================================================================================
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 30,1998
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 October 23, 1998 was 6,612,483.
================================================================================
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
INDEX
PAGE NO.
--------
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS:
Condensed Statements of Operations - Three and Nine
Months Ended September 30, 1998 and 1997 (Unaudited).......... 3
Condensed Balance Sheets - September 30, 1998
and December 31, 1997 (Unaudited)............................. 4
Condensed Statements of Cash Flows - Nine
Months Ended September 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 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 10
SIGNATURES................................................................... 10
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 20,757,363 $ 20,042,483 $ 59,664,007 $ 56,989,941
COST OF GOODS SOLD 15,572,443 16,509,562 46,698,772 45,197,009
------------ ------------ ------------ ------------
Gross profit 5,184,920 3,532,921 12,965,235 11,792,932
OPERATING EXPENSES:
Selling expenses 2,557,978 2,151,926 7,117,815 6,288,787
General and administrative expenses 661,506 638,569 2,037,593 2,020,363
------------ ------------ ------------ ------------
3,219,484 2,790,495 9,155,408 8,309,150
------------ ------------ ------------ ------------
OPERATING INCOME 1,965,436 742,426 3,809,827 3,483,782
NON-OPERATING EXPENSE 446,181 617,985 1,799,794 2,074,528
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 1,519,255 124,441 2,010,033 1,409,254
INCOME TAX (EXPENSE) BENEFIT (113,000) (25,000) (163,000) 167,932
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS 1,406,255 99,441 1,847,033 1,577,186
EXTRAORDINARY LOSS ON DEBT
PREPAYMENTS, less income tax benefit of $31,000 656,419 -- 656,419 --
------------ ------------ ------------ ------------
NET INCOME 749,836 99,441 1,190,614 1,577,186
PREFERRED STOCK DIVIDENDS 200,656 200,657 601,969 319,747
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 549,180 $ (101,216) $ 588,645 $ 1,257,439
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic
Income (loss) before extraordinary loss $ .18 $ (.02) $ .19 $ .19
Extraordinary loss on debt prepayments (.10) -- (.10) --
------------ ------------ ------------ ------------
Net income (loss) $ .08 $ (.02) $ .09 $ .19
============ ============ ============ ============
Diluted
Income (loss) before extraordinary loss $ .17 $ (.02) $ .17 $ .17
Extraordinary loss on debt prepayments (.09) -- (.09) --
------------ ------------ ------------ ------------
Net income (loss) $ .08 $ (.02) $ .08 $ .17
============ ============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 6,613,356 6,518,627 6,687,619 6,497,745
============ ============ ============ ============
Diluted 7,018,304 6,518,627 7,090,611 7,463,066
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ASSETS SEPTEMBER 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 218,926 $ --
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $318,000 and $203,500, respectively 9,683,569 6,528,296
Inventories 9,237,884 13,269,560
Deferred income taxes 425,000 425,000
Other 455,461 314,822
------------- -------------
Total current assets 20,020,840 20,537,678
PROPERTY AND EQUIPMENT, net 24,626,732 16,854,447
OTHER ASSETS:
Prepaid interest -- 836,998
Goodwill, less accumulated amortization of $454,000 and
$370,000, respectively 4,013,883 4,097,652
Other 1,184,351 1,502,196
------------- -------------
5,198,234 6,436,846
------------- -------------
$ 49,845,806 $ 43,828,971
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 11,225,159 $ 4,405,976
Accounts payable 5,858,396 8,892,015
Accrued liabilities 1,879,713 1,276,481
Current maturities of long-term debt 1,862,486 1,882,882
------------- -------------
Total current liabilities 20,825,754 16,457,354
LONG-TERM DEBT, less current maturities 10,926,426 5,489,900
SUBORDINATED DEBT -- 4,182,570
REDEEMABLE PREFERRED STOCK, 8% cumulative
dividend; convertible; $1,000 liquidation preference; $.01
par value; authorized, issued and outstanding 10,000 and
none, respectively 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 6,612,483 and
6,506,174 shares, respectively 66,125 65,062
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding -- --
Additional paid-in capital 36,511,969 36,707,200
Notes receivable from officers and employees on Common
Stock purchases (434,206) (434,206)
Accumulated deficit (28,087,762) (28,676,409)
------------- -------------
Total stockholders' equity 8,093,626 7,699,147
------------- -------------
$ 49,845,806 $ 43,828,971
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,190,614 $ 1,577,186
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on debt prepayments 656,419 --
Depreciation and amortization 1,642,972 1,312,799
