UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: SEPTEMBER 30, 1996
Commission File Number: 0-18050
EAGLE PACIFIC INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1642846
(State of Incorporation) (IRS Employer ID No.)
2430 METROPOLITAN CENTRE
333 S. SEVENTH STREET
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 _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 25, 1996: 6,409,190 shares of Common Stock, $.01 par
value per share.
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Condensed Balance Sheets - September 30, 1996
and December 31, 1995 (Unaudited) 3
Consolidated Condensed Statements of Operations - Three
and Nine Months Ended September 30, 1996 and 1995 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows - Nine
Months Ended September 30, 1996 and 1995 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION 9
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 1996 1995
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 641,290 $ 303,043
Restricted cash -- 500,000
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $285,900 and $157,900, respectively 9,035,894 6,322,387
Inventories 6,999,595 8,174,957
Other 361,269 153,118
------------ ------------
Total current assets 17,038,048 15,453,505
PROPERTY AND EQUIPMENT, net 10,461,057 9,354,748
OTHER ASSETS:
Prepaid interest 1,477,698 2,907,880
Goodwill, less accumulated amortization of $238,261 and
$172,092, respectively 3,599,545 3,202,631
Other 964,701 999,018
------------ ------------
6,041,944 7,109,529
------------ ------------
$ 33,541,049 $ 31,917,782
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 5,087,913 $ 5,521,505
Accounts payable 5,633,519 5,252,683
Accrued liabilities 1,473,063 1,209,321
Current maturities of long-term debt 1,934,004 3,019,064
------------ ------------
Total current liabilities 14,128,499 15,002,573
------------ ------------
LONG-TERM DEBT, less current maturities 7,530,278 5,356,762
SUBORDINATED DEBT 3,937,350 6,386,750
OTHER LONG-TERM LIABILITIES 413,221 596,622
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 and 1,383,500 shares, respectively 37,500 2,767,000
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 6,401,690 and 4,152,940 shares, respectively 64,017 41,529
Additional paid-in capital 36,970,331 32,757,381
Unearned compensation on stock options (125,086) (204,232)
Accumulated deficit (29,415,061) (30,786,603)
------------ ------------
Total stockholders' equity 7,531,701 4,575,075
------------ ------------
$ 33,541,049 $ 31,917,782
============ ============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 18,395,181 $ 19,038,421 $ 52,511,981 $ 37,315,159
COST OF GOODS SOLD 14,226,118 16,494,901 39,349,613 30,655,564
------------ ------------ ------------ ------------
Gross profit 4,169,063 2,543,520 13,162,368 6,659,595
OPERATING EXPENSES:
Selling expenses 1,939,443 1,789,828 5,561,434 3,786,709
General and administrative expenses 703,475 499,657 2,111,063 1,559,853
------------ ------------ ------------ ------------
2,642,918 2,289,485 7,672,497 5,346,562
------------ ------------ ------------ ------------
OPERATING INCOME 1,526,145 254,035 5,489,871 1,313,033
NON-OPERATING EXPENSE 636,918 774,027 2,156,741 2,027,075
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 889,227 (519,992) 3,333,130 (714,042)
INCOME TAX EXPENSE 39,600 12,600 152,600 --
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 849,627 (532,592) 3,180,530 (714,042)
EXTRAORDINARY LOSS ON DEBT PREPAYMENTS,
less income tax benefit of $90,000 -- -- 1,718,854 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) 849,627 (532,592) 1,461,676 (714,042)
PREFERRED STOCK DIVIDENDS (1,291) (48,421) (90,135) (145,266)
------------ ------------ ------------ ------------
NET INCOME (LOSS ) APPLICABLE TO
COMMON STOCK $ 848,336 $ (581,013) $ 1,371,541 $ (859,308)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary
Income (loss) before extraordinary loss .11 (.14) .50 (.22)
Extraordinary loss on debt prepayments
-- -- (.27) --
------------ ------------ ------------ ------------
Net income (loss) $ .11 $ (.14) $ .23 $ (.22)
============ ============ ============ ============
Fully diluted
Income (loss) before extraordinary loss $ .11 $ (.14) $ .44 $ (.22)
Extraordinary loss on debt prepayments
-- -- (.24) --
------------ ------------ ------------ ------------
Net income (loss) $ .11 $ (.14) $ .20 $ (.22)
============ ============ ============ ============
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
Primary 7,544,367 4,054,788 6,255,037 3,835,722
============ ============ ============ ============
Fully diluted 7,606,121 4,054,788 7,259,968 3,835,722
============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
EAGLE PACIFIC PLASTICS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,461,676 $ (714,042)
Adjustments necessary to reconcile net income (loss)
to net cash used in operating activities:
Extraordinary loss on debt prepayments 1,718,854 --
Minority interest 120,089 (16,865)
Depreciation and amortization 1,212,361 909,737
Loan discount amortization 260,088 365,039
Prepaid interest amortization 346,150 452,895
Change in operating assets and liabilities (1,011,718) 475,482
Other 105 (28,244)
------------ ------------
Net cash provided by operating activities 4,107,605 1,444,002
