UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A (No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, Suite 2430
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 September 30, 1999 was 7,235,098.
Part I and Exhibit 27 of the Registrant's Form 10-Q for the quarter ended
September 30, 1999 are hereby amended.
Part I
Item 1. Condensed Consolidated Financial Statements
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except for per share amounts)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
NET SALES $36,162 $20,757 $80,196 $59,664
COST OF GOODS SOLD 27,238 15,572 59,599 46,699
------- ------- ------- -------
Gross profit 8,924 5,185 20,597 12,965
OPERATING EXPENSES:
Selling expenses 3,830 2,558 9,326 7,118
General and administrative expenses 1,142 662 2,584 2,037
Nonrecurring expenses 1,163 - 1,163 -
------- ------- ------- -------
6,135 3,220 13,073 9,155
------- ------- ------- -------
OPERATING INCOME 2,789 1,965 7,524 3,810
NON-OPERATING EXPENSES:
Interest expense 729 451 1,832 1,836
Other income (16) (5) (207) (36)
Nonrecurring expenses 500 - 1,825 -
------- ------- ------- -------
1,213 446 3,450 1,800
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,576 1,519 4,074 2,010
INCOME TAX BENEFIT (EXPENSE) 2,348 (113) 4,184 (163)
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY LOSS 3,924 1,406 8,258 1,847
EXTRAORDINARY LOSS ON DEBT
PREPAYMENTS, Less income tax benefit of $31 - 656 - 656
NET INCOME 3,924 750 8,258 1,191
PREFERRED STOCK DIVIDENDS AND
LOSS ON REDEMPTION 999 201 1,401 602
------- ------- ------- -------
NET INCOME APPLICABLE TO COMMON STOCK $ 2,925 $ 549 $ 6,857 $ 589
======= ======= ======= =======
NET INCOME PER COMMON SHARE:
Basic
Income before extraordinary loss $ .42 $ .18 $ .99 $ .19
Extraordinary loss on debt prepayments - (.10) - (.10)
------- ------- ------- -------
Net Income $ .42 $ .08 $ .99 $ .09
======= ======= ======= =======
Diluted
Income before extraordinary loss $ .37 .17 .85 .17
Extraordinary loss on debt prepayments - (.09) - (.09)
------- ------- ------- -------
Net income $ .37 $ .08 $ .85 $ .08
======= ======= ======= =======
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 6,971 6,613 6,903 6,688
======= ======= ======= =======
Diluted 7,831 7,018 9,706 7,091
======= ======= ======= =======
See accompanying notes to unaudited condensed financial statements.
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
(In thousands, except for shares and per share amounts)
- ------------------------------------------------------------------------------------------------------------------------
ASSETS SEPT. 30, 1999 DEC. 31, 1998
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,747 $ -
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $1,283 and $199, respectively 37,480 6,310
Inventories 27,305 12,250
Deferred income taxes 3,915 425
Other 4,716 932
---------- -------
Total current assets 75,163 19,917
PROPERTY AND EQUIPMENT, net 74,745 21,987
OTHER ASSETS:
Land held for sale 2,140 2,491
Goodwill, less accumulated amortization of $565 and
$482, respectively 3,902 3,986
Deferred income taxes 2,991 825
Other 3,101 413
---------- -------
12,134 7,715
---------- -------
$ 162,042 $49,619
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowing $ 33,889 $ 9,632
Current maturities of long-term debt 10,331 1,850
Accounts payable 13,352 8,013
Accrued liabilities 16,122 1,738
---------- -------
Total current liabilities 73,694 21,233
OTHER LONG-TERM LIABILITIES 100 -
LONG-TERM DEBT, less current maturities 40,140 10,583
SENIOR SUBORDINATED DEBT, Net 26,379 -
COMMITMENT (Note 6), CONTINGENCY (Note 9) - -
REDEEMABLE PREFERRED STOCK, 8% cumulative dividend; convertible; - 10,000
$1,000 per share liquidation preference; $.01 par value;
authorized, issued and outstanding none and 10,000, respectively
STOCK WARRANTS 6,523 -
SHAREHOLDERS' EQUITY:
Series A preferred stock, 7% cumulative dividend; convertible; $2 per share
liquidation preference; no par value; authorized
2,000,000 shares; issued and outstanding 18,750 shares 38 38
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 7,235,098 and
6,635,035 shares, respectively 72 66
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding - -
Additional paid-in capital 38,537 36,481
Unearned compensation (424) -
Notes receivable from officers and employees on common
stock purchases (1,527) (434)
Accumulated deficit (21,490) (28,348)
---------- -------
Total stockholders' equity 15,206 7,803
---------- -------
$ 162,042 $49,619
========== =======
See accompanying notes to unaudited condensed financial statements
EAGLE PACIFIC INDUSTRIES, INC. CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands, except for per share amounts)
- --------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,258 $ 1,191
Adjustments to reconcile net income to net cash (Used in) provided by
operating activities:
Extraordinary loss on debt prepayment - 656
Gain on sale of land held for sale (189) -
Loss on sale of fixed assets 43 -
Depreciation and amortization 2,519 1,643
Amortization of debt issue costs, discounts, and premiums 128 657
Deferred income taxes (4,545) -
Non cash compensation 838 -
Change in operating assets and liabilities (7,394) (1,663)
------------ -----------
Net cash (used in) provided by operating activities (342) 2,484
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,662) (9,292)
Purchases of and improvements to land held for sale (144) -
Proceeds from sale of property and equipment 68 -
Proceeds from sale of land held for sale 684 -
Note receivable on stock purchase (1,093) -
Acqusition of PWPipe, net of cash acquired of $1.2 million (75,683) -
Other - (112)
------------ -----------
Net cash used in investing activities (78,830) (9,404)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings/(payments) under note payable 24,257 6,819
Payment of long-term debt (1,118) (5,362)
Issuance of long-term debt 39,156 6,478
Issuance of senior subordinated notes 19,078 -
Issuance of stock warrants 3,422 -
Issuance of common stock 1,912 -
Repurchase and retirement of common stock (1,782) (194)
Financing costs (2,991) -
Payment of preferred stock dividend (1,015) (602)
------------ -----------
Net cash provided by financing activities 80,919 7,139
------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,747 219
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - -
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,747 $ 219
============ ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Noncash activities:
Preferred stock exchanged for Subordinated Note (10,000)
Issuance of warrants relating to recapitalization/acquisition 2,060
Additional paid in capital-stock compensation 838
Subordinated Note acquired in recapitalization/acquisition 8,325
Other (385)
Deferred tax asset related to issuance of Subordinated Note 670
Effective September 16, 1999, the Company purchased all the outstanding capital
stock of Pacific Western Extruded Plastics Company (PWPipe) for $76.9 million,
including transaction costs, subject to certain balance sheet adjustments to be
determined. In connection with the acquisition, liabilities assumed were as
follows:
Fair value of assets acquired $ 98,496
Acquisition price of PWPipe (76,900)
----------------------
Liabilities assumed $ 21,596
======================
See accompanying notes to unaudited condensed financial statements.
