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 SEPTEMBER 30,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-18050
EAGLE PACIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its Charter)
MINNESOTA 41-1642846
(State of incorporation) (I.R.S. Employer Identification No.)
333 South Seventh Street
2430 Metropolitan Centre
Minneapolis, Minnesota 55402
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 371-9650
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
The number of shares of the registrant's Common Stock, $.01 par value per share,
outstanding as of October 24, 1997 was 6,523,474.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Condensed Statements of Operations - Three and Nine
Months Ended September 30, 1997 and 1996 (Unaudited)............ 3
Consolidated Condensed Balance Sheets - September 30, 1997
and December 31, 1996 (Unaudited)............................... 4
Consolidated Condensed Statements of Cash Flows - Nine
Months Ended September 30, 1997 and 1996 (Unaudited)............ 5
Notes to Consolidated Condensed Financial Statements (Unaudited).... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 7
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.............................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 9
SIGNATURES................................................................... 9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 20,042,483 $ 18,395,181 $ 56,989,941 $ 52,511,981
COST OF GOODS SOLD 16,509,562 14,226,118 45,197,009 39,349,613
------------ ------------ ------------ ------------
Gross profit 3,532,921 4,169,063 11,792,932 13,162,368
OPERATING EXPENSES:
Selling expenses 2,151,926 1,939,443 6,288,787 5,561,434
General and administrative expenses 638,569 703,475 2,020,363 2,111,063
------------ ------------ ------------ ------------
2,790,495 2,642,918 8,309,150 7,672,497
------------ ------------ ------------ ------------
OPERATING INCOME 742,426 1,526,145 3,483,782 5,489,871
NON-OPERATING EXPENSE 617,985 636,918 2,074,528 2,156,741
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 124,441 889,227 1,409,254 3,333,130
INCOME TAX BENEFIT (EXPENSE) (25,000) (39,600) 167,932 (152,600)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS 99,441 849,627 1,577,186 3,180,530
EXTRAORDINARY LOSS ON DEBT
PREPAYMENTS, less income tax benefit of $90,000 -- -- -- 1,718,854
------------ ------------ ------------ ------------
NET INCOME (LOSS) 99,441 849,627 1,577,186 1,461,676
PREFERRED STOCK DIVIDENDS (200,657) (1,291) (319,747) (90,135)
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ (101,216) $ 848,336 $ 1,257,439 $ 1,371,541
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Primary
Income before extraordinary loss $ (.02) $ .11 $ .17 $ .50
Extraordinary loss on debt prepayments -- -- -- (.27)
------------ ------------ ------------ ------------
Net income (loss) $ (.02) $ .11 $ .17 $ .23
============ ============ ============ ============
Fully diluted
Income before extraordinary loss $ (.02) $ .11 $ .17 $ .44
Extraordinary loss on debt prepayments -- -- -- (.24)
------------ ------------ ------------ ------------
Net income (loss) $ (.02) $ .11 $ .17 $ .20
============ ============ ============ ============
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 6,518,627 7,544,367 7,557,901 6,255,037
============ ============ ============ ============
Fully diluted 6,518,627 7,606,121 7,576,651 7,259,968
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
ASSETS SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ --
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $317,000 and $195,000, respectively 9,316,365 6,373,994
Inventories 9,779,744 10,279,169
Deferred income taxes 425,000 340,000
Other 364,373 196,482
------------ ------------
Total current assets 19,885,482 17,189,645
PROPERTY AND EQUIPMENT, net 15,782,500 11,486,019
OTHER ASSETS:
Prepaid interest 984,703 1,388,688
Goodwill, less accumulated amortization of $342,000 and
$263,000, respectively 4,125,575 3,650,298
Other 1,611,572 1,711,914
------------ ------------
6,721,850 6,750,900
------------ ------------
$ 42,389,832 $ 35,426,564
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 2,622,997 $ 4,649,102
Accounts payable 7,635,190 8,020,368
Accrued liabilities 1,640,756 1,442,180
Current maturities of long-term debt 1,927,559 1,951,751
