lender, from time to time, may reasonably request, bearing upon or
related to the Collateral or Borrower's and each of its Subsidiaries' financial
condition or results of operations.
Concurrently with the delivery of the financial statements described in
clause (i) of this subsection 8.1.2, Borrower shall forward to Lender a copy of
the accountants' letter, if any, to Borrower's management that is prepared in
connection with such financial statements and also shall cause to be prepared
and shall furnish to Lender a certificate of the aforesaid certified public
accountants certifying to Lender that, based upon their examination of the
financial statements of Borrower and its Subsidiaries performed in connection
with their examination of said financial statements, they are not aware of any
Default or Event of Default, or, if they are aware of such Default or Event of
Default, specifying the nature thereof, and acknowledging, in a manner
satisfactory to Lender, that they are aware that Lender is relying on such
financial statements in making its decisions with respect to the Loans.
Concurrently with the delivery of the financial statements described in clauses
(i) and (ii) of this subsection 8.1.2, or more frequently if
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requested by Lender, Borrower shall cause to be prepared and furnished to Lender
a compliance certificate in the form of Exhibit 8.1.2 hereto executed by the
chief financial officer of Borrower.
8.1.3 LANDLORD AND STORAGE AGREEMENTS. Provide Lender with copies of
all agreements between Borrower or any of its Subsidiaries and any landlord or
warehouseman which owns any premises at which any Inventory may, from time to
time, be kept.
8.1.4 SUBORDINATIONS. Provide Lender with a debt subordination
agreement or other instrument, in form and substance satisfactory to Lender,
executed by Borrower and in the case of such agreement executed by any Person
who is an officer, director or Affiliate of the Person to whom Borrower is or
hereafter becomes indebted for Subordinated Debt, subordinating in right of
payment and claim all of such Subordinated Debt, and any future advances thereon
to the full and final payment and performance of the Obligations (unless
otherwise provided in such agreement).
8.1.5 GUARANTOR FINANCIAL STATEMENTS. Deliver or cause to be delivered
to Lender financial statements for each Guarantor in form and substance
satisfactory to Lender at such intervals and covering such time periods as
Lender may request. Without limiting the generality of the foregoing, Borrower
shall deliver to Lender, or cause the Parent to deliver to Lender:
(i) no later than one hundred and twenty (120) days after the
close of each fiscal year of the Parent, unqualified audited financial statement
of the Parent and its Subsidiaries as of the end of such year, on a Consolidated
and consolidating basis; and
(ii) not later than forty-five (45) days after the end of each
fiscal quarter hereafter, unaudited interim financial statements of the Parent
and its Subsidiaries as of the end of such quarter and of the portion of the
Parent's fiscal year then elapsed, on a Consolidated and consolidating basis,
certified by the chief financial officer of the Parent as fairly presenting the
Consolidated financial position and results of operations of the Parent and its
Subsidiaries for such quarter and period subject only to changes from audit and
year-end adjustments and except that such statements need not contain notes;
8.1.6 PROJECTIONS. No later than ten (10) days prior to the end of
each fiscal year of Borrower, deliver to Lender Projections of the financial
conditions and results of operation of Borrower for the next succeeding fiscal
year, such Projections to be prepared on a month-to-month basis.
8.1.7 NOTICES. Promptly notify Lender in writing of the occurrence of
any event or the existence of any fact which renders any representation or
warranty in this Agreement or in any of the other Loan Documents inaccurate,
incomplete or misleading.
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8.1.8 YEAR 2000 COMPLIANCE. Take all action necessary to
assure that at all times the computer-based systems utilized by Borrower and
each of its Subsidiaries are able to effectively interpret, process and
manipulate data, including dates before, on and after December 31, 1999.
Borrower shall provide to Lender, within 180 days of the Closing Date, assurance
reasonably satisfactory to Lender that the computer-based systems utilized at
such time can perform without error functions involving dates before, on and
after December 31, 1999.
8.2 NEGATIVE COVENANTS. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless Lender has first consented thereto in writing, it will
not:
8.2.1 MERGERS, CONSOLIDATIONS, ACQUISITIONS. Merge or
consolidate, or permit any Subsidiary of Borrower to merge or consolidate, with
any Person; nor acquire, nor permit any of its Subsidiaries to acquire, all or
any substantial part of the Property of any Person, without Lender's prior
written consent.
8.2.2 LOANS. Make, or permit any Subsidiary of Borrower to
make, any loans or other advances of money (other than for salary, travel
advances, advances against commissions and other similar advances in the
ordinary course of business) to (i) Persons other than Parent or an Affiliate,
in excess of Twenty Five Thousand Dollars ($25,000), in the aggregate
outstanding at any one time during any fiscal year of the Borrower, and (ii)
Parent and/or any Affiliate in excess of One Hundred Fifty Thousand Dollars
($150,000), in the aggregate outstanding at any one time during any fiscal year
of the Borrower.
8.2.3 TOTAL INDEBTEDNESS. Create, incur, assume, or suffer to
exist, or permit any Subsidiary of Borrower to create, incur or suffer to exist,
any Indebtedness, except:
(i) Obligations owing to Lender;
(ii) Indebtedness of any Subsidiary of Borrower to
Borrower;
(iii) accounts payable to trade creditors and
obligations and accruals for current operating expenses (other than for Money
Borrowed) which are not aged more than one hundred twenty (120) days from
billing date or more than thirty (30) days from due date, in each case incurred
in the ordinary course of business and paid within such time period, unless the
same are being actively contested in good faith and by appropriate and lawful
proceedings; and Borrower or such Subsidiary shall have set aside such reserves,
if any, with respect thereto as are required by GAAP and deemed adequate by
Borrower or such Subsidiary and its independent accountants;
(iv) Obligations to pay Rentals permitted by subsection
8.2.9;
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(v) Permitted Purchase Money Indebtedness;
(vi) contingent liabilities arising out of (A)
guarantees permitted under subsection 8.2.6 or as otherwise permitted in this
Agreement, (B) endorsements of checks and other negotiable instruments for
deposit or collection in the ordinary course of business and (C) payments under
lease agreements, employment agreements and other agreements entered into in the
ordinary course of business upon fair and reasonable terms;
(vii) Indebtedness owing by Borrower or any Subsidiary
of Borrower to the Parent or to any other Affiliate in respect of intercompany
advances or charges, PROVIDED such advances or charges are made and incurred in
the ordinary course of business pursuant to and consistent with prior practices
of the Parent or any Affiliate of the Parent and so long as the interest rate
corresponding to any such indebtedness does not exceed 8% per annum;
(viii) Indebtedness which is secured by real Property;
(ix) Subordinated Debt;
(x) Indebtedness and other obligations of Borrower
under the Asset Purchase Agreement; and
(xi) Indebtedness not included in paragraphs (i)
through (x) above, or not otherwise specifically permitted under this Agreement,
which does not exceed at any time, in the aggregate, the sum of Three Hundred
Thousand Dollars ($300,000).
8.2.4 AFFILIATE TRANSACTIONS. Enter into, or be a party to, or
permit any Subsidiary of Borrower to enter into or be a party to, any
transaction with any Affiliate of Borrower, except: (i) in the ordinary course
of Borrower's or such Subsidiary's business and on terms no less favorable to
Borrower or such Subsidiary than Borrower or such Subsidiary could obtain in a
comparable arm's length transaction with a Person not an Affiliate of Borrower
or such Subsidiary; (ii) as otherwise specifically permitted in this Agreement,
in the other Loan Documents or in any waiver of the terms of this covenant
agreed to in writing by Lender (which waiver will not be unreasonably withheld
or delayed) and (iii) for charges, credits, advances, distributions, allocations
and/or accruals of intercompany management fees up to Two Hundred Thousand
Dollars ($200,000) during the period commencing as of the Closing Date through
June 30, 1999 and up to Four Hundred Thousand Dollars ($400,000) per each fiscal
year during the term of the Agreement thereafter, rent, interest and other
intercompany transactions by and between Borrower or any Subsidiary of Borrower,
on the one hand, and an Affiliate of or Parent of Borrower, on the other hand,
in fact or in substance not inconsistent with past practices of Parent and its
Affiliates.
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8.2.5 LIMITATION ON LIENS. Create or suffer to exist, or
permit any Subsidiary of Borrower to create or suffer to exist, any Lien upon
any of its Property (exclusive of real Property) income or profits, whether now
owned or hereafter acquired, except:
(i) Liens at any time granted in favor of Lender;
(ii) Liens for taxes (excluding any Lien imposed
pursuant to any of the Provisions of ERISA) not yet due, or being contested in
the manner described in subsection 7.1.14 hereto, but only if in Lender's
judgment such Lien does not adversely affect Lender's rights or the priority of
Lender's Lien in the Collateral;
(iii) Liens arising in the ordinary course of Borrower's
business by operation of law or regulation, but only if payment in respect of
any such Lien is not at the time required and such Liens do not, in the
aggregate, materially detract from the value of the Property (exclusive of real
Property) of Borrower or materially impair the use thereof in the operation of
Borrower's business;
(iv) Purchase Money Liens securing Permitted Purchase
Money Indebtedness;
(v) Liens securing Indebtedness permitted under
Section 8.2.3(viii);
(vi) such other Liens as appear on Exhibit 8.2.5
hereto; and
(vii) such other Liens as Lender may hereafter approve
in writing.
8.2.6 GUARANTEES. Guaranty, indemnify, or otherwise agree to
become liable for the payment or performance by any other Person of any
Indebtedness or other liabilities or obligations of such Person, except:
(i) as otherwise described under subsection 8.2.3
(vi)(B); and
(ii) for the guaranty by Borrower of an Affiliate's
payment or performance obligations arising under any instrument or agreement in
respect of Indebtedness for which such Affiliate is liable and which
Indebtedness is secured by a mortgage or deed of trust in favor of the holder
such Indebtedness against real Property, the title to or ownership of which is
in such Affiliate; provided that, (A) Borrower is the tenant in possession of
such real Property and (B) maximum liability of Borrower under all such
guarantees does not exceed Five Hundred Thousand Dollars ($500,000) in the
aggregate at any one time outstanding.
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8.2.7 DISPOSITION OF ASSETS. Sell or otherwise dispose of any
of, or permit any Subsidiary of Borrower to sell or otherwise dispose of any of,
its Property (exclusive of real Property), including any disposition of Property
(exclusive of real Property) as part of a sale and leaseback transaction, to or
in favor of any Person, except, in each case, for so long as no Event of Default
exists hereunder: (i) sales of Inventory and sales of other Property which does
not constitute Collateral, in each case in the ordinary course of business; (ii)
a transfer of Property to Borrower by a Subsidiary of Borrower, (iii) transfers
of Property (other than Collateral) by Borrower to (A) any Affiliate, including
the Parent, in satisfaction of indebtedness and (B) the Parent as a dividend, so
long as, in each case, such transfer is made in the ordinary course of business
or pursuant to and consistent with prior practices of any Affiliate, including
Parent, so long as such dividends are otherwise permitted by this Agreement, or
(iv) other dispositions expressly authorized by this Agreement.
8.2.8 BILL-AND-HOLD SALES, ETC. Make a sale to any customer on
a bill-and-hold, guaranteed sale, sale and return, sale on approval or
consignment basis, or any sale on a repurchase or return basis.
8.2.9 LEASES. Become, or permit any of its Subsidiaries to
become, a lessee under any operating lease (other than a lease under which
Borrower or any of its Subsidiaries is lessor) of Property if the aggregate
Rentals payable during any current or future period of twelve (12) consecutive
months under the lease in question and all other leases under which Borrower or
any of its Subsidiaries is then lessee would exceed Four Hundred Thousand
Dollars ($400,000); PROVIDED, HOWEVER, that not more than an additional
aggregate sum of Three Hundred Thousand Dollars ($300,000) may be payable during
any current or future period of twelve (12) consecutive months for Rentals
payable (a) under operating leases and (b) pursuant to Capitalized Lease
Obligations, in each case entered into or incurred, as the case may be, on or
after the Closing Date with respect to Property consisting of Equipment. The
term "Rentals" means, as of the date of determination, all payments which the
lessee is required to make by the terms of any lease, exclusive of occupancy
costs.
8.2.10 CAPITAL EXPENDITURES. Make Capital Expenditures (other
than payments on Capitalized Lease Obligations) which, as to Borrower and/or any
of its Subsidiaries exceed Two Hundred Thousand Dollars ($200,000), in the
aggregate, during any fiscal year of Borrower or be obligated for Capitalized
Lease Obligations in excess of Three Hundred Thousand Dollars ($300,000) during
any fiscal year of Borrower or any of its Subsidiaries.
8.2.11 DISTRIBUTIONS. Declare or make, or permit any Subsidiary
of Borrower to declare or make, any Distributions.
8.2.12 STOCK OF BORROWER AND/OR SUBSIDIARIES. Issue, or permit
any of its Subsidiaries to issue, any additional shares of its capital stock
except director's qualifying shares
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and except in respect to stock options to Borrower's directors or management, or
in conjunction with an initial public offering.
8.2.13 RESTRICTED INVESTMENT. Make or have, or permit any
Subsidiary of Borrower to make or have, any Restricted Investment.
8.2.14 TAX CONSOLIDATION. File or consent to the filing of any consolidated
income tax return with any Person other than Parent or a Subsidiary of Borrower.
8.2.15 SUBORDINATED DEBT. Make any payments of Subordinated
Debt in violation of the corresponding subordination agreement(s).
8.3 SPECIFIC FINANCIAL COVENANTS. During the term of this Agreement,
and thereafter for so long as there are any Obligations to Lender, Borrower
covenants and agrees that unless otherwise consented to by Lender in writing, it
shall:
8.3.1 MINIMUM ADJUSTED TANGIBLE NET WORTH. Maintain at all
times an Adjusted Tangible Net Worth of not less than an amount equal to 80% of
the actual Net Worth as shown on the Effective Date Balance Sheet.
8.3.2 CASH FLOW. Achieve Cash Flow of not less than the amount
shown below for the period corresponding thereto:
PERIOD AMOUNT
------ -------
The 2 month period commencing as of
November 1, 1998 through December 31, 1998 $0.00
The 5 month period commencing as of
November 1, 1998 through March 31, 1999 $0.00
The 6 month period commencing as of
January 1, 1999 through June 30, 1999 $0.00
The 9 month period commencing as of
January 1, 1999 through September 30, 1999 $250,000.00
The 12 month period commencing as of
January 1, 1999 through December 31, 1999,
and for each fiscal quarter thereafter
on a rolling 4-quarter basis $250,000.00
SECTION 9. CONDITIONS PRECEDENT
Notwithstanding any other provision of this Agreement or any of the
other Loan Documents, and without affecting in any manner the rights of Lender
under the other sections of this Agreement, Lender shall not be required to make
any Loan under this Agreement unless and until each of the following conditions
has been and continues to be satisfied:
9.1 DOCUMENTATION. Lender shall have received, in form and substance
satisfactory to Lender and its counsel, a duly executed copy of this Agreement
and the other Loan Documents,
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together with such additional documents, instruments, opinions and certificates
as Lender and its counsel shall require in connection therewith from time to
time, all in form and substance satisfactory to Lender and its counsel,
including without limitation, the following:
(A) Certified copies of Borrower's casualty insurance policies,
together with loss payable endorsements on Lender's standard form of Lender Loss
Payee naming Lender as lender loss payee, and certified copies of Borrower's
liability insurance policies, together with endorsements naming Lender as
additional insured;
(B) Certified copies of (i) resolutions of Borrower's and Parent's
respective board of directors authorizing the execution and delivery of this
Agreement and the Loan Documents (as applicable) and the performance of all
transactions contemplated hereby and thereby, (ii) Borrower's and Parent's
by-laws, and (iii) an incumbency certificate of Borrower and Parent;
(C) A copy of the Articles or Certificate of Incorporation of
Borrower and Parent, and all amendments thereto, certified by the Secretary of
State or other appropriate official of its respective jurisdiction of
incorporation;
(D) Good standing certificates for Borrower and Parent, issued by the
Secretary of State or other appropriate official of Borrower's and Parent's
jurisdiction of incorporation and each jurisdiction where the conduct of
Borrower's business activities or the ownership of its Properties necessitates
qualification;
(E) A closing certificate signed by the Chief Executive Officer of
Borrower dated as of the date hereof, stating that (i) the representations and
warranties set forth in Section 7 hereof are true and correct on and as of such
date, (ii) Borrower is, on such date, in compliance with all the terms and
provisions set forth in this Agreement and (iii) on such date no Default or
Event of Default has occurred or is continuing;
(F) The Security Documents duly executed, accepted and acknowledged
by or on behalf of each of the signatories thereto;
(G) The Other Agreements duly executed and delivered by Borrower;
(H) The favorable, written opinion of Carlton, Fields, Ward,
Emmanuel, Smith & Cutter, P.A., counsel to Borrower and Parent, as to the
transactions contemplated by this Agreement and any of the other Loan Documents;
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(I) Written instruction from Borrower directing the application of
proceeds of the initial Loans made pursuant to this Agreement, and an initial
Borrowing Base Certificate from Borrower;
(J) Duly executed agreement establishing the Dominion Account with a
financial institution acceptable to Lender for the collection or servicing of
the Accounts;
(K) Payment of all fees and expenses owing hereunder;
(L) Landlord Waivers for each of Borrower's locations as listed on
Exhibit 6.1 hereto;
(M) Surety Agreement from Parent;
(N) UCC-1 Financing Statements;
(O) Assignment of Key-Man Life Insurance Policy on the life of Gary
Howard in an amount equal to at least $2,000,000;
(P) Duly executed subordination agreements with respect to the
Subordinated Debt from Masonry Supply, Inc. and from Parent both in favor of
Lender;
(Q) Duly executed copy of the employment contract/noncompete between
Borrower and Gary Howard, covering a period not shorter than five (5) years;
(R) Evidence that the transactions contemplated by the Asset Purchase
Agreement have been consummated;
(S) Receipt of assurances that neither Borrower nor Parent will be
liable for any income tax liability of Masonry Supply, Inc for the period
commencing January 1, 1998 through June 30, 1998;
(T) Verification from Borrower's and Masonry Supply, Inc.'s tax
accountant that the approximate $3,408,000 of net operating loss carryforward of
Parent as of June 30, 1997 as shown on Parent's June 30, 1997 financial
statements plus any such additional carryforward losses incurred in Parent's
fiscal year ending June 30, 1998 will be available to offset future federal
income tax liabilities of Borrower and that Borrower will not be a federal tax
paying entity until Parent's carryforward losses are exhausted or no longer
available;
(U) Receipt of Masonry Supply, Inc.'s audited financial statements
for the fiscal years ending June 30, 1996, June 30, 1997 and June 30, 1998 which
shall contain no
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material adverse change from the results previously provided to Lender and
utilized by Lender in Lender's credit analysis;
(V) Evidence that as of the Closing Date, Masonry Supply,
Inc. shall have a minimum of $500,000 in cash which shall be used to fund, in
part, the acquisition or, alternatively cash in an amount equal to $500,000 less
any sums (not to exceed $400,000) used by Masonry Supply, Inc. to pay off
existing Indebtedness;
(W) Written assurances from an independent third-party
satisfactory to Lender that all computer-based systems utilized by Borrower
will, within 180 days of the Closing Date and at a cost to Borrower not to
exceed $50,000, be able to effectively interpret, process and manipulate data
including dates before, on and after December 31, 1999; and
(X) Such other documents, instruments and agreements as
Lender shall reasonably request in connection with the foregoing matters.