EAGLE PACIFIC INDUSTRIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. PRESENTATION
In September, 1999, Eagle Pacific Industries, Inc. (the "Company") acquired
Pacific Western Extruded Plastics Company ("PWPipe") as described in Note 2. The
acquisition is included in the September 30, 1999 balance sheet and all
operating results and cash flows have been included in the statements of income
and cash flows for the 10 day period from the consummation of the acquisition
through September 30, 1999.
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 the Company at
September 30, 1999, and the results of its operations for the three and nine
month periods ended September 30, 1999 and 1998, and its cash flows for the nine
month periods ended September 30, 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 and reports on Form 8-K filed on October 4, 1999.
Certain reclassifications have been made to the December 31, 1998, condensed
balance sheet to conform to the September 30, 1999, presentation. Such
reclassifications have no effect on net income or stockholders' equity as
previously stated.
2. ACQUISITION
Effective as of September 16, 1999, the Company acquired (the "Acquisition") all
of the outstanding capital stock of PWPipe, a manufacturer of polyvinyl chloride
("PVC") pipe and fittings. PWPipe was then merged into the Company. PWPipe
operates six manufacturing facilities located in Tacoma and Sunnyside,
Washington; Eugene, Oregon; and Cameron Park, Perris and Visalia, California,
from its operating headquarters in Eugene, Oregon. The Company paid
approximately $76.9 million, plus transaction costs, subject to certain balance
sheet adjustments to be determined. The Acquisition was financed in connection
with the Company's recapitalization which included the retirement of $10.0
million outstanding 8% convertible Preferred Stock, the amending of its
outstanding Senior Credit Facility and the issuance of an aggregation of $32.5
million mezzanine debt consisting of Senior Subordinated Notes and detachable
stock purchase Warrants (Note 4 and 5). In addition, in the fourth quarter of
fiscal 1999, the Company expects to record certain relocation and other
realignment expenses associated with the formation of a combined business
organization.
The Acquisition has been accounted for as a purchase in the third quarter of
fiscal 1999, and, accordingly, the results of operations of PWPipe for the
period subsequent to the consummation of the acquisition through September 30,
1999 are included in the accompanying financial statements. The purchase price
has been initially allocated to the assets acquired and liabilities assumed
based on their estimated fair values as set forth below, subject to adjustment
in the fourth quarter of fiscal 1999, once finalization of any purchase price
adjustments and certain valuation matters are known. The initial purchase price
allocation is as follows:
Net working capital $24.4
Property and equipment 52.1
Deferred tax asset .4
------------
$76.9
============
The following unaudited pro forma income statement information assumes that the
Acquisition took place on January 1, 1998. This information assumes that the
benefit from NOL carryforwards is applied to the purchase price on January 1,
1998, and not included in net income. In addition, pro forma income is taxed at
a rate of 40%.
Unaudited Pro Forma Income Statement Information (In thousands, except for per
share amounts)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
Net sales $ 91,636 $ 71,804 $ 220,296 $ 199,484
Net income 6,833 1,998 12,614 304
Basic earnings per share $ .93 $ .28 $ 1.73 $ .04
Diluted earnings per share .70 .21 1.31 .03
Included in the unaudited historical and pro forma interim 1999 net income and
earnings per share information are certain nonrecurring charges as discussed in
Note 10 associated with the Acquisition, and associated with proposed
acquisitions terminated earlier in fiscal 1999. These nonrecurring items reduce
historical and pro forma net income by approximately $1.5 million and $2.8
million for the three and nine months ended September 30, 1999, respectively.
Absent these nonrecurring charges, pro forma basic and diluted earnings per
share would be approximately $1.05 and $.79 for the three month period ended
September 30, 1999, respectively, and $1.96 and $1.48 for the nine months ended
September 30, 1999, respectively.
Included in the pro forma nine month period ending September 30, 1998 net income
and earnings per share information is a $3.3 million fair market value purchase
accounting adjustment related to inventory which was reflected in the earliest
pro forma period presented. Absent this charge, pro forma basis and diluted
earnings per share would be approximately $0.32 and $0.24 for the nine month
period ending September 30, 1998, respectively.
From a liquidity perspective, the Company will be utilizing significant federal
NOL carryforwards to offset the funding of its federal tax.
The unaudited pro forma income statement information has been prepared for
informational purposes only and may not be indicative of the operating results
that actually would have resulted had the Acquisition been made on January 1,
1998, or of the operating results that may occur in the future.
