================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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) 305-0339
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
The number of shares of the registrant's Common Stock, $.01 par value per share,
outstanding as of April 17, 1998 was 6,836,174.
================================================================================
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
INDEX
PAGE NO.
--------
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS:
Condensed Statements of Operations - Three
Months Ended March 31, 1998 and 1997 (Unaudited)............... 3
Condensed Balance Sheets - March 31, 1998
and December 31, 1997 (Unaudited).............................. 4
Condensed Statements of Cash Flows - Three
Months Ended March 31, 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...................................... 7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 9
SIGNATURES................................................................... 10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
NET SALES $ 18,510,064 $ 17,212,229
COST OF GOODS SOLD 15,128,680 13,363,313
------------ ------------
Gross profit 3,381,384 3,848,916
OPERATING EXPENSES:
Selling expenses 2,114,548 1,948,073
General and administrative expenses 677,186 695,988
------------ ------------
2,791,734 2,644,061
------------ ------------
OPERATING INCOME 589,650 1,204,855
NON-OPERATING EXPENSE (632,366) (677,587)
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (42,716) 527,268
INCOME TAX EXPENSE 7,000 23,000
------------ ------------
NET (LOSS) INCOME (49,716) 504,268
PREFERRED STOCK DIVIDENDS (200,656) (656)
------------ ------------
NET (LOSS) INCOME APPLICABLE TO COMMON
STOCK $ (250,372) $ 503,612
============ ============
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (.04) $ .08
============ ============
Diluted $ (.04) $ .07
============ ============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 6,646,341 6,457,738
Diluted 6,646,341 7,451,522
See accompanying notes to condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ASSETS MARCH 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ --
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $321,000 and $203,500, respectively 13,182,467 6,528,296
Inventories 13,517,073 13,269,560
Deferred income taxes 425,000 425,000
Other 260,841 314,822
------------ ------------
Total current assets 27,385,381 20,537,678
PROPERTY AND EQUIPMENT, net 19,226,559 16,854,447
OTHER ASSETS:
Prepaid interest 689,293 836,998
Goodwill, less accumulated amortization of $398,000 and
$370,000, respectively 4,069,729 4,097,652
Other 1,392,820 1,502,196
------------ ------------
6,151,842 6,436,846
------------ ------------
$ 52,763,782 $ 43,828,971
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 11,819,464 $ 4,405,976
Accounts payable 10,694,342 8,892,015
Accrued liabilities 1,336,401 1,276,481
Current maturities of long-term debt 1,888,523 1,882,882
------------ ------------
Total current liabilities 25,738,730 16,457,354
LONG-TERM DEBT, less current maturities 5,131,744 5,489,900
SUBORDINATED DEBT 4,238,586 4,182,570
REDEEMABLE PREFERRED STOCK, 8% cumulative
dividend; convertible; $1,000 liquidation preference; $.01 par
value; authorized, issued and outstanding 10,000 shares 10,000,000 10,000,000
STOCKHOLDERS' EQUITY:
Series A preferred stock, 7% cumulative dividend; convertible;
$2 liquidation preference; no par value; authorized 2,000,000
shares; issued and outstanding 18,750 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 6,816,174 and
6,506,174 shares, respectively 68,162 65,062
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding -- --
Additional paid-in capital 36,910,037 36,707,200
Notes receivable from officers and employees on Common
Stock purchases (434,206) (434,206)
Accumulated deficit (28,926,771) (28,676,409)
------------ ------------
Total stockholders' equity 7,654,722 7,699,147
------------ ------------
$ 52,763,782 $ 43,828,971
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (49,716) $ 504,268
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest -- 7,216
Depreciation and amortization 502,199 427,588
Loan discount amortization 152,141 95,412
Prepaid interest amortization 147,705 108,575
Change in operating assets and liabilities (4,985,446) (6,742,755)
----------- -----------
Net cash used in operating activities (4,233,117) (5,599,696)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,833,137) (595,509)
Purchases of minority interest -- (369,587)
Notes receivable from officers and employees on common
stock purchases -- (206,146)
----------- -----------
Net cash used in investing activities (2,833,137) (1,171,242)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable, net 7,413,488 6,947,383
Proceeds from long-term debt -- 260,000
Repayment of long-term debt (352,515) (481,259)
Issuance of common stock 205,937 65,469
Payment of debt issuance costs -- (20,000)
Payment of preferred stock dividend (200,656) (657)
----------- -----------
Net cash provided by financing activities 7,066,254 6,770,936
----------- -----------
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 MONTHS ENDED MARCH 31, 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 March 31, 1998 and the results of
its operations and cash flows for the three month periods ended March 31, 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
MARCH 31, DECEMBER 31,
1998 1997
----- ----
Raw materials $ 5,255,360 $ 5,033,398
Finished goods 8,261,713 8,236,162
------------ ------------
$ 13,517,073 $ 13,269,560
------------ ------------
3. (LOSS) EARNINGS PER COMMON SHARE
The following table reflects the calculation of basic and diluted (loss)
earnings per common share:
Because of the net loss in 1998, all potentially dilutive securities have an
antidilutive effect on the dilutive EPS calculation. Both basic and dilutive EPS
were computed by dividing the net loss applicable to common stock by the
weighted average common shares outstanding.
