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, 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, Suite 2430
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 September 30, 1999 was 7,235,098.
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
INDEX
Page No.
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Condensed Statements of Income - Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited)............. 3
Condensed Balance Sheets - September 30, 1999
and December 31, 1998 (Unaudited)................................ 4
Condensed Statements of Cash Flows - Nine
Months Ended September 30, 1999 and 1998 (Unaudited)............. 6
Notes to Condensed Financial Statements (Unaudited)................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 21
Item 2. Changes in Securities.............................................. 21
Item 3. Defaults Upon Senior Securities.................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................ 21
Item 5. Other Information.................................................. 21
Item 6. Exhibits and Reports on Form 8-K................................... 21
Signatures................................................................. 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $36,162 $20,757 $80,196 $59,664
COST OF GOODS SOLD 27,238 15,572 59,599 46,699
------- ------- ------- -------
Gross profit 8,924 5,185 20,597 12,965
OPERATING EXPENSES:
Selling expenses 3,830 2,558 9,326 7,118
General and administrative expenses 1,142 662 2,584 2,037
Nonrecurring expenses 1,163 - 1,163 -
------- ------- ------- -------
6,135 3,220 13,073 9,155
------- ------- ------- -------
OPERATING INCOME 2,789 1,965 7,524 3,810
NON-OPERATING EXPENSES:
Interest expense 729 451 1,832 1,836
Other income (16) (5) (207) (36)
Nonrecurring expenses 500 - 1,825 -
------- ------- ------- -------
1,213 446 3,450 1,800
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,576 1,519 4,074 2,010
INCOME TAX BENEFIT (EXPENSE) 2,348 (113) 4,184 (163)
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY LOSS 3,924 1,406 8,258 1,847
EXTRAORDINARY LOSS ON DEBT
PREPAYMENTS, Less income tax benefit of $31 - 656 - 656
NET INCOME 3,924 750 8,258 1,191
PREFERRED STOCK DIVIDENDS AND
LOSS ON REDEMPTION 432 201 833 602
------- ------- ------- -------
NET INCOME APPLICABLE TO
COMMON STOCK $ 3,492 $ 549 $ 7,425 $ 589
======= ======= ======= =======
NET INCOME PER COMMON SHARE:
Basic
Income before extraordinary loss $ .50 $ .18 $ 1.08 $ .19
Extraordinary loss on debt prepayments - (.10) - (.10)
------- ------- ------- -------
Net Income $ .50 $ .08 $ 1.08 $ .09
======= ======= ======= =======
Diluted
Income before extraordinary loss $ .39 .17 .85 .17
Extraordinary loss on debt prepayments (.09) (.09)
- -
------- ------- ------- -------
Net income $ .39 $ .08 $ .85 $ .08
======= ======= ======= =======
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 6,971 6,613 6,903 6,688
======= ======= ======= =======
Diluted 9,949 7,018 9,706 7,091
======= ======= ======= =======
See accompanying notes to unaudited condensed financial statements.
</TABLE>
3
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
(In thousands, except for shares and per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS SEPT. 30, 1999 DEC. 31, 1998
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,747 $ -
Accounts receivable, less allowance for doubtful accounts and
sale discounts of $1,283 and $199, respectively 37,480 6,310
Inventories 27,305 12,250
Deferred income taxes 3,915 425
Other 4,716 932
---------- -------
Total current assets 75,163 19,917
PROPERTY AND EQUIPMENT, net 74,745 21,987
OTHER ASSETS:
Land held for sale 2,140 2,491
Goodwill, less accumulated amortization of $565 and
$482, respectively 3,902 3,986
Deferred income taxes 2,991 825
Other, primarily spare parts inventory 3,101 413
---------- -------
12,134 7,715
---------- -------
$ 162,042 $49,619
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowing $ 33,889 $ 9,632
Current maturities of long-term debt 10,331 1,850
Accounts payable 13,352 8,013
Accrued liabilities 16,122 1,738
---------- -------
Total current liabilities 73,694 21,233
OTHER LONG-TERM LIABILITIES 100 -
LONG-TERM DEBT, less current maturities 40,140 10,583
SENIOR SUBORDINATED DEBT, Net 27,420 -
COMMITMENT (Note 6), CONTINGENCY (Note 9) - -
REDEEMABLE PREFERRED STOCK, 8% cumulative dividend; convertible; - 10,000
$1,000 per share liquidation preference; $.01 par value;
authorized, issued and outstanding none and 10,000, respectively
STOCK WARRANTS 4,915 -
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SHAREHOLDERS' 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 38 38
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 7,235,098 and
6,635,035 shares, respectively 72 66
Class B Common stock, par value $.01 per share; authorized
3,500,000 shares; none issued and outstanding - -
Additional paid-in capital 38,537 36,481
Unearned compensation (424) -
Notes receivable from officers and employees on common
stock purchases (1,527) (434)
Accumulated deficit (20,923) (28,348)