9.2 NO DEFAULT. No Default or Event of Default shall exist.
9.3 OTHER LOAN DOCUMENTS. Each of the conditions precedent set forth
in the other Loan Documents, shall have been satisfied or waived by Lender in
writing.
9.4 ADJUSTED AVAILABILITY. Lender shall have determined that
immediately after giving effect to (i) the making of the initial Loans requested
to be made on the Closing Date and (ii) the payment or reimbursement by Borrower
to Lender for all fees and costs incurred or payable in connection with the
transactions contemplated hereby and due on the Closing Date, Adjusted
Availability shall not be less than Seven Hundred Fifty Thousand Dollars
($750,000), where Adjusted Availability shall mean the excess, if any, of
Availability over that portion, if any, of Borrower's trade accounts payable
outstanding on the Closing Date which remains unpaid beyond the due date of the
relevant account payable.
9.5 NO LITIGATION. No action, proceeding, investigation, regulation
or legislation shall have been instituted, threatened or proposed before any
court, governmental agency or legislative body to enjoin, restrain or prohibit,
or to obtain damages in respect of, or which is related to or arises out of,
this Agreement or the consummation of the transactions contemplated hereby.
9.6 VENDOR CHECKS. Borrower and Lender shall have performed vendor
checks with key suppliers, including without limitation, Texas Industries, Inc.
and Lehigh Portland Cement Company to achieve assurances that the supply
relationships with Masonry Supply, Inc. will continue with Borrower without
interruption.
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9.7 RENT REDUCTION. Borrower and Lender shall have verified that
appropriate rent reductions have been instituted with respect to the Mansfield,
Texas location.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
10.1 EVENTS OF DEFAULT. The occurrence of one or more of the
following events shall constitute an "Event of Default":
10.1.1 PAYMENT OF OBLIGATIONS. Borrower shall: (i) fail to make
any payment of interest, fees, expenses or principal under the Term Loan or
other Obligations (except those described in clause (ii) hereof) payable under
this Agreement on the due date thereof and such failure shall continue without
cure for three (3) days, PROVIDED that such three (3) day cure period shall not
be applicable if such payments are due and payable due to maturity, or on demand
or acceleration following an Event of Default; or (ii) fail to make any payment
of principal under the Revolving Credit Loans on the due date thereof (whether
due at stated maturity, on demand, upon acceleration or otherwise).
10.1.2 MISREPRESENTATIONS. Any representation, warranty or
other statement made or furnished to Lender by or on behalf of Borrower, any
Subsidiary of Borrower or Guarantor in this Agreement, any of the other Loan
Documents or any instrument, certificate or financial statement furnished in
compliance with or in reference thereto proves to have been false or misleading
in any material respect when made or furnished or when reaffirmed pursuant to
Section 7.2 hereof.
10.1.3 BREACH OF SPECIFIC COVENANTS. Borrower shall fail or
neglect to perform, keep or observe any covenant contained in Sections 5.2, 6.1,
6.4, 8.1.1, 8.1.2, 8.2 (other than subsection 8.2.5, but only to the extent set
forth in subsection 10.1.4) or 8.3 hereof, on the date that Borrower is required
to perform, keep or observe such covenant.
10.1.4 BREACH OF OTHER COVENANTS. Borrower shall fail or
neglect to keep or observe (i) any covenant contained in subsection 8.2.5 (ii)
or (iii), to the extent any Lien referred to therein and which Borrower has
suffered to exist has been created or arises without Borrower's knowledge or
consent or (ii) any other covenant contained in this Agreement (other than a
covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and
in either case the breach of such covenant is not cured to Lender's satisfaction
within twenty (20) days after the sooner to occur of Borrower's receipt of
notice of such breach from Lender or the date on which such failure or neglect
first becomes known to any officer of Borrower.
10.1.5 DEFAULT UNDER SECURITY DOCUMENTS/OTHER AGREEMENTS. Any
event of default shall occur under, or Borrower shall default in the performance
or observance of any
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covenant, condition or agreement contained in, any of the Security Documents or
the Other Agreements and such default shall continue beyond any applicable grace
period.
10.1.6 OTHER DEFAULTS. There shall occur any default or event of
default on the part of Borrower under any agreement, document or instrument to
which Borrower is a party or by which Borrower or any of its Property is bound,
creating or relating to any Indebtedness (other than the Obligations) if the
payment or maturity of such Indebtedness is accelerated in consequence of such
event of default or demand for payment of such Indebtedness is made.
10.1.7 UNINSURED LOSSES. Any loss, theft, damage or destruction of any
of the Collateral not fully covered (subject to such deductibles as Lender shall
have permitted) by insurance shall have occurred, and such loss, theft, damage
or destruction shall have a material adverse effect on Borrower's financial
condition, Property or business prospects.
10.1.8 ADVERSE CHANGES. There shall occur any material adverse change
in the financial condition, Property or business prospects of Borrower.
10.1.9 INSOLVENCY AND RELATED PROCEEDINGS. Borrower or any Guarantor
shall cease to be Solvent or shall suffer the appointment of a receiver,
trustee, custodian or similar fiduciary, or shall make an assignment for the
benefit of creditors, or any petition for an order for relief shall be filed by
or against Borrower, any Subsidiary of Borrower or any Guarantor under the
Bankruptcy Code (if against Borrower, any Subsidiary of Borrower or any
Guarantor, the continuation of such proceeding for more than sixty (60) days),
or Borrower or any Guarantor shall make any offer of settlement, extension or
composition to their respective unsecured creditors generally.
10.1.10 BUSINESS DISRUPTION. There shall occur a cessation of a
substantial part of the business of Borrower or any Subsidiary of Borrower for a
period which significantly affects Borrower's or such Subsidiary's capacity to
continue its business, on a profitable basis; or Borrower or any Subsidiary of
Borrower shall suffer the loss or revocation of any license or permit now held
or hereafter acquired by Borrower or such Subsidiary which is necessary to the
continued or lawful operation of its business; or Borrower or any Subsidiary
shall be enjoined, restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its business
affairs.
10.1.11 CHANGE OF OWNERSHIP; ETC. The Parent or the shareholders
of Parent as of the Closing Date shall cease to own or control, beneficially and
of record, all of the issued and outstanding capital stock of Borrower, or
Douglas P. Fields shall cease to own or control beneficially, at least fifteen
percent (15%) of the issued and outstanding capital stock of the Parent or
Borrower, or Frederick M. Friedman shall cease to own or control beneficially,
at least fifteen percent (15%) of the issued and outstanding capital stock of
the Parent or Borrower,
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or both Douglas P. Fields and Frederick M. Friedman shall cease to be actively
engaged in the senior management of Borrower's business affairs or upon any sale
or transfer permitted hereunder by the Parent of the issued and outstanding
capital stock of Borrower, the Parent shall fail to then deliver to Lender a
writing executed by the Parent confirming the continuing effectiveness of the
Guaranty Agreement executed by it in favor of the Lender, which writing shall
contain a reaffirmation by the Parent of its continuing liability under the
Surety Agreement in accordance with its terms.
10.1.12 ERISA. A Reportable Event shall occur which Lender, in
its sole discretion, shall determine in good faith constitutes grounds for the
termination by the Pension Benefit Guaranty Corporation of any Plan or for the
appointment by the appropriate United States district court of a trustee for any
Plan, or if any Plan shall be terminated or any such trustee shall be requested
or appointed, or if Borrower, any Subsidiary of Borrower or any Guarantor is in
"default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments
to a Multiemployer Plan resulting from Borrower's, such Subsidiary's or such
Guarantor's complete or partial withdrawal from such Plan.
10.1.13 CHALLENGE TO AGREEMENT. Borrower, any Subsidiary of
Borrower or any Guarantor, or any Affiliate of any of them, shall challenge or
contest in any action, suit or proceeding the validity or enforceability of this
Agreement, or any of the other Loan Documents, the legality or enforceability of
any of the Obligations or the perfection or priority of any Lien granted to
Lender.
10.1.14 REPUDIATION OF OR DEFAULT UNDER SURETY AGREEMENT. Any
Guarantor shall revoke or attempt to revoke the Surety Agreement signed by such
Guarantor, or shall repudiate such Guarantor's liability thereunder or shall be
in default under the terms thereof.
10.1.15 CRIMINAL FORFEITURE. Borrower, any Subsidiary of
Borrower or any Guarantor shall be criminally indicted or convicted under any
law that could lead to a forfeiture of any Property of Borrower, any Subsidiary
of Borrower or any Guarantor.
10.1.16 JUDGMENTS. Any money judgment, writ of attachment or
similar process, singly, or in the aggregate, in each case in excess of One
Hundred Thousand Dollars ($100,000), is filed against Borrower, any Subsidiary
of Borrower or any Guarantor, or any of their respective Property and such
judgment, writ of attachment or similar process is not satisfied, bonded to the
satisfaction of Lender or stayed, in each case within 45 days of such filing.
10.2 ACCELERATION OF THE OBLIGATION. Without in any way limiting the
right of Lender to demand payment of any portion of the Obligations payable on
demand in accordance with Section 3.2 hereof, upon or at any time after the
occurrence of an Event of Default, all or any
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portion of the Obligations shall, at the option of Lender and without
presentment, demand protest or further notice by Lender, become at once due and
payable, and Borrower shall forthwith pay to Lender the full amount of such
Obligations, PROVIDED, that upon the occurrence of an Event of Default specified
in subsection 10.1.9 hereof, all of the Obligations shall become automatically
due and payable without declaration, notice or demand by Lender.
10.3 OTHER REMEDIES. Upon and after the occurrence of an Event of
Default, Lender shall have and may exercise from time to time the following
rights and remedies:
10.3.1 All of the rights and remedies of a secured party under
the Code or under other applicable law, and all other legal and equitable rights
to which Lender may be entitled, all of which rights and remedies shall be
cumulative and shall be in addition to any other rights or remedies contained in
this Agreement or any of the other Loan Documents, and none of which shall be
exclusive.
10.3.2 The right to take immediate possession of the Collateral,
and to (i) require Borrower to assemble the Collateral, at Borrower's expense,
and make it available to Lender at a place designated by Lender which is
reasonably convenient to both parties, and (ii) enter any premises where any of
the Collateral shall be located and to keep and store the Collateral on said
premises until sold (and if said premises be the Property of Borrower, Borrower
agrees not to charge Lender for storage thereof).
10.3.3 The right to sell or otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, with such notice as may
be required by law, in lots or in bulk, for cash or on credit, all as Lender, in
its sole discretion, may deem advisable. Borrower agrees that ten (10) days
written notice to Borrower of any public or private sale or other disposition of
Collateral shall be reasonable notice thereof, and such sale shall be at such
locations as Lender may designate in said notice. Lender shall have the right
to conduct such sales on Borrower's premises, without charge therefor, and such
sales may be adjourned from time to time in accordance with applicable law.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination thereof,
and Lender may purchase all or any part of the Collateral at public or, if
permitted by law, private sale and, in lieu of actual payment of such purchase
price, may set off the amount of such price against the Obligations. The
proceeds realized from the sale of any Collateral may be applied, after allowing
one (1) Business Day for collection, first to the costs, expenses and attorneys'
fees incurred by Lender in collecting the Obligations, in enforcing the rights
of Lender under the Loan Documents and in collecting, retaking, completing,
protecting, removing, storing, advertising for sale, selling and delivering any
Collateral; second to the interest due upon any of the Obligations; and third,
to the principal of the Obligations. If any deficiency shall arise, Borrower
shall remain liable to Lender therefor.
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10.3.4 Lender is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, tradenames, trademarks and advertising matter, or any
Property of a similar nature, as it pertains to the Collateral, in advertising
for sale and selling any Collateral, and Borrower's rights under all licenses
and all franchise agreements shall inure to Lender's benefit.
10.4 REMEDIES CUMULATIVE; NO WAIVER. All covenants, conditions,
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrower contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or in any schedule or in any Surety Agreement given to Lender or contained in
any other agreement between Lender and Borrower, heretofore, concurrently, or
hereafter entered into, shall be deemed cumulative to and not in derogation or
substitution of any of the terms, covenants, conditions, or agreements of
Borrower herein contained. The failure or delay of Lender to require strict
performance by Borrower of any provision of this Agreement or to exercise or
enforce any rights, Liens, powers, or remedies hereunder or under any of the
aforesaid agreements or other documents or security or Collateral shall not
operate as a waiver of such performance, Liens, rights, powers and remedies, but
all such requirements, Liens, rights, powers, and remedies shall continue in
full force and effect until all Loans and all other Obligations owing or to
become owing from Borrower to Lender shall have been fully satisfied. None of
the undertakings, agreements, warranties, covenants and representations of
Borrower contained in this Agreement or any of the other Loan Documents and no
Event of Default by Borrower under this Agreement or any other Loan Documents
shall be deemed to have been suspended or waived by Lender, unless such
suspension or waiver is by an instrument in writing specifying such suspension
or waiver and is signed by a duly authorized representative of Lender and
directed to Borrower.
SECTION 11. MISCELLANEOUS
11.1 POWER OF ATTORNEY. Borrower hereby irrevocably designates,
makes, constitutes and appoints Lender (and all Persons designated by Lender) as
Borrower's true and lawful attorney (and agent-in-fact), coupled with an
interest, solely for the purposes set forth below, and Lender, or Lender's
agent, may, without notice to Borrower and in either Borrower's or Lender's
name, but at the cost and expense of Borrower:
11.1.1 At such time or times upon or after the occurrence of a
Default or an Event of Default as Lender or said agent, in its sole discretion,
may determine, endorse Borrower's name on any checks, notes, acceptances,
drafts, money orders or any other evidence of payment or proceeds of the
Collateral which come into the possession of Lender or under Lender's control.
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11.1.2 At such time or times upon or after the occurrence of an
Event of Default as Lender or its agent in its sole discretion may determine:
(i) demand payment of the Accounts from the Account Debtors, enforce payment of
the Accounts by legal proceedings or otherwise, and generally exercise all of
Borrower's rights and remedies with respect to the collection of the Accounts;
(ii) settle, adjust, compromise, discharge or release any of the Accounts or
other Collateral or any legal proceedings brought to collect any of the Accounts
or other Collateral; (iii) sell or assign any of the Accounts and other
Collateral upon such terms, for such amounts and at such time or times as Lender
deems advisable; (iv) take control, in any manner, of any item of payment or
proceeds relating to any Collateral; (v) prepare, file and sign Borrower's name
to a proof of claim in bankruptcy or similar document against any Account Debtor
or to any notice of lien, assignment or satisfaction of lien or similar document
in connection with any of the Collateral; (vi) receive, open and dispose of all
mail addressed to Borrower and to notify postal authorities to change the
address for delivery thereof to such address as Lender may designate; (vii)
endorse the name of Borrower upon any of the items of payment or proceeds
relating to any Collateral and deposit the same to the account of Lender on
account of the Obligations; (viii) endorse the name of Borrower upon any chattel
paper, document, instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to the Accounts, Inventory and any other
Collateral; (ix) use Borrower's stationery and sign the name of Borrower to
verifications of the Accounts and notices thereof to Account Debtors, (x) use
the information recorded on or contained in any data processing equipment and
computer hardware and software relating to the Accounts, Inventory, and any
other Collateral; (xi) make and adjust claims under policies of insurance, and
(xii) do all other acts and things necessary, in Lender's determination, to
fulfill Borrower's obligations under this Agreement.
11.2 INDEMNITY. Borrower hereby agrees to indemnify Lender and hold
Lender harmless from and against any liability, loss, damage, suit, action or
proceeding ever suffered or incurred by Lender (including reasonable attorneys
fees and legal expenses) as the result of Borrower's failure, or alleged
failure, to observe, perform or discharge Borrower's duties hereunder. In
addition, Borrower shall defend Lender against and save it harmless from all
claims of any Person with respect to the Collateral. Without limiting the
generality of the foregoing, these indemnities shall extend to any claims
asserted against Lender by any Person under any Environmental Laws or similar
laws by reason of Borrower's or any other Person's failure to comply with laws
applicable to solid or hazardous waste materials or other toxic substances.
Notwithstanding any contrary provision in this Agreement, the obligation of
Borrower under this Section 11.2 shall survive the payment in full of the
Obligations and the termination of this Agreement.
11.3 MODIFICATION OF AGREEMENT; SALE OF INTEREST. This Agreement may
not be modified, altered or amended except by an agreement in writing signed by
Borrower and Lender. Borrower may not sell, assign or transfer any interest in
this Agreement, any of the other Loan Documents, or any of the Obligations, or
any portion thereof, including, without limitation,
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Borrower's rights, title, interests, remedies, powers, and duties hereunder or
thereunder. Borrower hereby consents to Lender's participation, sale,
assignment, transfer or other disposition, at any time or times hereafter, of
this Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, Lender's rights, title, interests,
remedies, powers, and duties hereunder or thereunder. In the case of an
assignment, the assignee shall have, to the extent of such assignment, the same
rights, benefits and obligations as it would if it were "Lender" hereunder, and
Lender shall be relieved of all obligations hereunder upon any such assignments.
Borrower agrees that it will use its best efforts to assist and cooperate with
Lender in any manner reasonably requested by Lender to effect the sale of
participations in or assignments of any of the Loan Documents or any portion
thereof or interest therein, including, without limitation, assisting in the
preparation of appropriate disclosure documents. Borrower further agrees that
Lender may disclose credit information regarding Borrower and its Subsidiaries
to any potential participant or assignee.
11.4 SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
11.5 SUCCESSORS AND ASSIGNS. This Agreement, the Other Agreements and
the Security Documents shall be binding upon and inure to the benefit of the
successors and assigns of Borrower and Lender permitted under Section 11.3
hereof.