------------ ------------
Total current liabilities 13,826,502 16,063,401
LONG-TERM DEBT, less current maturities 5,846,599 7,035,562
SUBORDINATED DEBT 4,126,554 3,972,450
OTHER LONG-TERM LIABILITIES -- 331,147
REDEEMABLE PREFERRED STOCK, 8% cumulative dividend; convertible; 9,444,734 --
$1,000 liquidation preference; $.01 par value; authorized,
issued and outstanding 10,000 and none, respectively
STOCKHOLDERS' EQUITY:
Series A preferred stock, 7% cumulative dividend;
convertible; $2 liquidation preference; no par value;
authorized 2,000,000 shares; issued and outstanding
18,750 shares 37,500 37,500
Undesignated stock, par value $.01 per share;
authorized 18,000,000 shares, none issued and outstanding -- --
Common stock, par value $.01 per share;
authorized 30,000,000 shares; issued and outstanding
6,523,474 and 6,443,237 shares, respectively 65,235 64,432
Class B Common stock, par value $.01 per share;
authorized 3,500,000 shares; none issued and outstanding -- --
Additional paid-in capital 37,334,344 37,211,090
Unearned compensation on stock options (28,125) (96,241)
Notes receivable from officers and employees on
Common Stock purchases (434,206) (66,343)
Accumulated deficit (27,829,305) (29,126,434)
------------ ------------
Total stockholders' equity 9,145,443 8,024,004
------------ ------------
$ 42,389,832 $ 35,426,564
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,577,186 $ 1,461,676
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on debt prepayments -- 1,718,854
Minority interest -- 120,089
Depreciation and amortization 1.312.799 1,212,361
Loan discount amortization 427,456 260,088
Prepaid interest amortization 403,985 346,150
Deferred income taxes (250,000) --
Change in operating assets and liabilities (2,888,549) (1,011,718)
Other -- 105
------------ ------------
Net cash provided by operating activities 582,877 4,107,605
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,386,782) (2,139,070)
Purchases of minority interest (748,718) (519,749)
Proceeds from restricted cash -- 500,000
Proceeds from property and equipment disposals -- 36,484
Notes receivable from officers and employees for purchase
of common stock (367,863) --
------------ ------------
Net cash used in investing activities (6,503,363) (2,122,335)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under note payable, net (2,026,105) (433,592)
Proceeds from long-term debt 260,000 8,029,950
Repayment of long-term debt (1,473,155) (10,001,552)
Issuance of redeemable preferred stock, net of offering costs 9,416,971 --
Issuance of common stock 82,522 1,446,563
Payment of debt issuance costs (20,000) (598,257)
Payment of preferred stock dividend (319,747) (90,135)
------------ ------------
Net cash provided by (used in) financing activities 5,920,486 (1,647,023)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS -- 338,247
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- 303,043
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 641,290
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the
financial position of Eagle Pacific Industries, Inc. and subsidiaries
("the Company") at September 30, 1997 and the results of its operations
for the three and nine month periods ended September 30, 1997 and 1996
and its cash flows for the nine month periods ended September 30, 1997
and 1996. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the Company's management believes that
the disclosures are adequate to make the information presented not
misleading, it is suggested that these consolidated condensed financial
statements be read in conjunction with the consolidated financial
statements of the Company included with its annual report on Form 10-K
for the year ended December 31, 1996.
2. INVENTORY
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
Raw materials $ 3,526,848 $ 3,151,147
Finished goods 6,252,896 7,128,022
----------- -----------
$ 9,779,744 $10,279,169
=========== ===========
3. REDEEMABLE PREFERRED STOCK
On May 9, 1997, the Company issued 10,000 shares of redeemable 8%
convertible preferred stock at $1,000 per share. The stock is
convertible at the holders option at $4.26 per share and has a
mandatory redemption at the liquidation preference of $1,000 per share
on May 9, 2004. After two years from issuance, the Company can cause a
mandatory conversion if the common stock trades above $7.45 for 30
consecutive days.
4. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share". This statement specifies the computation, presentation, and
disclosure requirements for earnings per share. This Statement is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. If the Company had
applied SFAS No. 128 to the computation of earnings per share for the
three and nine month periods ended September 30, 1997, the basic
amounts would have been $(.02) and $.19, respectively, and diluted
amounts would have been $(.02) and $.17, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS. The following table sets forth items from the Company's
Consolidated Statement of Operations as percentages of net revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 82.4 77.3 79.3 74.9
Gross Profit 17.6 22.7 20.7 25.1
Operating expenses 13.9 14.4 14.6 14.6
Operating income 3.7 8.3 6.1 10.5
Non-operating expense (3.1) (3.5) (3.6) (4.1)
Income before income taxes 0.6 4.8 2.5 6.4
and extraordinary loss
Income tax benefit (expense) (0.1) (0.2) 0.3 (0.3)
Extraordinary loss on debt -- -- -- (3.3)
prepayment
Net Income 0.5% 4.6% 2.8% 2.8%
The Company posted record net sales for the three and nine month
periods ended September 30, 1997, increasing 9% compared to the same periods in
1996, respectively. Higher volumes, primarily due to increased production
capacities, were responsible for the growth in revenues. Pounds sold rose 15%
and 11% for the three and nine month periods ended September 30, 1997,
respectively, compared to the same periods in 1996. Selling prices decreased 7%
and 2% for the three and nine month periods ended September 30, 1997,
respectively, compared to the same periods in 1996.
The decrease in gross profit as a percentage of net sales from 1996 to
1997 is primarily due to a combination of higher resin prices during the first
half of 1997 and lower selling prices during the third quarter of 1997.
Polyvinyl chloride (PVC) resin prices were approximately 2% higher during the
nine months ended September 30, 1997 compared to the same period in 1996. Much
of the PVC resin increases were driven by a tight supply of resin during the
first quarter, caused by various operational problems with many of the resin
producers; not true demand. Therefore, the Company was unable to pass all of the
raw material price increases on to its customers during the first half of 1997.
The lower selling prices is due to PVC resin prices peaking earlier than usual
in 1997. Resin pricing began it's more traditional fall/winter descent in
September of 1996, compared to an unusually-early June in 1997. To maintain its
market share, the Company was required to lower its prices at the same rate as
raw material price changes. As higher priced inventory was sold at lower market
prices, gross profits decreased significantly.
The decrease in non-operating expenses, which consist mainly of
interest expense, from 1996 to 1997 is primarily due to the debt refinancing and
new common equity obtained in May of 1996, which allowed the Company to
eliminate 40% of the Company's high cost subordinated debt. In addition, the
sale of redeemable preferred stock in May, 1997 also reduced interest expense.
The income tax provisions for 1997 and 1996 were calculated based upon
management's estimate of the annual effective income tax rates, reduced by
federal net operating loss (NOL) carryforwards utilized and state tax credits,
as well as NOL carryforwards expected to be used in future periods.
FINANCIAL CONDITION. The Company's financial condition improved
significantly in 1997 due to the issuance of $10 million of convertible
preferred stock during the second quarter. The proceeds from issuance of the
convertible preferred stock were used to pay down debt as well as provide
capital for the Company's growth strategy. At September 30, 1997, the Company
had $6.1 million of working capital.
Cash provided by operating activities was $583,000 and $4.1 million for
the nine months ended September 30, 1997 and 1996, respectively. The primary
reasons for the decrease are lower operating income and a smaller decrease in
inventories during the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996.
<PAGE>
The Company used $6.5 million and $2.1 million for investing activities
for the nine months ended September 30, 1997 and 1996, respectively. The primary
uses of cash in 1997 and 1996 were for capital expenditures and the purchase of
the minority interest in Eagle Plastics. The primary source of cash in 1996 was
proceeds from restricted cash.
Cash provided by financing activities was $5.9 million for the nine
months ended September 30, 1997, compared to cash used by financing activities
of $1.6 million for the nine months ended September 30, 1996. The increase is
primarily due to issuance of convertible preferred stock during the second
quarter of 1997, partially offset by payments under the note payable and
long-term debt.
The Company has commitments for capital expenditures of $625,000 at
September 30, 1997. Sources of liquidity include the Company's revolving credit
line, additional long-term debt financing, and the sale of Company equity
securities under either a private or public offering. With the addition of the
$10 million of redeemable preferred stock during the second quarter of 1997, the
Company believes that it has the financial resources needed to meet business
requirements in the foreseeable future, including capital expenditures for
expanding manufacturing capacity and working capital requirements.
