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 March 31,1999
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) 305-0339
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 April 30, 1999 was 7,015,222.
EAGLE PACIFIC INDUSTRIES, INC.
INDEX
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Condensed Statements of Operations - Three
Months Ended March 31, 1999 and 1998 (Unaudited)........... 3
Condensed Balance Sheets - March 31, 1999
and December 31, 1998 (Unaudited)........................... 4
Condensed Statements of Cash Flows - Three
Months Ended March 31, 1999 and 1998 (Unaudited)............ 5
Notes to Condensed Financial Statements (Unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 10
Item 2. Changes in Securities......................................... 10
Item 3. Defaults Upon Senior Securities............................... 10
Item 4. Submission of Matters to a Vote of Security Holders........... 10
Item 5. Other Information............................................. 10
Item 6. Exhibits and Reports on Form 8-K.............................. 10
Signatures............................................................. 11
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
NET SALES $ 19,585,939 $ 18,510,064
COST OF GOODS SOLD 14,145,353 15,128,680
------------ ------------
Gross profit 5,440,586 3,381,384
OPERATING EXPENSES:
Selling expenses 2,542,358 2,114,548
General and administrative expenses 669,443 677,186
------------ ------------
3,211,801 2,791,734
------------ ------------
OPERATING INCOME 2,228,785 589,650
NON-OPERATING EXPENSES
Interest expense (542,050) (632,366)
Terminated acquisition costs (1,325,000) -
------------ ------------
(1,867,050) (632,366)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 361,735 (42,716)
INCOME TAX EXPENSE 32,000 7,000
------------ ------------
NET INCOME (LOSS) 329,735 (49,716)
PREFERRED STOCK DIVIDENDS 200,656 200,656
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
$ 129,079 $ (250,372)
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ .02 $ (.04)
============ ============
Diluted $ .02 $ (.04)
============ ============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 6,719,635 6,646,341
Diluted 7,106,199 6,646,341
See accompanying notes to condensed financial statements.
3
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1999 AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS MARCH 31, 1999 DECEMBER 31, 1998
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $366,000 and $199,000, respectively 14,073,116 6,310,049
Inventories 13,129,006 12,249,959
Deferred income taxes 425,000 425,000
Other 954,659 932,207
-------------- -------------
Total current assets 28,581,781 19,917,215
PROPERTY AND EQUIPMENT, net 22,548,962 21,986,500
OTHER ASSETS:
Land held for sale 2,581,335 2,490,965
Goodwill, less accumulated amortization of $510,000 and
$482,000, respectively 3,958,037 3,985,960
Other 929,786 1,238,158
-------------- -------------
7,469,158 7,715,083
-------------- -------------
$ 58,599,901 $ 49,618,798
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 15,631,388 $ 9,632,105
Accounts payable 10,356,864 8,013,067
Accrued liabilities 2,429,663 1,738,427
Current maturities of long-term debt 1,682,048 1,849,628
-------------- -------------
Total current liabilities 30,099,963 21,233,227
LONG-TERM DEBT, less current maturities 10,282,359 10,582,585
REDEEMABLE PREFERRED STOCK, 8% cumulative
dividend; convertible; $1,000 liquidation preference; $.01 par
value; authorized, issued and outstanding 10,000 shares 10,000,000 10,000,000
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 37,500 37,500
shares
Undesignated stock, par value $.01 per share; authorized
14,490,000 shares, none issued and outstanding - -
Common stock, par value $.01 per share; authorized
30,000,000 shares; issued and outstanding 7,015,222 and
6,635,035 shares, respectively 70,152 66,350
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding - -
Additional paid-in capital 36,762,642 36,480,930
Notes receivable from officers and employees on Common
Stock purchases (434,206) (434,206)
Accumulated deficit (28,218,509) (28,347,588)
-------------- -------------
Total stockholders' equity 8,217,579 7,802,986
-------------- -------------
$ 58,599,901 $ 49,618,798
============== =============
See accompanying notes to condensed financial statements.
4
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 329,735 $ (49,716)
Adjustments to reconcile net income to net cash
used by operating activities:
Loss on disposal of property and equipment 1,690 -
Depreciation and amortization 662,400 502,199
Loan discount amortization 57,824 152,141
Prepaid interest amortization - 147,705
Change in operating assets and liabilities (5,749,590) (5,142,388)
------------------ ----------------
Net cash used in operating activities (4,697,941) (4,390,059)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,096,171) (2,676,195)
Purchases of and improvements to land held for sale (90,370) -
Deferred acquisition costs 237,297 -
Proceeds from property and equipment disposals 30,850 -
------------------ ----------------
Net cash used in investing activities (918,394) (2,676,195)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable 18,747,925 21,113,142
Payments under note payable (12,748,642) (13,699,654)
Proceeds from long-term debt - -
Repayment of long-term debt (467,806) (352,515)
Issuance of common stock 285,514 205,937
Payment of debt issuance costs - -
Payment of preferred stock dividend (200,656) (200,656)
------------------ ----------------
Net cash provided by financing activities 5,616,335 7,066,254
------------------ ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - -
------------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ -
================== ================
See accompanying notes to condensed financial statements.