3. INVENTORIES
(In thousands)
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials $ 15,484 $ 4,520
Finished goods 11,821 7,730
-------- -------
$ 27,305 $12,250
-------- -------
4. DEBT
In connection with the Acquisition, on September 20, 1999, the Company entered
into a Second Amended and Restated Loan and Security Agreement to obtain a
$100.0 million Senior Credit Facility ("Senior Credit Facility"). The Senior
Credit Facility consists of a: (i) Term Note A in the principal amount of $35.0
million ("Term Note A"); (ii) Term Note B in the principal amount of $15.0
million ("Term Note B"), and a (iii) $50.0 million Revolving Credit Facility
("Revolving Facility"). The Senior Credit Facility is secured by substantially
all the assets of the Company. Term Note A bears interest at a rate equal to the
LIBOR plus 2.75%. Term Note B bears interest at a rate equal to LIBOR plus
3.25%. The LIBOR rate at September 30, 1999 was 5.50%. Principal on the Term
Notes is due and payable quarterly in $1.25 million amounts beginning on
December 31, 1999, and continuing on the last day of each March, June, September
and December thereafter until paid in full on September 20, 2004. Outstanding
notes issued pursuant to the Revolving Facility bear interest at a rate equal to
LIBOR plus 2.50%. The Company is required to pay a fee equal to 0.5% on the
unused portion of the Revolving Facility.
Also on September 20, 1999, the Company issued Senior Subordinate Notes totaling
$32.5 million ($26.4 million recorded amount, net of debt discount described
below) with detachable stock purchase Warrants to purchase an aggregate of
1,940,542 shares of Company Common Stock (Note 5). Interest on the Senior
Subordinate Notes is payable at a fixed rate per annum equal to 14% beginning on
December 20, 1999 and on the 20th day of each March, June, September and
December thereafter until the entire principal and interest is paid in full on
September 20, 2007. Of this interest, 12% is payable in cash and 2% is payment
in kind. Principal is paid in three equal installments on each September 20th of
2005, 2006 and 2007. A debt discount totaling $6.1 million has been recorded
associated with the issuance of the Senior Subordinated Notes, based on the
collective estimated fair value of the Senior Subordinate Notes and Warrants on
the date issued. The discount will be amortized using an interest method as a
yield adjustment over the term of the note.
The various debt agreements set forth certain financial covenants, which
require, among other things, the Company to maintain certain levels of net worth
and financial ratios, limit the Company's capital expenditures, and restrict its
ability to pay dividends.
The fair market value of the Senior Credit Facility and Senior Subordinated
Notes based on discounted cash flow analysis using the Company's current
incremental borrowing rate, approximate their carrying value at September 30,
1999.
5. PREFERRED STOCK REDEMPTION AND COMMON STOCK PURCHASE WARRANT
On September 20, 1999, as part of the issuance of the Senior Subordinated Notes
(Note 4), the Company redeemed all $10.0 million of its outstanding 8%
Convertible Preferred Stock in exchange for $10.0 million Senior Subordinated
Notes and detachable Warrants to purchase 597,090 shares of Common Stock. A loss
of approximately $818,000 was recorded for financial reporting purposes
(classified with preferred dividends in the statement of income) on the
retirement of the preferred shares, based on the fair value of the Senior
Subordinated Note and detachable stock Warrant issued in the exchange.
In addition, detachable Warrants to purchase 1,343,452 shares of Common Stock
were issued in conjunction with the issuance of the $22.5 million Senior
Subordinated Note. All of the detachable Warrants are exercisable to purchase
the Company's Common Stock or Class B Common Stock at $0.01 per share and
expires in ten years. The number of shares issuable upon exercise and the
warrant exercise price are adjustable in the event the Company pays a dividend
in Common Stock, subdivides or combines its Common Stock, or sells capital stock
or options to purchase capital stock at a price less than the market price of
its capital stock on the date of issuance, or completes a capital reorganization
or reclassification of its capital stock. The Company has granted the warrant
holders a right of first refusal. The Company cannot sell or issue any of its
Common Stock, options or convertible securities unless the Company has first
offered to sell to each Warrant holder its proportionate share. Certain
affiliates of the Company granted the Warrant holders tagalong rights that give
the Warrant holders the right to join any affiliate in the sale of any of their
shares. In addition, the Company granted the Warrant holders a put right,
whereby in the event of a change of control of the Company, the Warrant holders
have the right to require the Company to purchase all or any part of the
Warrants or shares issuable upon exercise of the Warrants.
6. SHAREHOLDERS' EQUITY TRANSACTIONS
As described below, in connection with the Acquisition, the Company entered into
various equity transactions with certain officers and directors. The Company
sold an aggregate of 289,500 shares of Common Stock at fair market value, issued
an aggregate of 128,000 shares of Restricted Stock and granted incentive stock
options to purchase an aggregate of 272,500 shares of Common Stock.
In connection with the sale of Common Stock to the Company's directors and
officers, the Company accepted Promissory Notes as partial payment for
shares of the Company's Common Stock purchased. All of the promissory Notes are
dated September 16, 1999, and require that the principal balance to be paid in
full by November 20, 2004. The promissory Notes bear interest at the rate of the
Company's Revolving Credit Facility in place during the term of the Note.
Interest is due beginning on December 30, 1999, continuing on the last day of
each calendar year until the promissory Note is paid in full, and is a full
recourse obligation of the maker.
On September 16, 1999, Restricted Stock Grants were made to certain officers of
the Company. These shares carry dividend and voting rights. Sales of these
shares are restricted prior to the date of vesting. The shares vest 20% after
three years, 30% after four years, and the remaining 50% after five years from
the date of grant. The restricted stock is subject to an agreement requiring
forfeiture by the officer in the event of termination of employment prior to the
vesting date for reasons other than normal retirement, death or disability.
Shares issued were recorded at their fair market value on the date of grant with
the corresponding deferred charge as part of shareholders' equity. The deferred
charge is being amortized as compensation expense on a straight-line basis over
the related vesting period. As of September 30, 1999, 128,000 shares of
restricted stock were outstanding.
On September 2, 1999, the Company repurchased 555,265 shares of common stock for
$3.20 per share from a director of the Company. In addition, the director
exercised options for 48,860 shares which the Company repurchased. The net
aggregate cash purchase price of these transactions was $1.1 million. The
director resigned from the board and relinquished all of his equity ownership in
the Company through this transaction. In connection with repurchase, the Company
recorded a one-time charge of approximately $838,000 associated with shares
reacquired, which had been purchased in fiscal 1999 by the director under stock
option arrangements.
