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 30,1999
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 August 13, 1999 was 7,015,222.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
INDEX
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Condensed Statements of Income - Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited)............ 3
Condensed Balance Sheets - June 30, 1999
and December 31, 1998 (Unaudited).......................... 4
Condensed Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 (Unaudited)............ 5
Notes to Condensed Financial Statements (Unaudited).......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 13
Item 2. Changes in Securities........................................ 13
Item 3. Defaults Upon Senior Securities.............................. 13
Item 4. Submission of Matters to a Vote of Security Holders.......... 13
Item 5. Other Information............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
Signatures........................................................... 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $24,447,751 $20,396,580 $44,033,690 $38,906,644
COST OF GOODS SOLD 18,215,295 15,997,649 32,360,648 31,126,329
----------- ----------- ----------- -----------
Gross profit 6,232,456 4,398,931 11,673,042 7,780,315
OPERATING EXPENSES:
Selling expenses 2,953,486 2,445,289 5,495,844 4,559,837
General and administrative expenses 772,614 698,901 1,442,057 1,376,087
----------- ----------- ----------- -----------
3,726,100 3,144,190 6,937,901 5,935,924
----------- ----------- ----------- -----------
OPERATING INCOME 2,506,356 1,254,741 4,735,141 1,844,391
NON-OPERATING EXPENSES:
Interest expense 541,171 727,376 1,102,811 1,385,292
Other income (171,317) (6,129) (190,907) (31,679)
Terminated acquisition costs - - 1,325,000 -
----------- ----------- ----------- -----------
369,854 721,247 2,236,904 1,353,613
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,136,502 533,494 2,498,237 490,778
INCOME TAX (BENEFIT) EXPENSE (1,868,000) 43,000 (1,836,000) 50,000
----------- ----------- ----------- -----------
NET INCOME 4,004,502 490,494 4,334,237 440,778
PREFERRED STOCK DIVIDENDS 200,657 200,657 401,313 401,313
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO
COMMON STOCK $ 3,803,845 $ 289,837 $ 3,932,924 $ 39,465
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $ .54 $ .04 $ .57 $ .01
=========== =========== =========== ===========
Diluted $ .42 $ .04 $ .45 $ .01
=========== =========== =========== ===========
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 7,015,222 6,803,590 6,868,245 6,725,373
=========== =========== =========== ===========
Diluted 9,628,605 7,203,380 9,553,159 7,134,044
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
ASSETS JUNE 30, 1999 DEC. 31, 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $366,000 and $199,000, respectively 12,515,969 6,310,049
Inventories 10,775,802 12,249,959
Deferred income taxes 700,000 425,000
Other 901,438 932,207
------------- --------------
Total current assets 24,893,209 19,917,215
PROPERTY AND EQUIPMENT, net 22,816,084 21,986,500
OTHER ASSETS:
Land held for sale 2,260,756 2,490,965
Goodwill, less accumulated amortization of $538,000 and
$482,000, respectively 3,930,114 3,985,960
Deferred income taxes 2,550,000 825,000
Other 52,986 413,158
------------- --------------
8,793,856 7,715,083
------------- --------------
$ 56,503,149 $ 49,618,798
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 10,773,819 $ 9,632,105
Accounts payable 10,251,913 8,013,067
Accrued liabilities 1,858,006 1,738,427
Current maturities of long-term debt 1,616,063 1,849,628
------------- --------------
Total current liabilities 24,499,801 21,233,227
LONG-TERM DEBT, less current maturities 9,981,916 10,582,585
REDEEMABLE PREFERRED STOCK, 8% cumulative dividend; 10,000,000 10,000,000
convertible; $1,000 per share liquidation preference; $.01 par value;
authorized, issued and outstanding 10,000 shares,
STOCKHOLDERS' EQUITY:
Series A preferred stock, 7% cumulative dividend; convertible;
$2 per share 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
14,490,000 shares, none issued and outstanding - -
Common stock, par value $.01 per share; authorized
30,000,000 shares; issued and outstanding 7,015,222 and
6,635,035 shares, respectively 70,152 66,350
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding - -
Additional paid-in capital 36,762,642 36,480,930
Notes receivable from officers and employees on Common
Stock purchases (434,206) (434,206)
Accumulated deficit (24,414,656) (28,347,588)
------------- --------------
Total stockholders' equity 12,021,432 7,802,986
------------- --------------
$ 56,503,149 $ 49,618,798
============= ==============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
4
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,334,237 $ 440,778
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of land held for sale (164,186) -
Depreciation and amortization 1,215,617 1,043,498
Loan discount amortization 96,373 304,282
Prepaid interest amortization - 295,410
Deferred income taxes (2,000,000) -
Change in operating assets and liabilities (2,460,960) (1,776,836)
--------------- --------------
Net cash provided by operating activities 1,021,081 307,132
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,897,641) (6,045,227)
Purchases of and improvements to land held for sale (143,952) -
Proceeds from sale of property and equipment 68,200 -
Proceeds from sale of land held for sale 523,333 -
Other 237,297 -
--------------- --------------
Net cash used in investing activities (1,212,763) (6,045,227)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable 40,385,100 44,688,831
Payments under note payable (39,243,386) (37,617,248)
Repayment of long-term debt (834,234) (706,395)
Issuance of common stock 285,515 -
Payment and retirement of common stock - (175,780)
Payment of debt issuance costs - (50,000)
Payment of preferred stock dividend (401,313) (401,313)
--------------- --------------
Net cash provided by financing activities 191,682 5,738,095
--------------- --------------
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 unaudited condensed financial statements.