---------- -------
Total stockholders' equity 15,773 7,803
---------- -------
$ 162,042 $49,619
========== =======
See accompanying notes to unaudited condensed financial statements
</TABLE>
5
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,258 $ 1,191
Adjustments to reconcile net income to net cash
(Used in) provided by operating activities:
Extraordinary loss on debt prepayment - 656
Gain on sale of land held for sale (189) -
Loss on sale of fixed assets 43 -
Depreciation and amortization 2,519 1,643
Amortization of debt issue costs, discounts, and premiums 128 657
Deferred income taxes (4,545) -
Non cash compensation 838 -
Change in operating assets and liabilities (7,394) (1,663)
------------ -----------
Net cash (used in) provided by operating activities (342) 2,484
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,662) (9,292)
Purchases of and improvements to land held for sale (144) -
Proceeds from sale of property and equipment 68 -
Proceeds from sale of land held for sale 684 -
Note receivable on stock purchase (1,093) -
Acqusition of PWPipe, net of cash acquired of $1.2 million (75,683) -
Other - (112)
------------ -----------
Net cash used in investing activities (78,830) (9,404)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings/(payments) under note payable 24,257 6,819
Payment of long-term debt (1,118) (5,362)
Issuance of long-term debt 39,156 6,478
Issuance of senior subordinated notes 19,078 -
Issuance of stock warrants 3,422 -
Issuance of common stock 1,912 -
Repurchase and retirement of common stock (1,782) (194)
Financing costs (2,991) -
Payment of preferred stock dividend (1,015) (602)
------------ -----------
Net cash provided by financing activities 80,919 7,139
------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,747 219
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD - -
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,747 $ 219
============ ===========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Noncash activities:
Preferred stock exchanged for Subordinated Note (10,000)
Issuance of warrants relating to recapitalization/acquisition 1,493
Additional paid in capital-stock compensation 838
Subordinated Note acquired in recapitalization/acquisition 8,325
Other (182)
Deferred tax asset related to issuance of Subordinated Note 670
</TABLE>
Effective September 16, 1999, the Company purchased all the outstanding
capital stock of Pacific Western Extruded Plastics Company (PWPipe) for $76.9
million, including transaction costs, subject to certain balance sheet
adjustments to be determined. In connection with the acquisition, liabilities
assumed were as follows:
Fair value of assets acquired $ 98,496
Acquisition price of PWPipe (76,900)
----------------------
Liabilities assumed $ 21,596
======================
See accompanying notes to unaudited condensed financial statements.
7
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. PRESENTATION
In September, 1999, Eagle Pacific Industries, Inc. (the "Company")
acquired Pacific Western Extruded Plastics Company ("PWPipe") as described in
Note 2. The acquisition is included in the September 30, 1999 balance sheet and
all operating results and cash flows have been included in the statements of
income and cash flows for the 10 day period from the consummation of the
acquisition through September 30, 1999.
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 the
Company at September 30, 1999, and the results of its operations for the three
and nine month periods ended September 30, 1999 and 1998, and its cash flows for
the nine month periods ended September 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 and reports on Form 8-K filed on October 4, 1999.
Certain reclassifications have been made to the December 31, 1998, condensed
balance sheet to conform to the September 30, 1999, presentation. Such
reclassifications have no effect on net income or stockholders' equity as
previously stated.
2. ACQUISITION
Effective as of September 16, 1999, the Company acquired (the
"Acquisition") all of the outstanding capital stock of PWPipe, a manufacturer of
polyvinyl chloride ("PVC") pipe and fittings. PWPipe was then merged into the
Company. PWPipe operates six manufacturing facilities located in Tacoma and
Sunnyside, Washington; Eugene, Oregon; and Cameron Park, Perris and Visalia,
California, from its operating headquarters in Eugene, Oregon. The Company paid
approximately $76.9 million, plus transaction costs, subject to certain balance
sheet adjustments to be determined. The Acquisition was financed in connection
with the Company's recapitalization which included the retirement of $10.0
million outstanding 8% convertible Preferred Stock, the amending of its
outstanding Senior Credit Facility and the issuance of an aggregation of $32.5
million mezzanine debt consisting of Senior Subordinated Notes and detachable
stock purchase Warrants (Note 4 and 5). In addition, in the fourth quarter of
fiscal 1999, the Company expects to record certain relocation and other
realignment expenses associated with the formation of a combined business
organization.