After September 30, 1999, the Company entered into several agreements with
current and former officers of the Company. The Company made Restricted Stock
Grants to certain officers of the Company covering 54,000 shares. The Company
also sold 61,000 shares of common stock to these same officers and accepted
promissory notes for a portion of the purchase price. These officers were also
granted options covering in the aggregate 135,000 shares. The terms and
conditions of these grants and sales were the same as those described above. The
Company also entered into an agreement with a former officer and director which
granted to that person the right to require the Company to purchase shares of
the Company's common stock and options to purchase shares of the Company's
common stock under certain circumstances prior to December 31, 1999. Pursuant to
this agreement, the Company could be required to purchase up to 78,309 shares of
its common stock and options covering 150,500 shares of its common stock.
7. INCOME TAXES
The Company has net operating loss carryforwards of approximately $28.5 million,
$23.0 million of which expire in years 1999 and 2000, and $5.5 million expire in
years 2001 through 2013. In addition, there are state tax credit carryforwards
that expire in varying amounts through 2004. These carryforwards and credits are
available to offset future taxable income and state taxes, respectively.
The Company establishes deferred tax asset valuation allowances in accordance
with the provisions of FASB Statement No. 109, "Accounting for Income Taxes."
The Company continually reviews the adequacy of the valuation allowance and
recognizes benefits when it is more likely than not that the benefits will be
realized.
At September 30, 1999, the Company had net deferred tax assets of approximately
$6.9 million. In the quarter ended June 30, 1999, the Company reversed
approximately $2.0 million of valuation allowance placed on the Company's
deferred tax asset. In addition, in the quarter ended September 30, 1999, the
Company reversed approximately $2.1 million of valuation allowance placed on the
Company's deferred tax assets. The reversals, totaling $4.1 million, were based
on updated expectations about future years' taxable income to reflect continuing
improvements in operating results influenced by the Company's added production
capacity, and other indications that certain concerns that had previously
limited management's expectations about future taxable income no longer applied.
The valuation allowance at June 30, 1999 and September 30, 1999 reflect the
Company's then current best estimates of the amount of net operating loss
carryforwards that would expire in 1999 and 2000. The valuation allowance that
remains at September 30, 1999 principally represents approximately $4.6 million
of net operating loss carryforwards expected to expire in 1999.
Under generally accepted accounting principles, (a) the portion of the decrease
in valuation allowance related to a change in estimate of future years' income
is a discrete event in the period the change in estimate occurred and (b) the
portion of the decrease in the valuation allowance related to a change of
estimate in the current year income is recorded prospectively over the remainder
of the year through elimination of the valuation allowance and a similar amount
of the deferred tax asset as income is earned. Accordingly, (a) the adjustment
to the valuation allowance described above were accounted for discretely in the
quarters they were made and (b) the Company's federal effective tax rate for the
remainder of 1999, excluding the discrete adjustments and the matter described
in the following two sentences, is expected to be zero. In connection with the
Acquisition, taxable temporary differences originating after September 16, 1999,
related principally to accelerated depreciation, will result in the recognition
of a deferred tax liability by year-end 1999. The related deferred tax expense
is being recognized in the quarters ended September 30, 1999 and ending December
31, 1999 in proportion to the estimated pretax income of PWPipe in those
periods. The deferred tax expense recognized in the quarter ending December 31,
1999 is expected to result in an overall effective tax rate of approximately 25%
for that quarter. Beginning with the first quarter of 2000, the Company expects
that its overall effective tax rate will approximate 40%. The net deferred tax
asset represents management's best estimate of the tax benefits that will more
likely than not be realized in future years at each reporting date. However,
there can be no assurance that the Company can generate taxable income to
realize the net deferred tax asset.
Income before taxes and provisions for income tax (benefit) expense for the
three and nine months ended September 30, 1999 and 1998 are as follows:
(In thousands, except for share amounts)
September 1999 September 1998
------------------------------------ -------------------------------------
Three Months Nine Months Three Months Nine Months
---------------- ---------------- ----------------- ----------------
Pretax income $1,576 $4,074 $1,519 $2,010
================ ================ ================= ================
Current Tax Provision
State taxes (197) (361) (113) (163)
Deferred Tax Benefit-
Primarily change in
Estimate of future years'
Taxable income 2,090 4,090
Other 455 455 - -
---------------- ---------------- ----------------- ----------------
Total Tax Benefit (Expense) $2,348 $4,184 $ (113) $ (163)
================ ================ ================= ================
8. EARNINGS PER COMMON SHARE
The following table reflects the calculation of basic and diluted earnings per
common share:
(In thousands, except per share amounts)
Three Months Ended September 30,
1999 1998
---- ----
Basic EPS Computation
Income available to common stockholders $ 2,925 $ 549
======== =======
Average common shares outstanding 6,971 6,613
======== =======
Basic earnings per share $ .42 $ .08
======== =======
Diluted EPS Computation
Income available to common stockholders $ 2,925 $ 549
Preferred stock dividends - -
-------- -------
Income available to common stockholders (a) $ 2,925 $ 549
======== =======
Average common shares outstanding 6,971 6,613
Warrants, options, and restricted stock grants 841 386
Preferred stock 19 19
-------- -------
7,831 7,018
======== =======
Diluted earnings per share $ .37 $ .08
======== =======
(a) After considering dilutive nature of convertible shares, options and
restricted stock grants
Options to purchase 29,000 and 358,000 shares of common stock were outstanding
at September 30, 1999 and 1998, respectively, 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 8% Convertible
Preferred Stock was not assumed for the period ending September 30, 1999 and
1998, since the conversion would have an antidilutive effect on the diluted EPS
calculation.