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Pacific Plastics, Inc., net of cash acquired -- (4,195,035)
Purchase of property and equipment (2,139,070) (321,416)
Payment under noncompete agreement -- (750,000)
Purchase of minority interest (519,749) --
Proceeds from restricted cash 500,000 --
Decrease in other assets -- 100,000
Proceeds from sale of property and equipment 36,484 14,700
------------ ------------
Net cash used in investing activities (2,122,335) (5,151,751)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,422,500 43,750
Proceeds from exercise of stock options 24,063 --
Payment of preferred stock dividend (90,135) (145,266)
Proceeds from long-term debt 8,029,950 1,961,624
Repayment of long-term debt (10,001,552) (939,877)
Payment for prepaid interest -- (1,500,000)
Payment for debt issuance costs (598,257) --
Net borrowings under note payable (433,592) 4,561,117
------------ ------------
Net cash (used in) provided by financing activities (1,647,023) 3,981,348
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 338,247 273,599
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 303,043 --
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 641,290 $ 273,599
============ ============
See accompanying notes to consolidated condensed financial statements
</TABLE>
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
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 at
September 30, 1996 and the results of its operations for the three and
nine month periods ended September 30, 1996 and 1995 and its cash flows
for the nine month periods ended September 30, 1996 and 1995. 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-KSB for the year ended
December 31, 1995.
2. ACQUISITION OF PACIFIC PLASTICS, INC.
On July 10, 1995, the Company acquired all of the outstanding common
stock of Pacific Plastics, Inc. (Pacific). The following unaudited pro
forma condensed combined statements of operations reflect the combined
operations of the Company and Pacific during the nine months ended
September 30, 1995 as if the acquisition had occurred at the beginning
of 1995. The unaudited pro forma condensed combined statements of
operations may not necessarily reflect the actual results of operations
of the Company which would have resulted had the acquisition occurred as
of the dates presented. The unaudited pro forma information is not
necessarily indicative of future results of operations for the combined
companies.
NINE MONTHS ENDED
SEPTEMBER 30, 1995
------------------
Revenues $55,480,000
Gross profit 9,570,000
Net loss (622,000)
Net loss applicable to common stock (768,000)
Net loss per common share $ (.19)
3. INVENTORY
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Raw materials $ 2,056,317 $ 2,485,546
Finished goods 4,943,278 5,689,411
------------- ------------
$ 6,999,595 $ 8,174,957
------------- ------------
4. STOCKHOLDERS' EQUITY
During the second and third quarters of fiscal 1996, the Company issued
600,000, 19,000, 1,559,750, and 70,000 shares of common stock for a new
private equity offering, the acquisition of additional shares of Eagle
Plastics, Inc. stock, the conversion of 1,364,750 shares of preferred
stock, and the exercise of stock options, respectively.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH FINANCING
ACTIVITIES
A summary of supplemental cash flow information and non-cash financing
activities for the nine months ended September 30, is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest paid, including prepaid interest to fix the
contingent interest $1,413,764 $2,773,181
Issuance of notes payable in connection with the
agreement to fix the contingent interest -- 1,985,325
Issuance of common stock in connection with the
agreement to fix the contingent interest -- 642,600
Value of warrants issued in connection with the
agreement to fix the contingent interest -- 6,000
Issuance of common stock in connection with the
acquisition of Pacific -- 700,000
Issuance of notes payable in connection with the
acquisition of Pacific -- 1,700,000
Issuance of common stock in exchange for Preferred stock 2,729,500 --
Issuance of common stock in exchange for Eagle stock 59,375 --
</TABLE>
6. FINANCIAL RESTRUCTURING
In May 1996, the Company repurchased $3.0 million of it's subordinated
debt which generated an extraordinary loss of $1,718,854, net of income
taxes. The Company issued a three year warrant to purchase 215,000
shares of the Company's common stock in consideration for the
subordinated debt repurchase. In conjunction with the repurchase, the
Company obtained $1.5 million of new common equity and an additional
$3.4 million of term notes, and the Company repurchased approximately
one-half of the Eagle minority interest. The additional term notes were
obtained through a bank refinancing which consolidated the Eagle and
Pacific term notes and revolving credit loans into a $8.0 million term
note and a $16.5 million revolving credit loan.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION:
On July 10, 1995, the Company acquired all of the outstanding common stock of
Pacific Plastics, Inc. (Pacific). Pacific, and its wholly-owned subsidiary,
Arrow Pacific Plastics, Inc., extrude polyvinyl chloride pipe and polyethylene
tubing products which are marketed primarily in the Northwestern United States.