The Acquisition has been accounted for as a purchase in the third
quarter of fiscal 1999, and, accordingly, the results of operations of PWPipe
for the period subsequent to the consummation of the acquisition through
September 30, 1999 are included in the accompanying financial statements. The
purchase price has been initially allocated to the assets acquired and
liabilities assumed based on their estimated fair values as set forth below,
subject to adjustment in the fourth quarter of fiscal 1999, once finalization of
any purchase price adjustments and certain valuation matters are known. The
initial purchase price allocation is as follows:
Net working capital $24.4
Property and equipment 52.1
Deferred tax asset .4
------------
$76.9
============
8
<PAGE>
The following unaudited pro forma income statement information assumes
that the Acquisition took place on January 1, 1998. This information assumes
that the benefit from NOL carryforwards is applied to the purchase price on
January 1, 1998, and not included in net income. In addition, pro forma income
is taxed at a rate of 40%.
Unaudited Pro Forma Income Statement Information
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 91,636 $ 71,804 $ 220,296 $ 199,484
Net income 6,833 1,998 12,614 304
Basic earnings per share $ .93 $ .28 $ 1.73 $ .04
Diluted earnings per share .70 .21 1.31 .03
</TABLE>
Included in the unaudited historical and pro forma interim 1999 net
income and earnings per share information are certain nonrecurring charges as
discussed in Note 10 associated with the Acquisition, and associated with
proposed acquisitions terminated earlier in fiscal 1999. These nonrecurring
items reduce historical and pro forma net income by approximately $1.5 million
and $2.8 million for the three and nine months ended September 30, 1999,
respectively. Absent these nonrecurring charges, pro forma basic and diluted
earnings per share would be approximately $1.05 and $.79 for the three month
period ended September 30, 1999, respectively, and $1.92 and $1.48 for the nine
months ended September 30, 1999, respectively.
Included in the pro forma nine month period ending September 30, 1998
net income and earnings per share information is a $3.3 million fair market
value purchase accounting adjustment related to inventory which was reflected
in the earliest pro forma period presented. Absent this charge, pro forma
basis and diluted earnings per share would be approximately $0.32 and $0.24 for
the nine month period ending September 30, 1998, respectively.
From a liquidity perspective, the Company will be utilizing
significant federal NOL carryforwards to offset the funding of its federal tax.
The unaudited pro forma income statement information has been prepared
for informational purposes only and may not be indicative of the operating
results that actually would have resulted had the Acquisition been made on
January 1, 1998, or of the operating results that may occur in the future.
3. INVENTORIES
(In thousands)
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials $ 15,484 $ 4,520
Finished goods 11,821 7,730
-------- -------
$ 27,305 $12,250
-------- -------
4. DEBT
In connection with the Acquisition, on September 20, 1999, the Company
entered into a Second Amended and Restated Loan and Security Agreement to obtain
a $100.0 million Senior Credit Facility ("Senior Credit Facility"). The Senior
Credit Facility consists of a: (i) Term Note A in the principal amount of $35.0
million ("Term Note A"); (ii) Term Note B in the principal amount of $15.0
million ("Term Note B"), and a (iii) $50.0 million Revolving Credit Facility
("Revolving Facility"). The Senior Credit Facility is secured by substantially
all the assets of the Company. Term Note A bears interest at a rate equal to the
LIBOR plus 2.75%. Term Note B bears interest at a rate equal to LIBOR plus
3.25%. The LIBOR rate at September 30, 1999 was 5.50%. Principal on the Term
Notes is due and payable quarterly in $1.25 million amounts beginning on
December 31, 1999, and continuing on the last day of each March, June, September
and December thereafter until paid in full on September 20, 2004. Outstanding
notes issued pursuant to the Revolving Facility bear interest at a rate equal to
LIBOR plus 2.50%. The Company is required to pay a fee equal to 0.5% on the
unused portion of the Revolving Facility.
9
<PAGE>
Also on September 20, 1999, the Company issued Senior Subordinate Notes
totaling $32.5 million ($27.4 million recorded amount, net of debt discount
described below) with detachable stock purchase Warrants to purchase an
aggregate of 1,940,542 shares of Company Common Stock (Note 5). Interest on the
Senior Subordinate Notes is payable at a fixed rate per annum equal to 14%
beginning on December 20, 1999 and on the 20th day of each March, June,
September and December thereafter until the entire principal and interest is
paid in full on September 20, 2007. Of this interest, 12% is payable in cash and
2% is payment in kind. Principal is paid in three equal installments on each
September 20th of 2005, 2006 and 2007. A debt discount totaling $5.1 million has
been recorded associated with the issuance of the Senior Subordinated Notes,
based on the collective estimated fair value of the Senior Subordinate Notes and
Warrants on the date issued, as determined by an independent valuation firm. The
discount will be amortized using an interest method as a yield adjustment over
the term of the note.