(In thousands, except per share amounts)
Nine Months Ended September 30,
1999 1998
---- ----
Basic EPS Computation
Income available to common stockholders $ 6,857 $ 589
======== =======
Average common shares outstanding 6,903 6,688
======== =======
Basic earnings per share $ .99 $ .09
======== =======
Diluted EPS Computation
Income available to common stockholders $ 6,857 $ 589
Preferred stock dividends 1,401 -
-------- -------
Income available to common stockholders (a) $ 8,258 $ 589
======== =======
Average common shares outstanding 6,903 6,688
Warrants, options, and restricted stock grants 514 403
Preferred stock 2,289 -
-------- -------
9,706 7,091
======== =======
Diluted earnings per share $ .85 $ .08
======== =======
(a) After considering dilutive nature of convertible shares, options and
restricted stock grants
Options to purchase 201,000 and 309,000 shares of common stock were outstanding
at September 30, 1999 and 1998, respectively, 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 7% Convertible
Preferred Stock and 8% Convertible Preferred Stock was not assumed for the
period ending September 30, 1998, since the conversion would have an
antidilutive effect on the diluted EPS calculation.
9. LITIGATION
On July 21, 1999, Lamson & Sessions Co. filed a complaint against the Company to
recover alleged damages incurred by Lamson in connection with the termination of
the Company's proposed acquisition of Lamson's PVC pipe business. As set forth
in the complaint, Lamson is seeking nearly $1 million in fees and expenses, plus
an undetermined amount of damages. The Company believes that the outcome of this
litigation will not have a material adverse effect on the Company's financial
position and future results of operations. The Company has recorded additional
estimated costs incurred associated with the disposition of this matter (Note
10) of $500,000, in the third quarter ended September 30, 1999.
10. NONRECURRING ITEMS
Nonrecurring items included in operating (item (b) below) or nonoperating income
(item (a) below) consist of certain nonrecurring charges associated with the
acquisition of PWPipe, and associated with a proposed acquisition terminated
earlier in 1999. The following table summarizes nonrecurring items recorded by
the Company:
Dollars in Thousands
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ----------------- ---------------- -----------------
Terminated acquisition related $ 500 - $ 1,825 $ -
costs (a)
Costs associated with the
PWPipe acquisition, recorded in
the third quarter
ended September 30, 1999 (b):
Expense incurred in 838 - 838 -
connection with director
resignation (Note 6)
Transaction based 175 - 175 -
compensation
Other 150 - 150 -
---------------- ----------------- ---------------- -----------------
$ 1,663 $ - $ 2,988 $ -
================ ================= ================ =================
(a) 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 the first quarter ended March 31, 1999, in conjunction
with the termination of the agreements, the Company recorded a charge for
acquisition related costs of $1,325,000. The Company recorded an additional
charge of $500,000 in the third quarter ended September 30, 1999 associated with
this terminated transaction (Note 9).
Note 11: Adjustment of Prior Interim Period Financial Statements
The Company's financial statements as of September 30, 1999, have been adjusted
to reflect the final determination of the estimated fair market value of the
stock purchase warrants issued on September 20, 1999. These warrants were issued
in conjunction with the recapitalization of the Company at the time of the
Acquisition of Pacific Western Extruded Plastics Company. The adjustment was
made to comply with the SEC's current position with respect to the valuation of
securities.
The adjustment has no effect on previously reported operating income or net
income for the Company's interim September 30, 1999, statements of income. The
adjustment relates to the amount of the loss on redemption in connection with
the exchange of the previously outstanding preferred stock for senior
subordinated notes with stock purchase warrants, and to the carrying value of
the newly issued subordinated notes. The effect of this adjustment on the
September 30, 1999 financial statements is as follows:
Dollars in thousands, except per share information:
As Previously Reported As Adjusted
------------------------------------- --------------------------------------
Balance sheet - September 30, 1999:
Subordinated debt $27,420 $26,379
Stock purchase warrants 4,915 6,523
Stockholders' equity 15,773 15,206
Statements of income - interim Three Months Nine Months Three Months Nine Months
periods ended September 30, 1999: Ended Ended Ended Ended
---------------- ----------------- ----------------- -----------------
Net income $3,924 $8,258 $3,924 $8,258
Preferred stock dividends and 432 833 999 1,401
loss on redemption
Net income applicable to common 3,492 7,425 2,925 6,857
stock
Net income per common share:
Basic .50 1.08 .42 .99
Diluted $.39 $.85 $.37 $.85
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 Income as percentages of net sales:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
----- ---- ----- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.3 75.0 74.3 78.3
Gross Profit 24.7 25.0 25.7 21.7
Operating expenses 17.0 15.5 16.3 15.3
Operating income 7.7 9.5 9.4 6.4
Non-operating expense 3.4 2.2 4.3 3.0
Income before income taxes 4.4 7.3 5.1 3.4
Income tax (benefit) expense (6.5) 0.5 (5.2) 0.3
Income before extraordinary 10.9 6.8 10.3 3.1
loss
Extraordinary loss - (3.2) - (1.1)
Net Income 10.9% 3.6% 10.3% 2.0%
The Company posted record net sales for the three and nine month periods ended
September 30, 1999, increasing 74% and 34%, respectively, compared to the same
periods in 1998. Higher volumes, primarily due to increased demand and
production capacities and the acquisition of PWPipe in September were
responsible for the growth in revenue for the nine months ended September 30,
1999. Both higher volumes and selling prices were responsible for the revenue
growth for the three months ended September 30, 1999. Pounds sold rose 57% and
35% for the three and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998. Selling prices increased 14% and 1% for
the three and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998. The higher selling prices were due to
increased demand for plastic pipe, the strength of the economy in the western
United States, and the influence on selling prices by increases in the cost of
PVC resin.
Gross profits decreased from 25.0% to 24.7% for the three months ending
September 30, 1999, and increased from 21.7% to 25.7% for the nine months ending
September 30, 1999. The slight decrease in gross profits in the three months
ending September 30, 1999, is due to accounting requirements associated with the
finished goods inventory acquired with the acquisition of PWPipe. Absent these
accounting requirements, gross profits for the three months would have reflected
an increase that approximates the rate experienced for the nine months ending
September 30, 1999. The significant increase in gross profits for the nine month
period ending September 30, 1999 is due to increased production efficiencies
together with strong demand in all markets and the influence on selling price of
the rise in the cost of PVC resin.
