UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-18050
EAGLE PACIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its Charter)
MINNESOTA 41-1642846
(State of incorporation) (I.R.S. Employer Identification No.)
333 South Seventh Street
2430 Metropolitan Centre
Minneapolis, Minnesota 55402
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 371-9650
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
The number of shares of the registrant's Common Stock, $.01 par value per share,
outstanding as of July 25, 1997 was 6,518,237.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE
NO.
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Condensed Statements of Operations - Three and Six
Months Ended June 30, 1997 and 1996 (Unaudited)............... 3
Consolidated Condensed Balance Sheets - June 30, 1997
and December 31, 1996 (Unaudited)............................. 4
Consolidated Condensed Statements of Cash Flows - Six
Months Ended June 30, 1997 and 1996 (Unaudited)............... 5
Notes to Consolidated Condensed Financial Statements (Unaudited).. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 7
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES............................................ 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 9
SIGNATURES....................................................................10
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
NET SALES $ 19,735,228 $ 18,174,787 $ 36,947,458 $ 34,116,800
COST OF GOODS SOLD 15,324,133 13,337,957 28,687,447 25,123,495
------------ ------------ ------------ ------------
Gross profit 4,411,095 4,836,830 8,260,011 8,993,305
OPERATING EXPENSES:
Selling expenses 2,188,788 1,934,666 4,136,861 3,621,990
General and administrative expenses 685,806 677,118 1,381,794 1,407,588
------------ ------------ ------------ ------------
2,874,594 2,611,784 5,518,655 5,029,578
------------ ------------ ------------ ------------
OPERATING INCOME 1,536,501 2,225,046 2,741,356 3,963,727
NON-OPERATING EXPENSE 778,956 747,580 1,456,543 1,519,824
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 757,545 1,477,466 1,284,813 2,443,903
INCOME TAX BENEFIT (EXPENSE) 215,932 (96,000) 192,932 (113,000)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS 973,477 1,381,466 1,477,745 2,330,903
EXTRAORDINARY LOSS ON DEBT
PREPAYMENTS, less income tax benefit of $90,000 -- 1,718,854 -- 1,718,854
------------ ------------ ------------ ------------
NET INCOME (LOSS) 973,477 (337,388) 1,477,745 612,049
PREFERRED STOCK DIVIDENDS (118,434) (40,421) (119,090) (88,844)
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 855,043 $ (377,809) $ 1,358,655 $ 523,205
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Primary
Income before extraordinary loss $ .11 $ .28 $ .18 $ .41
Extraordinary loss on debt prepayments -- (.36) -- (.31)
------------ ------------ ------------ ------------
Net income (loss) $ .11 $ (.08) $ .18 $ .10
============ ============ ============ ============
Fully diluted
Income before extraordinary loss $ .11 $ .22 $ .18 $ .33
Extraordinary loss on debt prepayments -- (.28) -- (.24)
------------ ------------ ------------ ------------
Net income (loss) $ .11 $ (.06) $ .18 $ .09
============ ============ ============ ============
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 7,582,260 4,756,652 7,553,574 5,610,425
============ ============ ============ ============
Fully diluted 8,813,413 6,062,710 8,181,875 7,180,615
============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
ASSETS JUNE 30, 1997 DECEMBER 31, 1996
CURRENT ASSETS:
Cash and cash equivalents $ -- $ --
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $290,000 and $195,000, respectively 10,467,335 6,373,994
Inventories 12,688,397 10,279,169
Deferred income taxes 425,000 340,000
Other 406,590 196,482
------------ ------------
Total current assets 23,987,322 17,189,645
PROPERTY AND EQUIPMENT, net 13,390,708 11,486,019
OTHER ASSETS:
Prepaid interest 1,132,408 1,388,688
Goodwill, less accumulated amortization of $315,000 and
$263,000, respectively 3,869,390 3,650,298
Other 1,720,948 1,711,914
------------ ------------
6,722,746 6,750,900
------------ ------------
$ 44,100,776 $ 35,426,564
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 2,217,214 $ 4,649,102
Accounts payable 9,182,966 8,020,368
Accrued liabilities 1,526,717 1,442,180
Current maturities of long-term debt 2,021,387 1,951,751
------------ ------------
Total current liabilities 14,948,284 16,063,401
LONG-TERM DEBT, less current maturities 6,251,005 7,035,562
SUBORDINATED DEBT 4,070,538 3,972,450