PERIOD ENDED MARCH 31, 1997
---------------------------
PER SHARE
INCOME SHARES AMOUNT
------ ------ ------
Income before extraordinary item $ 504,268
Preferred stock dividends (656)
----------
<PAGE>
BASIC EPS BEFORE EXTRAORDINARY ITEM
Income available to common stockholders 503,612 6,457,738 $ .08
==========
EFFECT OF DILUTIVE SECURITIES
Warrants and options 975,034
7% convertible preferred stock 656 18,750
---------- ---------
DILUTED EPS BEFORE EXTRAORDINARY ITEM
Income available to common stockholders $ 504,268 7,451,522 $ .07
========== ========= ==========
Options to purchase 10,759 shares of common stock were outstanding at
March 31, 1997, 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.
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:
THREE MONTHS ENDED MARCH 31,
1998 1997
-------- --------
Net sales 100.0% 100.0%
Cost of goods sold 81.7 77.6
Gross profit 18.3 22.4
Operating expenses 15.1 15.4
Operating income 3.2 7.0
Non-operating expense (3.4) (4.0)
(Loss) income before income taxes (0.2) 3.0
Income tax expense 0.0 0.1
Net (loss) income (0.2)% 2.9%
The Company posted record first quarter net sales in 1998,
increasing 8% from 1997. Higher volumes, primarily due to increased demand and
production capacities, were responsible for the growth in revenues. Pounds sold
rose 10% from 1997 to 1998 and selling prices decreased 3% from 1997 to 1998.
The decrease in the gross profit as a percentage of net sales from
1997 to 1998 is primarily due to lower selling prices in the first quarter of
1998, compared to the first quarter of 1997. PVC resin prices decreased nearly
13% during the first quarter of 1998 compared to the first quarter of 1997 due
to an oversupply of resin caused by lower exports to Asian markets. Pricing
pressures from competitors forced the Company to pass all of the 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.
<PAGE>
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 1996. 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.
FINANCIAL CONDITION. The Company's financial condition remains
strong despite the seasonal winter factors of extended terms to customers and
higher inventories. Also, the Company is using short-term financing for the new
manufacturing facility in Utah until it is completed.
Cash used in operating activities was $4.2 million in the first
quarter of 1998 compared to $5.6 million in 1997. The primary reason for the
decrease is a smaller increase in inventories during the three months ended
March 31, 1998 compared to the three months ended March 31, 1997.
The Company used $2.8 million and $1.2 million for investing
activities for the three months ended March 31, 1998 and 1997, respectively.
Capital expenditures were the sole use of cash in 1998. The primary uses of cash
in 1997 were capital expenditures and purchase of minority interest.
Cash provided by financing activities was $7.1 million and $6.8
million for the three months ended March 31, 1998 and 1997, respectively. The
increase is primarily due to higher borrowings under the note payable caused by
the large capital expenditures in 1998.
The Company had commitments for capital expenditures of $1.2 million
at March 31, 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
<PAGE>
PVC and PE resin and the dynamic supply and demand factors worldwide, it is very
difficult to predict gross margin percentages or assume that historical trends
will continue.
The NOLs are available through the year 2010; however, the majority
expire by the year 2000. The amount of available NOLs actually used will be
dependent on future profits. The Company does not expect to utilize all of its
NOLs before they expire.
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.
Statements 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
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.
<PAGE>
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: April 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852426
<NAME> EAGLE PACIFIC INDUSTRIES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,503,467
<ALLOWANCES> 321,000
<INVENTORY> 13,517,073
<CURRENT-ASSETS> 27,385,381
<PP&E> 23,863,128
<DEPRECIATION> 4,636,569
<TOTAL-ASSETS> 52,763,782
<CURRENT-LIABILITIES> 25,738,730
<BONDS> 9,370,330
10,037,500
0
<COMMON> 68,162
<OTHER-SE> 7,549,060
<TOTAL-LIABILITY-AND-EQUITY> 52,763,782
<SALES> 18,510,064
<TOTAL-REVENUES> 18,510,064
<CGS> 15,128,680
<TOTAL-COSTS> 15,128,680
<OTHER-EXPENSES> 2,780,506
<LOSS-PROVISION> 11,228
<INTEREST-EXPENSE> 632,366
<INCOME-PRETAX> (42,716)
<INCOME-TAX> 7,000
<INCOME-CONTINUING> (49,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,716)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