Loan discount amortization 362,106 427,456
Prepaid interest amortization 295,410 403,985
Deferred income taxes -- (250,000)
Change in operating assets and liabilities (1,663,490) (2,888,549)
------------ ------------
Net cash provided by operating activities 2,484,031 582,877
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,291,866) (5,386,782)
Purchases of minority interest -- (748,718)
Change in other assets (112,415) --
Notes receivable from officers and employees for purchase of
common stock -- (367,863)
------------ ------------
Net cash used in investing activities (9,404,281) (6,503,363)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under note payable, net 6,819,183 (2,026,105)
Proceeds from long-term debt 6,477,800 260,000
Repayment of long-term debt (5,361,670) (1,473,155)
Issuance of redeemable preferred stock, net of offering costs -- 9,416,971
(Purchase) issuance of common stock (194,168) 82,522
Payment of debt issuance costs -- (20,000)
Payment of preferred stock dividend (601,969) (319,747)
------------ ------------
Net cash provided by financing activities 7,139,176 5,920,486
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 218,926 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- --
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 218,926 $ --
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30, 1998 and the results of its
operations for the three and nine month periods ended September 30, 1998 and
1997 and its cash flows for the nine month periods ended September 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
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Raw materials $ 4,055,419 $ 5,033,398
Finished goods 5,182,465 8,236,162
------------- ------------
$ 9,237,884 $ 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 SEPTEMBER 30,
--------------------------------
1998 1997
---- ----
BASIC EPS COMPUTATION
Income available to common stockholders $ 549,180 $ (101,216)
============ ============
Average common shares outstanding 6,613,356 6,518,627
============ ============
Basic earnings per share $ .08 $ (.02)
============ ============
DILUTED EPS COMPUTATION
Income available to common stockholders $ 549,180 $ (101,216)
8% redeemable preferred stock dividends -- --
7% convertible preferred stock dividends 656 --
------------ ------------
Income available to common stockholders 549,836 $ (101,216)
============ ============
Average common shares outstanding 6,613,356 6,518,627
Warrants and options 386,198 --
8% redeemable preferred stock -- --
7% convertible preferred stock 18,750 --
------------ ------------
7,018,304 6,518,627
============ ============
Diluted earnings per share $ .08 $ (.02)
============ ============
6
<PAGE>
Options to purchase 358,384 shares of common stock were outstanding at September
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 was not
assumed for the three months ending September 30, 1998, since the conversion
would have an antidilutive effect on the diluted EPS calculation. Because of the
net loss for the three months ending September 30, 1997, all potentially
dilutive securities have an antidilutive effect on the diluted EPS calculation.
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---- ----
BASIC EPS COMPUTATION
Income available to common stockholders $ 588,645 $ 1,257,439
============ ===========
Average common shares outstanding 6,687,619 6,497,745
============ ===========
Basic earnings per share $ .09 $ .19
============ ===========
DILUTED EPS COMPUTATION
Income available to common stockholders $ 588,645 $ 1,257,439
8% redeemable preferred stock dividends -- --
7% convertible preferred stock dividends -- 1,969
------------ -----------
Income available to common stockholders 588,645 1,259,408
============ ===========
Average common shares outstanding 6,687,619 6,497,745
Warrants and options 402,992 946,571
8% redeemable preferred stock -- --
7% convertible preferred stock -- 18,750
------------ -----------
7,090,611 7,463,066
============ ===========
Diluted earnings per share $ .08 $ .17
============ ===========
Options to purchase 308,946 and 15,878 shares of common stock were outstanding
at September 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 8% redeemable
convertible preferred stock was not assumed for the nine months ending September
30, 1998 and 1997, respectively, since the conversion would have an antidilutive
effect on the diluted EPS calculation. Conversion of the 7% convertible
preferred stock was not assumed for the nine months ending September 30, 1997,
since the conversion would have an antidilutive effect on the diluted EPS
calculation.
4. DEBT
In July 1998, the Company repurchased the remainder of it's subordinated debt
for $4.3 million which generated an extraordinary loss of $656,419, net of
income taxes. In conjunction with the repurchase, the Company obtained a $6.5
million term note from its current lender.
