================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30,1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-18050
EAGLE PACIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its Charter)
MINNESOTA 41-1642846
(State of incorporation) (I.R.S. Employer Identification No.)
333 South Seventh Street
2430 Metropolitan Centre
Minneapolis, Minnesota 55402
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 371-9650
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
The number of shares of the registrant's Common Stock, $.01 par value per share,
outstanding as of July 24, 1998 was 6,612,483.
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<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
INDEX
PAGE NO.
--------
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS:
Condensed Statements of Operations - Three and Six
Months Ended June 30, 1998 and 1997 (Unaudited)............... 3
Condensed Balance Sheets - June 30, 1998
and December 31, 1997 (Unaudited)............................. 4
Condensed Statements of Cash Flows - Six
Months Ended June 30, 1998 and 1997 (Unaudited)............... 5
Notes to Condensed Financial Statements (Unaudited)............. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 10
SIGNATURES................................................................. 11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 20,396,580 $ 19,735,228 $ 38,906,644 $ 36,947,458
COST OF GOODS SOLD 15,997,649 15,324,133 31,126,329 28,687,447
------------ ------------ ------------ ------------
Gross profit 4,398,931 4,411,095 7,780,315 8,260,011
OPERATING EXPENSES:
Selling expenses 2,445,289 2,188,788 4,559,837 4,136,861
General and administrative expenses 698,901 685,806 1,376,087 1,381,794
------------ ------------ ------------ ------------
3,144,190 2,874,594 5,935,924 5,518,655
------------ ------------ ------------ ------------
OPERATING INCOME 1,254,741 1,536,501 1,844,391 2,741,356
NON-OPERATING EXPENSE 721,247 778,956 1,353,613 1,456,543
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 533,494 757,545 490,778 1,284,813
INCOME TAX (EXPENSE) BENEFIT (43,000) 215,932 (50,000) 192,932
------------ ------------ ------------ ------------
NET INCOME 490,494 973,477 440,778 1,477,745
PREFERRED STOCK DIVIDENDS 200,657 118,434 401,313 119,090
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO
COMMON STOCK $ 289,837 $ 855,043 $ 39,465 $ 1,358,655
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic $ .04 $ .13 $ .01 $ 21
============ ============ ============ ============
Diluted $ .04 $ .11 $ .01 $ .18
============ ============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 6,803,590 6,515,819 6,725,373 6,487,133
============ ============ ============ ============
Diluted 7,203,380 8,764,041 7,134,044 8,105,455
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ASSETS JUNE 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ --
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $274,000 and $203,500, respectively 10,514,025 6,528,296
Inventories 11,521,422 13,269,560
Deferred income taxes 425,000 425,000
Other 281,585 314,822
------------ ------------
Total current assets 22,742,032 20,537,678
PROPERTY AND EQUIPMENT, net 21,938,392 16,854,447
OTHER ASSETS:
Prepaid interest 541,588 836,998
Goodwill, less accumulated amortization of $426,000 and
$370,000, respectively 4,041,806 4,097,652
Other 1,333,444 1,502,196
------------ ------------
5,916,838 6,436,846
------------ ------------
$ 50,597,262 $ 43,828,971
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 11,477,559 $ 4,405,976
Accounts payable 8,912,518 8,892,015
Accrued liabilities 1,683,356 1,276,481
Current maturities of long-term debt 1,866,410 1,882,882
------------ ------------
Total current liabilities 23,939,843 16,457,354
LONG-TERM DEBT, less current maturities 4,799,977 5,489,900
SUBORDINATED DEBT 4,294,602 4,182,570
REDEEMABLE PREFERRED STOCK, 8% cumulative dividend; 10,000,000 10,000,000
convertible; $1,000 liquidation preference; $.01 par value;
authorized, issued and outstanding 10,000 shares,
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;
30,000,000 shares; issued and outstanding 6,621,783 and
6,506,174 shares, respectively 66,218 65,062
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding -- --
Additional paid-in capital 36,530,264 36,707,200
Notes receivable from officers and employees on Common
Stock purchases (434,206) (434,206)
Accumulated deficit (28,636,936) (28,676,409)
------------ ------------
Total stockholders' equity 7,562,840 7,699,147
------------ ------------
$ 50,597,262 $ 43,828,971
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- ---------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 440,778 $ 1,477,745