The various debt agreements set forth certain financial covenants,
which require, among other things, the Company to maintain certain levels of net
worth and financial ratios, limit the Company's capital expenditures, and
restrict its ability to pay dividends.
The fair market value of the Senior Credit Facility and Senior
Subordinated Notes based on discounted cash flow analysis using the Company's
current incremental borrowing rate, approximate their carrying value at
September 30, 1999.
5. PREFERRED STOCK REDEMPTION AND COMMON STOCK PURCHASE WARRANT
On September 20, 1999, as part of the issuance of the Senior
Subordinated Notes (Note 4), the Company redeemed all $10.0 million of its
outstanding 8% Convertible Preferred Stock in exchange for $10.0 million Senior
Subordinated Notes and detachable Warrants to purchase 597,090 shares of Common
Stock. A loss of approximately $251,000 was recorded for financial reporting
purposes (classified with preferred dividends in the statement of income) on the
retirement of the preferred shares, based on the fair value of the Senior
Subordinated Note and detachable stock Warrant issued in the exchange.
In addition, detachable Warrants to purchase 1,343,452 shares of Common
Stock were issued in conjunction with the issuance of the $22.5 million Senior
Subordinated Note. All of the detachable Warrants are exercisable to purchase
the Company's Common Stock or Class B Common Stock at $0.01 per share and
expires in ten years. The number of shares issuable upon exercise and the
warrant exercise price are adjustable in the event the Company pays a dividend
in Common Stock, subdivides or combines its Common Stock, or sells capital stock
or options to purchase capital stock at a price less than the market price of
its capital stock on the date of issuance, or completes a capital reorganization
or reclassification of its capital stock. The Company has granted the warrant
holders a right of first refusal. The Company cannot sell or issue any of its
Common Stock, options or convertible securities unless the Company has first
offered to sell to each Warrant holder its proportionate share. Certain
affiliates of the Company granted the Warrant holders tagalong rights that give
the Warrant holders the right to join any affiliate in the sale of any of their
shares. In addition, the Company granted the Warrant holders a put right,
whereby in the event of a change of control of the Company, the Warrant holders
have the right to require the Company to purchase all or any part of the
Warrants or shares issuable upon exercise of the Warrants.
6. SHAREHOLDERS' EQUITY TRANSACTIONS
As described below, in connection with the Acquistion, the Company
entered into various equity transactions with certain officers and directors.
The Company sold an aggregate of 289,500 shares of Common Stock at fair market
value, issued an aggregate of 128,000 shares of Restricted Stock and granted
incentive stock options to purchase an aggregate of 272,500 shares of Common
Stock.
In connection with the sale of Common Stock to the Company's directors
and officers, the Company accepted Promissory Notes as partial payment for
10
<PAGE>
shares of the Company's Common Stock purchased. All of the promissory Notes are
dated September 16, 1999, and require that the principal balance to be paid in
full by November 20, 2004. The promissory Notes bear interest at the rate of the
Company's Revolving Credit Facility in place during the term of the Note.
Interest is due beginning on December 30, 1999, continuing on the last day of
each calendar year until the promissory Note is paid in full, and is a full
recourse obligation of the maker.
On September 16, 1999, Restricted Stock Grants were made to certain
officers of the Company. These shares carry dividend and voting rights. Sales of
these shares are restricted prior to the date of vesting. The shares vest 20%
after three years, 30% after four years, and the remaining 50% after five years
from the date of grant. The restricted stock is subject to an agreement
requiring forfeiture by the officer in the event of termination of employment
prior to the vesting date for reasons other than normal retirement, death or
disability. Shares issued were recorded at their fair market value on the date
of grant with the corresponding deferred charge as part of shareholders' equity.
The deferred charge is being amortized as compensation expense on a
straight-line basis over the related vesting period. As of September 30, 1999,
128,000 shares of restricted stock were outstanding.
On September 2, 1999, the Company repurchased 555,265 shares of common
stock for $3.20 per share from a director of the Company. In addition, the
director excercised options for 48,860 shares which the Company repurchased. The
net aggregate cash purchase price of these transactions was $1.1 million. The
director resigned from the board and relinquished all of his equity ownership in
the Company through this transaction. In connection with repurchase, the Company
recorded a one-time charge of approximately $838,000 associated with shares
reacquired, which had been purchased in fiscal 1999 by the director under stock
option arrangements.