11.6 CUMULATIVE EFFECT, CONFLICT OF TERMS. The provisions of the
Other Agreements and the Security Documents are hereby made coextensive with the
provisions of this Agreement. Except as otherwise provided in Section 3.2
hereof and except as otherwise provided in any of the other Loan Documents by
specific reference to the applicable provision of this Agreement, if any
provision contained in this Agreement is in direct conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Agreement shall govern and control.
11.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
11.8 NOTICE. Except as otherwise provided herein, all notices,
requests and demands to or upon a party hereto, to be effective, shall be in
writing and shall be sent by certified or registered mail, return receipt
requested, by personal delivery against receipt, by overnight courier or by
facsimile and, unless otherwise expressly provided herein, shall be deemed to
have
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been validly served, given or delivered immediately when delivered against
receipt, five (5) days after deposit in the mail, postage prepaid, or one (1)
Business Day after deposit with an overnight courier or in the case of facsimile
notice, when sent, addressed as follows:
If to Lender: Fleet Capital Corporation
200 Glastonbury Boulevard
Glastonbury, Connecticut 06033
Attention: The Northeast Loan Administration Manager
Facsimile No.: 860-657-7759
With a copy to: Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attention: Harvey I. Forman, Esquire
Facsimile No.: 215-569-5555
If to Borrower: MSI/Eagle Supply, Inc.
122 East 42nd Street, Suite 1116
New York, NY 10168
Attention: Frederick M. Friedman,
Executive Vice President
Facsimile No.: 212-972-0326
With a copy to: TDA Industries, Inc.
122 East 42nd Street
New York, NY 10168
Attention: Mr. Frederick M. Friedman
Facsimile No.: 212-972-0326
With a copy to: Carlton Fields
One Harbour Place
777 South Harbour Island Drive
Tampa, Florida 33602
Attention: Nathaniel L. Doliner, Esquire
Facsimile No.: 813-229-4133
or to such other address as each party may designate for itself by notice given
in accordance with this Section 11.8, PROVIDED, HOWEVER, that any notice,
request or demand to or upon Lender pursuant to subsection 3.1.1 or 4.2.2 hereof
shall not be effective until received by Lender.
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11.9 LENDER'S CONSENT. Whenever Lender's consent is required to be
obtained under this Agreement, any of the Other Agreements or any of the
Security Documents as a condition to any action, inaction condition or event,
Lender shall be authorized to give or withhold such sole and absolute
discretion and to condition its consent upon the giving of additional
collateral security for the Obligations, the payment of money or any
other matter.
11.10 CREDIT INQUIRIES. Borrower hereby authorizes and permits
Lender to respond to usual and customary credit inquiries from third
parties concerning Borrower or any of its Subsidiaries.
11.11 TIME OF ESSENCE. Time is of the essence of this Agreement, the
Other Agreements and the Security Documents.
11.12 ENTIRE AGREEMENT. This Agreement and the other Loan Documents,
together with all other instruments, agreements and certificates executed by
the parties in connection therewith or with reference thereto, embody the
entire understanding and agreement between the parties hereto and thereto
with respect to the subject matter hereof and thereof and supersede all prior
agreements, understandings and inducements, whether express or implied, oral
or written.
11.13 INTERPRETATION. No provision of this Agreement or any of the
other Loan Documents shall be construed against or interpreted to the
disadvantage of any party hereto by any court or other governmental or
judicial authority by reason of such party having or being deemed to have
structured or dictated such provision.
11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
DALLAS, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT IF ANY OF THE
COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN NEW YORK, THE LAWS OF
SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE
OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER
REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH
JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF NEW YORK AS
PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT
OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER,
BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPREME COURT OF THE STATE OF NEW
YORK, SITTING IN NEW YORK COUNTY, OR, AT LENDER'S OPTION, THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, SHALL HAVE EXCLUSIVE
JURISDICTION TO
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HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING
TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT.
BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY
OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF
SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY, SUCH COURT.
BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL
RECEIPT THEREOF OR FIVE (5) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE
RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR
TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH
FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY
OTHER APPROPRIATE FORUM OR JURISDICTION.
11.15 WAIVERS BY BORROWER. BORROWER WAIVES (i) THE RIGHT TO TRIAL BY
JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR
COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS,
THE OBLIGATIONS OR THE COLLATERAL; (ii) PRESENTMENT, DEMAND AND PROTEST AND
NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE,
COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER,
ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES
AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY
RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) NOTICE PRIOR
TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH
MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF
LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION
LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE
FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS
AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE
DEALINGS
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WITH BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE
FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY
WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL
BY THE COURT.
11.16 PARTIES TO ACT IN A COMMERCIALLY REASONABLE MANNER. Each party
hereto agrees to act at all times in its dealings with the other party hereto in
a commercially reasonable manner.
IN WITNESS WHEREOF, this Agreement has been duly executed on the day and
year specified at the beginning of this Agreement.
Attest: MSI/EAGLE SUPPLY, INC.
("Borrower")
By: /s/ Illegible By: /s/ Douglas P. Fields
--------------------------- -----------------------------
Secretary
[Corporate Seal] Title: Chief Executive Officer
--------------------------
Accepted in Glastenbury CT
---------------------
FLEET CAPITAL CORPORATION
("Lender")
By: /s/ Kim Buckley
-----------------------------
Title: Vice President
--------------------------
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Exhibit 10.25
REVOLVING CREDIT NOTE
$6,000,000.00 October 22, 1998
FOR VALUE RECEIVED, and intending to be legally bound, MSI/EAGLE SUPPLY,
INC., a Delaware corporation ("Borrower") hereby promises to pay to the order of
Fleet Capital Corporation, a Rhode Island corporation ("Lender"), in such coin
or currency of the United States which shall be legal tender in payment of all
debts and dues, public and private, at the time of payment, the maximum
principal sum of Six Million Dollars ($6,000,000) or such lesser sum which then
represents the aggregate unpaid principal balance of Revolving Credit Loans,
together with interest from and after the date hereof on the unpaid principal
balance outstanding at the rates per annum set forth in the Loan Agreement (as
defined below). Interest shall be computed in the manner provided in Section 2
of the Loan Agreement.
This Revolving Credit Note (the "Note") is the Revolving Credit Note
referred to in, and is issued pursuant to, that certain Loan and Security
Agreement between Borrower and Lender, dated the date hereof (as amended from
time to time, the "Loan Agreement"), and is entitled to all of the benefits and
security of the Loan Agreement. All of the terms, covenants and conditions of
the Loan Agreement and the Security Documents are hereby made a part of this
Note and are deemed incorporated herein in full. All capitalized terms used
herein, unless otherwise specifically defined in this Note, shall have the
meanings ascribed to them in the Loan Agreement.
The principal amount and accrued interest of this Note shall be due and
payable on the dates and in the manner hereinafter set forth:
(a) Interest shall be due and payable monthly, in arrears, on the first
day of each month, commencing on December 1, 1998, and continuing until
such time as the full principal balance, together with all other amounts
owing hereunder, shall have been paid in full.
(b) Principal shall be payable in accordance with the Loan Agreement and
all outstanding principal, together with any and all other amounts due
hereunder, shall be due and payable on the earlier of the last day of the
Original Term or any Renewal Term of the Loan Agreement (as applicable) or
on the day of the termination of this Agreement.
Notwithstanding the foregoing, the entire unpaid principal balance and accrued
interest on this Note shall be due and payable immediately upon acceleration of
the Obligations following an Event of Default under the Loan Agreement or
termination of the Loan Agreement pursuant to Section 4 thereof.
This Note shall be subject to prepayment (and prepayment premium, if
applicable) in accordance with the provisions of Sections 3.2 and 3.3 of the
Loan Agreement. Borrowers may
<PAGE>
also terminate the Loan Agreement and, in connection with such termination,
prepay this Note in the manner and subject to the conditions provided in Section
4 of the Loan Agreement.
Upon the occurrence of an Event of Default, Lender shall have all of the
rights and remedies set forth in Section 10 of the Loan Agreement.
Time is of the essence under this Note. To the fullest extent permitted by
applicable law, Borrower, for itself and its legal representatives, successors
and assigns, expressly waives presentment, demand, protest, notice of dishonor,
notice of non-payment, notice of maturity, notice of protest, presentment for
the purpose of accelerating maturity, diligence in collection, and the benefit
of any exemption or insolvency laws.
Wherever possible, each provision of this Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Note shall be prohibited or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or remaining provisions of this
Note. No delay or failure on the part of Lender in the exercise of any right or
remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in
any default, nor shall any single or partial exercise by Lender of any right or
remedy preclude any other right or remedy. Lender, at its option, may enforce
its rights against any Collateral securing this Note without enforcing its
rights against Borrower or any other property or indebtedness due or to become
due to Borrower. Borrower agrees that, without releasing or impairing
Borrower's liability hereunder, Lender may at any time release, surrender,
substitute or exchange any Collateral securing this Note and may at any time
release any party primarily or secondarily liable for the indebtedness evidenced
by this Note.
IN ANY LITIGATION ARISING OUT OF OR RELATING TO ANY OF THE MATTERS
CONTAINED IN THIS NOTE OR ANY OF THE DOCUMENTS DELIVERED IN CONNECTION HEREWITH
IN WHICH THE LENDER AND BORROWER ARE ADVERSE PARTIES, THE LENDER AND BORROWER
WAIVE TRIAL BY JURY.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of New York.
2
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered on the date first above written.
ATTEST: MSI/EAGLE SUPPLY, INC.
[Illegible] By: /s/ Douglas P. Fields
- -------------------- ----------------------------
Name: Douglas P. Fields
Title: CEO
3
<PAGE>
Exhibit 10.26
TERM NOTE
$3,075,000.00 October 22, 1998
FOR VALUE RECEIVED, and intending to be legally bound, MSI/EAGLE SUPPLY,
INC., a Delaware corporation ("Borrower") hereby promises to pay to the order of
Fleet Capital Corporation, a Rhode Island corporation ("Lender"), in such coin
or currency of the United States which shall be legal tender in payment of all
debts and dues, public and private, at the time of payment, the maximum
principal sum of Three Million Seventy Five Thousand Dollars ($3,075,000), or
such lesser sum which represents the aggregate unpaid principal balance
hereunder, together with interest from and after the date hereof on the unpaid
principal balance outstanding at the rates per annum set forth in the Loan
Agreement (as defined below). Interest shall be computed in the manner provided
in Section 2 of the Loan Agreement.
This Term Note (the "Note") is the Term Note referred to in, and is issued
pursuant to, that certain Loan and Security Agreement between Borrower and
Lender dated the date hereof (hereinafter, as amended from time to time, the
"Loan Agreement"), and is entitled to all of the benefits and security of the
Loan Agreement. All of the terms, covenants and conditions of the Loan
Agreement and the Security Documents are hereby made a part of this Note and are
deemed incorporated herein in full. All capitalized terms used herein, unless
otherwise specifically defined in this Note, shall have the meanings ascribed to
them in the Loan Agreement.
The principal amount and accrued interest of this Note shall be due and
payable on the dates and in the manner hereinafter set forth:
(a) Interest on the outstanding principal balance shall be due and payable
monthly, in arrears, on the first day of each month, commencing on December
1, 1998, and continuing until such time as the full principal balance,
together with all other amounts owing hereunder, shall have been paid in
full.
(b) The principal amount hereunder shall be due and payable in
consecutive monthly installments of principal of $37,000 each, on the first
day of each calendar month commencing on December 1, 1998 ("Initial Payment
Date") and a final installment in an amount equal to the entire remaining
principal amount then outstanding under this Note, together with any and
all other amounts due hereunder, due and payable on the earlier to occur of
the first day of the 84th month following the Initial Payment Date, the end
of the Original Term or Renewal Term (as applicable), or the termination of
this Agreement.
Notwithstanding the foregoing, the entire unpaid principal balance and accrued
interest on this Note shall be due and payable immediately upon acceleration of
the Obligations following an Event of Default under the Loan Agreement or
termination of the Loan Agreement pursuant to Section 4 thereof.
<PAGE>
This Note shall be subject to mandatory prepayment (and prepayment premium,
if applicable) in accordance with the provisions of Sections 3.2 and 3.3 of the
Loan Agreement. Borrower may also terminate the Loan Agreement and, in
connection with such termination, prepay this Note in the manner and subject to
the conditions provided in Section 4 of the Loan Agreement.
Upon the occurrence of an Event of Default, Lender shall have all of the
rights and remedies set forth in Section 10 of the Loan Agreement.
Time is of the essence under this Note. To the fullest extent permitted by
applicable law, Borrower, for itself and its legal representatives, successors
and assigns, expressly waives presentment, demand, protest, notice of dishonor,
notice of non-payment, notice of maturity, notice of protest, presentment for
the purpose of accelerating maturity, diligence in collection, and the benefit
of any exemption or insolvency laws.
Wherever possible, each provision of this Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Note shall be prohibited or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or remaining provisions of this
Note. No delay or failure on the part of Lender in the exercise of any right or
remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in
any default, nor shall any single or partial exercise by Lender of any right or
remedy preclude any other right or remedy. Lender, at its option, may enforce
its rights against any Collateral securing this Note without enforcing its
rights against Borrower or any other property or indebtedness due or to become
due to Borrower. Borrower agrees that, without releasing or impairing
Borrower's liability hereunder, Lender may at any time release, surrender,
substitute or exchange any Collateral securing this Note and may at any time
release any party primarily or secondarily liable for the indebtedness evidenced
by this Note.
IN ANY LITIGATION ARISING OUT OF OR RELATING TO ANY OF THE MATTERS
CONTAINED IN THIS NOTE OR ANY OF THE DOCUMENTS DELIVERED IN CONNECTION HEREWITH
IN WHICH THE LENDER AND BORROWER ARE ADVERSE PARTIES, THE LENDER AND BORROWER
WAIVE TRIAL BY JURY.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of New York.
2
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered on the date first above written.
ATTEST: MSI/EAGLE SUPPLY, INC.
/s/ Illegible By: /s/ Douglas P. Fields
- ------------------------------ --------------------------------
Name: Douglas P. Fields
Title: Chief Executive Officer
3
<PAGE>
Exhibit 10.27
SURETY AGREEMENT
To: Fleet Capital Corporation Date: October 22, 1998
200 Glastonbury Blvd.
Glastonbury, CT 06033
To induce you to establish and/or continue financing arrangements with and
consider making or continuing certain loans and extending or continuing to
extend credit from time to time to MSI/Eagle Supply, Inc., a Delaware
corporation, ("Borrower") the Undersigned, intending to be legally bound, hereby
guarantees and becomes surety for the unconditional and prompt payment and
performance to you of all of the Obligations of Borrower to you. The
Undersigned shall also pay or reimburse you on demand for all costs and
expenses, including without limitation attorneys' fees, incurred by you at any
time to enforce, protect, preserve, or defend your rights hereunder and with
respect to any property securing this Surety Agreement. All payments hereunder
shall be made in lawful money of the United States, in immediately available
funds. Unless otherwise defined herein, all capitalized terms shall have the
respective meanings given to such terms in that certain Loan and Security
Agreement dated the date hereof between Borrower and you (as it may hereafter be
amended, supplemented or replaced from time to time, the "Loan Agreement").
The Undersigned further undertakes and agrees as follows:
(1) The Undersigned represents and warrants that:
(a) The Undersigned's execution and performance of this Surety
Agreement shall not (i) violate or result in a default or breach (immediately or
with the passage of time) under any contract, agreement or instrument to which
the Undersigned is a party, or by which the Undersigned is bound, (ii) violate
or result in a default or breach under any order, decree, award, injunction,
judgment, law, regulation or rule, (iii) cause or result in the imposition or
creation of any lien upon any property of the Undersigned, or (iv) violate or
result in a breach of the articles of incorporation or by-laws of the
Undersigned.
(b) The Undersigned has the full power and capacity to enter into and
perform under this Surety Agreement, which has been authorized by all necessary
corporate action on behalf of the Undersigned.
(c) No consent, license or approval of, or filing or registration
with, any governmental authority is necessary for the execution and performance
hereof by the Undersigned.
(d) This Surety Agreement constitutes the valid and binding
obligation of the Undersigned enforceable in accordance with its terms.
<PAGE>
(e) This Surety Agreement promotes and furthers the business and
interests of the Undersigned and the creation of the obligations hereunder will
result in direct financial benefit to the Undersigned.
(2) The Undersigned hereby waives notice of (a) acceptance of this Surety
Agreement, (b) the existence or incurring from time to time of any Obligations
guaranteed hereunder, or (c) the existence of any Event of Default, the making
of demand, or the taking of any action by you, under the Loan Agreement.
(3) The Undersigned hereby consents and agrees that you may at any time or
from time to time in your discretion (a) extend or change the time of payment,
and/or the manner, place or terms of payment of any or all Obligations, (b)
amend, supplement or replace the Loan Agreement or any related agreements, (c)
renew, extend, modify, increase or decrease loans and extensions of credit to
Borrower, (d) modify the terms and conditions under which loans and extensions
of credit may be made to Borrower, (e) settle, compromise or grant releases for
liabilities of Borrower, and/or any other person or persons liable with
Undersigned for, any Obligations, (f) exchange, release, surrender, sell,
subordinate, or compromise any collateral of any party now or hereafter securing
any of the Obligations, and (g) apply any and all payments received by you at
any time against the Obligations in any order as you may determine; all of the
foregoing in such manner and upon such terms as you may see fit, and without
notice to or further consent from the Undersigned, who hereby agrees to be and
shall remain bound upon this Surety Agreement notwithstanding any such action on
your part.
(4) The liability of the Undersigned hereunder is absolute and
unconditional and shall not be reduced, impaired or affected in any way by
reason of (a) any failure to obtain, retain or preserve, or the lack of prior
enforcement of, any rights against any person or persons (including Borrower and
the Undersigned) or in any property, (b) the invalidity or unenforceability of
any Obligations or rights in any Collateral, (c) any delay in making demand upon
Borrower or any delay in enforcing, or any failure to enforce, any rights
against Borrower or in any Collateral even if such rights are thereby lost, (d)
any failure, neglect or omission on your part to obtain or perfect any lien
upon, protect, exercise rights against, or realize on, any property of Borrower,
the Undersigned or any other party securing the Obligations, (e) the existence
or nonexistence of any defenses which may be available to the Borrower with
respect to the Obligations, or (f) the commencement of any bankruptcy,
reorganization, liquidation, dissolution or receivership proceeding or case
filed by or against Borrower.