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest -- 17,780
Depreciation and amortization 1,043,498 867,365
Loan discount amortization 304,282 247,552
Prepaid interest amortization 295,410 256,280
Deferred income taxes -- (250,000)
Change in operating assets and liabilities (1,776,836) (5,556,661)
----------- -----------
Net cash provided by (used in) operating activities 307,132 (2,939,939)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,045,227) (2,618,264)
Purchases of minority interest -- (369,588)
Notes receivable from officers and employees for purchase of
common stock -- (275,808)
----------- -----------
Net cash used in investing activities (6,045,227) (3,263,660)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (Payments) under note payable, net 7,071,583 (2,431,888)
Proceeds from long-term debt -- 260,000
Repayment of long-term debt (706,395) (974,921)
Issuance of redeemable preferred stock, net of offering costs -- 9,417,629
(Purchase) issuance of common stock (175,780) 71,869
Payment of debt issuance costs (50,000) (20,000)
Payment of preferred stock dividend (401,313) (119,090)
----------- -----------
Net cash provided by financing activities 5,738,095 6,203,599
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD -- --
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
1. PRESENTATION
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Eagle Pacific
Industries, Inc. ("the Company") at June 30, 1998 and the results of its
operations for the three and six month periods ended June 30, 1998 and 1997 and
its cash flows for the six month periods ended June 30, 1998 and 1997. 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, 1997.
2. INVENTORY
JUNE 30, 1998 DECEMBER 31, 1997
-------------- -----------------
Raw materials $ 4,920,307 $ 5,033,398
Finished goods 6,601,115 8,236,162
------------- -------------
$ 11,521,422 $ 13,269,560
============= =============
3. EARNINGS PER COMMON SHARE
The following table reflects the calculation of basic and diluted earnings per
common share:
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
---------- ----------
BASIC EPS COMPUTATION
Income available to common stockholders $ 289,837 $ 855,043
========== ==========
Average common shares outstanding 6,803,590 6,515,819
========== ==========
Basic earnings per share $ .04 $ .13
========== ==========
DILUTED EPS COMPUTATION
Income available to common stockholders $ 289,837 $ 855,043
8% redeemable preferred stock dividends -- 117,778
7% convertible preferred stock dividends 656 656
---------- ----------
Income available to common stockholders 290,493 973,477
========== ==========
Average common shares outstanding 6,803,590 6,515,819
Warrants and options 381,040 1,017,069
8% redeemable preferred stock -- 1,212,403
7% convertible preferred stock 18,750 18,750
---------- ----------
7,203,380 8,764,041
========== ==========
Diluted earnings per share $ .04 $ .11
========== ==========
Options to purchase 367,933 shares of common stock were outstanding at June
30, 1998, 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% redeemable convertible preferred stock
<PAGE>
was not assumed for the period ending June 30, 1998, since the conversion would
have an antidilutive effect on the diluted EPS calculation.
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---------- ----------
BASIC EPS COMPUTATION
Income available to common stockholders $ 39,465 $1,358,655
========== ==========
Average common shares outstanding 6,725,373 6,487,133
========== ==========
Basic earnings per share $ .01 $ .21
========== ==========
DILUTED EPS COMPUTATION
Income available to common stockholders $ 39,465 $1,358,655
8% redeemable preferred stock dividends -- 117,778
7% convertible preferred stock dividends -- 1,312
---------- ----------
Income available to common stockholders 39,465 1,477,745
========== ==========
Average common shares outstanding 6,725,373 6,487,133
Warrants and options 408,671 990,021
8% redeemable preferred stock -- 609,551
7% convertible preferred stock -- 18,750
7,134,044 8,105,455
========== ==========
Diluted earnings per share $ .01 $ .18
Options to purchase 285,046 and 4,388 shares of common stock were
outstanding at June 30, 1998 and 1997, 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% redeemable convertible preferred stock was
not assumed for the period ending June 30, 1998, since the conversion would have
an antidilutive effect on the diluted EPS calculation.
SUBSEQUENT EVENT
Subsequent to June 30, 1998, the Company refinanced all of its subordinated
debt with a $6.5 million promissory note, due May 9, 2002. The refinancing will
result in a one-time, after-tax extraordinary charge of approximately $660,000
in the third quarter of 1998.