5
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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, 1999, and the results of
its operations for the three and six month periods ended June 30, 1999 and 1998,
and its cash flows for the six month periods ended June 30, 1999 and 1998.
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, 1998. Certain
reclassifications have been made to the December 31, 1998 Condensed Balance
Sheet to conform to the June 30, 1999 presentation. Such reclassification has no
effect on net income or stockholders' equity as previously stated.
2. INVENTORY
June 30, 1999 December 31,1998
------------- ----------------
Raw materials $ 4,867,387 $ 4,519,991
Finished goods 5,908,415 7,729,968
$ 10,775,802 $ 12,249,959
3. INCOME TAXES
The Company has net operating loss carryforwards of approximately
$28.5 million, $23.0 million of which expire in years 1999 and 2000, and $5.5
million expire in years 2001 through 2013. In addition, there are state tax
credit carryforwards that expire in varying amounts through 2004. These
carryforwards and credits are available to offset future taxable income and
state taxes, respectively.
The Company establishes deferred tax asset valuation allowances in
accordance with the provisions of FASB Statement No. 109, "Accounting for Income
Taxes." The Company continually reviews the adequacy of the valuation allowance
and recognizes benefits when it is more likely than not that the benefits will
be realized.
At June 30, 1999, the Company had net deferred tax assets of
approximately $3.3 million. In the quarter ended June 30, 1999, the Company
reversed approximately $2.0 million of valuation allowance placed on the
Company's deferred tax assets. The reversal was based on continuing improvements
in operating results influenced by the Company's added production capacity, as
well as other indications that certain concerns that had previously limited
management's expectations about future taxable income no longer applied. Under
generally accepted accounting principles, (a) the portion of the decrease in
valuation allowance related to a change in estimate of future years' income is a
discrete event in the period the change in estimate occurred and (b) the portion
of the decrease in the valuation allowance related to a change of estimate in
the current year income is recorded prospectively over the remainder of the year
through elimination of the valuation allowance and a similar amount of the
deferred tax asset as income is earned. Accordingly, the Company's federal
effective tax rate for the remainder of 1999, excluding the discrete event
described in the following sentence, is expected to be zero. In addition, the
valuation allowance reversal in the quarter ended June 30, 1999 relates to the
change in estimate of future years' income. The valuation allowance that remains
at June 30, 1999 principally represents approximately $16.0 million of net
operating loss carryforwards forecasted to expire in 1999 and 2000. The net
deferred tax asset represents management's best estimate of the tax benefits
that will more likely than not be realized in future years. However, there can
be no assurance that the Company can generate taxable income to realize the net
deferred tax asset. The Company anticipates that in fiscal years subsequent to
1999, the overall federal and state effective tax rate applied to earnings as
reported for financial reporting purposes will approximate 38%, absent any
further adjustment of estimated income in 2000 available to offset net operating
loss carryforwards expiring in that year.