(5) If any or all payments made from time to time to you with respect to
any obligation hereby guaranteed are recovered from, or repaid by, you in whole
or in part in any bankruptcy, reorganization, insolvency or similar proceeding
instituted by or against Borrower, this Surety Agreement shall continue to be
fully applicable to such obligation to the same extent as if the recovered or
repaid payment(s) had never been originally made on such obligation.
2
<PAGE>
(6) All rights and remedies hereunder and under the Loan Agreement, and
related agreements, are cumulative and not alternative, and you may proceed in
any order from time to time against Borrower, the Undersigned and/or any other
obligor of Borrower's Obligations and their respective assets.
(7) Any and all rights of any nature of the Undersigned to subrogation,
reimbursement or indemnity and any right of the Undersigned to recourse to any
assets or property of Borrower for any reason shall be unconditionally
subordinated to all of your rights under the Loan Agreement and the Undersigned
shall not at any time exercise any of such rights unless and until all of the
Obligations have been unconditionally paid in full.
(8) Your books and records of any and all of Borrower's Obligations,
absent manifest error, shall be prima facie evidence against the Undersigned of
the indebtedness due you or to become due to you hereunder.
(9) This Surety Agreement shall constitute a continuing surety obligation
and you may continue to act in reliance hereon until all of the Obligations have
been paid and satisfied in full. You shall not have any obligation to proceed
against, or exhaust any or all of your rights against, Borrower prior to
proceeding against the Undersigned hereunder.
(10) The Undersigned agrees that you shall have a right of setoff against
any and all property of the Undersigned now or at any time in your possession,
including without limitation deposit accounts, and the proceeds thereof, as
security for the obligations of the Undersigned hereunder.
(11) If an Event of Default occurs and is continuing under the Loan
Agreement, then all of the Undersigned's liabilities to you hereunder shall, at
your option, become immediately due and payable and you may at any time and from
time to time take any and/or all actions and enforce all rights and remedies
available hereunder or under applicable law to collect the Undersigned's
liabilities hereunder.
(12) Failure or delay in exercising any right or remedy against the
Undersigned hereunder shall not be deemed a waiver thereof or preclude the
exercise of any other right or remedy hereunder. No waiver of any breach of or
provision of this Surety Agreement shall be construed as a waiver of any
subsequent breach or of any other provision. The invalidity or unenforceability
of any provision hereof shall not affect the remaining provisions which shall
remain in full force and effect.
(13) This Surety Agreement shall (a) be legally binding upon the
Undersigned, and the Undersigned's successors and assigns, provided that the
Undersigned's obligations hereunder may not be delegated or assigned without
your prior written consent and (b) benefit any and all of your successors and
assigns.
3
<PAGE>
(14) This Surety Agreement embodies the whole agreement and understanding
of the parties hereto relative to the subject matter hereof. No modification of
any provision hereof shall be enforceable unless approved by you in writing.
(15) This Surety Agreement shall in all respects be interpreted, construed
and governed by the substantive laws of the State of New York. The Undersigned
irrevocably (i) submits to the jurisdiction of the Supreme Court of the State of
New York and the United States District Court for the Southern District of New
York for the purposes of any litigation or proceeding hereunder or concerning
the terms hereof and (ii) waives the right to a jury trial with respect to any
litigation or proceeding hereunder or concerning the terms hereof.
(16) (a) In any action or proceeding brought by you to enforce the terms
hereof, the Undersigned waives personal service of the summons, complaint, and
any motion or other process, and agrees that notice thereof may be served by
registered or certified mail, return receipt requested or by nationally
recognized overnight courier at the address of the Undersigned set forth on the
signature page hereof. Such service shall be deemed made on the date of
delivery at such address.
(b) Any and all notices which may be given to the Undersigned by you
hereunder shall be sent to the Undersigned at the address of the Undersigned set
forth on the signature page hereof and shall be deemed given to and received (on
the date delivered) by the Undersigned if personally delivered or if sent by
facsimile transmission or if sent in the manner provided for service of process
in paragraph 16(a) above.
DATED the date and year first above written.
TDA INDUSTRIES, INC.
By: /s/ Douglas P. Fields CEO
----------------------------
Address: 122 East 42nd Street
Suite 1116
New York, NY 10168
4
<PAGE>
Exhibit 10.28(A)
SUBORDINATION AGREEMENT
October 22, 1998
To: Fleet Capital Corporation ("Lender")
200 Glastonbury Blvd., Suite 200
Glastonbury, CT 06033
To induce the Lender to make a credit facility available to and for the
benefit of MSI/Eagle Supply, Inc. ("Borrower") pursuant to the terms of that
certain Loan and Security Agreement between Borrower and Lender, of even date
herewith (as hereafter amended, supplemented or replaced from time to time, the
"Loan Agreement"), the undersigned hereby agrees as follows:
1. The payment of any and all Subordinated Debt is expressly subordinated
to the Senior Debt to the extent and in the manner set forth in this
Subordination Agreement. The term "Subordinated Debt" means all indebtedness,
liabilities, and obligations of Borrower, now existing or hereafter arising, to
the undersigned including but not limited to (i) management fees and
distributions, (ii) indebtedness of Borrower to the undersigned evidenced by
that certain promissory note dated October 22, 1998 ("Note") in the original
principal amount of One Million Dollars ($1,000,000) and (iii) any other
obligations owing by the Borrower, now or hereafter to the undersigned. The
term "Senior Debt" means any and all Obligations of Borrower to Lender under the
Loan Agreement.
2. Until the Senior Debt is paid in full, Borrower shall not pay, and
undersigned shall not accept, any payments of any kind (including prepayments)
associated with Subordinated Debt, provided however, that so long as: (i) the
undersigned has not received notice from Lender that an Event of Default or a
Default under the Loan Agreement has occurred; (ii) the outstanding principal
balance under the Term Note (as defined in the Loan Agreement) does not exceed
the market value of Borrower's equipment that is not subject to any Liens other
than Liens in favor of Lender; and (iii) no Event of Default or Default would
result from the making of any such payment(s), Borrower may pay and the
undersigned may accept management fees and distributions and scheduled (and
accrued but unpaid) interest and principal under the Note. Notwithstanding the
foregoing, upon notice from Lender to the undersigned of the occurrence of an
Event of Default, or a Default, under the Loan Agreement, Borrower shall not
make and the undersigned shall not receive, any payments of interest or
principal, or otherwise, on the Subordinated Debt, without Lender's prior
written consent. Notwithstanding anything herein to the contrary, Borrower shall
be permitted to make payments to the undersigned of an amount equal to the
federal and state income taxes accrued on the Interim Earnings (as such term is
defined in the Asset Purchase Agreement, as defined in the Loan Agreement).
3. Any payments on the Subordinated Debt received by the undersigned,
other than as permitted in paragraph 2 above, shall be held in trust for Lender
and the undersigned will forthwith turn over any such payments in the form
received, properly endorsed, to Lender to be applied to the Senior Debt as
determined by Lender.
<PAGE>
4. Borrower shall not grant to the undersigned and the undersigned shall
not take any lien on or security interest in any of Borrower's property, now
owned or hereafter acquired or created, without Lender's prior written consent.
5. The undersigned agrees that it will not make any assertion or claim in
any action, suit or proceeding of any nature whatsoever in any way challenging
the priority, validity or effectiveness of the liens and security interests
granted to Lender under and in connection with the Loan Agreement, or any
amendment, extension, replacement thereof or related agreement between Lender
and Borrower.
6. The undersigned will not commence any action or proceeding against
Borrower to recover all or any part of the Subordinated Debt not paid when due,
and shall at no time join with any creditor, in bringing any proceeding against
Borrower under any liquidation, conservatorship, bankruptcy, reorganization,
rearrangement, or other insolvency law now or hereafter existing, unless and
until the Senior Debt shall be paid in full. Subject to the foregoing, the
undersigned may accelerate the amount of the Subordinated Debt upon the
occurrence of (i) the acceleration of the Senior Debt; and (ii) the filing of a
petition under the Bankruptcy Code by Borrower.
7. In the event of any liquidation, conservatorship, bankruptcy,
reorganization, rearrangement, or other insolvency proceeding of Borrower, the
undersigned will at Lender's request file any claims, proofs of claim, or other
instruments of similar character necessary to enforce the obligations of
Borrower in respect of the Subordinated Debt and will hold in trust for Lender
and pay over to Lender in the same form received, to be applied on the Senior
Debt as determined by Lender, any and all money, dividends or other assets
received in any such proceedings on account of the Subordinated Debt, unless and
until the Senior Debt shall be paid in full, including without limitation,
interest owing to Lender after the commencement of a bankruptcy proceeding at
the rate specified in the Loan Agreement, whether or not such interest is an
allowable claim in such proceeding. Lender may, as attorney-in-fact for the
undersigned, take such action on behalf of the undersigned and the undersigned
hereby appoints Lender as attorney-in-fact for the undersigned to demand, sue
for, collect, and receive any and all such money, dividends or other assets and
give acquittance therefore and to file any claim, proof of claim or other
instrument of similar character and to take such other proceedings in Lender's
name or in the name of the undersigned, as Lender may deem necessary or
advisable for the enforcement of this Agreement. The undersigned will execute
and deliver to Lender such other and further powers of attorney or other
instruments as either reasonably may request in order to accomplish the
foregoing.
8. Lender may at any time and from time to time, without the consent of
or notice to the undersigned, without incurring responsibility to the
undersigned and without impairing or releasing any of Lender's rights, or any of
the obligations of the undersigned hereunder:
(a) Change the amount, manner, place or terms of payment or change or
extend the time of payment of or renew or alter the Senior Debt, or any part
thereof, or amend, supplement
2
<PAGE>
or replace the Loan Agreement and/or any notes or surety or guaranty agreements
executed in connection therewith in any manner or enter into or amend,
supplement or replace in any manner any other agreement relating to the Senior
Debt;
(b) Sell, exchange, release or otherwise deal with all or any part of
any property at any time pledged or mortgaged by any party to secure or securing
the Senior Debt or any part thereof;
(c) Release anyone liable in any manner for the payment or collection
of the Senior Debt;
(d) Exercise or refrain from exercising any rights against Borrower,
or others (including the undersigned); and
(e) Apply sums paid by any party to the Senior Debt in any order or
manner as determined by Lender.
9. The undersigned will advise each future holder of all or any part of
the Subordinated Debt that the Subordinated Debt is subordinated to the Senior
Debt in the manner and to the extent provided herein. The undersigned
represents that no part of the Subordinated Debt or any instrument evidencing
the same has been transferred or assigned and the undersigned will not transfer
or assign, except to Lender, any part of the Subordinated Debt while any Senior
Debt remains outstanding, unless such transfer or assignment is made expressly
subject to this Agreement. Upon Lender's request, the undersigned will in the
case of any Subordinated Debt which is not evidenced by any instrument cause the
same to be evidenced by an appropriate instrument or instruments, and place
thereon and on any and all instruments evidencing the Subordinated Debt a legend
in such form as Lender may determine to the effect that the indebtedness
evidenced thereby is subordinated and subject to the prior payment in full of
all Senior Debt pursuant to this Subordination Agreement, as well as deliver all
such instruments to Lender.
10. This Subordination Agreement contains the entire agreement between the
parties regarding the subject matter hereof and may be amended, supplemented or
modified only by written instrument executed by Lender and the undersigned.
This Subordination Agreement, and the rights of Lender hereunder shall terminate
upon indefeasible payment in full of all Senior Debt.
11. The undersigned represents and warrants that neither the execution or
delivery of this Subordination Agreement nor fulfillment of nor compliance with
the terms and provisions hereof will conflict with, or result in a breach of the
terms, conditions, or provisions of or constitute a default under any agreement
or instrument to which the undersigned or any of the undersigned's assets is now
subject.
12. Any notice of acceptance of this Subordination Agreement is hereby
waived.
3
<PAGE>
13. This Subordination Agreement may be assigned by Lender, in whole or in
part in connection with any assignment or transfer of any portion of the Senior
Debt.
14. This Subordination Agreement shall be binding upon the undersigned,
and the undersigned's successors, representatives and assigns.
15. Except as provided in paragraph 2 above, Borrower agrees that it will
not make any payment on any of the Subordinated Debt, or take any other action
in contravention of the provisions of this Subordination Agreement.
16. This Subordination Agreement shall in all respects be interpreted,
construed and governed by the substantive laws of the State of New York. The
undersigned and Lender, each (i) submits to the jurisdiction of the Supreme
Court of the State of New York, or the United States District Court for the
Southern District of New York for the purposes of resolving any controversy
relating thereto and (ii) WAIVES THE RIGHT TO A JURY TRIAL FOR THE PURPOSE OF
RESOLVING ANY CONTROVERSY HEREUNDER OR ENFORCING OR DEFENDING ANY RIGHTS OR
CLAIM HEREUNDER OR IN CONNECTION HEREWITH, WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE.
TDA INDUSTRIES, INC.
BY: /s/ Douglas P. Fields
---------------------------------
NAME: Douglas P. Fields
TITLE: Chief Executive Officer
Consented and agreed to as of the date first above written:
BORROWER:
MSI/EAGLE SUPPLY, INC.
BY: /s/ Douglas P. Fields
---------------------------------
NAME: Douglas P. Fields
TITLE: Chief Executive Officer
4
<PAGE>
LENDER:
FLEET CAPITAL CORPORATION
By: /s/ Kim Buckley
------------------------------
Name: Kim Buckley
Title: Vice President
5
<PAGE>
Exhibit 10.28(B)
SUBORDINATION AGREEMENT
Dated: October 22, 1998
To: Fleet Capital Corporation ("Lender")
200 Glastonbury Blvd., Suite 200
Glastonbury, CT 06033
To induce the Lender to make a credit facility available to and for the
benefit of MSI/Eagle Supply, Inc. ("Borrower") pursuant to the terms of that
certain Loan and Security Agreement between Borrower and Lender, dated the date
hereof (as hereafter amended, supplemented or replaced from time to time, the
"Loan Agreement"), the undersigned hereby agrees as follows:
1. The payment of any and all Subordinated Debt is expressly subordinated
to the Senior Debt to the extent and in the manner set forth in this
Subordination Agreement. The term "Subordinated Debt" means the principal of
and interest on all indebtedness, liabilities, and obligations of Borrower, now
existing or hereafter arising, to the undersigned including but not limited to:
(i) the indebtedness of Borrower evidenced by that certain Secured
Non-Negotiable Promissory Note dated the date hereof ("Note"), payable to the
order of the undersigned in the original principal amount of $2,045,972 and all
other amounts owed by Borrower to undersigned pursuant to Section 2.4 of that
certain Asset Purchase Agreement of even date herewith between Borrower and the
undersigned ("Asset Purchase Agreement"), and (ii) any other obligations owing
by the Borrower, now or hereafter to the undersigned. The term "Senior Debt"
means any and all Obligations of Borrower to Lender under the Loan Agreement.
2. Until the Senior Debt is paid in full, Borrower shall not pay, and
undersigned shall not accept, any payments of any kind (including prepayments)
associated with Subordinated Debt, provided however, that so long as the
undersigned has not received notice from Lender that an Event of Default or a
Default under the Loan Agreement has occurred, and if no Event of Default would
result from the making of any such payment(s), Borrower may pay and the
undersigned may accept scheduled interest payments on the Note and the payments
described in Sections 1.6, 2.1, 2.3 and 2.4 of the Asset Purchase Agreement.
Notwithstanding the foregoing, upon notice from Lender to the undersigned of the
occurrence of an Event of Default, or a Default, under the Loan Agreement,
Borrower shall not make and the undersigned shall not receive, any payments of
interest or principal, or otherwise, on the Subordinated Debt, without Lender's
prior written consent.
3. Any payments on the Subordinated Debt received by the undersigned,
other than as permitted in paragraph 2 above, shall be held in trust for Lender
and the undersigned will forthwith turn over any such payments in the form
received, properly endorsed, to Lender to be applied to the Senior Debt as
determined by Lender.
<PAGE>
4. Borrower shall not grant to the undersigned and the undersigned shall
not take any lien on or security interest in any of Borrower's property, now
owned or hereafter acquired or created, without Lender's prior written consent,
except with respect to the security interest granted pursuant to that certain
Subordinate Security Agreement from Borrower to undersigned of even date
herewith (the terms of which are incorporated herein by reference).
5. a. The undersigned agrees that it will not make any assertion or
claim in any action, suit or proceeding of any nature whatsoever in any way
challenging the priority, validity or effectiveness of the liens and security
interests granted to Lender under and in connection with the Loan Agreement, or
any amendment, extension, replacement thereof or related agreement between
Lender and Borrower, and further agrees that Lender's lien and security interest
in the Collateral (as defined in the Loan Agreement) shall at all times while
the Obligations are owing from Borrower to Lender be superior and prior to the
liens and security interests granted to the undersigned pursuant to the
Subordinate Security Agreement (which liens and security interest of the
undersigned shall be subject and inferior to those of Lender) in the Borrower's
assets, irrespective of the time, order or method of attachment or perfection of
the Lender's and the undersigned's liens and security interests, or the filing
of financing statements or the taking of possession of the collateral, or any
portion thereof.
b. Notwithstanding anything to the contrary contained herein or in
the Subordinate Security Agreement, undersigned agrees that in the event that
any Collateral (as defined in the Loan Agreement) or other property of Borrower
that is subject to the liens of the undersigned is sold, transferred, conveyed
or otherwise disposed of (i) as permitted under the Loan Agreement or (ii) as
otherwise consented to by Lender and Borrower, undersigned shall release all
rights to and interests in such property (including its lien), and such property
shall be transferred free and clear of all liens and security interests
(including the lien of the undersigned). Undersigned shall execute such
termination and release documents as Lender may request to effectuate the terms
hereof.
6. The undersigned will not commence any action or proceeding against
Borrower to recover all or any part of the Subordinated Debt not paid when due,
and shall at no time join with any creditor, in bringing any proceeding against
Borrower under any liquidation, conservatorship, bankruptcy, reorganization,
rearrangement, or other insolvency law now or hereafter existing, unless and
until the Senior Debt shall be paid in full. Subject to the foregoing, the
undersigned may accelerate the amount of the Subordinated Debt upon the
occurrence of (i) the acceleration of the Senior Debt; and (ii) the filing of a
petition under the Bankruptcy Code by Borrower.