After September 30, 1999, the Company entered into several agreements
with current and former officers of the Company. The Company made Restricted
Stock Grants to certain officers of the Company covering 54,000 shares. The
Company also sold 61,000 shares of common stock to these same officers and
accepted promissory notes for a portion of the purchase price. These officers
were also granted options covering in the aggregate 135,000 shares. The terms
and conditions of these grants and sales were the same as those described above.
The Company also entered into an agreement with a former officer and director
which granted to that person the right to require the Company to purchase shares
of the Company's common stock and options to purchase shares of the Company's
common stock under certain circumstances prior to December 31, 1999. Pursuant to
this agreement, the Company could be required to purchase up to 78,309
shares of its common stock and options covering 150,500 shares of its
common stock.
7. 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 September 30, 1999, the Company had net deferred tax assets of
approximately $6.9 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 asset. In addition, in the quarter ended September 30,
1999, the Company reversed approximately $2.1 million of valuation allowance
placed on the Company's deferred tax assets. The reversals, totaling $4.1
million, were based on updated expectations about future years' taxable income
to reflect continuing improvements in operating results influenced by the
Company's added production capacity, and other indications that certain concerns
that had previously limited management's expectations about future taxable
income no longer applied. The valuation allowance at June 30, 1999 and September
30, 1999 reflect the Company's then current best estimates of the amount of net
operating loss carryforwards that would expire in 1999 and 2000. The valuation
allowance that remains at September 30, 1999 principally represents
approximately $4.6 million of net operating loss carryforwards expected to
expire in 1999.
11
<PAGE>
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, (a)
the adustment to the valuation allowance described above were accounted for
discretely in the quarters they were made and (b) the Company's federal
effective tax rate for the remainder of 1999, excluding the discrete adjustments
and the matter described in the following two sentences, is expected to be zero.
In connection with the Acquisition, taxable temporary differences originating
after September 16, 1999, related principally to accelerated depreciation, will
result in the recognition of a deferred tax liability by year-end 1999. The
related deferred tax expense is being recognized in the quarters ended September
30, 1999 and ending December 31, 1999 in proportion to the estimated pretax
income of PWPipe in those periods. The deferred tax expense recognized in the
quarter ending December 31, 1999 is expected to result in an overall effective
tax rate of approximately 25% for that quarter. Beginning with the first quarter
of 2000, the Company expects that its overall effective tax rate will
approximate 40%. 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 at each reporting date. However, there can be no assurance that the
Company can generate taxable income to realize the net deferred tax asset.
Income before taxes and provisions for income tax (benefit) expense for
the three and nine months ended September 30, 1999 and 1998 are as follows:
(In thousands, except for share amounts)
<TABLE>
<CAPTION>
September 1999 September 1998
------------------------------------ -------------------------------------
Three Months Nine Months Three Months Nine Months
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Pretax income $1,576 $4,074 $1,519 $2,010
================ ================ ================= ================
Current Tax Provision (361)
State taxes (197) (113) (163)
Deferred Tax Benefit-
Primarily change in
Estimate of future years'
Taxable income 2,090 4,090
Other 455 455 - -
---------------- ---------------- ----------------- ----------------
Total Tax Benefit (Expense) $2,348 $4,184 $ (113) $ (163)
================ ================ ================= ================
</TABLE>
7. EARNINGS PER COMMON SHARE
The following table reflects the calculation of basic and diluted earnings per
common share:
(In thousands, except per share amounts)
Three Months Ended September 30,
1999 1998
---- ----
Basic EPS Computation
Income available to common stockholders $ 3,492 $ 549
======== =======
Average common shares outstanding 6,971 6,613
======== =======
Basic earnings per share $ .50 $ .08
======== =======
Diluted EPS Computation
Income available to common stockholders $ 3,492 $ 549
Preferred stock dividends 432 -
-------- -------
Income available to common stockholders (a) $ 3,924 $ 549
======== =======
12
<PAGE>
Average common shares outstanding 6,971 6,613
Warrants, options, and restricted stock grants 841 386
Preferred stock 2,137 19
-------- -------
9,949 7,018
======== =======
Diluted earnings per share $ .39 $ .08
======== =======
(a) After considering dilutive nature of convertible shares, options and
restricted stock grants
Options to purchase 29,000 and 358,000 shares of common stock were outstanding
at September 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% Convertible
Preferred Stock was not assumed for the period ending September 30, 1998, since
the conversion would have an antidilutive effect on the diluted EPS calculation.