7
<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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.0 82.4 78.3 79.3
Gross Profit 25.0 17.6 21.7 20.7
Operating expenses 15.5 13.9 15.3 14.6
Operating income 9.5 3.7 6.4 6.1
Non-operating expense (2.2) (3.1) (3.0) (3.6)
Income before income taxes
and extraordinary loss 7.3 0.6 3.4 2.5
Income tax (expense) benefit (0.5) (0.1) (0.3) 0.3
Extraordinary loss on debt
prepayment (3.2) -- (1.1) --
Net Income 3.6% 0.5% 2.0% 2.8%
The Company posted record net sales for the three and nine month periods
ended September 30, 1998, increasing 4% and 5%, respectively, compared to the
same periods in 1997. Higher volumes of pipe sold, primarily due to increased
demand and production capacities, were responsible for the growth in revenues.
Pounds sold rose 15% and 14% for the three and nine month periods, respectively,
ended September 30, 1998, compared to the same periods in 1997. Selling prices
decreased 8% and 11% for the three and nine month periods, respectively, ended
September 30, 1998, compared to the same periods in 1997.
The increase in gross profit, as a percentage of net sales, from 1997 to
1998 is primarily due to a combination of strong demand and falling resin prices
in 1998. PVC resin prices decreased due an oversupply of resin caused by
depressed Asian markets. Strong demand allowed the Company to retain a portion
of the raw material price decreases.
The increase in operating expenses, as a percentage of net sales, from
1997 to 1998 is primarily due to higher freight costs, from increased sales
volume, combined with 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 had negative working capital of $805,000
on September 30, 1998, due to the use of short-term financing during the
construction of the new manufacturing facility in Utah. 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 $2.5 million and $583,000 for
the nine months ended September 30, 1998 and 1997, respectively. The primary
reason for the improved results are improved profits and lower inventory levels
in 1998 compared to 1997.
The Company used $9.4 million and $6.5 million for investing activities
for the nine months ended September 30, 1998 and 1997, respectively. The primary
use of cash in 1998 and 1997 was for capital expenditures.
Cash provided by financing activities was $7.1 million and $5.9 million
for the nine months ended
8
<PAGE>
September 30, 1998 and 1997, respectively. The primary source of cash in 1998
was borrowings under the revolving credit loan and the refinancing of the
subordinated debt with the issuance of a larger term note. The primary source of
cash in 1997 was the issuance of redeemable preferred stock, partially offset by
payments on the revolving credit loan and long-term debt.
The Company had commitments for capital expenditures of $587,000 at
September 30, 1998, which will be funded from borrowings under the revolving
credit loan. Additional sources of liquidity, if needed, may 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 margin 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 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 exposure to the Year 2000 issue by evaluating its software and hardware
systems and has determined that the cost to upgrade is not material. In
addition, the Company has inquired of its major customers and suppliers as to
their readiness to the Year 2000 issue to determine the extent to which the
Company is indirectly vulnerable to any third-party year 2000 issues. Many of
the Company's customers and suppliers have responded that they believe they are
or will be Year 2000 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 Company plans to continue to assess
its exposure to the Year 2000 issue and develop plans to address any effects of
the issue that could have an adverse effect on the Company and its operations.
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
9
<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 - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
10.1 First Amendment Agreement dated July 6, 1998 between Registrant
and Fleet Capital
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 3, 1998
10
EXHIBIT 10.1
FIRST AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("First
Amendment") is made as of the 6th day of July, 1998 by and between FLEET CAPITAL
CORPORATION ("Lender"), a Rhode Island corporation with an office at One North
Franklin, Chicago, Illinois 60606, and EAGLE PACIFIC INDUSTRIES, INC.
("Borrower"), a Minnesota corporation with its chief executive office and
principal place of business at 2430 Metropolitan Centre, 333 South Seventh
Street, Minneapolis, Minnesota 55402.
Recitals
I. Lender and Borrower entered into a certain Amended and Restated Loan and
Security Agreement dated as of the 31st day of December, 1997, (said Amended and
Restated Loan and Security Agreement, the "Existing Loan Agreement");
I. Borrower has requested Lender to amend and modify certain of the provisions
of the Existing Loan Agreement and Lender, pursuant to the terms hereof, is
willing to so amend and modify the Existing Loan Agreement.