7. In the event of any liquidation, conservatorship, bankruptcy,
reorganization, rearrangement, or other insolvency proceeding of Borrower, the
undersigned will at Lender's request file any claims, proofs of claim, or other
instruments of similar character necessary to enforce the obligations of
Borrower in respect of the Subordinated Debt and will hold in trust for Lender
and pay over to Lender in the same form received, to be applied on the Senior
Debt as determined by
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Lender, any and all money, dividends or other assets received in any such
proceedings on account of the Subordinated Debt, unless and until the Senior
Debt shall be paid in full. Lender may, as attorney-in-fact for the
undersigned, take such action on behalf of the undersigned and the undersigned
hereby appoints Lender as attorney-in-fact for the undersigned to demand, sue
for, collect, and receive any and all such money, dividends or other assets and
give acquittance therefore and to file any claim, proof of claim or other
instrument of similar character and to take such other proceedings in Lender's
name or in the name of the undersigned, as Lender may deem necessary or
advisable for the enforcement of this Agreement. The undersigned will execute
and deliver to Lender such other and further powers of attorney or other
instruments as either reasonably may request in order to accomplish the
foregoing.
8. Lender may at any time and from time to time, without the consent of
or notice to the undersigned, without incurring responsibility to the
undersigned and without impairing or releasing any of Lender's rights, or any of
the obligations of the undersigned hereunder:
(a) Change the amount, manner, place or terms of payment or change or
extend the time of payment of or renew or alter the Senior Debt, or any part
thereof, or amend, supplement or replace the Loan Agreement and/or any notes or
surety or guaranty agreements executed in connection therewith in any manner or
enter into or amend, supplement or replace in any manner any other agreement
relating to the Senior Debt;
(b) Sell, exchange, release or otherwise deal with all or any part of
any property at any time pledged or mortgaged by any party to secure or securing
the Senior Debt or any part thereof;
(c) Release anyone liable in any manner for the payment or collection
of the Senior Debt;
(d) Exercise or refrain from exercising any rights against Borrower,
or others (including the undersigned); and
(e) Apply sums paid by any party to the Senior Debt in any order or
manner as determined by Lender.
9. The undersigned will advise each future holder of all or any part of
the Subordinated Debt that the Subordinated Debt is subordinated to the Senior
Debt in the manner and to the extent provided herein. The undersigned
represents that no part of the Subordinated Debt or any instrument evidencing
the same has been transferred or assigned and the undersigned will not transfer
or assign, except to Lender, any part of the Subordinated Debt while any Senior
Debt remains outstanding, unless such transfer or assignment is made expressly
subject to this Agreement. Upon Lender's request, the undersigned will in the
case of any Subordinated Debt which is not evidenced by any instrument cause the
same to be evidenced by an appropriate instrument or instruments, and place
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thereon and on any and all instruments evidencing the Subordinated Debt a legend
in such form as Lender may determine to the effect that the indebtedness
evidenced thereby is subordinated and subject to the prior payment in full of
all Senior Debt pursuant to this Subordination Agreement, as well as deliver all
such instruments to Lender.
10. This Subordination Agreement contains the entire agreement between the
parties regarding the subject matter hereof and may be amended, supplemented or
modified only by written instrument executed by Lender and the undersigned.
This Subordination Agreement, and the rights of Lender hereunder shall terminate
upon indefeasible payment in full of all Senior Debt.
11. The undersigned represents and warrants that neither the execution or
delivery of this Subordination Agreement nor fulfillment of nor compliance with
the terms and provisions hereof will conflict with, or result in a breach of the
terms, conditions, or provisions of or constitute a default under any agreement
or instrument to which the undersigned or any of the undersigned's assets is now
subject.
12. Any notice of acceptance of this Subordination Agreement is hereby
waived.
13. This Subordination Agreement may be assigned by Lender, in whole or in
part in connection with any assignment or transfer of any portion of the Senior
Debt.
14. This Subordination Agreement shall be binding upon the undersigned,
and the undersigned's successors, representatives and assigns.
15. Except as provided in paragraph 2 above, Borrower agrees that it will
not make any payment on any of the Subordinated Debt, or take any other action
in contravention of the provisions of this Subordination Agreement.
16. This Subordination Agreement shall in all respects be interpreted,
construed and governed by the substantive laws of the State of New York. The
undersigned and Lender, each (i) submits to the jurisdiction of the Supreme
Court of the State of New York, or the United States District Court for the
Southern District of New York for the purposes of resolving any controversy
relating thereto and (ii) WAIVES THE RIGHT TO A JURY TRIAL FOR THE PURPOSE OF
RESOLVING ANY CONTROVERSY HEREUNDER OR ENFORCING OR DEFENDING ANY RIGHTS OR
CLAIM HEREUNDER OR IN CONNECTION HEREWITH, WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE.
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MASONRY SUPPLY, INC.
BY: /s/ Gary L. Howard
-------------------------------
GARY L. HOWARD, PRESIDENT
Consented and agreed to as of the date first above written:
BORROWER:
MSI/EAGLE SUPPLY, INC.
BY: /s/ Douglas P. Fields
---------------------------------
LENDER:
FLEET CAPITAL CORPORATION
BY:/s/ Kim Buckley
---------------------------------
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Exhibit 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of October 22,
1998 (the "Effective Date"), by and between MSI/EAGLE SUPPLY, INC., a Delaware
corporation (the "Employer,") and GARY L. HOWARD, an individual resident of
Texas (the "Executive").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, the
Employer is acquiring, pursuant to that certain Asset Purchase Agreement by and
between, inter alia, the Employer, as buyer, Masonry Supply, Inc., a Texas
corporation (the "Seller") as seller, and the Executive, as shareholder of
Seller, dated October 22, 1998 (the "Asset Purchase Agreement"), substantially
all of the assets of the Seller, including the Seller's business operations at
four primary business locations in Texas (the "Acquired Business").
B. The Executive is the sole shareholder of the Seller and is currently the
Seller's president and chief executive officer. The Executive will benefit
substantially from the transaction set forth in the Asset Purchase Agreement.
C. The Employer wishes to obtain the Executive's continued experience and
expertise with the Acquired Business and wishes to employ the Executive as
president of the Employer.
D. The Executive wishes to accept such employment upon the terms and
conditions set forth in this Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
"Confidential Information"--any and all:
(a) trade secrets concerning the business and affairs of the Employer,
product specifications, data, know-how, designs, graphs, drawings,
inventions and ideas, past, current, and planned research and development,
current and planned distribution methods and processes, customer lists,
current and anticipated customer requirements, price lists, market studies,
business plans, and any other information, however documented, that is a
trade secret under New York or Texas law; and
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(b) information concerning the business and affairs of the Employer and
the Acquired Business (which includes historical financial statements,
financial projections and budgets, historical and projected sales, capital
spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Employer containing or based, in whole or
in part, on any information included in the foregoing.
"Employee Invention" --any idea, invention, technique, modification,
process, or improvement (whether patentable or not), any industrial design
(whether registerable or not), and any work of authorship (whether or not
copyright protection may be obtained for it) created, conceived, or developed by
the Executive, either solely or in conjunction with others, during the
Employment Period, or a period that includes a portion of the Employment Period,
that relates in any way to, or is useful in any manner in, the business then
being conducted or proposed to be conducted by the Employer, and any such item
created by the Executive, either solely or in conjunction with others, following
termination of the Executive's employment with the Employer, that is based upon
or uses Confidential Information.
"person" --any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or governmental body.
2. EMPLOYMENT TERMS AND DUTIES
2.1 Employment
The Employer hereby employs the Executive, and the Executive hereby accepts
employment by the Employer, upon the terms and conditions set forth in this
Agreement.
2.2 Term
Subject to the provisions of Section 6, the term of the Executive's
employment under this Agreement (the "Employment Period") shall commence on the
Effective Date and continue through June 30, 2003.
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2.3 Duties
The Executive will serve as a senior executive officer of the Employer and
have such duties and title(s) as are assigned or delegated to the Executive by
the board of directors of the Employer (the "Board of Directors") and will
initially serve as president of the Employer. The Executive will devote his
entire time, attention, skill and energy during normal business hours
exclusively to the business of the Employer, will use his best efforts to
promote the success of the Employer's business, and will cooperate fully with
the Board of Directors in the advancement of the best interests of the Employer.
If the Executive is elected as a director of the Employer or as a director or
officer of any of its affiliates, the Executive agrees to serve as such and will
fulfill his duties as a director or officer without additional compensation.
3. COMPENSATION
3.1 Salary
The Executive will be paid an annual salary of $260,000.00, subject to
adjustment as provided below (the "Salary"), which will be payable in equal
periodic installments according to the Employer's customary payroll practices as
they may be revised from time to time at the Employer's discretion, but no less
frequently than monthly. The Salary will be reviewed by the Board of Directors
not less frequently than annually and may be adjusted upward or downward in the
sole discretion of the Board of Directors, but in no event will the Salary be
less than $260,000.00 per year.
3.2 Benefits
The Executive will, during the Employment Period, be permitted to
participate in such pension, profit sharing, bonus, life insurance,
hospitalization, major medical, and other employee benefit plans of the Employer
that may be in effect from time to time, to the extent the Executive is eligible
under the terms of those plans (collectively, the "Benefits").
3.3 Key Man Insurance
The Employer shall obtain and maintain at all times during the Employment
Period one or more life insurance policies on the life of the Executive ("Key
Man Insurance") for the benefit of, and payable to, the Employer for the
aggregate amount not less than the sum of (i) $2,000,000.00 plus (ii) the unpaid
principal balance from time to time of the Promissory Note, as defined in
Section 2.1(a) of the Asset Purchase Agreement (the "Note") as such principal
balance may be adjusted or reduced in accordance with the terms of the Asset
Purchase Agreement and the Note. In the event of the death of the Executive,
such portion of the proceeds of the Key Man Insurance equal to the then unpaid
principal balance of the Note, together with all accrued and unpaid
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interest thereon, shall be paid to the Seller as payment in full of the Note,
immediately upon the receipt of such proceeds by the Employer.
3.4 Disability Insurance
The Employer shall obtain and maintain at all times during the Employment
Period disability insurance on the Executive ("Disability Insurance") which
shall provide the Executive with disability income up to the amount of
$20,000.00 per month through June 30, 2003 in the event of the total disability
of the Executive (as defined under the Disability Insurance policy). The
Executive agrees to submit to any medical examination(s) and provide any
information and documents reasonably necessary for the Employer to obtain any
insurance required by this Agreement, including, without limitation, the Key Man
Insurance and the Disability Insurance. Notwithstanding the foregoing, the
Employer's obligation to obtain the Disability Insurance shall be contingent on
its ability to obtain the Disability Insurance on standard (or better) rates
generally prevailing in Texas for disability insurance with similar benefits on
persons of an age similar to the Executive's age. The Executive represents and
warrants that he is in good health and is insurable at such standard (or better)
rates.
4. FACILITIES AND EXPENSES
The Employer will furnish the Executive with office space, equipment,
supplies, and such other facilities and personnel as the Employer deems
necessary or appropriate for the performance of the Executive's duties under
this Agreement. The Employer will pay on behalf of the Executive (or reimburse
the Executive for) reasonable out-of-pocket expenses incurred by the Executive
at the request of, or on behalf of, the Employer in the performance of the
Executive's duties pursuant to this Agreement and in accordance with the
Employer's employment policies, including reasonable expenses incurred by the
Executive in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses. The
Executive must file expense reports with respect to such expenses in accordance
with the Employer's expense reimbursement policies as they may be revised from
time to time at the Employer's discretion.
5. VACATIONS AND HOLIDAYS
The Executive will be entitled to paid vacation in accordance with the
vacation policies of the Employer in effect for its executive officers as may be
changed from time to time by the Employer. Vacation must be taken by the
Executive at a time mutually convenient to the Employer and the Executive. The
Executive will also be entitled to the paid holidays and other paid leave set
forth in the Employer's policies.
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6. TERMINATION
6.1 Events of Termination
The Employment Period, the Executive's Salary and Benefits, and any and all
other rights of the Executive under this Agreement or otherwise as an employee
of the Employer will terminate (except as otherwise provided in this Section 6):
(a) upon the death of the Executive (other than the right to require the
prepayment of the Note in accordance with Section 3.3);
(b) upon the disability of the Executive (as defined in Section 6.2)
immediately upon notice from the Employer to the Executive;
(c) for cause (as defined in Section 6.3) at the option of the Employer,
immediately upon notice from the Employer to the Executive, or at such later
time as such notice may specify; or
(d) for good reason (as defined in Section 6.4) upon not less than thirty
days= prior notice from the Executive to the Employer.
6.2 Definition of "Disability"
For purposes of Section 6.1(b), the Executive will be deemed to have a
"disability" if, for physical or mental reasons, the Executive is unable to
perform the essential functions of the Executive's duties under this Agreement
for 120 consecutive days, or 180 days during any twelve month period, as
determined in accordance with this Section 6.2. The disability of the Executive
will be determined by a medical doctor selected by written agreement of the
Employer and the Executive upon the request of either party by notice to the
other. If the Employer and the Executive cannot agree on the selection of a
medical doctor, each of them will select a medical doctor and the two medical
doctors will select a third medical doctor who will determine whether the
Executive has a disability. The determination of the medical doctor selected
under this Section 6.2 will be binding on both parties. The Executive must
submit to a reasonable number of examinations by the medical doctor making the
determination of disability under this Section 6.2, and the Executive hereby
authorizes the disclosure and release to the Employer of such determination and
all supporting medical records. If the Executive is not legally competent, the
Executive's legal guardian or duly authorized attorney-in-fact will act in the
Executive's stead, under this Section 6.2, for the purposes of submitting the
Executive to the examinations, and providing the authorization of disclosure,
required under this Section 6.2.
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6.3 Definition of "For Cause"
For purposes of Section 6.1(c), the phrase "for cause" means: (a) the
Executive's material breach of this Agreement which breach continues for more
than thirty (30) days after notice thereof has been received by the Executive
from the Board of Directors; (b) the Executive's failure to adhere to any
written Employer policy if the Executive has been given a reasonable opportunity
to comply with such policy or cure his failure to comply (which reasonable
opportunity shall not exceed thirty (30) days); (c) the appropriation (or
attempted appropriation) of a material business opportunity of the Employer,
including attempting to secure or securing any personal profit in connection
with any transaction entered into on behalf of the Employer; (d) the
misappropriation (or attempted misappropriation) of any of the Employer's funds
or property; or (e) the conviction of, the indictment for (or its procedural
equivalent), or the entering of a guilty plea or plea of no contest with respect
to, a felony, the equivalent thereof, or any other crime with respect to which
imprisonment for more than six (6) months is a possible punishment.
If the Executive commits an act described in Sections 6.3 (a), (b), (c),
(d) or (e) and the Employer elects to terminate the Executive's employment,
Buyer shall be relieved of its obligation to make any of the contingent purchase
price payments required by Section 2.4(a) of the Asset Purchase Agreement
subsequent to the date of such termination.
6.4 Definition of "For Good Reason"
For purposes of Section 6.1(d), the phrase "for good reason" means any of
the following: (a) the Employer's material breach of this Agreement which breach
continues for more than thirty (30) days after notice has been received by the
Employer; (b) the assignment of the Executive without his consent to a position,
responsibilities, or duties of a materially lesser status or degree of
responsibility than a senior executive officer of the Employer; or (c) the
Employer's material breach of the Asset Purchase Agreement which breach
continues for more than thirty (30) days after notice has been received by the
Employer.
6.5 Termination Pay
Effective upon the termination of this Agreement, the Employer will be
obligated to pay the Executive (or, in the event of his death, his designated
beneficiary as defined below) only such compensation as is provided in this
Section 6.5 and in lieu of all other amounts and in settlement and complete
release of all claims the Executive may have against the Employer. For purposes
of this Section 6.5, the Executive's designated beneficiary will be such
individual beneficiary or trust, located at such address, as the Executive may
designate by notice to the Employer from time to time or, if the Executive fails
to give notice to the Employer of such a beneficiary, the Executive's estate.
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Notwithstanding the preceding sentence, the Employer will have no duty, in any
circumstances, to attempt to open an estate on behalf of the Executive, to
determine whether any beneficiary designated by the Executive is alive or to
ascertain the address of any such beneficiary, to determine the existence of any
trust, to determine whether any person or entity purporting to act as the
Executive's personal representative (or the trustee of a trust established by
the Executive) is duly authorized to act in that capacity, or to locate or
attempt to locate any beneficiary, personal representative, or trustee.
(A) Termination by the Executive for Good Reason. If the Executive
terminates this Agreement for good reason, the Employer will pay the Executive
the Executive's Salary for the remainder, if any, of the calendar month in which
such termination is effective.
(B) Termination by the Employer for Cause. If the Employer terminates this
Agreement for cause, the Executive will be entitled to receive his Salary only
through the date such termination is effective.
(C) Termination upon Disability. If this Agreement is terminated by either
party as a result of the Executive's disability, as determined under Section
6.2, the Employer will pay the Executive his Salary through the remainder of the
calendar month during which such termination is effective.
(D) Termination upon Death. If this Agreement is terminated because of the
Executive's death, the Executive will be entitled to receive his Salary through
the end of the calendar month in which his death occurs.
(E) Benefits. The Executive's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date of the termination
of this Agreement and the Executive will be entitled to accrued Benefits
pursuant to such plans only as provided in such plans. Notwithstanding the
foregoing, unless termination is pursuant to Section 6.5(B) or (D) above, the
Employer shall continue, at its sole cost, the Executive's medical insurance for
(i) six (6) months after termination, or (ii) through June 30, 2003, whichever
is shorter.
7. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS
7.1 Acknowledgments by the Executive
The Executive acknowledges that (a) during the Employment Period and as a
part of his employment, the Executive will be afforded access to Confidential
Information; (b) public disclosure of such Confidential Information could have
an adverse effect on the Employer and its business; (c) because the Executive
possesses substantial technical expertise and skill with respect to the
Employer's business, the Employer desires to obtain exclusive ownership of each
Employee Invention, and the Employer will be at a
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substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; (d) the Employer has required that the Executive
make the covenants in this Section 7 as a condition to its purchase of the
Acquired Business; and (e) the provisions of this Section 7 are reasonable and
necessary to prevent the improper use or disclosure of Confidential Information
and to provide the Employer with exclusive ownership of all Employee Inventions.
7.2 Agreements of the Executive
In consideration of the compensation and benefits to be paid or provided to
the Executive by the Employer under this Agreement, the Executive covenants as
follows:
(A) Confidentiality.
(i) During and following the Employment Period, the Executive will hold
in confidence the Confidential Information and will not disclose it to any
person except with the specific prior written consent of the Employer or
except as otherwise expressly permitted by the terms of this Agreement.
(ii) Any trade secrets of the Employer will be entitled to all of the
protections and benefits under New York, Texas and any other applicable
law. If any information that the Employer deems to be a trade secret is
found by a court of competent jurisdiction not to be a trade secret for
purposes of this Agreement, such information will, nevertheless, be
considered Confidential Information for purposes of this Agreement. The
Executive hereby waives any requirement that the Employer submit proof of
the economic value of any trade secret or post a bond or other security.