(In thousands, except per share amounts)
Nine Months Ended September 30,
1999 1998
---- ----
Basic EPS Computation
Income available to common stockholders $ 7,425 $ 589
======== =======
Average common shares outstanding 6,903 6,688
======== =======
Basic earnings per share $ 1.08 $ .09
======== =======
Diluted EPS Computation
Income available to common stockholders $ 7,425 $ 589
Preferred stock dividends 835 -
-------- -------
Income available to common stockholders (a) $ 8,260 $ 589
======== =======
Average common shares outstanding 6,903 6,688
Warrants, options, and restricted stock grants 514 403
Preferred stock 2,289 -
-------- -------
9,706 7,091
======== =======
Diluted earnings per share $ .85 $ .08
======== =======
(a) After considering dilutive nature of convertible shares, options and
restricted stock grants
Options to purchase 201,000 and 309,000 shares of common stock were outstanding
at September 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% Convertible Preferred Stock was not assumed for the
period ending September 30, 1998, since the conversion would have an
antidilutive effect on the diluted EPS calculation.
9. 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.
As set forth in the complaint, 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. The Company has
recorded additional estimated costs incurred associated with the disposition of
this matter (Note 10) of $500,000, in the third quarter ended September 30,
1999.
13
<PAGE>
10. NONRECURRING ITEMS
Nonrecurring items included in operating (item (b) below) or
nonoperating income (item (a) below) consist of certain nonrecurring charges
associated with the acquisition of PWPipe, and associated with a proposed
acquisition terminated earlier in 1999. The following table summarizes
nonrecurring items recorded by the Company:
<TABLE>
<CAPTION>
Dollars in Thousands
------------------------------------------------------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Terminated acquisition related $ 500 - $ 1,825 $ -
costs (a)
Costs associated with the
PWPipe acquisition, recorded in
the third quarter
ended September 30, 1999 (b):
Expense incurred in 838 - 838 -
connection with director
resignation (Note 6)
Transaction based 175 - 175 -
compensation
Other 150 - 150 -
---------------- ----------------- ---------------- -----------------
$ 1,663 $ - $ 2,988 $ -
================ ================= ================ =================
</TABLE>
(a) 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 the first quarter ended March 31,
1999, in conjunction with the termination of the agreements, the Company
recorded a charge for acquisition related costs of $1,325,000. The Company
recorded an additional charge of $500,000 in the third quarter ended
September 30, 1999 associated with this terminated transaction (Note 9).
14
<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 Income as percentages of net sales:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
----- ---- ----- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.3 75.0 74.3 78.3
Gross Profit 24.7 25.0 25.7 21.7
Operating expenses 17.0 15.5 16.3 15.3
Operating income 7.7 9.5 9.4 6.4
Non-operating expense 3.4 2.2 4.3 3.0
Income before income taxes 4.4 7.3 5.1 3.4
Income tax (benefit) expense (6.5) 0.5 (5.2) 0.3
Income before extraordinary 10.9 6.8 10.3 3.1
loss
Extraordinary loss - (3.2) - (1.1)
Net Income 10.9% 3.6% 10.3% 2.0%
</TABLE>
The Company posted record net sales for the three and nine month
periods ended September 30, 1999, increasing 74% and 34%, respectively, compared
to the same periods in 1998. Higher volumes, primarily due to increased demand
and production capacities and the acquisition of PWPipe in September were
responsible for the growth in revenue for the nine months ended September 30,
1999. Both higher volumes and selling prices were responsible for the revenue
growth for the three months ended September 30, 1999. Pounds sold rose 57% and
35% for the three and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998. Selling prices increased 14% and 1% for
the three and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998. The higher selling prices were due to
increased demand for plastic pipe, the strength of the economy in the western
United States, and the influence on selling prices by increases in the cost of
PVC resin.
Gross profits decreased from 25.0% to 24.7% for the three months ending
September 30, 1999, and increased from 21.7% to 25.7% for the nine months ending
September 30, 1999. The slight decrease in gross profits in the three months
ending September 30, 1999, is due to accounting requirements associated with the
finished goods inventory acquired with the acquisition of PWPipe. Absent these
accounting requirements, gross profits for the three months would have reflected
an increase that approximates the rate experienced for the nine months ending
September 30, 1999. The significant increase in gross profits for the nine month
period ending September 30, 1999 is due to increased production efficiencies
together with strong demand in all markets and the influence on selling price of
the rise in the cost of PVC resin.
The increase in operating expenses of 1.5% and 1.0% as a percentage of
net sales, for the three and nine month periods ending September 30, 1999,
respectively, is a result of non-recurring expenses experienced in the third
quarter as discussed in Note 10 to the financial statements. Without these
non-recurring expenses, operating expenses would have decreased 2.1% and 0.4%
for three and nine month periods ending September 30, 1999, respectively.