5
EAGLE PACIFIC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. PRESENTATION
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of Eagle
Pacific Industries, Inc. ("the Company") at March 31, 1999 and the results of
its operations and cash flows for the three month periods ended March 31, 1999
and 1998. Certain information and footnote disclosures normally included in
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 condensed financial statements be read in
conjunction with the financial statements of the Company included with its
annual report on Form 10-K for the year ended December 31, 1998.
2. INVENTORY
March 31, December 31,
1999 1998
-------- ------------
Raw materials $ 4,960,906 $ 4,519,991
Finished goods 8,168,100 7,729,968
----------- -----------
$13,129,006 $12,249,959
----------- -----------
3. EARNINGS (LOSS) PER COMMON SHARE
The following table reflects the calculation of basic and diluted earnings
(loss) per common share ("EPS"):
Period Ended March 31, 1999
---------------------------
Per Share
Income Shares Amount
------ ------ ------
Net income $ 329,735
Preferred stock dividends (200,656)
----------
Basic EPS
Income available to common stockholders 129,079 6,719,635 $ .02
======
Effect of dilutive securities
Warrants and options 386,564
---------
Diluted EPS
Income available to common stockholders $ 129,079 7,106,199 $ .02
========== ========= ======
6
Options to purchase 425,706 shares of common stock were outstanding at
March 31, 1999, but were not included in the computation of diluted EPS because
the options exercise prices were greater than the average market price of the
common shares. Conversion of the Series A 7% convertible preferred stock and the
8% convertible preferred stock was not assumed since the conversion would have
an antidilutive effect on the diluted EPS calculation.
Because of the net loss in 1998, all potentially dilutive securities have
an antidilutive effect on the dilutive EPS calculation. Both basic and dilutive
EPS were computed by dividing the net loss applicable to common stock by the
weighted average common shares outstanding.
4. TERMINATION OF ASSET PURCHASE AND MERGER
On April 19, 1999, the Company announced the termination of its agreements
to acquire the polyvinyl chloride (PVC) pipe business of The Lamson & Sessions
Co. and the Oklahoma City resin manufacturing facility owned and operated by
CONDEA Vista Company. In conjunction with the termination of the agreements, the
Company recorded a charge for acquisition related costs of $1,325,000.
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
Statement of Operations as a percentage of net sales:
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
Net sales 100.0% 100.0%
Cost of goods sold 72.2 81.7
Gross profit 27.8 18.3
Operating expenses 16.4 15.1
Operating income 11.4 3.2
Non-operating expense 9.5 3.4
Income (Loss) before income taxes 1.8 (0.2)
Income tax expense 0.2 0.0
Net income (loss) 1.7% (0.2)%
The Company posted record first quarter net sales in 1999, increasing
6% from the first quarter of 1998. Higher volumes, primarily due to increased
demand and production capacities, were responsible for the growth in revenues.
Pounds sold rose 19% from 1998 to 1999 but were partially offset by an 11%
decrease in selling prices from 1998 to 1999. The lower selling prices were due
to lower PVC raw material costs, the primary component of PVC pipe.
Gross profits increased to 27.8 percent of sales, compared with 18.3
percent of sales for 1998. The significant increase in the gross profit was due
to increased production efficiencies, coupled with strong demand from the
construction industry. Mild weather and low interest rates fueled the high
activity in the construction market.
Operating expenses, as a percentage of net sales, increased 1.3% during
the first quarter of 1999 compared to the first quarter of 1998. The increase in
operating expenses was primarily due to higher freight costs from increased
sales volume, combined with lower selling prices.
Non-operating expenses increased during the first quarter of 1999
compared to the first quarter of 1998. The increase in non-operating expenses is
due to the $1,325,000 charge incurred as a result of the terminated acquisition
costs, partially offset by lower interest expense. The lower interest expense is
due to the repayment of the subordinated debt in July of 1998.
7
The income tax provisions for 1999 and 1998 were calculated based upon
management's estimate of the annual effective rates, reduced by federal net
operating loss ("NOL") and state tax credit carryforwards utilized.