(iii) None of the obligations and restrictions set forth in Sections
7.2(A)(i) or 7.2(A)(ii) applies to any part of the Confidential Information
that the Executive demonstrates was or became generally available to the
public other than as a result of a disclosure by the Executive.
(iv) The Executive will not remove from the Employer's premises (except
to the extent such removal is for purposes of the performance of the
Executive's duties at home or while traveling, or except as otherwise
specifically authorized by the Employer) any document, record, notebook,
plan, model, component, device, or computer software or code, whether
embodied in a disk or in any other form (collectively, the "Proprietary
Items"). The Executive recognizes that, as between the Employer and the
Executive, all of the Proprietary Items, whether or not developed by the
Executive, are the exclusive property of the Employer. Upon termination of
this Agreement by either party, or upon the request of the Employer during
the Employment Period, the Executive will return to the Employer all of the
Proprietary Items and other forms or media containing
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Confidential Information in the Executive's possession or subject to the
Executive's control, and the Executive shall not retain any copies,
abstracts, sketches, or other physical embodiment of any of the Proprietary
Items.
(B) Employee Inventions. Each Employee Invention will belong exclusively to
the Employer. The Executive acknowledges that all of the Executive's writing,
works of authorship, specially commissioned works, and other Employee Inventions
are works made for hire and the property of the Employer, including any
copyrights, patents, or other intellectual property rights pertaining thereto.
If it is determined that any such works are not works made for hire, the
Executive hereby assigns to the Employer all of the Executive's right, title,
and interest, including all rights of copyright, patent, and other intellectual
property rights, to or in such Employee Inventions. The Executive covenants that
he will promptly:
(i) disclose to the Employer in writing any Employee Invention;
(ii) assign to the Employer or to a party designated by the Employer,
at the Employer's request and without additional compensation, all of the
Executive's right to the Employee Invention for the United States and all
foreign jurisdictions;
(iii) execute and deliver to the Employer such applications,
assignments, and other documents as the Employer may request in order to
apply for and obtain patents or other registrations with respect to any
Employee Invention in the United States and any foreign jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance in support of the
Employer's rights to any Employee Invention.
7.3 Disputes or Controversies
The Executive recognizes that should a dispute or controversy arising from
or relating to this Agreement be submitted for adjudication to any court,
arbitration panel, or other third party, the preservation of the secrecy of
Confidential Information may be jeopardized. All pleadings, documents,
testimony, and records relating to any such adjudication will be maintained in
secrecy and will be available for inspection by the Employer, the Executive, and
their respective attorneys and experts, who will agree, in advance and in
writing, to receive and maintain all such information in secrecy, except as may
be limited by them in writing.
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8. NON-COMPETITION AND NON-INTERFERENCE
8.1 Acknowledgments by the Executive
The Executive acknowledges that: (a) the services to be performed by him
under this Agreement are of a special, unique, unusual, extraordinary, and
intellectual character; (b) the Employer's business and that of its affiliated
companies, including, without limitation, TDA Industries, Inc., Eagle Supply,
Inc. and JEH/Eagle Supply, Inc. (together with the Employer and any other
affiliate of the Employer, the "Eagle Companies") is currently regional in scope
but may become national in scope and its products are currently marketed in six
or more regions (with distribution facilities currently located in nine states)
but may in the future be marketed throughout the United States; (c) the Eagle
Companies compete with other businesses that are or could be located in any part
of the United States; (d) the Employer has required that the Executive make the
covenants set forth in this Section 8 as a condition to the Employer's purchase
of the Acquired Business and the employment of the Executive hereunder; and (e)
the provisions of this Section 8 are reasonable and necessary to protect the
Eagle Companies' business.
8.2 Covenants of the Executive
In consideration of the acknowledgments by the Executive, and in
consideration of the Salary, Benefits and other compensation to be paid or
provided to the Executive by the Employer, the Executive covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period (as defined
below), engage or invest in, own, manage, operate, finance, control, or
participate in the ownership, management, operation, financing, or control
of, be employed by, associated with, or in any manner connected with, lend
the Executive's name or any similar name to, lend Executive's credit to or
render services or advice to, any business which sells products or services
which are similar to the types of products or services sold by the Employer
in any state in which the Employer's products at that time (or anytime
thereafter during the Post-Employment Period) are sold, marketed or
distributed, whether directly, through the other Eagle Companies, or
through independent third parties; provided, however, that the Executive
may purchase or otherwise acquire up to (but not more than) one percent of
any class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such securities are
listed on any national or regional securities exchange or have been
registered under Section 12(g) of the Securities Exchange Act of 1934;
(b) whether for the Executive's own account or for the account of any
other person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
10
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carried on by the Employer or any of the other Eagle Companies, from any
person known by the Executive to be a customer prior to or during the
Employment Period of the Employer or any of the other Eagle Companies,
whether or not the Executive had personal contact with such person during
and by reason of the Executive's employment with the Employer;
(c) whether for the Executive's own account or the account of any other
person (i) at any time during the Employment Period or the Post-Employment
Period, solicit, employ, or otherwise engage as an employee, independent
contractor, or otherwise, any person who is or was an employee of the
Employer or any of the other Eagle Companies at any time during the
Employment Period or in any manner induce or attempt to induce any employee
of the Employer or any of the other Eagle Companies to terminate his
employment with the Employer of any of the other Eagle Companies; or (ii)
at any time during the Employment Period or the Post Employment Period,
interfere with the relationship of the Employer or any of the other Eagle
Companies with any person, including any person who at any time during the
Employment Period was an employee, contractor, supplier, or customer of the
Employer or any of the other Eagle Companies; or
(d) at any time during or after the Employment Period, disparage the
Employer or any of the other Eagle Companies or any of their shareholders,
directors, officers, employees, or agents.
For purposes of this Section 8.2, the term "Post-Employment Period" means the
two-year period beginning on the date of termination of the Executive's
employment with the Employer.
If any covenant in this Section 8.2 is held to be unreasonable, arbitrary,
or against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic or market area, and such lesser scope,
time, or geographic or market area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary, and not against
public policy, will be effective, binding, and enforceable against the
Executive.
The period of time applicable to any covenant in this Section 8.2 will be
extended by the duration of any violation by the Executive of such covenant.
The Executive will, while the covenants under this Section 8.2 are in
effect, give notice to the Employer, within ten days after accepting any other
employment, of the identity of the Executive's employer. The Employer may notify
such employer that the Executive is bound by this Agreement and, at the
Employer's election, furnish such employer with a copy of this Agreement or
relevant portions thereof.
11
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The Executive and the Employer acknowledge that the purchase price for the
Acquired Business, as set forth in the Asset Purchase Agreement, was based in
part on the Executive's and Seller's commitment not to compete with the Eagle
Companies as provided herein and in the Asset Purchase Agreement. Accordingly,
if the Executive or Seller violates the provisions of this Section 8.2 or the
provisions of Section 11 of the Asset Purchase Agreement, in addition to any of
Buyer's other rights and remedies provided herein or in the Asset Purchase
Agreement, Buyer shall be relieved of its obligation to make any of the
contingent purchase price payments required by Section 2.4(a) of the Asset
Purchase Agreement subsequent to the date of such violation.
9. GENERAL PROVISIONS
9.1 Injunctive Relief and Additional Remedies
The Executive acknowledges that the injury that would be suffered by the
Employer as a result of a breach of the provisions of this Agreement (including
any provision of Sections 7 and 8) would be irreparable and that an award of
monetary damages to the Employer for such a breach would be an inadequate
remedy. Consequently, the Employer will have the right, in addition to any other
rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provision of this
Agreement, and the Employer will not be obligated to post bond or other security
in seeking such relief. Without limiting the Employer's rights under this
Section 9 or any other remedies of the Employer, if the Executive breaches any
of the provisions of Section 7 or 8, the Employer will have the right to cease
making any payments otherwise due to the Executive under this Agreement.
9.2 Covenants of Sections 7 and 8 are Essential and
Independent Covenants
The covenants by the Executive in Sections 7 and 8 are essential elements
of this Agreement and the Asset Purchase Agreement, and without the Executive's
agreement to comply with such covenants, the Buyer would not have purchased the
Acquired Business under the Asset Purchase Agreement and the Employer would not
have entered into this Agreement or employed the Executive. The Employer and the
Executive have independently consulted their respective counsel and have been
advised in all respects concerning the reasonableness and propriety of such
covenants, with specific regard to the nature of the business conducted, and
intended to be conducted, by the Employer and the other Eagle Companies.
The Executive's covenants in Sections 7 and 8 are independent covenants and
the existence of any claim by the Executive against the Employer under this
Agreement or otherwise will not excuse the Executive's breach of any covenant in
Section 7 or 8.
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If the Executive's employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of the Executive in Sections 7 and 8.
9.3 Representations and Warranties by the Executive
The Executive represents and warrants to the Employer that the execution
and delivery by the Executive of this Agreement do not, and the performance by
the Executive of the Executive's obligations hereunder will not, with or without
the giving of notice or the passage of time, or both: (a) violate any judgment,
writ, injunction, or order of any court, arbitrator, or governmental agency
applicable to the Executive; or (b) conflict with, result in the breach of any
provisions of or the termination of, or constitute a default under, any
agreement to which the Executive is a party or by which the Executive is or may
be bound.
9.4 Obligations Contingent on Performance
The obligations of the Employer hereunder, including its obligation to pay
the compensation provided for herein, are contingent upon the Executive's
substantial performance of the Executive's obligations hereunder.
9.5 Waiver
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by either party in exercising
any right, power, or privilege under this Agreement will operate as a waiver of
such right, power, or privilege, and no single or partial exercise of any such
right, power, or privilege will preclude any other or further exercise of such
right, power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law: (a) no claim or
right arising out of this Agreement can be discharged by one party, in whole or
in part, by a waiver or renunciation of the claim or right unless in writing
signed by the other party; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
9.6 Binding Effect; Delegation of Duties Prohibited
This Agreement shall inure to the benefit of, and shall be binding upon,
the parties hereto and their respective successors, assigns, heirs, and legal
representatives, including any entity with which the Employer may merge or
consolidate or to which all or substantially all of its assets may be
transferred. The duties and covenants of the Executive under this Agreement,
being personal, may not be delegated.
13
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9.7 Notices
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by facsimile
(with written confirmation of receipt), provided that a copy is mailed by
certified mail, return receipt requested, or (c) when received by the addressee,
if sent by a nationally recognized overnight delivery service (receipt
requested), in each case to the appropriate addresses and facsimile numbers set
forth below (or to such other addresses and facsimile numbers as a party may
designate by notice to the other parties):
If to Employer: MSI/Eagle Supply, Inc.
c/o TDA Industries, Inc.
122 East 42nd Street, Suite 1116
New York, NY 10168
Attention: Douglas P. Fields,
Chief Executive Officer
With a copy to: Carlton, Fields, Ward, Emmanuel,
Smith & Cutler, P.A.
P.O. Box 3239
Tampa, Florida 33601
(if by mail)
or
One Harbour Place, 5th Floor
Tampa, Florida 33602
(if by hand delivery)
Attention: Nathaniel L. Doliner,
Attorney at Law
If to the Executive: 20 Woodland Court
Mansfield, Texas 76063
14
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With a copy to: Raymond Meeks, Esq.
Attorney at Law
1000 N. Walnut Creek Drive
Suite C
Mansfield, Texas 76063
9.8 Entire Agreement; Amendments
This Agreement, the Asset Purchase Agreement, and the documents executed in
connection with the Asset Purchase Agreement, contain the entire agreement
between the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings, oral or written, between the parties hereto
with respect to the subject matter hereof. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties hereto.
9.9 Governing Law
This Agreement shall be governed by the law of the State of New York
without regard to its conflicts of laws principles except to the extent an
action may be brought to enforce any of the protective covenants set forth in
Section 8 of this Agreement. In order to simplify any such legal proceedings,
which likely would require review of the law of the forum jurisdiction to ensure
that enforcement is appropriate as a matter of public policy, it is agreed that
notwithstanding principles of conflicts of law otherwise requiring a different
result, the law of the state in which the enforcement action is filed shall
govern construction and enforcement of such protective covenants.
9.10 Jurisdiction; Waiver of Jury Trial
Any action or proceeding seeking to enforce any provision of, or based on
any right arising out of, this Agreement may be brought against either of the
parties in the courts of the State of New York in New York County, New York, or,
if it has or can acquire jurisdiction, in the United States District Court for
the Southern District of New York, or the Middle District of Florida, and each
of the parties consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding and waives any
objection to venue laid therein. The parties agree to accept service of process
by certified mail, or such other means as permitted for the giving of notices
hereunder. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world. THE PARTIES HERETO
ACKNOWLEDGE THAT THE TIME AND EXPENSE REQUIRED FOR TRIAL BY JURY EXCEED THE TIME
AND EXPENSE FOR A BENCH TRIAL AND HEREBY WAIVE, TO THE EXTENT PERMITTED BY LAW,
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
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AGREEMENT.
9.11 Section Headings; Construction
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement unless otherwise specified. All words used in this Agreement will be
construed to be of such gender or number as the circumstances require. Unless
otherwise expressly provided, the word "including" does not limit the preceding
words or terms.
9.12 Severability
If any provision of this Agreement is held invalid or unenforceable in any
jurisdiction by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect in such jurisdiction. Any
provision of this Agreement held invalid or unenforceable only in part or degree
will remain in full force and effect to the extent not held invalid or
unenforceable.
9.13 Counterparts
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of
the date first written above.
WITNESSES: EXECUTIVE:
[illegible]
- ------------------------
[illegible] /s/ Gary L. Howard
- ------------------------ ----------------------
GARY L. HOWARD
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EMPLOYER:
MSI/EAGLE SUPPLY, INC.,
a Delaware corporation
By: /s/ Douglas P. Fields, CEO
-----------------------------
Douglas P. Fields
Chief Executive Officer
ACKNOWLEDGED AND AGREED TO, this 22nd day of October, 1998.
MASONRY SUPPLY, INC.,
a Texas corporation
By: /s/ Gary L. Howard, Pres.
--------------------------------
Gary L. Howard
President
<PAGE>
Exhibit 10.30
LEASE
THIS LEASE (the "Lease") is made effective as of the 22nd day of October,
1998, between GARY L. HOWARD AND PATTI L. HOWARD, husband and wife ("LANDLORD"),
having an address of 20 Woodland Court, Mansfield, Texas 76063, and MSI/EAGLE
SUPPLY, INC., a Delaware corporation, having an address of c/o TDA Industries,
Inc., 122 East 42nd Street, Suite 1116, New York, New York 10168 ("Tenant").
W I T N E S S E T H:
SECTION 1. PREMISES. In consideration of the rent agreed to be paid by
Tenant to Landlord, and in consideration of the covenants of the respective
parties set forth in this Lease, Landlord leases and lets unto Tenant, and
Tenant leases from Landlord, the land described on SCHEDULE "A" attached hereto
and made a part hereof, and the building located thereon (the "BUILDING") having
an address of 2090 Highway 157 North, Mansfield, Texas 76063 (the land and
Building are collectively referred to herein as the "PREMISES").
SECTION 2. TERM OF LEASE. The term of this Lease shall be for a term of
three (3) years and ten (10) days commencing on October 22, 1998 (the "LEASE
COMMENCEMENT DATE") and ending on October 31, 2001 (the "LEASE TERMINATION
DATE"). The term "LEASE YEAR" as used herein shall mean the twelve consecutive
month period commencing November 1, 1998 and each twelve consecutive month
period thereafter during the Lease term.
SECTION 3. RENTAL. Tenant covenants and agrees that it will pay to
Landlord for the use of the Premises the following rental:
A. FIXED RENT. Tenant shall pay fixed rent for the Premises at the
annual rate of One Hundred Six Thousand Seven Hundred Fifty-two and 00/100
Dollars ($106,752.00), payable in monthly installments of Eight Thousand Eight
Hundred Ninety-six 00/100 Dollars ($8,896.00) per month, payable on the first
day of each month ("Fixed Rent"); provided, however, that Tenant's first
installment of fixed rent shall be in the amount of Eleven Thousand Seven
Hundred Sixty-Six Dollars ($11,766.00), covering the period October 22, 1998
through November 30, 1998. If Tenant exercises its first option to renew the
term of this Lease pursuant to Section 4 of this Lease, the annual Fixed Rent
during the first Renewal Term shall be equal to one hundred five percent (105%)
of the annual Fixed Rent during the initial term. If Tenant exercises its
second option to renew the term of this Lease pursuant to Section 4 of this
Lease, the annual Fixed Rent during the second Renewal Term shall be equal to
one hundred five percent (105%) of the annual Fixed Rent during the first
Renewal Term. The annual Fixed Rent for each Lease Year during a Renewal Term,
if any, shall be payable in equal monthly installments on the first day of each
month of the Renewal Term.
B. SALES, USE AND EXCISE TAXES. Tenant shall also pay with all Fixed
Rent due under this Lease an amount equal to any tax on all amounts classified
as rent which may be now or hereafter imposed by any lawful authority or agency.
SECTION 4. EXTENSIONS. Tenant has two (2) options to extend the term of
this Lease for two (2) additional periods of three (3) years each (individually
a "RENEWAL TERM" and collectively the "RENEWAL TERMS") to commence immediately
upon the expiration of the initial
<PAGE>
term or immediately preceding Renewal Term, as the case may be, upon the same
terms and conditions as contained in this Lease, except for the Fixed Rent for
each Renewal Term, which shall be determined in accordance with the procedures
set forth in Section 3A of this Lease. In order to exercise the renewal options
granted herein, Tenant shall notify Landlord in writing not less than thirty
(30) days prior to the expiration of the initial term or the Renewal Term, as
the case may be, that it is exercising its option to renew the term.
SECTION 5. USE OF PREMISES. The Premises shall be used for any purpose
permitted by applicable laws, including, without limitation, a warehouse and
showroom for masonry materials and supplies and other building supplies and
materials and office and clerical activities related thereto. At all times
during the term of this Lease, Tenant shall maintain and keep in effect all
permits and licenses necessary for the operation of Tenant's business on the
Premises and conduct its business in a lawful manner.
SECTION 6. MAINTENANCE AND CARE OF PREMISES.