NOW THEREFORE, in consideration of the premises, the mutual covenants and
agreements herein contained, and any extension of credit now made by Lender to
Borrower the parties agree as follows:
I. Definitions. Except as otherwise provided herein, all capitalized terms used
herein without definition shall have the meanings given them in the Existing
Loan Agreement.
I. Additional and Amended Definitions. The definitions of "Borrowing Base",
"LIBOR Revolving Loan Portion" contained in Appendix A to the Existing Loan
Agreement is hereby deleted and the following are inserted in their stead. The
following definitions of "Change of Control" and "First Amendment Effective
Date" are hereby inserted into Appendix A to the Existing Loan Agreement:
* * *
"Borrowing Base - as at any date of determination thereof, an amount equal to
the lesser of:
(i) Sixteen Million Five Hundred Thousand Dollars ($16,500,000);
or
(ii) an amount equal to:
(a) up to eighty-five percent 85%, of the net amount of
Eligible Accounts outstanding at such date;
PLUS
(b) the lesser of (1) Ten Million Dollars ($10,000,000); or
(2) up to fifty-five percent (55%) of the value of Eligible
Inventory at such date calculated on the basis of the lower of cost
or market with the cost of raw materials and finished good
calculated on a first-in, first-out basis.
For purposes hereof, the net amount of Eligible Accounts at any time shall be
the face amount of such Eligible Accounts less any and all returns, rebates,
discounts (which may, at Lender's option, be calculated on shortest terms),
credits, allowances or excise taxes of any nature at any time issued, owing,
claimed by Account Debtors, granted, outstanding or payable in connection with
such Accounts at such time.
* * *
Change of Control - the occurrence of any of the foregoing: (1) any Person, or
any group within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Exchange
11
<PAGE>
Act") and the rules and regulations promulgated thereunder, shall have acquired
after the date hereof beneficial ownership (within the meaning of Rule 13d-3 of
the Exchange Act), directly or indirectly, of Securities (or other Securities
convertible into such Securities) representing fifty percent (50%) of the
combined voting power of all Securities of Borrower entitled to vote in the
election of directors, other than Securities having such power only by reason of
the happening of a contingency (hereinafter called a "Controlling Person"); or
(2) a majority of the Board of Directors of Borrower shall cease for any reason
to consist of (A) individuals who on the date hereof were serving as directors
of Borrower and (B) individuals who subsequently become members of the Board if
such individuals' nomination for election or election to the Board is
recommended or approved by a majority of the Board of Directors or Stockholders
of Borrower. For purposes of clause (1) above, a person or group shall not be a
Controlling Person if such Person or group holds voting power in good faith and
not for the purposes of circumventing this provision as an agent, bank, broker,
nominee, trustee, or holder of revocable proxies given in response to a
solicitation pursuant to the Exchange Act, for one or more beneficial owners who
do not individually, or, if they are a group acting in concert, as a group, have
the voting power specified in clause (1).
* * *
First Amendment Effective Date - June 30, 1998.
LIBOR Term Portion - that portion of Term Loan A or the Term Loan B specified in
a LIBOR Request which is not less than $1,000,000, which does not exceed the
outstanding balance of Term Loan A or Term Loan B not already subject to a LIBOR
Option and, which, as of the date of the LIBOR Request specifying such LIBOR
Portion, has met the conditions for basing interest on the LIBOR Rate in Section
2.1.1(B) hereof and the LIBOR Period of which was commenced and not terminated."