The increase in operating expenses of 1.5% and 1.0% as a percentage of net
sales, for the three and nine month periods ending September 30, 1999,
respectively, is a result of non-recurring expenses experienced in the third
quarter as discussed in Note 10 to the financial statements. Without these
non-recurring expenses, operating expenses would have decreased 2.1% and 0.4%
for three and nine month periods ending September 30, 1999, respectively.
The increase in non-operating expenses for the three month period ending
September 30, 1999, is due to the $.5 million and $1.3 million charges incurred
in the third and first quarters of 1999, respectively, as a result of the
terminated acquisition costs as discussed in Note 10 to the financial
statements, and to higher interest expense incurred with the recapitalization of
the Company and financing of the acquisition of PWPipe. The increase in
non-operating expenses for the nine month period ending September 30, 1999 is
due to the previously mentioned terminated acquisition costs and the expenses
incurred in the third quarter.
As of September 30, 1999, the Company had net deferred tax assets of
approximately $6.9 million. In the quarter ended June 30, 1999, the Company
reversed approximately $2.0 million of valuation placed on the Company's
deferred tax assets. In addition, in the quarter ended September 30, 1999, the
Company reversed approximately $2.1 million of valuation allowance placed on the
Company's deferred tax assets. The reversals, totaling $4.1 million, were based
on updated expectations about future years' taxable income to reflect continuing
improvements in operating results influenced by the Company's added production
capacity, and other indications that certain concerns that had previously
limited management's expectations about future taxable income no longer applied.
The valuation allowance at June 30, 1999 and September 30, 1999 reflect the
Company's then current best estimates of the amount of net operating loss
carryforwards that would expire in 1999 and 2000. The valuation allowance that
remains at September 30, 1999 principally represents approximately $4.6 million
of net operating loss carryforwards expected to expire in 1999.
Under generally accepted accounting principles, (a) the portion of the decrease
in valuation allowance related to a change in estimate of future years income is
a discrete event in the period the change in estimate occurred and (b) the
portion of the decrease in the valuation allowance related to a change of
estimate in current year income is recorded prospectively over the remainder of
the year through elimination of the valuation allowance and a similar amount of
the deferred tax asset as income is earned. Accordingly, (a) the adjustments to
the valuation allowance described above were accounted for discretely in the
quarters they were made and (b) the Company's federal effective tax rate for
financial reporting purposes for the remainder of 1999, excluding the discrete
adjustments and the matter described in the following two sentences, is expected
to be zero. In connection with the Acquisition, taxable temporary differences
originating after September 16, 1999, related principally to accelerated
depreciation, will result in the recognition of a deferred tax liability by
year-end 1999. The related deferred tax expense is being recognized in the
quarters ended September 30, 1999 and ending December 31, 1999 in proportion to
the estimated pretax income of PWPipe in those periods. The deferred tax expense
recognized in the quarter ending December 31, 1999 is expected to result in an
overall effective tax rate of approximately 25% for that quarter. Beginning with
the first quarter of 2000, the company expects that its overall effective tax
rate will approximate 40%. The net deferred tax asset represents management's
best estimate of the tax benefits that will more likely than not be realized in
future years at each reporting date. However, there can be no assurance that the
Company can generate taxable income to realize the net deferred tax asset.
Supplemental Discussion and Analysis of Pro Forma Results of Operations. The
following is a supplemental discussion and analysis of the Company's pro forma
results of operations for the three and nine months ended September 30, 1999,
compared with the pro forma results of operations for the three and nine month
periods ended September 30, 1998, as if the Acquisition had occurred on January
1, 1998. The pro forma results may not be indicative of results that actually
would have occurred had the Acquisition taken place at the beginning of the
period presented or of results which may occur in the future.
The following table sets forth selected pro forma operating statement data for
the Company:
(In thousands, except for per share amounts)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
----- ---- ---- ----
Net sales $ 91,636 $ 71,804 $ 220,296 $ 199,484
Cost of goods sold 62,766 54,794 154,957 160,762
Gross Profit 28,870 17,010 65,338 38,722
Operating expenses 13,273 10,885 32,972 29,497
Operating income 15,597 6,125 32,366 9,225
Interest Expense 2,810 2,758 8,661 8,663
Other Expense 1,398 37 2,684 56
Income before income taxes 11,389 3,330 21,023 506
Income tax (benefit) expense 4,556 1,332 8,409 202
Net Income 6,833 1,998 12,614 304
EPS
Basic $ .93 $ .28 $ 1.73 $ .04
Diluted $ .70 $ .21 $ 1.31 $ .03
Average shares
Basic 7,357,500 7,030,500 7,301,500 7,105,500
Diluted 9,826,042 9,357,042 9,651,042 9,449,042
(In percentages)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
----- ---- ----- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.5 76.3 70.3 80.6
Gross Profit 31.5 23.7 29.7 19.4
Operating expenses 14.5 15.2 15.0 14.8
Operating income 17.0 8.5 14.7 4.6
Interest Expense 3.1 3.8 3.9 4.3
Other Expense 1.5 0.0 1.2 0.0
Income before income taxes 12.4 4.6 9.5 0.3
Income tax (benefit) expense 5.0 1.2 3.8 0.1
Net Income 7.5 3.5 5.7 0.2
The principal factors underlying the changes and trends set forth above in the
pro forma results of operations information are consistent with those discussed
on pages 14 and 15 associated with the Company's historic operations
information, largely accentuated by a significant increase in pounds sold of 8%
and 13% in the three and nine months ended September 30, 1999, respectively.
This is a result of the economy in the western United States and its influence
on the construction industry and its suppliers. In addition, selling prices have
increased due to increases in the price of PVC resin and strong demand for
finished goods, and the Company has realized the result of significant capacity
and process improvement investments made by both Eagle and PWPipe over the last
two years being deployed in 1999.