The increase in non-operating expenses for the three month period
ending September 30, 1999, is due to the $.5 million and $1.3 million charges
incurred in the third and first quarters of 1999, respectively, as a result of
the terminated acquisition costs as discussed in Note 10 to the financial
statements, and to higher interest expense incurred with the recapitalization of
the Company and financing of the acquisition of PWPipe. The increase in
non-operating expenses for the nine month period ending September 30, 1999 is
due to the previously mentioned terminated acquisition costs and the expenses
incurred in the third quarter.
As of September 30, 1999, the Company had net deferred tax assets of
approximately $6.9 million. In the quarter ended June 30, 1999, the Company
reversed approximately $2.0 million of valuation placed on the Company's
15
<PAGE>
deferred tax assets. In addition, in the quarter ended September 30, 1999, the
Company reversed approximately $2.1 million of valuation allowance placed on the
Company's deferred tax assets. The reversals, totaling $4.1 million, were based
on updated expectations about future years' taxable income to reflect continuing
improvements in operating results influenced by the Company's added production
capacity, and other indications that certain concerns that had previously
limited management's expectations about future taxable income no longer applied.
The valuation allowance at June 30, 1999 and September 30, 1999 reflect the
Company's then current best estimates of the amount of net operating loss
carryforwards that would expire in 1999 and 2000. The valuation allowance that
remains at September 30, 1999 principally represents approximately $4.6 million
of net operating loss carryforwards expected to expire in 1999.
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 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, (a) the adjustments to
the valuation allowance described above were accounted for discretely in the
quarters they were made and (b) the Company's federal effective tax rate for
financial reporting purposes for the remainder of 1999, excluding the discrete
adjustments and the matter described in the following two sentences, is expected
to be zero. In connection with the Acquisition, taxable temporary differences
originating after September 16, 1999, related principally to accelerated
depreciation, will result in the recognition of a deferred tax liability by
year-end 1999. The related deferred tax expense is being recognized in the
quarters ended September 30, 1999 and ending December 31, 1999 in proportion to
the estimated pretax income of PWPipe in those periods. The deferred tax expense
recognized in the quarter ending December 31, 1999 is expected to result in an
overall effective tax rate of approximately 25% for that quarter. Beginning with
the first quarter of 2000, the company expects that its overall effective tax
rate will approximate 40%. 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 at each reporting date. However, there can be no assurance that the
Company can generate taxable income to realize the net deferred tax asset.
Supplemental Discussion and Analysis of Pro Forma Results of Operations. The
following is a supplemental discussion and analysis of the Company's pro forma
results of operations for the three and nine months ended September 30, 1999,
compared with the pro forma results of operations for the three and nine month
periods ended September 30, 1998, as if the Acquisition had occurred on January
1, 1998. The pro forma results may not be indicative of results that actually
would have occurred had the Acquisition taken place at the beginning of the
period presented or of results which may occur in the future.
The following table sets forth selected pro forma operating statement
data for the Company:
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
----- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 91,636 $ 71,804 $ 220,296 $ 199,484
Cost of goods sold 62,766 54,794 154,957 160,762
Gross Profit 28,870 17,010 65,338 38,722
Operating expenses 13,273 10,885 32,972 29,497
Operating income 15,597 6,125 32,366 9,225
Interest Expense 2,810 2,758 8,661 8,663
Other Expense 1,398 37 2,684 56
Income before income taxes 11,389 3,330 21,023 506
Income tax (benefit) expense 4,556 1,332 8,409 202
Net Income 6,833 1,998 12,614 304
EPS
Basic $ .93 $ .28 $ 1.73 $ .04
Diluted $ .70 $ .21 $ 1.31 $ .03
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Average shares
Basic 7,357,500 7,030,500 7,301,500 7,105,500
Diluted 9,826,042 9,357,042 9,651,042 9,449,042
</TABLE>
(In percentages)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
----- ---- ----- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.5 76.3 70.3 80.6
Gross Profit 31.5 23.7 29.7 19.4
Operating expenses 14.5 15.2 15.0 14.8
Operating income 17.0 8.5 14.7 4.6
Interest Expense 3.1 3.8 3.9 4.3
Other Expense 1.5 0.0 1.2 0.0
Income before income taxes 12.4 4.6 9.5 0.3
Income tax (benefit) expense 5.0 1.2 3.8 0.1
Net Income 7.5 3.5 5.7 0.2
</TABLE>
The principal factors underlying the changes and trends set forth above
in the pro forma results of operations information are consistent with those
discussed on pages 14 and 15 associated with the Company's historic operations
information, largely accentuated by a significant increase in pounds sold of 8%
and 13% in the three and nine months ended September 30, 1999, respectively.
This is a result of the economy in the western United States and its influence
on the construction industry and its suppliers. In addition, selling prices have
increased due to increases in the price of PVC resin and strong demand for
finished goods, and the Company has realized the result of significant capacity
and process improvement investments made by both Eagle and PWPipe over the last
two years being deployed in 1999.