OUTLOOK. The statements contained in this Outlook are based on current
expectations. These statements are forward looking and actual results may differ
materially from those anticipated by some of the statements made herein. These
forward statements involve a number of risks and uncertainties in addition to
those specifically mentioned below, including: business conditions and the
general economy, competitive factors such as major capacity increases from
competitors, and weather factors. Any one or more of these factors and risks
could have a materially adverse effect on the Company's results of operations.
The Company expects the demand for plastic pipe and tubing to grow as
acceptance of plastic pipe over metal pipe continues and the overall economy
continues to grow. Industry growth projections call for annual sales growth
rates for plastic pipe and tubing of three percent or greater per year through
1998. The Company has historically been able, and expects in the future, to grow
at rates substantially in excess of the industry averages due to its emphasis on
customer satisfaction, product quality and differentiation and innovative
promotional programs. The Company's strategy has been, and continues to be, to
concentrate growth in the higher profit products and geographic regions.
The Company's gross margin percentage is a sensitive function of PVC
and polyethylene (PE) raw material resin prices. In a rising or stable resin
market, margins and sales volume have historically been higher and conversely,
in falling resin markets sales volumes and margins have historically been lower.
Due to the commodity nature of PVC and PE resin and the dynamic supply and
demand factors both domestically and worldwide, it is very difficult to predict
gross margin percentages or assume that historical trends will continue.
The Company does not anticipate any events in the foreseeable future
that would hinder the availability of the federal net operating loss
carryforwards (NOLs). The NOLs are available through the year 2010, however, the
majority expire by the year 2000. The amount of available NOLs actually used is
dependent on future profits and the Company does not expect to utilize all of
its NOLs before they expire.
The Company believes that it has the product offerings, facilities,
personnel, and competitive and financial resources for continued business
success, but future revenues, costs, margins, and profits are all influenced by
a number of factors, as discussed above.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
11 Earnings Per Share Schedule
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
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: November 13, 1997
EXHIBIT 11
Earnings Per Share Schedule
Calculation of net income under the modified treasury stock method:
THREE NINE
MONTHS MONTHS
----------- -----------
Primary
Net (loss) income applicable to common stock $ (101,216) $ 1,257,439
Assumed interest expense reduction -- 30,178
----------- -----------
$ (101,216) $ 1,287,617
=========== ===========
Weighted average common stock outstanding 6,518,627 6,497,745
Common stock equivalents -- 1,060,156
----------- -----------
6,518,627 7,557,901
=========== ===========
Net (loss) income per share $ (.02) $ .17
=========== ===========
Fully diluted
Net (loss) income applicable to common stock $ (101,216) $ 1,257,439
Preferred stock dividends -- 1,969
Assumed interest expense reduction -- 30,178
----------- -----------
$ (101,216) $ 1,289,586
=========== ===========
Weighted average common stock outstanding 6,518,627 6,497,745
Common stock equivalents -- 1,060,156
Assumed conversion of preferred stock -- 18,750
----------- -----------
6,518,627 7,576,651
=========== ===========
Net income per share $ (.02) $ .17
=========== ===========
The assumed conversion of the redeemable preferred stock was antidilutive,
therefore it was excluded from the fully diluted calculations
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 9,633,365
<ALLOWANCES> 317,000
<INVENTORY> 9,779,744
<CURRENT-ASSETS> 19,885,482
<PP&E> 19,694,041
<DEPRECIATION> 3,911,540
<TOTAL-ASSETS> 42,389,832
<CURRENT-LIABILITIES> 13,826,502
<BONDS> 9,973,153
9,482,234
0
<COMMON> 65,235
<OTHER-SE> 9,042,708
<TOTAL-LIABILITY-AND-EQUITY> 42,389,832
<SALES> 56,989,941
<TOTAL-REVENUES> 56,989,941
<CGS> 45,197,009
<TOTAL-COSTS> 45,197,009
<OTHER-EXPENSES> 8,283,994
<LOSS-PROVISION> (1,954)
<INTEREST-EXPENSE> 2,101,638
<INCOME-PRETAX> 1,409,254
<INCOME-TAX> (167,932)
<INCOME-CONTINUING> 1,577,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,577,186
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