OTHER LONG-TERM LIABILITIES 179,478 331,147
REDEEMABLE PREFERRED STOCK, 8% cumulative 9,417,629 --
dividend; convertible; $1,000 liquidation preference; $.01
par value; authorized, issued and outstanding 10,000
and none, respectively
STOCKHOLDERS' EQUITY:
Series A preferred stock, 7% cumulative dividend; convertible;
$2 liquidation preference; no par value; authorized 2,000,000
shares; issued and outstanding 18,750 shares 37,500 37,500
Undesignated stock, par value $.01 per share; authorized
18,000,000 shares, none issued and outstanding -- --
Common stock, par value $.01 per share; authorized
30,000,000 shares; issued and outstanding 6,518,237 and
6,443,237 shares, respectively 65,182 64,432
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding -- --
Additional paid-in capital 37,282,209 37,211,090
Unearned compensation on stock options (41,119) (96,241)
Notes receivable from officers and employees on Common
Stock purchases (342,151) (66,343)
Accumulated deficit (27,767,779) (29,126,434)
------------ ------------
Total stockholders' equity 9,233,842 8,024,004
------------ ------------
$ 44,100,776 $ 35,426,564
============ ============
See accompanying notes to consolidated condensed financial statements.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
- ----------------------------------------------------------------------------------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,477,745 $ 612,049
Adjustments to reconcile net income to net cash
used by operating activities:
Extraordinary loss on debt prepayments -- 1,718,853
Minority interest 17,780 90,389
Depreciation and amortization 867,365 791,608
Loan discount amortization 247,552 189,819
Prepaid interest amortization 256,280 257,140
Deferred income taxes (250,000) --
Change in operating assets and liabilities (5,556,661) (3,489,806)
Other -- 7,150
----------- -----------
Net cash (used in) provided by operating activities (2,939,939) 177,202
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,618,264) (1,779,280)
Purchases of minority interest (369,588) (519,749)
Proceeds from restricted cash -- 500,000
Proceeds from property and equipment disposals -- 16,285
Notes receivable from officers and employees for purchase of
common stock (275,808) --
----------- -----------
Net cash used in investing activities (3,263,660) (1,782,744)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) Borrowings under note payable, net (2,431,888) 1,988,745
Proceeds from long-term debt 260,000 8,029,950
Repayment of long-term debt (974,921) (9,528,778)
Issuance of redeemable preferred stock, net of offering costs 9,417,629 1,446,563
Issuance of common stock 71,869 1,446,563
Payment of debt issuance costs (20,000) (545,137)
Payment of preferred stock dividend (119,090) (88,844)
----------- -----------
Net cash provided by financing activities 6,203,599 1,302,499
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- (303,043)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD -- 303,043
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ --
=========== ===========
See accompanying notes to consolidated condensed financial statements.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
1. PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the
financial position of Eagle Pacific Industries, Inc. and subsidiaries
("the Company") at June 30, 1997 and the results of its operations for
the three and six month periods ended June 30, 1997 and 1996 and its
cash flows for the six month periods ended June 30, 1997 and 1996.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the Company's management believes that
the disclosures are adequate to make the information presented not
misleading, it is suggested that these consolidated condensed
financial statements be read in conjunction with the consolidated
financial statements of the Company included with its annual report on
Form 10-K for the year ended December 31, 1996.
2. INVENTORY
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
Raw materials $ 4,773,187 $ 3,151,147
Finished goods 7,915,210 7,128,022
------------ ------------
$ 12,688,397 $ 10,279,169
------------ ------------
3. REDEEMABLE PREFERRED STOCK
On May 9, 1997, the Company issued 10,000 shares of redeemable 8%
convertible preferred stock at $1,000 per share. The stock is
convertible at the holders option at $4.26 per share and has a
mandatory redemption at the liquidation preference of $1,000 per share
on May 9, 2004. After two years from issuance, the Company can cause a
mandatory conversion if the common stock trades above $7.45 for 30
consecutive days.
4. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share". This statement specifies the computation, presentation,
and disclosure requirements for earnings per share. This Statement is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. If the Company had
applied SFAS No. 128 to the computation of earnings per share for the
three and six month periods ended June 30, 1997, the basic amounts
would have been $.13 and $.21 and diluted amounts would have been $.11
and $.18, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS. The following table sets forth items from the Company's
Consolidated Statement of Operations as percentages of net revenues:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
----- ----- ----- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 77.6 73.4 77.6 73.7
Gross Profit 22.4 26.6 22.4 26.3
Operating expenses 14.6 14.4 14.9 14.7
Operating income 7.8 12.2 7.5 11.6
Non-operating expense (4.0) (4.1) (4.0) (4.5)
Income before income taxes 3.8 8.1 3.5 7.1
and extraordinary loss
Income tax benefit (expense) 1.1 (0.5) 0.5 (0.3)
Extraordinary loss on debt - (9.5) - (5.0)
prepayment
Net Income 4.9% (1.9)% 4.0% 1.8%
The Company posted record net sales for the three and six month periods
ended June 30, 1997, increasing 9% and 8% compared to the same periods in 1996,
respectively. Higher volumes, primarily due to increased production capacities,
were responsible for the growth in revenues. Pounds sold rose 7% and 8% for the
three and six month periods ended June 30, 1997 compared to the same periods in
1996, respectively. Selling prices increased 2% and .5% for the three and six
month periods ended June 30, 1997 compared to the same periods in 1996,
respectively.
The decrease in gross profit as a percentage of net sales from 1996 to
1997 is primarily due to higher resin prices in 1997. Polyvinyl chloride (PVC)
resin prices were approximately 9% higher during the first half of 1997 compared
to the same period in 1996. Much of the PVC resin increases were driven by a
tight supply of resin caused by various operational problems with many of the
resin producers; not true demand. Therefore, the Company was unable to pass all
of the raw material price increases on to its customers as indicated by the .5%
selling price increase mentioned in the previous paragraph.
The slight increase in operating expenses as a percentage of net sales
from 1996 to 1997 is primarily due to higher freight costs associated with the
expansion of the Company's market area, partially offset by lower general and
administrative expenses relating to salaries and professional fees. The
Company's ability to expand its market area is the result of the new capacity at
it's Hastings, Nebraska facility.
The decrease in non-operating expenses, which consist mainly of
interest expense, from 1996 to 1997 is primarily due to the debt refinancing and
new common equity obtained in May of 1996, which allowed the Company to
eliminate 40% of the Company's high cost subordinated debt. In addition, the
sale of redeemable preferred stock in May, 1997 also reduced interest expense.
The income tax provisions for 1997 and 1996 were calculated based upon
management's estimate of the annual effective income tax rates, reduced by
federal net operating loss (NOL) carryforwards utilized and state tax credits,
as well as NOL carryforwards expected to be used in future periods. Due to more
profitable operations and future expected profits, an income tax benefit of
$250,000 was recorded in the second quarter of 1997, representing a change in
the deferred tax asset valuation allowance relating to a portion of the NOL
carryforwards which are now expected to be utilized in the future.
FINANCIAL CONDITION. The Company's financial condition improved
significantly during the second quarter due to the issuance of $10 million of
convertible preferred stock. The proceeds from issuance of the convertible
preferred stock were used to pay down debt as well as provide capital for the
Company's growth strategy. At June 30, 1997, the Company had $9.0 million of
working capital.
Cash used in operating activities was $2.9 million in 1997 compared to
cash provided by operating
activities of $177,000 in 1996. The primary reason for the increase is the
larger increase in inventories during the six months ended June 30, 1997.
The Company used $3.3 million and $1.8 million for investing activities
for the six months ended June 30, 1997 and 1996, respectively. The primary uses
of cash in 1997 and 1996 were for capital expenditures and the purchase of the
minority interest in Eagle Plastics. The primary source of cash in 1996 was
proceeds from restricted cash.
Cash provided by financing activities was $6.2 million and $1.3 million
for the six months ended June 30, 1997 and 1996, respectively. The increase is
primarily due to issuance of convertible preferred stock during the second
quarter of 1997, partially offset by payments under the note payable.
The Company has commitments for capital expenditures of $1.3 million at
June 30, 1997. Sources of liquidity include the Company's revolving credit line,
additional long-term debt financing, and the sale of Company equity securities
under either a private or public offering. With the addition of the $10 million
of redeemable preferred stock during the second quarter of 1997, the Company
believes that it has the financial resources needed to meet business
requirements in the foreseeable future, including capital expenditures for
expanding manufacturing capacity and working capital requirements.
OUTLOOK. The statements contained in this Outlook are based on current
expectations. These statements are forward looking and actual results may differ
materially from those anticipated by some of the statements made herein.