Financial Condition. The Company had negative working capital of
$1,518,000 on March 31, 1999. The negative working capital is due to the use of
short-term financing during the construction of the new manufacturing facility
in Utah. The Company currently has a short-term bridge loan through the
revolving credit loan, which is expected to be replaced by permanent long-term
financing.
Cash used in operating activities was $4.7 million in the first quarter
of 1999 compared to $4.4 million in 1998. The primary use of cash in 1998 and
1999 was the change in operating assets and liabilities.
The Company used $918,000 and $2.7 million for investing activities for
the three months ended March 31, 1999 and 1998, respectively. The primary use of
cash in 1998 and 1999 was capital expenditures.
Cash provided by financing activities was $5.6 million and $7.1 million
for the three months ended March 31, 1999 and 1998, respectively. The decrease
is primarily due to lower borrowings under the note payable due to higher
profits and lower capital expenditures in 1999 compared to 1998.
The Company had commitments for capital expenditures of $567,000 at
March 31, 1999, which will be funded from borrowings under the revolving credit
loan. Additional sources of liquidity, if needed, 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. The Company
believes that it has the financial resources needed to meet its current and
future business requirements, including capital expenditures for expanding
manufacturing capacity and working capital requirements.
Outlook. The statements contained in this Outlook section 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 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 of three percent or greater per year through 2003. The Company has
historically been able, and expects in the future to be able, to grow at rates
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
initiatives in higher profit products and geographic regions.
The Company's gross margin percentage is a sensitive function of PVC
and PE raw material resin prices and capacity levels in the industry. 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. Gross margins also suffer when capacity increases
outpace demand due to increased competition to utilize capacity. The Company
believes that supply and demand in the plastic pipe industry is currently
balanced. Due to the commodity nature of PVC and PE resin and the dynamic supply
and demand factors worldwide, it is very difficult to predict gross margin
percentages or assume that historical trends will continue.
The NOLs are available through the year 2012; however, the majority
expire by the year 2000. The amount of available NOLs actually used will be
dependent on future profits. The Company does not expect to utilize all of its
NOLs before they expire.
8
The foregoing statements contained in this outlook section and those
specifically relating to the Company's expectation of the plastic pipe and
tubing market, and the Company's performance in relation to such growth, the
Company's ability to utilize NOLs in the future and its belief that it has the
necessary resources for future success are all forward looking statements that
involve a number of risks and uncertainties. Some of the factors that could
cause actual results to differ materially include, but are not limited to, raw
material cost fluctuations, general economic conditions, competition,
availability of working capital and weather conditions.
Year 2000 (Y2K) Compliance. As with other organizations, the Company's computer
hardware and software were originally designed to recognize calendar years by
their last two digits. Calculations performed using these truncated fields would
not work properly with dates from the year 2000 and beyond.
The Company has completed an assessment of its information systems
programs and completed changes on the majority of these programs to make them
Y2K compliant. The Company believes that approximately 75% of its information
systems programs are Y2K compliant and expects the remainder of its information
systems programs to be compliant by the end of the second quarter. The Company
is currently assessing, with the assistance of its vendors, whether any Y2K
problems exist in its office and production equipment. This assessment project
along with the remediation of any problems is expected to be completed by the
end of the second quarter of 1999. The Company received responses from
approximately 60% of its office and equipment vendors, that such equipment is
Y2K compliant. In addition, the Company has inquired of all its major customers
and suppliers as to their readiness to the Y2K issue to determine the extent to
which the Company is indirectly vulnerable to any third-party Y2K issues and all
such customers and suppliers have responded that they believe they are or will
be Y2K compliant. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company would not have a material adverse effect
on the Company.
The total cost associated with the modifications to be Y2K compliant are
expected to be approximately $25,000, of which approximately $15,000 have been
expensed as of March 31, 1999.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could have an adverse effect on the Company's
operations. Due to the general uncertainty inherent in the Y2K problem,
resulting in part from the uncertainty of the Y2K readiness of the Company's
third-party suppliers and customers, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material impact on the
Company's operations. The Company believes that the assessment and remediation
steps it is taking will significantly reduce its exposure to the Y2K problem.
Our most likely worst case Year 2000 scenario is if one or more plants does not
have power to operate its equipment. Such a scenario would result in a backlog
of production and the Company would be required to utilize existing inventory to
fill customer orders.
At this time, the Company believes it has addressed all Y2K issues that may
arise; therefore, no contingency plan has been developed. If problems are
detected during the Company's in-house testing or if information is received
from an outside source that they would be unable to be Y2K compliant, the
Company will then develop an appropriate contingency plan to address Y2K
problems that may arise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk -
Not applicable
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K. None
-------------------
10
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: May 14, 1999
11