The pro forma results of operations reflect a pro forma interest expense at
rates that approximate that which the Company would have experienced on pro
forma debt levels that would have been outstanding over the pro forma periods.
The pro forma results do not reflect any anticipated cost savings or any
synergies that are anticipated from the Acquisition, and there can be no
assurance that any such cost savings or synergies will occur.
Had the Acquisition been consummated on January 1, 1998, the Company believes
that the valuation allowances related to deferred tax assets for the Company's
net operating loss carryforwards would have been decreased at that date as part
of the purchase accounting for the Acquisition. Accordingly, the pro forma
results of operations reflect a consistent pro forma overall effective income
tax rate of 40%.
Included in the unaudited historical and pro forma interim 1999 net income and
earnings per share information are certain nonrecurring charges, as noted in
Note 10 to the financial statements, associated with the acquisition of PWPipe,
and associated with proposed acquisitions terminated earlier in fiscal 1999.
These nonrecurring items approximately reduce historical and pro forma net
income for the three and nine month periods ended September 30, 1999, by $1.5
million and $2.8 million, respectively. Absent these nonrecurring charges,
pro forma basic and diluted earnings per share would be approximately $1.05 and
$.79, and $1.96 and $1.48 for the three and nine month periods ending September
30, 1999, respectively.
Included in the pro forma nine month period ending September 30, 1998 net income
and earnings per share information is a $3.3 million fair market value purchase
accounting adjustment related to inventory which was reflected in the earliest
pro forma period presented. Absent this charge, pro forma basis and diluted
earnings per share would be approximately $0.32 and $0.24 for the nine month
period ending September 30, 1998, respectively.
Financial Condition. The Company had working capital of $1.5 million at
September 30, 1999. As of September 30, 1999, the Company had available excess
borrowing capacity under its Revolving Facility of $4.5 million. Subsequent to
September 30, 1999, certain restrictions were lifted on the borrowing capacity
regarding items related to the recapitalization of the Company, available
collateral increased, and the Company provided net cash from operations. As a
result, on October 31, 1999, the Company had available excess borrowing capacity
under its Revolving Facility of $19.2 million.
Cash used by operating activities was $0.3 million in 1999. Cash provided by
operations was $2.5 million in 1998. The primary use of cash in 1999 was a $4.9
million reduction in accounts payable due to the mid-month timing of the
Acquisition of PWPipe in September, 1999. The reported 1999 reduction in cash
provided by operations is also influenced by an increase in September 1999 cost
of sales related to the acquired PWPipe finished goods inventories, previously
discussed.
The Company used $78.8 million and $9.4 million on investing activities for the
nine months ended September 30, 1999 and 1998, respectively. The primary use of
cash in 1999 was for the purchase of PWPipe. The primary use of cash in 1998 was
for capital expenditures.
Cash provided by financing activities was $80.9 million and $7.1 million for the
nine months ended September 30, 1999 and 1998, respectively. The primary source
of cash in 1999 was borrowings under the Senior Credit Facility and Senior
Subordinated Notes, and in 1998 was borrowings under the revolving credit loan.
The Company had estimated commitments for capital expenditures of $515,000 at
September 30, 1999, which will be funded from borrowings under the Revolving
Facility and operating cash flow. Additional sources of liquidity, if needed,
include the Company's Revolving Facility, 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.
On July 21, 1999, Lamson & Sessions Co. filed a complaint against the Company to
recover alleged damages incurred by Lamson in connection with the termination of
the Company's proposed acquisition of Lamson's PVC pipe business. As set forth
in the complaint, Lamson is seeking nearly $1 million in fees and expenses, plus
an undetermined amount of damages. The Company believes that the outcome of this
litigation will not have a material adverse effect on the Company's financial
position and future results of operations. During the third quarter of 1999, the
Company reserved $500,000 for legal fees to defend the Company in this matter.
Effective September 16, 1999, the Company completed the acquisition of all of
the outstanding capital stock of PWPipe, a manufacturer of polyvinyl chloride
(PVC) pipe and fittings. PWPipe operates six manufacturing facilities located in
Tacoma and Sunnyside, Washington; Eugene, Oregon; and Cameron Park, Perris and
Visalia, California, from its operating headquarters in Eugene, Oregon. The
Company paid approximately $76.9 million, plus transaction costs, subject to
certain balance sheet adjustments to be determined. In addition, in the fourth
quarter of fiscal 1999, the Company expects to record certain relocation and
other realignment expenses associated with the formation of a combined business
organization.
In connection with the Acquisition of PWPipe on September 20, 1999, the Company
entered into a Second Amended and Restated Loan and Security Agreement to obtain
a $100.0 million Senior Credit Facility. The Senior Credit Facility consists of
a: (i) Term Note A in the principal amount of $35.0 million; (ii) Term Note B in
the principal amount of $15.0 million, and a (iii) $50.0 million Revolving
Facility. The Senior Credit Facility is secured by substantially all the assets
of the Company. Term Note A bears interest at a rate equal to the LIBOR plus
2.75%. Term Note B bears interest at a rate equal to LIBOR plus 3.25%. The LIBOR
rate at September 30, 1999 was 5.50%. Principal on the Term Notes is due and
payable quarterly in $1.25 million amounts beginning on December 31, 1999, and
continuing on the last day of each March, June, September and December
thereafter until paid in full on September 20, 2004. Outstanding notes issued
pursuant to the Revolving Facility bear interest at a rate equal to LIBOR plus
2.50%. The Company is required to pay a fee equal to 0.5% of the unused portion
of the Revolving Facility.
Also on September 20, 1999, the Company issued Senior Subordinate Notes totaling
$32.5 million ($26.4 million recorded amount, net of debt discount described
below) with detachable stock purchase Warrants to purchase an aggregate of
1,940,542 shares of Company Common Stock. Interest on the Senior Subordinate
Notes is payable at a fixed rate per annum equal to 14% beginning on December
20, 1999, and on the 20th day of each March, June, September and December
thereafter until the entire principal and interest is paid in full on September
20, 2007. Of this interest, 12% is payable in cash and 2% is payment in kind.