As Pacific was not acquired by the Company until July 1995, the Company's
operating results are not comparable with prior years.
RESULTS OF OPERATIONS:
NET SALES - Net sales for the three months ended September 30, 1996, were
$18,395,000, a decrease of $643,000 from net sales of $19,038,000 for the three
months ended September 30, 1995. Net sales for the nine months ended September
30, 1996, were $52,512,000, an increase of $15,197,000 over net sales of
$37,315,000 for the nine months ended September 30, 1995. Net sales for 1996
decreased $2,968,000, when compared to the nine months 1995 pro forma net sales.
The decrease in the three month and proforma net sales is entirely due to lower
selling prices as pounds sold during the three and nine months of 1996 are
approximately 5% higher than the 1995 three month actual results and nine month
1995 pro forma results. The increase in the nine month actual net sales is due
to the acquisition of Pacific and is partially offset by the lower selling
prices.
GROSS PROFIT - Gross profit as a percentage of net sales was 22.7% and 25.1% for
the three and nine months ended September 30, 1996, respectively, compared to
13.4% and 17.8% for the three and nine months ended September 30, 1995,
respectively. The increase in the gross profit is primarily due to the
stabilization of polyvinyl chloride (PVC) and polyethylene (PE) raw material
costs and selling prices during 1996.
OPERATING EXPENSES - Total operating expenses for the three and nine months
ended September 30, 1996 increased $353,000 and $2,326,000, respectively,
compared to the same periods in 1995. The increase in the three month results is
due to higher selling expenses as a result of the higher sales volume. The
increase in the nine month results is primarily due to the acquisition of
Pacific as well as the higher sales volume. Operating expenses decreased $49,000
for the nine months ended September 30, 1996 compared to the same period 1995
pro forma operating expenses. The decrease is primarily due to salary and wage
savings from consolidation of administrative staff after the Pacific
acquisition, partially offset by higher selling expenses as a result of higher
sales volume.
INTEREST EXPENSE - Interest expense decreased $237,000 and $81,000 during the
three and nine months ended September 30, 1996, respectively, compared to the
same periods in 1995. Interest expense decreased $493,000 during the nine months
ended September 30, 1996 compared to the same period 1995 pro forma results. The
decrease is due to the financial restructuring in the second quarter of 1996,
lower borrowings on the revolving credit loans and lower interest rates.
INCOME TAXES - The income tax provisions for the three and nine months ended
September 30, 1996 and 1995, were calculated based upon management's estimate of
the annual effective rates. The effective income tax rate for fiscal 1996 is
lower than the statutory rate as a result of a decrease in the deferred income
tax valuation primarily due to utilizing federal net operating loss
carryforwards to offset current federal taxable income. The effective income tax
rate for fiscal 1995 is lower than the statutory rate because the Company's net
operating losses could not be carried back and realization of any benefits from
the 1995 loss were uncertain.
NET INCOME (LOSS) - The Company generated net income of $850,000 and $1,462,000
for the three and nine months ended September 30, 1996, respectively, compared
to a net loss of $533,000 and $714,000 for same periods in 1995. The Company had
a pro forma net loss of $622,000 for the nine month period ended September 30,
1995. The 1996 nine month results include a $1,719,000 one-time extraordinary
loss on debt prepayments. The improved profitability is primarily attributable
to the recent stabilization of the plastic resin market, which contributed to
higher gross profit margins.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at September 30, 1996, was $2,910,000, an increase of $2,459,000
from working capital of $451,000 at December 31, 1995. The increase in working
capital is primarily due to a reduction in the current maturities of long-term
debt as a result of the financial restructuring and a return to profitable
results in 1996 versus the losses incurred in 1995.