A. Landlord shall, at its own cost and expense, diligently, promptly
and in a good workmanlike manner make all maintenance, repairs and replacements
to (i) the structural components of the Building, including, without limitation,
the roof, roofing system, exterior walls, bearing walls, support beams,
foundations, columns, exterior doors, and windows and lateral support to the
Building; (ii) insure watertightness of the Building (including caulking of the
flashings) and repairs to the roof, roofing system, curtain walls, windows and
skylights if required to insure watertightness; and (iii) any items required to
be maintained by Tenant pursuant to Section 6.B. which were damaged by the
negligence or more culpable conduct of Landlord or its agents or employees. In
addition, Landlord, at its expense, shall replace any electrical, plumbing,
heating, air conditioning or other mechanical installation if, in Tenant's
reasonable opinion, such electrical, plumbing, heating, air conditioning or
other mechanical installation can no longer be maintained in good condition
through routine repairs and maintenance by Tenant pursuant to Section 6.B. of
this Lease.
B. Tenant shall, at its own cost and expense, diligently, promptly
and in a good workmanlike manner: (i) maintain the interior of the Building in a
clean and attractive condition; (ii) maintain and repair all electrical,
plumbing, heating, air conditioning or other mechanical installations and
equipment; (iii) keep the lawn and landscaping in a satisfactory condition; (iv)
maintain the parking lot; and (v) as may be necessary, maintain, repair and/or
replace any items to be maintained by Landlord pursuant to Section 6.A. of this
Lease if damage to such items is caused by the negligence or more culpable
conduct of Tenant or its agents or employees. Tenant shall repair any breakage
of glass in the Building which breakage is not caused by the negligence or more
culpable conduct of Landlord or its agents or employees.
SECTION 7. INSURANCE. Tenant, at its sole expense, shall procure and
maintain during the term of this Lease the following insurance policies:
A. A general commercial liability policy of insurance insuring and
naming Landlord and Tenant against liability occasioned by accident on or
about the Premises. Such policy shall be written by an insurance company
which is authorized to do business in the state in which the Premises is
located and shall be in the amount of not less than a combined single limit
of not less than $1,000,000.00.
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B. Fire and extended coverage, vandalism and malicious mischief
insurance with an "All Risks" endorsement, naming both Landlord and Tenant
as insured parties and loss payees (as their interests may appear) against
loss by fire, flood, windstorm and all other insurable casualties in an
amount no less than eighty percent (80%) the full replacement value of the
Building, or such other amount as may be agreed upon by Landlord and
Tenant.
SECTION 8. ASSIGNMENT OR SUBLETTING. Tenant shall not assign this Lease
or any estate or interest therein, or sublet the Premises or any part thereof,
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. Notwithstanding anything else to the contrary
contained in this Lease, Tenant shall have the right, without the consent of
Landlord, to assign this Lease or sublet all or part of the Premises to a
Related Corporation of Tenant (as hereinafter defined) or to a Successor
Corporation of Tenant (as hereinafter defined). The term "Related Corporation"
shall mean a corporation, partnership or other business entity, which, directly
or indirectly, controls, is controlled by, or is under common control with
another corporation, partnership or other business entity of Tenant. If more
than fifty percent (50%) of the voting stock of a corporation shall be owned by
another corporation or by a partnership or other business entity, the
corporation whose stock is so owned shall be deemed to be controlled by the
corporation, partnership or business entity owning such stock. The term
"Successor Corporation" shall mean a corporation or other business entity into
or with which another corporation or business entity shall be merged or
consolidated or to which all or substantially all of the assets of such other
corporation or other business entity shall be transferred.
SECTION 9. TAXES, ASSESSMENTS AND UTILITIES. Tenant covenants and agrees
to pay promptly before delinquency all charges for real estate taxes and
assessments. Tenant also covenants and agrees to pay promptly before
delinquency all charges for electricity, water and other utilities servicing the
Premises. In addition, Tenant, at Tenant's expense, shall provide for its own
garbage collection and janitorial services for the Premises.
SECTION 10. CASUALTY.
If during the term of this Lease the Premises are damaged or destroyed by
fire or other casualty, Landlord agrees, at its sole expense, promptly to repair
and restore the Premises in the same condition they were in immediately prior to
the damage or destruction. During such period of repair and restoration, the
Fixed Rent shall abate or be reduced to the extent that Tenant is deprived of
the full use of the Premises (the amount of such abatement shall be based on
both the physical extent of the damage or destruction and the extent to which
the damage or destruction causes interference with or impairment of the
operation of the business of Tenant, having regard to the extent to which Tenant
may be required to discontinue or alter its business operations on the
Premises); provided, however, if the damage to the Premises (i) cannot be
repaired or restored within one hundred twenty (120) days following the
occurrence of the fire or other casualty, or (ii) the damage to the Premises can
be repaired or restored within that period, but such damage is not repaired or
restored during that period, then Tenant may terminate this Lease, effective as
of the date of the occurrence of the fire or other casualty by giving written
notice to Landlord. If Tenant elects to terminate this Lease, this Lease shall
be deemed to have been terminated as of the date of the fire or other casualty,
and any advance payments on account of Fixed Rent received by Landlord from
Tenant for periods after the fire or other casualty shall be refunded to Tenant.
Insurance proceeds with respect to the fire or other casualty shall be payable
to Landlord and Tenant as their respective interests may appear.
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SECTION 11. EMINENT DOMAIN.
A. In the event that: (i) the whole or any part of the Building shall be
taken during the term of this Lease or any extension or renewal thereof for any
public or quasi-public use under any governmental law, ordinance, regulation or
by right of eminent domain, (ii) all or any portion of the parking area for the
Building shall be taken for any public or quasi-public use so as to, in Tenant's
reasonable judgment, render the parking inadequate for Tenant's business; or
(iii) if access to the adjacent roadways from the existing curb cuts shall be
denied as a result of a taking for any public or quasi-public use (any of such
events being hereinafter referred to as a "TAKING"), Tenant shall have the
option of terminating this Lease as of a date no later than the date possession
is required by the condemning authority, such termination date to be specified
in a notice of termination to be given by Tenant to Landlord. Fixed Rent shall
be prorated as of the termination date and any advance payments on account of
Fixed Rent received by Landlord from Tenant for periods after the taking shall
be refunded to Tenant.
B. In the event of any taking which does not give rise to an option to
terminate or in the event of a taking which does give rise to an option to
terminate and Tenant elects not to terminate, Landlord shall promptly restore or
repair the Building to the same condition as existed immediately prior to such
taking insofar as is reasonably possible. The award and any excess shall be
held in trust by Landlord and used for such purpose. A just and proportionate
part of the Fixed Rent payable hereunder shall be abated from the date of such
taking until ten (10) days after Landlord has restored the Premises, and
thereafter the Fixed Rent shall be reduced in proportion to the reduction in the
then rental value of the Premises after the taking in comparison with the rental
value prior to the taking.
C. Landlord shall not agree to any condemnation award without the prior
written consent of Tenant, which will not be unreasonably withheld or delayed.
D. In the event of any taking, Tenant shall have the right to recover
from the condemning authority: (i) Tenant's moving expenses; (ii) depreciation
to and cost of removing Tenant's trade fixtures; (iii) Tenant's loss of
business; and (iv) the value of the loss of the leasehold estate.
SECTION 12. TENANT DEFAULT. If Tenant shall fail to pay the Fixed Rent or
other charges required to be paid by Tenant hereunder or to observe any of the
covenants or obligations on Tenant's part to be performed hereunder or to comply
with any of the other provisions of this Lease, such act or omission shall
constitute a default by Tenant under this Lease. In the event of a default by
Tenant, Landlord may give written notice to Tenant, and if Tenant thereafter
fails to cure any such default involving the payment of money within ten (10)
days after the date on which such notice was given, or if the default involves
some act or omission other than the payment of money and shall not be cured
within thirty (30) days after the date on which such notice was given (provided,
however, if the default involves some act or omission other than the payment of
money which cannot be cured within thirty (30) days after the date on which such
notice was given, Landlord shall not exercise any remedies unless the cure
thereof is not undertaken promptly within such period and thereafter
expeditiously completed), then in any such event the Landlord shall have the
right to terminate this Lease or exercise any other remedies available to it
under Texas law.
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SECTION 13. LANDLORD DEFAULT. If Landlord shall fail to pay when due any
amounts required to be paid by Landlord under this Lease or to observe any of
the covenants or obligations on Landlord's part to be performed under this Lease
or to comply with any other provisions of this Lease, such act or omission shall
constitute a default by Landlord under this Lease. In the event of a default by
Landlord, Tenant may give written notice to Landlord, and if Landlord thereafter
fails to cure any such default involving the payment of money within ten (10)
days after the date on which such notice was given, or if the default involves
some act or omission other than the payment of money and shall not be cured
within thirty (30) days after the date on which such notice was given (provided,
however, if the default involves some act or omission other than the payment of
money which cannot be cured within thirty (30) days after the date on which such
notice was given, Tenant shall not exercise any of its remedies unless the cure
thereof is not undertaken promptly within such period and thereafter
expeditiously completed), then Tenant may, at Tenant's option, perform any such
term, provision or condition and any payments made by Tenant in connection
therewith shall be immediately due and owing by Landlord to Tenant, and Tenant
shall have the right to deduct the amount thereof, together with the interest at
the maximum legal rate thereon, from the Fixed Rents then due or thereafter
coming due under this Lease. In addition, Tenant shall have a right to
terminate this Lease or exercise any other remedies available to it under Texas
law.
Section 14. ATTORNEY'S FEES In the event of any litigation arising out of
this Lease between Landlord and Tenant, the prevailing party in such litigation
shall be entitled to recover from the non-prevailing party all costs and
expenses incurred in connection with such litigation, including reasonable
attorneys' fees and paralegals' fees, whether incurred prior to trial, at trial,
on appeal or in any bankruptcy or administrative proceeding.
SECTION 15. COVENANT AGAINST LIENS. Landlord's interest in the Premises
shall not be subject to liens for improvements made by Tenant, and Tenant shall
have no power or authority to create any lien or permit any lien to attach to
Tenant's leasehold or to the estate, reversion or other estate of Landlord in
the Premises or on the improvements of which the Premises are a part. All
materialmen, contractors, artisans, mechanics and laborers and other persons
contracting with Tenant with respect to the Premises or any part thereof, or any
such party who may avail himself of any lien against the realty (whether same
shall proceed in law or in equity) are hereby charged with notice that they
shall look solely to Tenant to secure payment of any amounts due for work done
or material furnished to Tenant at the Premises. Tenant shall advise all
persons furnishing designs, labor, materials or services to the Premises in
connection with Tenant's improvement(s) thereof of the provisions of this
Section.
SECTION 16. RIGHT OF FIRST REFUSAL. Landlord grants Tenant the right of
first refusal to purchase the Premises in accordance with the terms of this
Section 16. Landlord shall notify Tenant no later than three (3) business days
after Landlord receives an offer to purchase the Premises from a third party,
which is acceptable to Landlord, and Tenant shall thereafter have the right to
purchase the Premises from Landlord on the same terms and conditions as stated
in the offer made by the third party to purchase the Premises from the Landlord.
Tenant shall have twenty (20) days after receipt of Landlord's notice of such
offer in which to notify Landlord in writing whether or not it elects to
purchase the Premises. If Tenant elects to purchase the Premises, Landlord and
Tenant shall execute a contract providing for the purchase of the Premises by
Tenant according to the terms set forth in the third party's offer.
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SECTION 17. RELOCATION. Landlord may, but shall not be obligated to,
construct a new warehouse facility (the "NEW FACILITY") in the Mansfield, Texas
area, and Tenant may desire to lease the New Facility from Landlord, provided
Landlord and Tenant agree upon the terms of a lease between Landlord and Tenant
for the New Facility (the "NEW FACILITY LEASE"). In the event that Landlord
constructs the New Facility and Landlord and Tenant agree upon the terms of the
New Facility Lease, then this Lease automatically shall terminate and be of no
further force and effect upon the execution of the New Facility Lease by
Landlord and Tenant and the relocation of Tenant from the Premises to the New
Facility. Nothing contained in this Paragraph 17 shall be construed as imposing
an obligation upon Landlord to construct the New Facility or an obligation upon
either Landlord or Tenant to execute the New Facility Lease. The New Facility
may be owned in whole or in part by Landlord and/or Tenant and/or affiliated
entities of Landlord and/or Tenant.
SECTION 18. HAZARDOUS WASTE.
A. Except for Hazardous Materials (as defined in Section 18.C. of this
Lease) as may typically be found in building material businesses, Tenant shall
not use, generate, manufacture, produce, store, release, discharge, or dispose
of, on, under or about the Premises or land surrounding the Premises
(collectively, the "PROPERTY") any Hazardous Materials. Tenant shall, at its
sole cost and expense, engage in any assessment or remediation work required by
any federal, state or local laws, rules, regulations, codes or ordinances in
connection with any Hazardous Materials introduced to the Property by Tenant or
Tenant's employees or agents.
To the extent permitted by then applicable law, Tenant shall protect,
indemnify, defend and hold harmless Landlord from and against any and all
claims, liabilities, losses, actions, costs and expenses (including attorneys'
fees and costs of defense, whether incurred out of court, at trial, on appeal or
in any bankruptcy or administrative proceeding) incurred by Landlord as the
result of the introduction to the Property by Tenant or Tenant's agents or
employees of any Hazardous Materials.
B. Landlord represents and warrants to Tenant that there are no Hazardous
Materials located in, on or under the Property. Landlord shall, at its sole
cost and expense, engage in any assessment or remediation work required by any
federal, state or local laws, rules, regulations, codes or ordinances in
connection with any Hazardous Materials used, existing, stored, released or
disposed of on or about the Property, except for any Hazardous Materials
introduced to the Property by Tenant or Tenant's agents or employees.
To the extent provided by then applicable law, Landlord shall protect,
indemnify, defend and hold harmless Tenant from and against any and all claims,
liabilities, losses, actions, costs and expenses (including attorneys' fees and
costs of defense, whether incurred out of court, at trial, on appeal or in any
bankruptcy or administrative proceeding) incurred by Tenant as a result of (i) a
breach of any of Landlord's representations and warranties set forth in Section
18.B. of this Lease; or (ii) any use, generation, manufacture, production,
storage, introduction, release, discharge or disposal of on, under or about the
Property of any Hazardous Material, except for those Hazardous Materials
introduced to the Property by Tenant.
C. "HAZARDOUS MATERIALS" shall include, without limitation, (i) those
substances included within the definitions of "hazardous substances," "hazardous
materials," "toxic substances" or "solid waste" under all present and future
federal, state and local laws (whether
6
<PAGE>
under common law, statute, rule, regulation or otherwise) relating to the
protection of human health or the environment, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
and the Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801, ET
SEQ., all as heretofore and hereafter amended, or in any regulations promulgated
pursuant to said laws; (ii) such other substances, materials and wastes which
are or become regulated under applicable local, state or federal law or by the
United States government or which are or become classified as hazardous or toxic
under federal, state or local laws or regulations; and (ii) any material, waste
or substance which contains petroleum, asbestos or polychlorinated biphenyls, is
designated as a "hazardous substance" pursuant to Section 311 of the Clean Water
Act of 1977, 33 U.S.C. Sections 1251, ET SEQ. (33 U.S.C. ' 1321) or listed
pursuant to Section 307 of the Clean Water Act of 1977 (33 U.S.C. ' 1317) or
contains any flammable, explosive or radioactive material.
D. The terms and provisions of this Section 18 shall survive the
termination of this Lease.
SECTION 19. SHORT-FORM LEASE. The parties agree, at the request of either
party, to promptly execute two (2) originals of an instrument, in recordable
form, which will constitute a short form of this Lease, setting forth the
description of the Premises, the terms of this Lease, and any other portions
thereof, excepting the rental provisions, as either party may request. The cost
of preparing and recording this short form of this Lease shall be borne by the
party requesting the execution and recording of the same.
SECTION 20. FORCE MAJEURE. Anything in this Lease to the contrary
notwithstanding, neither Landlord nor Tenant shall be deemed in default with
respect to the performance of any of the terms, covenants and conditions of this
Lease and the other party shall not be entitled to exercise any remedies stated
herein or available at law or in equity if a failure to perform shall be due to
any strike, lockout, civil commotion, war-like operation, invasion, rebellion,
hostilities, military or usurped power, sabotage, governmental regulations or
controls, inability to obtain any material, service or financing, Acts of God or
other cause beyond the control of Landlord or Tenant, as the case may be.
SECTION 21. SURRENDER OF DEMISED PREMISES. Tenant shall deliver and
surrender to Landlord possession of the Premises upon expiration of this Lease,
and Tenant shall remove all of Tenant's personal property, trade fixtures and
equipment from the Premises upon expiration of this Lease.
SECTION 22. QUIET ENJOYMENT. Landlord represents that it has title to the
land described on Schedule AA@ and full right and authority to lease the
Premises, and Tenant shall peacefully and quietly hold and enjoy the Premises
for the full term hereof so long as it does not default in the performance of
any of the provisions hereof beyond applicable grace periods.
SECTION 23. WAIVER OF LANDLORD'S LIEN. Landlord hereby waives any lien it
may have, statutory or otherwise, on any of Tenant's property, furniture,
fixtures and equipment on the Premises during the entire term of this Lease
(including any Renewal Terms), and Landlord agrees to execute any written
instrument confirming such waiver as may be requested by Tenant or Tenant's
lender.
7
<PAGE>
SECTION 24. NOTICES. The Fixed Rent accruing hereunder shall be paid to
Landlord at the following address:
Gary L. Howard and Patti L. Howard
20 Woodland Court
Mansfield, TX 76063
until Tenant is notified otherwise in writing and all notices given to Landlord
hereunder shall be forwarded to Landlord postage prepaid, by registered or
certified mail, return receipt requested, or by express or courier service, at
the foregoing address until Tenant is notified otherwise in writing. All
notices given to Tenant hereunder shall be forwarded to Tenant at:
Mr. Frederick M. Friedman
MSI/Eagle Supply, Inc.
c/o TDA Industries, Inc.
122 E. 42nd Street, Suite 1116
New York, New York 10168
with a copy to: Carlton, Fields, Ward, Emmanuel, Smith
& Cutler, P.A.
One Harbour Place
777 South Harbour Island Boulevard
Tampa, Florida 33602-5799
Attn: Nathaniel L. Doliner, Esquire
by registered or certified mail, return receipt requested, postage prepaid, or
by personal delivery or express or courier service, until Landlord is notified
otherwise in writing. Any notice or demand required to be given or that may be
given hereunder shall be deemed complete upon the date of receipt thereof, or if
delivery is refused, on the date of attempted delivery thereof. Either party
hereto may change its address to any other address in the United States of
America by notice in writing given to the other party in the manner herein
provided.
SECTION 25. TITLE OF SECTIONS. The titles of the sections throughout this
Lease are for convenience and reference only and the words contained therein
shall in no way be held to explain, modify, amplify or aid in the
interpretation, construction or meaning of the provisions of this Lease.