<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
Statement of Operations as percentages of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 78.4 77.6 80.0 77.6
Gross Profit 21.6 22.4 20.0 22.4
Operating expenses 15.4 14.6 15.3 14.9
Operating income 6.2 7.8 4.7 7.5
Non-operating expense 3.5 4.0 3.5 4.0
Income before income taxes 2.6 3.8 1.2 3.5
Income tax (expense) benefit (0.2) 1.1 (0.1) 0.5
Net Income 2.4% 4.9% 1.1% 4.0%
</TABLE>
The Company posted record net sales for the three and six month periods
ended June 30, 1998, increasing 3% and 5% compared to the same periods in 1997,
respectively. Higher volumes, primarily due to increased demand and production
capacities, were responsible for the growth in revenues. Pounds sold rose 16%
and 13% for the three and six month periods ended June 30, 1998 compared to the
same periods in 1997, respectively. Selling prices decreased 11% and 7% for the
three and six month periods ended June 30, 1998 compared to the same periods in
1997, respectively.
The decrease in the gross profit, as a percentage of net sales, from
1997 to 1998 is primarily due to a combination of strong competition and falling
resin prices in 1998. PVC resin prices decreased due to the Asian crisis which
caused an oversupply of resin because of lower exports. Pricing pressures from
competitors forced the Company to pass raw material price decreases on to its
customers. As higher priced inventory was sold at lower market prices, gross
profits decreased and cost of goods sold increased.
The increase in operating expenses, as a percentage of net sales, from 1997 to
1998 is primarily due to higher freight costs associated with the combination of
increased volume and lower selling prices.
The decrease in non-operating expenses, which consists principally of
interest expense, from 1997 to 1998 is primarily due to the issuance of $10.0
million of redeemable preferred stock in May of 1997. The proceeds from the
preferred stock were used to pay down the Company's revolving credit line.
The income tax provisions for 1998 and 1997 were calculated based upon
management's estimate of the annual effective rates, reduced by federal net
operating loss ("NOL") and state tax credit carryforwards utilized, as well as
NOL carryforwards expected to be used in future periods. Due to more profitable
operations and future expected profits, an income tax benefit of $250,000 was
recorded in the second quarter of 1997, representing a change in the deferred
tax asset valuation allowance relating to a portion of the NOL carryforwards
which are now expected to be utilized in the future.
FINANCIAL CONDITION. The Company's financial condition remains strong
despite negative working capital of $1.2 million on June 30, 1998. The negative
working capital is due to the use of short-term financing during the
construction of the new manufacturing facility in Utah. Upon completion of the
Utah facility, the Company intends to replace the short-term financing with
long-term financing, which will improve the Company's working capital position.
Cash provided by operating activities was $307,000 in 1998 compared to
cash used in operating activities of $2.9 million in 1997. The primary reason
for the improved results are lower inventory levels in 1998 compared to 1997.
The Company used $6.0 million and $3.3 million on investing activities for the
six months ended June 30, 1998 and 1997, respectively. The primary use of cash
in 1998 and 1997 was for capital expenditures.
<PAGE>
Cash provided by financing activities was $5.7 million and $6.2 million
for the six months ended June 30, 1998 and 1997, respectively. The primary
source of cash in 1998 was borrowings under the revolving credit loan. The
primary source of cash in 1997 was the issuance of redeemable preferred stock,
partially offset by payments on the revolving credit loan.
The Company had commitments for capital expenditures of $500,000 at
June 30, 1998, which will be funded from borrowings under the revolving credit
loan. Additional sources of liquidity, if needed, include the Company's
revolving credit line, additional long-term debt financing, and the sale of
Company equity securities under either a private or public offering. The Company
believes that it has the financial resources needed to meet its current and
future business requirements, including capital expenditures for expanding
manufacturing capacity and working capital requirements.
OUTLOOK. The statements contained in this Outlook are based on current
expectations. These statements are forward-looking, and actual results may
differ materially from those anticipated by some of the statements made herein.