Net cash flows provided by operating activities was $4,108,000 and $1,444,000
for the nine months ended September 30, 1996 and 1995, respectively. The
improved operating cashflows is primarily due to increased profits prior to the
extraordinary loss, partially offset by a change in operating assets and
liabilities.
Net cash flows used in investing activities totaled $2,122,000 and $5,152,000
for the nine months ended September 30, 1996 and 1995, respectively. The primary
use of cash in 1996 relates to capital expenditures for the plant expansion at
Eagle. The primary use of cash in 1995 relates to the acquisition of Pacific
Plastics, Inc.
Net cash flows used in financing activities total $1,647,000 compared to net
cashflows provided by financing activities of $3,981,000 for the nine months
ended September 30, 1996 and 1995, respectively. The primary use of cash in 1996
was payments on long-term debt, which was partially offset by additional
borrowings on the Company's line of credit, proceeds from long-term debt, and
issuance of common stock. The primary source of cash in 1995 was additional
borrowings on the Company's line of credit.
The Company believes that the funds to be generated from its operations,
together with funds available under its $16.5 million line of credit will be
sufficient to satisfy its liquidity and capital resource requirements for the
next twelve months.
The Company's principal commitments at September 30, 1996 consisted of
obligations under operating leases for facilities and an agreement to purchase
land in Utah for approximately $450,000.
INFLATION:
The Company does not believe that inflation has had a significant impact on the
results of its operations.
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 Matter to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits. See "Exhibit Index" immediately following the signature page
of this form 10-Q.
(b) Reports on Form 8-K. None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
President
By /s/ Patrick M. Mertens
-------------------------------------
Patrick M. Mertens
Chief Financial Officer
Dated: November 1, 1996
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
11 Earnings Per Share Schedule
27 Financial Data Schedule
EXHIBIT 11. Earnings Per Share Schedule
Calculation of net income under the modified treasury stock method:
<TABLE>
<CAPTION>
THREE NINE
MONTHS MONTHS
---------- ----------
<S> <C> <C>
Primary
Average common stock outstanding 6,395,867 5,106,537
Common stock equivalents 1,148,500 1,148,500
---------- ----------
7,544,367 6,255,037
========== ==========
Net income applicable to common stock $ 848,336 $1,371,541
Assumed interest expense reduction 18 61,671
---------- ----------
$ 848,354 $1,433,212
========== ==========
Net income per share $ .11 $ .23
========== ==========
Fully diluted
Average common stock outstanding 6,401,690 6,055,537
Preferred stock 18,750 18,750
Common stock equivalents 1,185,681 1,185,681
---------- ----------
7,606,121 7,259,968
========== ==========
Net income applicable to common stock $ 848,336 $1,371,541
Preferred stock dividends 1,291 90,135
Assumed interest expense reduction -- --
---------- ----------
$ 849,627 $1,461,676
========== ==========
Net income per share $ .11 $ .20
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 641,290
<SECURITIES> 0
<RECEIVABLES> 9,321,794
<ALLOWANCES> 285,900
<INVENTORY> 6,999,595
<CURRENT-ASSETS> 17,038,048
<PP&E> 13,263,448
<DEPRECIATION> 2,802,391
<TOTAL-ASSETS> 33,541,049
<CURRENT-LIABILITIES> 14,128,499
<BONDS> 13,401,632
37,500
0
<COMMON> 64,017
<OTHER-SE> 7,430,184
<TOTAL-LIABILITY-AND-EQUITY> 33,541,049
<SALES> 52,511,981
<TOTAL-REVENUES> 52,511,981
<CGS> 39,349,613
<TOTAL-COSTS> 39,349,613
<OTHER-EXPENSES> 7,685,781
<LOSS-PROVISION> (13,284)
<INTEREST-EXPENSE> 2,066,486
<INCOME-PRETAX> 3,333,130
<INCOME-TAX> 152,600
<INCOME-CONTINUING> 3,180,530
<DISCONTINUED> 0
<EXTRAORDINARY> (1,718,854)
<CHANGES> 0
<NET-INCOME> 1,461,676
<EPS-PRIMARY> .23
<EPS-DILUTED> .20
</TABLE>