I. Credit Facility, Term Loan and Working Capital Loan. The first paragraph of
Section 1 and Section 1.2 are hereby deleted from the Existing Loan Agreement
and the following are inserted in their stead:
"SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the representations
and warranties made in, this Agreement and the other Loan Documents, Lender
agree to make a Total Credit Facility of up to Twenty-Eight Million Five Hundred
Thousand Dollars ($28,500,000) available upon Borrower's request therefor, as
follows:
* * *
1.2 Term Loan
1.2.1 Term Loan. Pursuant to Section 1.2 of the Original Loan Agreement Lender
made (i) a term loan (the "EPI Term Loan") to EPI on the Original Closing Date
in the principal amount of Three Million Two Hundred Seventy-Five Thousand
Dollars ($3,275,000), (ii) a term loan (the "PPI Term Loan") to PPI on the
Original Closing Date in the principal amount of Three Million Seven Hundred
Seventy-Five Thousand Dollars ($3,775,000), and (iii) a term loan (the "APP Term
Loan") to APP on the Original Closing Date in the principal amount of Nine
Hundred Fifty Thousand Dollars ($950,000). The proceeds of the EPI Term Loan,
the PPI Term Loan and the APP Term Loan were used for purposes described in the
Original Loan Agreement. As of the Restructuring Closing Date, the EPI Term
Loan, the PPI Term Loan and the APP Term Loan were consolidated into one term
Loan ("Term Loan A"), which was evidenced by a certain amended and restated
secured promissory note in the form of Exhibit A ("Term Note A"). As of June 1,
1998, the outstanding principal balance of the Term Loan A was Five Million Six
Hundred Seventeen Thousand Five Hundred Dollars ($5,617,500). On the First
Amendment Effective Date, Lender shall, subject to the terms and conditions of
this Agreement, make an additional term loan ("Term Loan B") to Borrower in the
principal amount of Twelve Million Dollars ($12,000,000) minus the then
outstanding principal balance of Term Loan A. Term Loan B shall be evidenced by
a certain secured promissory note in the form of Exhibit A-1 ("Term Note B") and
collectively with Term Note A, the "Term Note"). The proceeds of Term Loan B
shall be used by Borrower to repay the Indebtedness for Money Borrowed
outstanding under the Subordinated Debt Documents and for the purpose for which
the proceeds of Revolving Credit Loans are authorized to be used. Upon execution
and delivery by Lender and Borrower of the First Amendment, Lender shall be
deemed to have consented to the
12
<PAGE>
prepayment of the Indebtedness for Money Borrowed outstanding under the
Subordinated Debt Documents. Term Loan A and Term Loan B (collectively the "Term
Loan") shall be evidenced and repayable pursuant to the terms of the Term Note A
and Term Note B, respectively, and shall be secured by all the Collateral.
* * *
I. Term. Section 4.1 and Section 4.2.3 of the Existing Loan Agreement is hereby
deleted and the following is inserted in its stead:
4.1 Term of Agreement. Subject to Lender's right to cease making Loans to
Borrower upon or during the continuation of any Default or Event of Default,
this Agreement shall be in effect for a period through and including May 9, 2002
(the "Original Term"), unless terminated as provided in Section 4.2 hereof.
* * *
4.2.3 Termination Charges. At the effective date of termination of this
Agreement for any reason, Borrower shall pay to Lender (in addition to the then
outstanding principal, accrued interest and other charges owing under the terms
of this Agreement and any of the other Loan Documents) as liquidated damages for
the loss of the bargain and not as a penalty, an amount equal to (i) the sum of
one percent (1%) of the lesser of the principal balance of the Term Loan A or
Four Million Dollars ($4,000,000) less the amount of any prior prepayments of
the Term Loan plus two percent (2%) of the remaining portion of the Total Credit
Facility less the amount of principal paid on the Term Loan as of such date, if
termination occurs on or prior to May 8, 2000; or (ii) one percent (1%) of the
Total Credit Facility less the amount of principal paid on the Term Loan as of
such date, if termination occurs on or after May 9, 2000 but prior to May 8,
2002. If termination occurs on the last day of the Original Term, no termination
charge shall be payable. Any other prepayment of the Term Loan shall be subject
to a prepayment fee equal to (i) the sum of (x) one percent (1%) of the lesser
of the amount of the prepayment or Four Million Dollars ($4,000,000) less the
amount of any prior prepayments of the Term Loan plus (y) two percent (2%) of
the remainder (if any) of the prepayment, if the prepayment occurs on or prior
to May 8, 2000; or (ii) one percent (1%) of the amount of the prepayment if the
prepayment occurs on or after May 9, 2000 but prior to May 8, 2002. No
prepayment fee shall be due in respect to any prepayment made after May 7,
2002." The foregoing notwithstanding, Lender agrees to waive any such
termination charge in the event that this Agreement is terminated after October
31, 1999 in connection with a Change in Control. Further, notwithstanding the
foregoing, Borrower shall be entitled to prepay up to Two Million Five Hundred
Thousand Dollars ($2,500,000) in principal of the Term Loan during each yearly
period ending on May 8th during the term of this Agreement without any premium
or prepayment fee if such prepayment is made from the proceeds of Borrower's
operations.