Principal is paid in three equal installments on each September 20th of 2005,
2006 and 2007. A debt discount totaling $6.1 million has been recorded
associated with the issuance of the Senior Subordinated Notes, based on the
collective estimated fair value of the Senior Subordinate Notes and Warrants on
the date of issue.The discount will be amortized using an interest method as a
yield adjustment over their term.
The various debt agreements set forth certain financial covenants, which
require, among other things, that the Company maintain certain levels of net
worth and ratios of financial condition, limits capital expenditures, and
restricts the Company payment of dividends.
As described below, in connection with the Acquisition of PWPipe, the Company
entered into various equity transactions with certain officers and directors.
The Company sold an aggregate of 289,500 shares of Common Stock at fair market
value, issued an aggregate of 128,000 shares of Restricted Stock and granted
incentive stock options to purchase an aggregate of 272,500 shares of Common
Stock.
In connection with the sale of Common Stock to the Company's directors and
officers, the Company accepted Promissory Notes as partial payment for shares of
the Company's Common Stock purchased. All of the promissory Notes are dated
September 16, 1999, and require that the principal balance be paid in full by
November 20, 2004. The promissory Notes bear interest at the rate of the
Company's Revolving Credit Facility in place during the term of the Note.
Interest is due beginning on December 30, 1999, and continuing on the last day
of each calendar year until the promissory Note is paid in full, and is a full
recourse obligation of the maker.
On September 16, 1999, Restricted Stock Grants were made to certain officers of
the Company. These shares carry dividend and voting rights. Sales of these
shares are restricted prior to the date of vesting. The shares vest 20% after
three years, 30% after four years, and the remaining 50% after five years from
the date of grant. The restricted stock is subject to an agreement requiring
forfeiture by the officer in the event of termination of employment prior to the
vesting date for reasons other than normal retirement, death or disability.
Shares issued were recorded at their fair market value on the date of grant with
the corresponding deferred charge as part of shareholders' equity. The deferred
charge is being amortized as compensation expense on a straight-line basis over
the related vesting period. As of September 30, 1999, 128,000 shares of
restricted stock were outstanding.
Outlook. The statements contained in this Outlook section are based on Company
management's 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 and product
quality. The Company's ability to grow may be restrained, by among other things,
the availability of PVC resin. 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
currently believes that supply and demand for PVC resin in the plastic pipe
industry is currently balanced. The Company also currently believes that PVC
resin demand will be greater than PVC resin supply in the year 2000 and that
there may be shortages of PVC resin. 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 Company has net operating loss carryforwards of approximately $28.5 million,
$23.0 million of which expire in years 1999 and 2000, and $5.5 million expire in
years 2001 through 2013. In addition, there are state tax credit carryforwards
that expire in varying amounts through 2004. These carryforwards and credits are
available to offset future taxable income and state taxes, respectively.
The foregoing statements contained in this outlook section including 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, and its statement below regarding "Year
2000 (Y2K) Compliance" are all forward looking statements. The forward looking
statements involve a number of risks and uncertainties, some of which are beyond
the Company's control, that may cause actual results to differ from the
Company's expectations. Some of the factors that could cause actual results to
differ materially include, but are not limited to, raw material cost
fluctuations, raw material availability, 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 and believes
that it has completed changes on these systems to make them Y2K compliant. The
Company believes that 100% of its information systems are Y2K compliant. The
Company has also assessed, with the assistance of its vendors, whether any Y2K
problems exist in its office and production equipment. The Company believes that
all of its office and production equipment is Y2K compliant. In addition, the
Company has inquired of all its major 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 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 $15,000, all of which has been expensed as of
September 30, 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. The 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
The company is exposed to certain market risks based on the outstanding
long-term debt obligations of $83.9 million at September 30, 1999. Market risk
is estimated as the potential increase in fair value resulting from a
hypothetical one percent increase in interest rates which would result in an
annual interest expense increase of approximately $839,000.
Under covenants of the Company's Senior Credit Facility, the Company is required
to secure interest rate protection commencing within sixty days of the closing
date until at least the third anniversary of the closing date, for one half of
the outstanding principal of Term Loan A and Term Loan B. The Company plans to
secure an interest rate swap prior to November 20, 1999, for three years with a
LIBOR rate of 6.46% for one half of the outstanding principal of Term Loan A and
Term Loan B.
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
------- -----------
10.1* Employment agreement dated October 15, 1999, between the
Company and James K. Rash
27 Financial Data Schedule
* Filed with original Form 10-Q for quarter ended September 30, 1999 and
incorporated herein by reference.
(b) Reports on Form 8-K.
On September 2, 1999 the Company filed a Current Report on Form 8-K to report
the resignation of Larry D. Schnase from the Company's Board of Directors, and
the purchase of all of his shares of common stock and options to purchase common
stock for a net aggregate purchase price of $1.1 million. There were no
financial statements filed with the Form 8-K.
On September 20, 1999, the Company filed a Current Report on Form 8-K to report
its acquisition of Pacific Western Extruded Plastics Company ("PWPipe") from
Mitsubishi Chemical America, Inc. and Mitsubishi Plastics, Inc. (the "Sellers").
The registrant purchased all the outstanding capital stock of PWPipe pursuant to
a Stock Purchase Agreement dated September 16, 1999 by and among the Company,
Mitsubishi Chemical America, Inc. and Mitsubishi Plastics, Inc. Pursuant to Item
7(a)(4) of Form 8-K, the required financial statements will be filed by
amendment by December 13, 1999, or sooner if such information is available.
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/ Roger R. Robb
Roger R. Robb
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: December 30, 1999
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1* Employment agreement dated October 15, 1999, between the Company
and James K. Rash
27 Financial Data Schedule (filed in electronic format only)
* Filed with original Form 10-Q for quarter ended September 30, 1999 and
incorporated herein by reference.