6
<PAGE>
Income before taxes and provisions for income tax (benefit) expense for
the three and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
June 1999 June 1998
--------------------------------------- --------------------------------------
Three Months Six Months Three Months Six Months
------------------ ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Pretax income $ 2,136,502 $ 2,498,237 $ 533,494 $490,778
================== ================= ================== ================
Current Tax Provision - primarily
state taxes 132,000 164,000 43,000 50,000
Deferred Tax Benefit-change in
estimate of future years
taxable income (2,000,000) (2,000,000) - -
------------------ ----------------- ------------------ ----------------
Total Tax (Benefit) Provision $(1,868,000) $(1,836,000) $ 43,000 $50,000
================== ================= ================== ================
</TABLE>
4. EARNINGS PER COMMON SHARE
The following table reflects the calculation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Basic EPS Computation
Income available to common stockholders $ 3,803,845 $ 289,837
============ =========
Average common shares outstanding 7,015,222 6,803,590
============ =========
Basic earnings per share $ .54 $ .04
============ =========
Diluted EPS Computation
Income available to common stockholders $ 3,803,845 $ 289,837
8% redeemable preferred stock dividends 200,000 -
7% convertible preferred stock dividends 657 656
------------ ---------
Income available to common stockholders 4,004,502 290,493
============ =========
Average common shares outstanding 7,015,222 6,803,590
Warrants and options 247,215 381,040
8% redeemable preferred stock 2,347,418 -
7% convertible preferred stock 18,750 18,750
------------ ---------
9,628,605 7,203,380
============ =========
Diluted earnings per share $ .42 $ .04
============ =========
</TABLE>
Options to purchase 354,275 and 367,933 shares of common stock were
outstanding at June 30, 1999 and 1998, 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 period ending
June 30, 1998, since the conversion would have an antidilutive effect on the
diluted EPS calculation.
7
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Basic EPS Computation
Income available to common stockholders $ 3,932,924 $ 39,465
=========== ==========
Average common shares outstanding 6,868,245 6,725,373
=========== ==========
Basic earnings per share $ .57 $ .01
=========== ==========
Diluted EPS Computation
Income available to common stockholders $ 3,932,924 $ 39,465
8% redeemable preferred stock dividends 400,000 -
7% convertible preferred stock dividends 1,313 -
----------- ----------
Income available to common stockholders 4,334,237 39,465
=========== ==========
Average common shares outstanding 6,868,245 6,725,373
Warrants and options 318,746 408,671
8% redeemable preferred stock 2,347,418 -
7% convertible preferred stock 18,750 -
----------- ----------
9,553,159 7,134,044
=========== ==========
Diluted earnings per share $ .45 $ .01
=========== ==========
</TABLE>
Options to purchase 388,646 and 285,046 shares of common stock were
outstanding at June 30, 1999 and 1998, 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.
5. TERMINATION OF ASSET PURCHASE AND MERGER
On April 19, 1999, the Company announced the termination of its
agreements to acquire the polyvinyl chloride (PVC) pipe business of The Lamson &
Sessions Co. and the Oklahoma City resin manufacturing facility owned and
operated by CONDEA Vista Company. In conjunction with the termination of the
agreements, the Company recorded a charge for acquisition related costs of
$1,325,000.
6. LITIGATION
On July 21, 1999, Lamson & Sessions Co. filed a complaint against the
Company to recover alleged damages incurred by Lamson in connection with the
termination of the Company's proposed acquisition of Lamson's PVC pipe business.
Lamson is seeking nearly $1 million in fees and expenses, plus an undetermined
amount of damages. The Company believes that the outcome of this litigation will
not have a material adverse effect on the Company's financial position and
future results of operations.
7. PENDING ACQUISITION
On July 29, 1999, the Company signed a letter of intent with Mitsubishi
Chemical America, Inc. to acquire all the outstanding capital stock of Pacific
Western Extruded Plastics Company (PW Pipe). The Company will pay $80 million
for PW pipe, subject to certain balance sheet adjustments. The stock purchase
will be accounted for by the purchase method of accounting and is contingent
upon obtaining certain regulatory consents, obtaining satisfactory financing,
and other conditions. The company will use a combination of senior secured debt
and subordinated notes, with warrants to finance the purchase. The Company
anticipates that the closing will take place in the third quarter of 1999. PW
pipe manufacturers and distributes polyvinyl chloride (PVC) pipe and had sales
of $94 million for the six months ended June 30, 1999.
8
<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,
1999 1998 1999 1998
----- ----- ----- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 74.5 78.4 73.5 80.0
Gross Profit 25.5 21.6 26.5 20.0
Operating expenses 15.2 15.4 15.8 15.3
Operating income 10.3 6.2 10.7 4.7
Non-operating expense 1.5 3.5 5.1 3.5
Income before income taxes 8.8 2.6 5.6 1.2
Income tax (benefit) expense 7.6 0.2 4.2 0.1
Net Income 16.4% 2.4% 9.8% 1.1%
</TABLE>
The Company posted record net sales for the three and six month periods
ended June 30, 1999, increasing 20% and 13%, respectively, compared to the same
periods in 1998. Higher volumes, primarily due to increased demand and
production capacities, were responsible for the growth in revenue. Pounds sold
rose 25% and 22%, respectively, for the three and six month periods ended June
30, 1999 compared to the same periods in 1998. Selling prices decreased .4% and
7%, respectively, for the three and six month periods ended June 30, 1999
compared to the same periods in 1998. The lower selling prices were due to lower
PVC raw material costs, the primary component of PVC pipe.