* * *
I. Lien on Realty. Section 5.3 of the Existing Loan Agreement is hereby deleted
and the following is inserted in its stead:
5.3 Lien on Realty. The due and punctual payment and performance of the
Obligations shall also be secured by the Lien created by the Mortgages. If
Borrower shall acquire at any time or times hereafter any interest in other real
Property (other than leasehold interests in sales offices), Borrower agrees
promptly to execute and deliver to Lender, as additional security and Collateral
for the Obligations, deeds of trust, security deeds, mortgages or other
collateral assignments satisfactory in form and substance to Lender and its
counsel (herein collectively referred to as "New Mortgages") covering such real
Property. The Mortgages and each New Mortgage shall be duly recorded (at
Borrower's expense) in each office where such recording is required to
constitute a valid Lien on the real Property covered thereby. In respect to each
Mortgage and each New Mortgage, Borrower shall deliver to Lender, at Borrower's
expense, mortgagee title insurance policies issued by a title insurance company
satisfactory to Lender insuring Lender, as mortgagee; such policies shall be in
form and substance satisfactory to Lender and shall insure a valid first Lien in
favor of Lender on the Property covered thereby, subject only to those
exceptions acceptable to Lender and its counsel. Said policies shall be in form
and substance satisfactory to Lender. Borrower shall also deliver to Lender such
other documents, including, without limitation, ALTA Surveys of the real
Property, as Lender and its counsel may reasonably request relating to the real
Property subject to any such New Mortgage. The foregoing notwithstanding,
Borrower shall not be
13
<PAGE>
required to provide a New Mortgage or an ALTA Survey in respect to the real
Property in Utah acquired in the last six months of 1997 until the July 31, 1998
and further shall not be required to provide any such New Mortgage or ALTA
Survey if, prior to July 31, 1998, Borrower has consummated a sale and leaseback
or similar transaction in respect to such Property, as described in Section
8.2.8.
I. Distributions. Section 8.2.7 of the Existing Loan Agreement is hereby deleted
and the following is inserted in its stead:
"8.2.7 Distributions. Declare or make, or permit any Subsidiary of any Borrower
to declare or make, any Distributions; provided, however, that:
(a) Lender acknowledges that immediately after the closing of the
transactions contemplated by the Original Loan Agreement, EPI, PPI and/or
APP made Distributions to Borrower in an amount not to exceed Four Million
Twenty Thousand Dollars ($4,020,000) in order to permit Borrower to repay
Four Million Twenty Thousand Dollars ($4,020,000) of Indebtedness owed
under the Subordinated Debt Documents;
(b) In connection with the Restructuring, Borrowing issued the Schnase
Note in exchange for shares of EPI's common Stock held by Larry Schnase;
(c) If after giving effect to any such Distribution there would be no
existing and continuing Default or Event of Default, Borrower may make
regularly scheduled quarterly dividends on its Series A Stock and
Preferred Stock; and
(d) If after giving effect to any such Distribution there would be no
existing and continuing Default or Event of Default and Availability would
equal or exceed [Four Million Dollars ($4,000,000)], Borrower may make
open market repurchases of its shares of common stock in calendar year
1998 in an aggregate amount not to exceed Five Hundred Thousand Dollars
($500,000)."