SECTION 26. BINDING EFFECT. Except as herein otherwise expressly
provided, the terms and provisions hereof shall be binding upon and shall inure
to the benefit of the heirs, executors, administrators, successors and assigns
of Landlord and the permitted assigns of Tenant.
SECTION 27. INVALIDITY OF PARTICULAR PROVISION. If any term or provision
of this Lease or the application hereof to any person or circumstance shall to
any extent be invalid or unenforceable, the remainder of this Lease or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable shall not be affected
thereby, and each term and provision of this Lease shall be valid and enforced
to the fullest extent permitted by law.
8
<PAGE>
SECTION 28. CONSTRUCTION. This Lease has been executed in the State of
Texas and shall be construed in accordance with the laws thereof.
SECTION 29. ENTIRE AGREEMENT. This Lease and the Schedule attached hereto
and by reference made a part hereof constitute the entire agreement between the
parties hereto, and no portion thereof may be altered, modified or amended in
any manner whatsoever unless same shall be in writing and signed by the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Lease effective
as of the date first above written.
Signed, sealed and delivered
in the presence of:
Name: /s/ Illegible /s/ Gary L. Howard
-------------------------- ------------------------------
GARY L. HOWARD
Name: /s/ Illegible /s/ Patti L. Howard
-------------------------- ------------------------------
PATTI L. HOWARD
Witnesses as to Landlord LANDLORD
MSI/EAGLE SUPPLY, INC. ., a Delaware
corporation
Name: /s/ Illegible
--------------------------
By: /s/ Douglas P. Fields
-----------------------------
Name: /s/ Illegible Douglas P. Fields
-------------------------- Chief Executive Officer
Witnesses as to Tenant TENANT
9
<PAGE>
SCHEDULE "A"
DESCRIPTION OF LAND
That certain real property located in Mansfield, Tarrant County, Texas, having a
street address of 2090 Highway 157 North, and more particularly located within
the area shaded below.
[GRAPHIC OMITTED]
<PAGE>
Exhibit 10.31
This Note has not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), and the securities laws of any state. The Note has been
acquired for investment purposes only and not with a view to distribution or
resale, and may not be sold, assigned, made subject to a security interest,
pledged, hypothecated, transferred or otherwise disposed of unless and until
registered under the 1933 Act, or an opinion of counsel satisfactory to Eagle
Supply Group, Inc. is received that registration is not required under such 1933
Act or such state securities laws.
EAGLE SUPPLY GROUP, INC.
$100,000.00
PROMISSORY NOTE
Eagle Supply Group, Inc., a Delaware corporation (the "Corporation"),
for value received, hereby promises to pay to TDA Industries, Inc. or registered
assigns (the "Holder") upon the earlier of (a) August 9, 2000 or (b) the closing
date of an initial public offering of the Corporation's equity securities
pursuant to which the Company receives gross proceeds of not less than
$10,000,000.00 (the "Maturity Date"), at the principal offices of the
Corporation, the principal sum of One Hundred Thousand Dollars and no cents
($100,000.00) in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts, and to pay interest on the outstanding principal sum hereof at the rate
of six (6%) percent per annum from the date hereof until the Corporation's
obligation with respect to the payment of such principal sum shall be discharged
as herein provided (the "Note"). Interest shall be due and payable on the
Maturity Date and shall accrue and be payable in like coin or currency to the
Holder hereof at the office of the Corporation. In the event that for any reason
whatsoever any interest or other consideration payable with respect to this Note
shall be deemed to be usurious by a court of competent jurisdiction under the
laws of the State of New York or the laws of any other state governing the
repayment hereof, then so much of such interest or other consideration as shall
be deemed to be usurious shall be held by the Holder as security for the
repayment of the principal amount hereof or shall otherwise be waived.
1. Transfers of Note to Comply with the 1933 Act
The Holder agrees that this Note may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (1) to a person who, in
the opinion of counsel to the Corporation, is a person to whom the Note may
legally be transferred without
<PAGE>
registration and without delivery of a current prospectus under the 1933 Act and
any applicable state securities laws with respect thereto and then only against
receipt of an agreement of such person to comply with the provisions of this
Section 1 with respect to any resale or other disposition of the Note; or (2) to
any person who complies with the provisions of this Section 1 with respect to
any resale or other disposition of the Note; or (3) to any person upon delivery
of a prospectus then meeting the requirements of the 1933 Act relating to such
securities and the offering thereof for such sale or disposition, and thereafter
to all successive assignees.
2. Prepayment
The principal amount of this Note may be prepaid by the
Corporation, in whole or in part without premium or penalty, at any time. Upon
any prepayment of the entire principal amount of this Note, all accrued, but
unpaid, interest shall be paid to the Holder on the date fixed for prepayment by
the Corporation.
3. Covenants of Corporation
a. The Corporation covenants and agrees that, so long as this
Note shall be outstanding, it will:
(i) Do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence,
rights and franchises and comply with all laws applicable to
the Corporation as its counsel may advise; and
(ii) At all times keep true and correct books, records and
accounts.
4. Events of Default
a. This Note shall become due and payable immediately upon any
of the following events, herein called "Events of Default".
(i) Default in the payment of the principal or accrued
interest on this Note, when and as the same shall become due
and payable, whether by acceleration or otherwise;
(ii) Default in the due observance or performance of any
covenant, condition or agreement on the part of the
Corporation to be observed or performed pursuant to the terms
2
<PAGE>
hereof, if such default shall continue uncured for sixty days
after written notice specifying such default shall have been
given to the Corporation by the Holder;
(iii) The entry of a final judgment, arbitration award or
order against the Corporation in an amount exceeding $100,000
which judgment remains unsatisfied for ninety days after the
date of such entry;
(iv) Application for, or consent to, the appointment of a
receiver, trustee or liquidator for the Corporation or of its
property;
(v) Admission in writing of the Corporation's inability to
pay its debts as they mature;
(vi) General assignment by the Corporation for the benefit
of creditors;
(vii) Filing by the Corporation of a voluntary petition in
bankruptcy or a petition or an answer seeking reorganization,
or an arrangement with creditors; or
(viii) The entry against the Corporation of a court order
approving a petition filed against it under the federal
bankruptcy laws, which order shall not have been vacated or
set aside or otherwise terminated within ninety days.
b. In case any one or more of the Events of Default specified
above shall happen and be continuing, the Holder may proceed to protect and
enforce his or her right by suit in the specific performance of any covenant or
agreement contained in this Note or in aid of the exercise of any power granted
in this Note or may proceed to enforce the payment of this Note or to enforce
any other legal or equitable rights as such Holder may have.
c. In the event that the Corporation shall default in the
payment of the principal and interest on the later of the Maturity Date or its
presentment for payment, the total principal amount of and interest due upon all
unpaid Notes shall automatically be due and payable.
3
<PAGE>
5. No Recourse
No recourse shall be had for the payment of the principal of or
interest upon this Note, or for any claim based thereon or otherwise, against
any incorporator, stockholder, officer, director or attorney, past present or
future of the Corporation whether by virtue of any constitution, statute, rule
or laws, enforcement of any assessment or penalty, or by reason of any matter
prior to the delivery of this Note or otherwise except for claims arising from a
theft or misappropriation of assets by any such person, or the declaration or
payment of dividends in violation of the Delaware General Corporation Law then
in effect, all such liability, by the acceptance hereof and as part of the
consideration of the issue hereof, being expressly waived.
6. Miscellaneous
a. This Note has been issued by the Corporation pursuant to
authorization of the Board of Directors of the Corporation.
b. The Corporation may consider and treat the person in whose
name this Note shall be registered as the absolute owner thereof for all
purposes whatsoever (whether or not this Note shall be overdue), and the
Corporation shall not be affected by any notice to the contrary. Subject to the
limitations herein stated, the registered owner of this Note shall have the
right to transfer this Note by assignment, and the transferee thereof shall,
upon his registration as owner of this Note, become vested with all the powers
and rights of the transferor. Registration of any new owner(s) shall take place
upon presentation of this Note to the Corporation at is principal offices,
together with a duly authenticated assignment. In case of transfer by operation
of law, the transferee agrees to notify the Corporation of such transfer and of
his address, and to submit appropriate evidence regarding the transfer so that
this Note may be registered in the name of the transferee. This Note is
transferable only on the books of the Corporation by the holder hereof, in
person or by attorney, on the surrender hereof, duly endorsed. Communications
sent to any registered owner shall be effective as against all holders or
transferees of the Note not registered at the time of sending the communication.
c. Payments of interest shall be made as specified above to
the registered owner of this Note. Payment of principal shall be made to the
registered owner of this Note upon presentation of this Note on or after
maturity. No interest shall be due on this Note for such period of time that may
elapse between the maturity of this Note and its presentation for payment.
4
<PAGE>
d. The Holder shall not by virtue hereof be entitled to any
rights of a stockholder in the Corporation, whether at law or in equity, and the
rights of the Holder are limited to those expressed in this Note.
e. Upon receipt by the Corporation of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Note,
and (in the case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Note, if mutilated,
the Corporation shall execute and deliver a new Note of like tenor and date. Any
such new Note executed and delivered shall constitute an additional contractual
obligation on the part of the Corporation, whether or not this Note so lost,
stolen, destroyed or mutilated shall be at any time enforceable by anyone.
f. This Note shall be construed and enforced in accordance
with the laws of the State of New York without regard to the conflicts of laws
principles thereof or the actual domiciles of the Corporation and the Holder.
The Corporation and the Holder hereby consent to the jurisdiction of the Courts
of the State of New York and the United States District Courts situated therein
in connection with any action concerning the provisions of this Note instituted
by the Holder against the Corporation.
IN WITNESS WHEREOF, Eagle Supply Group, Inc., has caused this Note to
be signed in its name by its Chief Executive Officer.
EAGLE SUPPLY GROUP, INC.
Date: August 20, 1998 By: /s/ Douglas P. Fields
----------------------
Douglas P. Fields,
Chief Executive Officer
5
<PAGE>
Exhibit 10.32
[Letterhead]
December 11, 1998
Mr. Frederick M. Friedman
TDA Industries, Inc.
122 East 42nd Street
New York, New York 10168
Dear Fred,
Reference is made to the Loan and Security Agreement (as amended from time to
time, the "Loan Agreement") dated July 8, 1997, by and between JEH
Acquisition Corp. ("the Borrower"), and Fleet Capital Corp. ("the Lender").
All capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Loan Agreement unless indicated otherwise.
Borrower has requested that Lender (a) waive its rights and remedies as a
result of a certain Events of Default existing under the Loan Agreement, and
(b) agree to modify certain provisions of the Loan Agreement. Lender has
agreed to grant Borrower's requests on the terms and conditions set forth
below.
In consideration of the mutual benefits to be derived hereby, Borrower and
Lender hereby agree as follows:
(1) Borrower acknowledges that it has failed to comply with the provisions of
Sections 8.2.10 Capital Expenditures and that the failure to comply with
such section constitutes an Event of Default under terms of the Loan
Agreement. Lender hereby waives the rights and remedies available to it
under the Loan Agreement as a result of such Event of Default for the
period ending June 30, 1998. Such waiver is effective only for the matters
expressly set forth herein for such period only and shall not be effective
as to any other Defaults or Events of Default under the terms of the Loan
Agreement or for any other period.
(2) Section 8.2.10 Capital Expenditures is hereby deleted in its entirety and
replaced by the following:
8.2.10 Capital Expenditures. Make non-financed Capital Expenditures (other
than payments on Capitalized Lease Obligations), which as to Borrower and/or
any of its subsidiaries exceed $600,000, during any fiscal year of Borrower
or be obligated for Capitalized Lease Obligations in
<PAGE>
excess of $1,500,000 during any fiscal year of Borrower or any of its
subsidiaries.
(3) Section 4.1 Term of Agreement. Is amended and restated as follows:
Subject to Lender's right to cease making Loan's to Borrower upon or
after the occurrence of any Default or Event of Default, this Agreement
shall be in effect from the date hereof through and including October
22, 2003 (the "Original Term") and this Agreement shall automatically
renew for one (1) year periods thereafter (the "Renewal Terms"), unless
(a) the party which elects not to renew this Agreement gives at least
one hundred and eighty (180) days written notice thereof to the other
party prior to the expiration of the Original Term (or the then current
Renewal Term, as the case may be) or (b) this Agreement shall be sooner
terminated as provided in Section 4.2 hereof.
Except as expressly set forth herein, all terms and conditions of the Loan
Agreement shall remain in full force and effect without amendment,
modification or limitation of any kind.
Sincerely,
/s/ Kim Bushey
----------------------
Kim Brian Bushey
Vice President
Accepted and Agreed:
JEH Acquisition Corp.
By: illegible
-----------------------
Title: illegible
--------------------
<PAGE>
Exhibit 10.33
[LETTERHEAD OF FLEET CAPITAL]
December 11, 1998
Mr. Frederick M. Friedman
TDA Industries, Inc.
122 East 42nd Street
New York, New York 10168
Dear Fred,
Reference is made to the Loan and Security Agreement (as amended from time to
time, the "Loan Agreement") dated December 23, 1994, by and between Eagle
Supply, Inc., ("Borrower"), and Fleet Capital Corp. ("Lender") formerly known
as Barclays Business Credit, Inc. All capitalized terms used herein without
definition shall have the meanings ascribed to such terms in the Loan Agreement
unless indicated otherwise.
Borrower has requested that Lender agree to modify certain provisions of the
Loan Agreement. Lender has agreed to grant Borrower's request on the terms and
conditions set forth below.
In consideration of the mutual benefits to be derived hereby, Borrower and
Lender hereby agree as follows:
(1) Section 4.1 TERM OF AGREEMENT. Is amended and restated as follows:
Subject to Lender's right to cease making Loan's to Borrower upon or after
the occurrence of any Default or Event of Default, this Agreement shall be in
effect from the date hereof through and including October 22, 2003 (the
"Original Term"), and this Agreement shall automatically renew for one (1) year
periods thereafter (the "Renewal Terms"), unless (a) the party which elects not
to renew this Agreement gives at least one hundred and eighty (180) days
written notice thereof to the other party prior to the expiration of the
Original Term (or the then current Renewal Term, as the case may be) or (b)
this Agreement shall be sooner terminated as provided in Section 4.2 hereof.
Except as expressly set forth herein, all terms and conditions of the Loan
Agreement shall remain in full force and effect without amendment, modification
or limitation of any kind.
Sincerely,
/s/ Kim Brian Bushey
- ------------------------
Kim Brian Bushey
Vice President
Accepted and Agreed:
Eagle Supply, Inc.
By: /s/ [Illegible]
Title: [Illegible]
<PAGE>
EXHIBIT 12.1
EAGLE SUPPLY GROUP, INC.
COMPUTATION OF "ADDITIONAL SHARES" FOR PRO FORMA EARNINGS PER SHARE
YEAR ENDED JUNE 30, 1998 AND FOUR MONTHS ENDED OCTOBER 31, 1998
Assumed shares issued for pay-down of debt with IPO proceeds and additional
shares required to cover the dividend in excess of 1998 earnings in accordance
with Topic 1:B:3
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
10/31/98 6/30/98
------------ -----------
<S> <C> <C>
Equity of Eagle, MSI Eagle and JEH Eagle--before intercompany account offset.......... $5,772,956 $ 3,571,048
Guaranteed minimum equity............................................................. 1,000,000 1,000,000
------------ -----------
Possible dividend..................................................................... $4,772,956 $ 2,571,048
------------ -----------
------------ -----------
Dividend limited to lower of possible dividend or intercompany Eagle account less
mortgage
Intercompany account of Eagle....................................................... $3,565,481 $ 3,623,619
Less mortgage which is retained..................................................... (495,497) (500,065)
------------ -----------
Assumed dividend.................................................................. 3,069,984 3,123,554
------------ -----------
Excess (shortfall)................................................................ 1,702,972 (552,506)
Historical combined earnings--Eagle, MSI Eagle and JEH Eagle.......................... 1,201,908 799,586
------------ -----------
Assumed proceeds required in excess of earnings to replace dividend................. $1,868,076 $ 1,771,462
------------ -----------
------------ -----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Shares required to be sold to generate
required proceeds:
Offering price--shares.......... $ 5.000
Offering price--warrants........ .125
---------
Total......................... 5.125
Estimated expenses at 19%....... .810
---------
$ 4.315
---------
---------
Additional Shares needed for Dividend (1868/4.315) 432,926
Additional Shares needed for Dividend (1771/4.315) 410,536
Debt reduction $4,525,000
Shares required (4525/4.315) 1,048,667 1,048,667
----------- -----------
TOTAL ADDITIONAL SHARES 1,481,594 1,459,203
----------- -----------
----------- -----------
</TABLE>
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Eagle Supply Group, Inc.
on Form S-1 of our report dated September 18, 1998 on the examination of the
balance sheets of Eagle Supply Group, Inc. as of June 30, 1998 and 1997 on the
related statements of operations, shareholders' (deficiency) equity and cash
flows for the years ended June 30, 1998 and 1997 and the period May 1, 1996
(inception) to June 30, 1996, appearing in the Prospectus, which is part of this
Registration Statement and to the reference to us under the heading 'Experts' in
such prospectus.
We also consent to the use in this Registration Statement of Eagle Supply Group,
Inc. on Form S-1 of our report dated September 9, 1998 on the examination of the
balance sheets of Eagle Supply, Inc. as of June 30, 1998 and 1997 and the
related statements of operations, shareholder's (deficiency) equity and cash
flows for each of the three years in the period ended June 30, 1998, appearing
in the Prospectus, which is part of this Registration Statement and to the
reference to us under the heading "Experts" in such prospectus.
We also consent to the use in this Registration Statement of Eagle Supply Group,
Inc. on Form S-1 of our report dated September 11, 1998 (December 11, 1998 as to
Note 4A) on the examination of the balance sheet of JEH/Eagle Supply, Inc. as of
June 30, 1998 and the related statement of operations, shareholder's equity and
cash flows for the year ended June 30, 1998, appearing in this Prospectus, which
is part of this Registration Statement and to the reference to us under the
heading "Experts" in such prospectus.
/s/ Deloitte & Touche LLP
December 24, 1998
New York, New York
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Eagle Supply
Group, Inc. on Form S-1 of our reports (a) dated August 20, 1997 of JEH
Company, Inc. and (b) dated September 25 and December 10, 1998 of Masonry
Supply, Inc., both Texas corporations, appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Waters, Murray & Associates
- ----------------------------------
WATERS, MURRAY & ASSOCIATES
December 23, 1998