The Company expects the demand for plastic pipe and tubing to grow as
acceptance of plastic pipe over metal pipe continues and the overall economy
continues to grow. Industry growth projections call for annual sales growth
rates for plastic pipe and tubing of four percent or greater per year through
1998. The Company has historically been able, and expects in the future, to grow
at rates substantially in excess of the industry averages due to its emphasis on
customer satisfaction, product quality and differentiation and innovative
promotional programs. The Company's strategy has been, and continues to be, to
concentrate growth in the higher profit products and geographic regions.
The Company's gross margin percentage is a sensitive function of PVC
and polyethylene (PE) raw material resin prices. In a rising or stable resin
market, margins and sales volume have historically been higher and conversely,
in falling resin markets sales volumes and margins have historically been lower.
Due to the commodity nature of PVC and PE resin and the dynamic supply and
demand factors both domestically and worldwide, it is very difficult to predict
gross margin percentages or assume that historical trends will continue.
The Company does not anticipate any events in the foreseeable future
that would hinder the availability of the federal net operating loss
carryforwards (NOLs). The NOLs are available through the year 2010, however, the
majority expire by the year 2000. The amount of available NOLs actually used is
dependent on future profits and the Company does not expect to utilize all of
its NOLs before they expire.
The Company's future results of operations and the other forward
looking statements contained in this Outlook, in particular the statements
regarding growth in the plastic pipe industry, capital spending and resin
prices, involve a number of risks and uncertainties. In addition to the factors
discussed above, the other factors that could cause actual results to differ
materially are the following: business conditions and the general economy,
competitive factors, such as major capacity increases from rivals, and weather
factors.
The Company believes that it has the product offerings, facilities,
personnel, and competitive and financial resources for continued business
success, but future revenues, costs, margins, and profits are all influenced by
a number of factors, as discussed above.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On May 9, 1997 the Company issued 10,000 shares of 8% Convertible
Preferred Stock to accredited investors pursuant to section 4(2) of
the Securities Act of 1933. The new 8% Convertible Preferred Stock
entitles its holders to cumulative cash dividends at the rate of 8%
(on the value of $1,000 per share). Dividends are payable quarterly,
but if the Company is unable to pay the dividends, then such dividends
shall accrue at the rate of 12% per annum until paid in full. 8%
Preferred shareholders also receive any dividends paid on shares of
common stock. No dividends can be paid on other common or preferred
stock until dividends on the 8% Preferred have been paid. In the event
of liquidation of the Company, the 8% Preferred holders receive $1,000
per share, plus any accrued but unpaid dividends, before any payment
or declaration and setting apart for payment of any amount can be made
in respect of the common stock or any other class of preferred stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 13, 1997.
a) A resolution was adopted to set the number of directors for
the ensuing year at seven. The resolution passed with
4,685,556 votes were cast in favor, 9,051 opposed, and 7,561
votes withheld.
b) Larry D. Schnase and G. Peter Konen were elected to serve as
directors of the Company until the 1999 Annual Shareholders
meeting. Each nominee ran unopposed and received 4,687,542
votes in his favor and 14,628 votes withheld. Other directors
whose term of office as a director continued after the meeting
are: William H. Spell, Bruce A. Richard, Richard W. Perkins,
George R. Long, and Harry W. Spell.
c) The Company's 1997 Stock Option Plan was approved by the
shareholders by a vote of 3,058,694 in favor, 148,188 against,
79,271 votes withheld, and 1,416,017 shares recorded as broker
non-votes. The plan provides for granting of incentive and non
qualified stock options to directors, officers, employees, and
key consultants. A total of 1,000,000 shares of the Company's
Common Stock has been reserved for issuance under this plan.
d) Deloitte & Touche LLP was elected as the Company's independent
public accountants by a vote of 4,666,211 in favor, 25,639
against, and 10,320 votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
3(i) Articles of incorporation, as amended
11 Earnings Per Share Schedule
27 Financial Data Schedule
(b) Reports on Form 8-K.
On May 17, 1997, the registrant filed form 8-K to report the issuance
of 8% preferred stock. There were no financial statements filed with
the 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE PACIFIC INDUSTRIES, INC.
By /s/ William H. Spell
-----------------------------
William H. Spell
Chief Executive Officer
By /s/ Patrick M. Mertens
-----------------------------
Patrick M. Mertens
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 4, 1997