The Company expects the demand for plastic pipe to grow as acceptance
of plastic pipe over metal pipe continues and the overall economy continues to
grow. Industry growth projections call for annual sales growth rates for plastic
pipe of three percent or greater per year through 2003. The Company has
historically been able, and expects in the future to be able, to grow at rates
in excess of the industry averages due to its emphasis on customer satisfaction,
product quality and differentiation and innovative promotional programs. The
Company's strategy has been, and continues to be, to concentrate growth
initiatives in higher profit products and geographic regions.
The Company's gross margin percentage is a sensitive function of PVC
and PE raw material resin prices and capacity levels in the industry. In a
rising or stable resin market, margins and sales volume have historically been
higher and conversely, in falling resin markets, sales volumes and margins have
historically been lower. Gross margins also suffer when capacity increases
outpace demand due to increased competition to utilize capacity. The Company
believes that there currently is over-capacity in the plastic pipe industry. Due
to the commodity nature of PVC and PE resin and the dynamic supply and demand
factors worldwide, it is very difficult to predict gross margin percentages or
assume that historical trends will continue.
The NOLs are available through 2010; however, the majority expire by
2000. The amount of available NOLs actually used will be dependent on future
profits. The Company does not expect to utilize all of its NOLs before they
expire.
As with other organizations, the Company's computer programs 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 initiated efforts to remedy
this situation and expects all programs to be corrected and tested prior to the
year 2000. The incremental costs of this project will not have a material effect
on the Company's financial statements. In addition, the Company has communicated
with others with whom it does significant business to determine their year 2000
compliance readiness and the extent to which the Company is vulnerable to any
third party year 2000 issues. 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, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The foregoing statements contained in this outlook section and those
specifically relating to the Company's expectation of the plastic pipe and
tubing market and the Company's performance in relation to such growth, the
Company's ability to utilize NOLs in the future and its belief that it has the
necessary resources for future success are all forward looking statements that
involve a number of risks and uncertainties. Some of the factors that could
cause actual results to differ materially include, but are not limited to, raw
material cost fluctuations, general economic conditions, competition,
availability of working capital and weather conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not
applicable
<PAGE>
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
The Company's annual meeting of shareholders was held on June 10, 1998.
a) A resolution was adopted to set the number of directors for the
ensuing year at seven. The resolution passed with 5,092,589 votes
cast in favor, 109,895 opposed, and 79,787 votes withheld.
b) William H. Spell and Bruce A. Richard were elected to serve as
directors of the Company until the 2001 Annual Shareholders
meeting. Other directors whose term of office as a director
continued after the meeting are: Larry D. Schnase, G. Peter
Konen, Richard W. Perkins, George R. Long, and Harry W. Spell.
William H. Spell Bruce A. Richard
---------------- ----------------
Votes in favor 5,072,150 5,092,369
Votes withheld 130,334 110,115
c) The 653,000 share increase in the number of shares reserved for
issuance under the Company's 1997 Stock Option Plan was approved
by the shareholders by a vote of 3,021,363 in favor, 798,562
against, 20,254 votes withheld, and 1,442,092 shares recorded as
broker non-votes.
d) Deloitte & Touche LLP was elected as the Company's independent
public accountants by a vote of 5,099,789 in favor, 106,051
against, and 76,431 votes withheld.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
-------------
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K. None
-------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAGLE PACIFIC INDUSTRIES, INC.
By /s/ William H. Spell
--------------------
William H. Spell
Chief Executive Officer
By /s/ Patrick M. Mertens
----------------------
Patrick M. Mertens
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,788,025
<ALLOWANCES> 274,000
<INVENTORY> 11,521,422
<CURRENT-ASSETS> 22,742,032
<PP&E> 27,111,922
<DEPRECIATION> 5,173,530
<TOTAL-ASSETS> 50,597,262
<CURRENT-LIABILITIES> 23,939,843
<BONDS> 9,094,579
10,037,500
0
<COMMON> 66,218
<OTHER-SE> 7,459,122
<TOTAL-LIABILITY-AND-EQUITY> 50,597,262
<SALES> 38,906,644
<TOTAL-REVENUES> 38,906,644
<CGS> 31,126,329
<TOTAL-COSTS> 31,126,329
<OTHER-EXPENSES> 5,895,018
<LOSS-PROVISION> 9,227
<INTEREST-EXPENSE> 1,385,292
<INCOME-PRETAX> 490,778
<INCOME-TAX> 50,000
<INCOME-CONTINUING> 440,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 440,778
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