I. Financial Covenants. Section 8.3 of the Existing Loan Agreement is hereby
deleted and the following in inserted in its stead:
"8.3 Specific Financial Covenants. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
8.3.1 Minimum Consolidated Adjusted Tangible Net Worth. Maintain at all times
within each of the following periods, a Consolidated Adjusted Tangible Net Worth
of not less than the amount shown below for the period corresponding thereto:
Period Amount
- ------ ------
June 30, 1996 through and
including September 29, 1996 ($1,000,000)
September 30, 1996 through and
including December 30, 1996 ($100,000)
December 31, 1996 through and
including March 30, 1997 $200,000
March 31, 1997 through and
including June 29, 1997 $300,000
June 30, 1997 through and
including September 29, 1997 $1,300,000
September 30, 1997 through and
including December 30, 1997 $2,200,000
14
<PAGE>
December 31, 1997 through and
including March 30, 1998 $2,500,000
March 31, 1998 through and
including June 29, 1998 $2,600,000
June 30, 1998 through and
including September 29, 1998 $9,000,000
September 30, 1998 through and
including December 30, 1998 $9,000,000
December 31, 1998 through and
including March 30, 1999 $9,000,000
March 31, 1999 through and
including June 29, 1999 $9,000,000
June 30, 1999 through and
including September 29, 1999 $9,000,000
September 30, 1999 through and
including December 30, 1999 $9,000,000
December 31, 1999 through and
including March 30, 2000 $10,000,000
March 31, 2000 through and
including June 29, 2000 $10,000,000
June 30, 2000 through and
including September 29, 2000 $10,000,000
September 30, 2000 through and
including December 30, 2000 $10,000,000
December 31, 2000 through and
including March 30, 2001 $11,000,000
March 31, 2001 through and
including June 29, 2001 $11,000,000
June 30, 2001 through and
including September 29, 2001 $11,000,000
September 30, 2001 through and
including December 30, 2001 $11,000,000
December 31, 2001 through and
including March 30, 2002 $12,000,000
March 30, 2002 and each day thereafter $12,000,000
8.3.2 Consolidated Net Cash Flow. Achieve Consolidated Net Cash Flow for each of
the periods listed below equal to or greater than the amount set forth opposite
such period:
Net Cash Flow Amount
- ------------- ------
January 1, 1996 through and
including June 30, 1996 $150,000
January 1, 1996 through and
including September 30, 1996 $650,000
January 1, 1996 through and
including December 31, 1996 ($1,500,000)
15
<PAGE>
January 1, 1997 through and
including March 31, 1997 ($1,000,000)
January 1, 1997 through and
including June 30, 1997 ($350,000)
January 1, 1997 through and
including September 30, 1997 $150,000
January 1, 1997 through and
including December 31, 1997 ($1,500,000)
January 1, 1998 through and
including March 31, 1998 ($1,150,000)
January 1, 1998 through and
including June 30, 1998 ($500,000)
January 1, 1998 through and
including September 30, 1998 $0
January 1, 1998 through and
including December 31, 1998 ($150,000)
January 1, 1999 through and
including March 31, 1999 ($500,000)
January 1, 1999 through and
including June 30, 1999 $0
the twelve month period ended on September 30,
1999 and the last day of each fiscal quarter thereafter $0
8.3.3 Senior Interest Coverage Ratio. Achieve, at the end of each fiscal quarter
within the term hereof a Senior Interest Coverage Ratio equal to or greater than
the ratio shown below for the quarter corresponding thereto:
Each Fiscal Quarter Ending Ratio
-------------------------- -----
January 1st to March 31st 2.00 to 1
January 1st to June 30th 2.75 to 1
January 1st to September 30th 3.00 to 1
January 1st to December 31st 2.00 to 1"
I. Addition of Exhibit. Exhibit A-1 in the form attached hereto is hereby added
to the existing Loan Agreement.
I. Continuing Effect. Except as otherwise provided herein, the Existing Loan
Agreement remains in full force and effect.
IN WITNESS WHEREOF, this First Amendment has been duly executed on the day and
year specified in the beginning hereof.
EAGLE PACIFIC INDUSTRIES, INC.
("Borrower")
By:
Name:
16
<PAGE>
Title:
FLEET CAPITAL CORPORATION
("Lender")
By:
Name: Michael Scolaro
Title: Vice President
17
<PAGE>
EXHIBIT A-2
SECURED PROMISSORY NOTE
$6,477,800 July 6, 1998
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned (hereinafter "Borrower"), hereby promises to
pay to the order of FLEET CAPITAL CORPORATION, a Rhode Island corporation
(hereinafter "Lender"), in such coin or currency of the United States which
shall be legal tender in payment of all debts and dues, public and private, at
the time of payment, the principal sum of Six Million Four Hundred Seventy-Seven
Thousand Eight Hundred Dollars ($6,477,800), together with interest from and
after the date hereof on the unpaid principal balance outstanding from time to
time.