Gross profits increased to 25.5% and 26.5% of sales for the three and
six months ended June 30, 1999, compared with 21.6% and 20.0% of sales for the
same periods in 1998. The significant increases in gross profits were due to
increased production efficiencies, coupled with strong demand from the
construction industry. Mild weather and low interest rates fueled the high
activity in the construction market.
The decrease in operating expenses, as a percentage of net sales, for
the three months ended June 30, 1999 compared to the same period in 1998 was
primarily due to flat administrative expenses coupled with increased sales. The
increase in operating expenses, as a percentage of net sales, for the six months
ended June 30,1999 compared to the same period in 1998 was primarily due to
higher freight costs from increased sales volumes, combined with lower selling
prices.
The increase in non-operating expenses for the six month period ended
June 30, 1999 is due to the $1,325,000 charge incurred in the first quarter of
1999 as a result of the terminated acquisition costs, partially offset by lower
interest expense. The lower interest expense is due to the repayment of the
subordinated debt in July of 1998.
9
<PAGE>
At June 30, 1999, the Company had net deferred tax assets of
approximately $3.3 million. In the quarter ended June 30, 1999, the Company
reversed approximately $2.0 million of valuation allowance placed on the
Company's deferred tax assets. The reversal was based on continuing improvements
in operating results influenced by the Company's added production capacity, as
well as other indications that certain concerns that had previously limited
management's expectations about future taxable income no longer applied. Under
generally accepted accounting principles, (a) the portion of the decrease in
valuation allowance related to a change in estimate of future years' income is a
discrete event in the period the change in estimate occurred and (b) the portion
of the decrease in the valuation allowance related to a change of estimate in
the current year income is recorded prospectively over the remainder of the year
through elimination of the valuation allowance and a similar amount of the
deferred tax asset as income is earned. Accordingly, the Company's federal
effective tax rate for the remainder of 1999, excluding the discrete event
described in the following sentence, is expected to be zero. In addition, the
valuation allowance reversal in the quarter ended June 30, 1999 relates to the
change in estimate of future years' income. The valuation allowance that remains
at June 30, 1999 principally represents approximately $16.0 million of net
operating loss carryforwards forecasted to expire in 1999 and 2000. The net
deferred tax asset represents management's best estimate of the tax benefits
that will more likely than not be realized in future years. However, there can
be no assurance that the Company can generate taxable income to realize the net
deferred tax asset. The Company anticipates that in fiscal years subsequent to
1999, the overall federal and state effective tax rate applied to earnings as
reported for financial reporting purposes will approximate 38%, absent any
further adjustment associated estimated income in 2000 available to offset for
net operating loss carryforwards expiring in that year.
Financial Condition
The Company had working capital of $393,000 on June 30, 1999. The low
working capital is due to the use of short-term financing for the construction
of the new manufacturing facility and purchase of land for the entire industrial
park in Utah. The Company is in the process of selling the excess land and is
reviewing options for long-term financing for the production facility and the
land that it occupies. As of June 30, 1999, the Company had available excess
borrowing capacity under its revolving credit facility of $5.7 million.
Cash provided by operating activities was $1.0 million in 1999 and
$307,000 in 1998. Improved profitability was the primary reason for the improved
results in 1999 compared to 1998.
The Company used $1.2 million and $6.0 million on investing activities
for the six months ended June 30, 1999 and 1998, respectively. The primary use
of cash in 1999 and 1998 was for capital expenditures.
Cash provided by financing activities was $192,000 and $5.7 million for
the six months ended June 30, 1999 and 1998, respectively. The primary source of
cash in 1999 and 1998 was borrowings under the revolving credit loan.
The Company had commitments for capital expenditures of $325,000 at
June 30, 1999, 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.
On July 21, 1999, Lamson & Sessions Co. filed a complaint against the
Company to recover alleged damages incurred by Lamson in connection with the
termination of the Company's proposed acquisition of Lamson's PVC pipe business.
Lamson is seeking nearly $1 million in fees and expenses, plus an undetermined
amount of damages. The Company believes that the outcome of this litigation will
not have a material adverse effect on the Company's financial position and
future results of operations.
10
<PAGE>
On July 29, 1999, the Company signed a letter of intent with Mitsubishi
Chemical America, Inc. to acquire all the outstanding capital stock of Pacific
Western Extruded Plastics Company (PW Pipe). The Company will pay $80 million
for PW pipe, subject to certain balance sheet adjustments. The stock purchase
will be accounted for by the purchase method of accounting and is contingent
upon obtaining certain regulatory consents, obtaining satisfactory financing,
and other conditions. The company will use a combination of senior secured debt
and subordinated notes, with warrants to finance the purchase. The Company
anticipates that the closing will take place in the third quarter of 1999. PW
pipe manufacturers and distributes polyvinyl chloride (PVC) pipe and had sales
of $94 million for the six months ended June 30, 1999.
Outlook
The statements contained in this Outlook section are based on Company
management's 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 supply and demand in the plastic pipe industry is currently
balanced. 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 Company has net operating loss carryforwards of approximately
$28.5 million, $23.0 million of which expire in years 1999 and 2000, and $5.5
million expire in years 2001 through 2013. In addition, there are state tax
credit carryforwards that expire in varying amounts through 2004. These
carryforwards and credits are available to offset future taxable income and
state taxes, respectively.
The Company establishes deferred tax asset valuation allowances in
accordance with the provisions of FASB Statement No. 109, "Accounting for Income
Taxes." The Company continually reviews the adequacy of the valuation allowance
and recognizes benefits when it is more likely than not that the benefits will
be realized.
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.
Year 2000 (Y2K) Compliance. 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.
11
<PAGE>
The Company has completed an assessment of its information systems
programs and completed changes on the majority of these programs to make them
Y2K compliant. The Company believes that approximately 85% of its information
systems programs are Y2K compliant and expects the remainder of its information
systems programs to be compliant by the end of the third quarter. The Company is
currently assessing, with the assistance of its vendors, whether any Y2K
problems exist in its office and production equipment. This assessment project
along with the remediation of any problems is expected to be completed by the
end of the third quarter of 1999. The Company received responses from
approximately 90% of its office and equipment vendors, that such equipment is
Y2K compliant. In addition, the Company has inquired of all its major customers
and suppliers as to their readiness to the Y2K issue to determine the extent to
which the Company is indirectly vulnerable to any third-party Y2K issues and all
such customers and suppliers have responded that they believe they are or will
be Y2K 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 total cost associated with the modifications to be Y2K compliant
are expected to be approximately $15,000, of which approximately $10,000 have
been expensed as of June 30, 1999.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could have an adverse effect on the Company's
operations. Due to the general uncertainty inherent in the Y2K problem,
resulting in part from the uncertainty of the Y2K readiness of the Company's
third-party suppliers and customers, the Company is unable to determine at this
time whether the consequences of Y2K failures will have a material impact on the
Company's operations. The Company believes that the assessment and remediation
steps it is taking will significantly reduce its exposure to the Y2K problem.
Our most likely worst case Year 2000 scenario is if one or more plants does not
have power to operate its equipment. Such a scenario would result in a backlog
of production and the Company would be required to utilize existing inventory to
fill customer orders.
At this time, the Company believes it has addressed all Y2K issues that
may arise; therefore, no contingency plan has been developed. If problems are
detected during the Company's in-house testing or if information is received
from an outside source that they would be unable to be Y2K compliant, the
Company will then develop an appropriate contingency plan to address Y2K
problems that may arise.
Item 3. Quantitative and qualitative disclosures about market
risk - Not applicable
12
<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 8, 1999.
a) A resolution was adopted to set the number of directors for
the ensuing year at seven. The resolution passed with
3,301,732 votes cast in favor, 410,432 opposed, and 21,229
votes withheld.
b) Richard W. Perkins, George R. Long, and Harry W. Spell were
elected to serve as directors of the Company until the 2002
Annual Shareholders meeting. Other directors whose term of
office as a director continued after the meeting are: Larry D.
Schnase, G. Peter Konen, William H. Spell and Bruce A.
Richard.
Richard W. Perkins George R. Long Harry W. Spell
Votes in favor 3,371,105 3,371,105 3,367,683
Votes withheld 362,288 362,288 365,710
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.
On May 4, 1999, the registrant filed form 8-K to report a change in
certifying accountants. There were no financial statements filed with
the 8-K.
13
<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 20, 1999
14
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