This Secured Promissory Note (the "Note") is the Term Note B referred to in, and
is issued pursuant to, that certain Amended and Restated Loan and Security
Agreement between Borrower and Lender dated the date hereof (hereinafter, as
amended from time to time, the "Loan Agreement"), and is entitled to all of the
benefits and security of the Loan Agreement. All of the terms, covenants and
conditions of the Loan Agreement and the Security Documents are hereby made a
part of this Note and are deemed incorporated herein in full. All capitalized
terms used herein, unless otherwise specifically defined in this Note, shall
have the meanings ascribed to them in the Loan Agreement.
For so long as no Event of Default shall have occurred the principal amount and
accrued interest of this Note shall be due and payable on the dates and in the
manner hereinafter set forth:
(a) Interest on the unpaid principal balance outstanding from time to time
shall be paid at such interest rates and at such times as are specified in
the Loan Agreement;
(b) Principal shall be due and payable monthly, commencing the first day
of the calendar month after the month in which Term Loan A has been repaid
in full, in twenty-four equal installments of Two Hundred Sixty-Nine
Thousand Nine Hundred Eight and 33/100 Dollars ($269,908.33) each; and
(c) The entire remaining principal amount then outstanding, together with
any and all other amounts due hereunder, shall be due and payable on the
Commitment Termination Date.
Notwithstanding the foregoing, the entire unpaid principal balance and accrued
interest on this Note shall be due and payable immediately upon any termination
of the Loan Agreement pursuant to Section 4 thereof.
This Note shall be subject to mandatory prepayment in accordance with the
provisions of Section 3.3 of the Loan Agreement. Borrower may also terminate the
Loan Agreement and, in connection with such termination, prepay this Note in the
manner provided in Section 4 of the Loan Agreement. In addition, Borrower may
prepay this Note in the manner provided in Section 4 of the Loan Agreement.
Upon the occurrence of an Event of Default, Lender shall have all of the rights
and remedies set forth in Section 10 of the Loan Agreement.
Time is of the essence of this Note. To the fullest extent permitted by
applicable law, Borrower, for itself and its legal representatives, successors
and assigns, expressly waive presentment, demand, protest, notice of dishonor,
notice of non-payment, notice of maturity, notice of protest, presentment for
the purpose of accelerating maturity, diligence in collection, and the benefit
of any exemption or insolvency laws.
Wherever possible, each provision of this Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Note shall be prohibited or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or remaining provisions of this
Note. No delay or failure on the part of Lender in the exercise of any right or
remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in
any default, nor shall any single or partial exercise by Lender of any right or
remedy preclude any other right or remedy. Lender, at
18
<PAGE>
its option, may enforce its rights against any collateral securing this Note
without enforcing its rights against Borrower, any guarantor of the indebtedness
evidenced hereby or any other property or indebtedness due or to become due to
Borrower. Borrower agrees that, without releasing or impairing Borrower's
liability hereunder, Lender may at any time release, surrender, substitute or
exchange any collateral securing this Note and may at any time release any party
primarily or secondarily liable for the indebtedness evidenced by this Note.
This Note shall be governed by, and construed and enforced in accordance with,
the laws of the State of Illinois.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered in Chicago, Illinois, on the date first above written.
EAGLE PACIFIC INDUSTRIES, INC.,
a Minnesota corporation ("Borrower")
By:
Name:
Title:
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 218,926
<SECURITIES> 0
<RECEIVABLES> 10,001,569
<ALLOWANCES> 318,000
<INVENTORY> 9,237,884
<CURRENT-ASSETS> 20,020,840
<PP&E> 30,358,563
<DEPRECIATION> 5,731,831
<TOTAL-ASSETS> 49,845,806
<CURRENT-LIABILITIES> 20,825,754
<BONDS> 10,926,426
10,037,500
0
<COMMON> 66,125
<OTHER-SE> 7,990,001
<TOTAL-LIABILITY-AND-EQUITY> 49,845,806
<SALES> 59,664,007
<TOTAL-REVENUES> 59,664,007
<CGS> 46,698,772
<TOTAL-COSTS> 46,698,772
<OTHER-EXPENSES> 9,088,755
<LOSS-PROVISION> 30,127
<INTEREST-EXPENSE> 1,836,320
<INCOME-PRETAX> 2,010,033
<INCOME-TAX> 163,000
<INCOME-CONTINUING> 1,847,033
<DISCONTINUED> 0
<EXTRAORDINARY> (656,419)
<CHANGES> 0
<NET-INCOME> 1,190,614
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