The pro forma results of operations reflect a pro forma interest
expense at rates that approximate that which the Company would have experienced
on pro forma debt levels that would have been outstanding over the pro forma
periods. The pro forma results do not reflect any anticipated cost savings or
any synergies that are anticipated from the Acquisition, and there can be no
assurance that any such cost savings or synergies will occur.
Had the Acquisition been consummated on January 1, 1998, the Company
believes that the valuation allowances related to deferred tax assets for the
Company's net operating loss carryforwards would have been decreased at that
date as part of the purchase accounting for the Acquisition. Accordingly, the
pro forma results of operations reflect a consistent pro forma overall effective
income tax rate of 40%.
Included in the unaudited historical and pro forma interim 1999 net
income and earnings per share information are certain nonrecurring charges, as
noted in Note 10 to the financial statements, associated with the acquisition of
PWPipe, and associated with proposed acquisitions terminated earlier in fiscal
1999. These nonrecurring items approximately reduce historical and pro forma net
income for the three and nine month periods ended September 30, 1999, by $1.5
million and $2.8 million, respectively. Absent these nonrecurring charges,
proforma basic and diluted earnings per share would be approximately $1.05 and
$.79, and $1.96 and $1.48 for the three and nine month periods ending September
30, 1999, respectively.
Included in the pro forma nine month period ending September 30, 1998
net income and earnings per share information is a $3.3 million fair market
value purchase accounting adjustment related to inventory which was reflected
in the earliest pro forma period presented. Absent this charge, pro forma
basis and diluted earnings per share would be approximately $0.32 and $0.24 for
the nine month period ending September 30, 1998, respectively.
17
<PAGE>
Financial Condition. The Company had working capital of $1.5 million at
September 30, 1999. As of September 30, 1999, the Company had available excess
borrowing capacity under its Revolving Facility of $4.5 million. Subsequent to
September 30, 1999, certain restrictions were lifted on the borrowing capacity
regarding items related to the recapitaliazation of the Company, available
collateral increased, and the Company provided net cash from operations. As a
result, on October 31, 1999, the Company had available excess borrowing capacity
under its Revolving Facility of $19.2 million.
Cash used by operating activities was $0.3 million in 1999. Cash
provided by operations was $2.5 million in 1998. The primary use of cash in 1999
was a $4.9 million reduction in accounts payable due to the mid-month timing of
the Acquisition of PWPipe in September, 1999. The reported 1999 reduction in
cash provided by operations is also influenced by an increase in September 1999
cost of sales related to the acquired PWPipe finished goods inventories,
previously discussed.
The Company used $78.8 million and $9.4 million on investing
activities for the nine months ended September 30, 1999 and 1998, respectively.
The primary use of cash in 1999 was for the purchase of PWPipe. The primary use
of cash in 1998 was for capital expenditures.
Cash provided by financing activities was $80.9 million and $7.1
million for the nine months ended September 30, 1999 and 1998, respectively. The
primary source of cash in 1999 was borrowings under the Senior Credit Facility
and Senior Subordinated Notes, and in 1998 was borrowings under the revolving
credit loan.
The Company had estimated commitments for capital expenditures of
$515,000 at September 30, 1999, which will be funded from borrowings under the
Revolving Facility and operating cash flow. Additional sources of liquidity, if
needed, include the Company's Revolving Facility, 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.
As set forth in the complaint, 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. During the third
quarter of 1999, the Company reserved $500,000 for legal fees to defend the
Company in this matter.
Effective September 16, 1999, the Company completed the acquisition of
all of the outstanding capital stock of PWPipe, a manufacturer of polyvinyl
chloride (PVC) pipe and fittings. PWPipe operates six manufacturing facilities
located in Tacoma and Sunnyside, Washington; Eugene, Oregon; and Cameron Park,
Perris and Visalia, California, from its operating headquarters in Eugene,
Oregon. The Company paid approximately $76.9 million, plus transaction costs,
subject to certain balance sheet adjustments to be determined. In addition, in
the fourth quarter of fiscal 1999, the Company expects to record certain
relocation and other realignment expenses associated with the formation of a
combined business organization.
In connection with the Acquisition of PWPipe on September 20, 1999,
the Company entered into a Second Amended and Restated Loan and Security
Agreement to obtain a $100.0 million Senior Credit Facility. The Senior Credit
Facility consists of a: (i) Term Note A in the principal amount of $35.0
million; (ii) Term Note B in the principal amount of $15.0 million, and a (iii)
$50.0 million Revolving Facility. The Senior Credit Facility is secured by
substantially all the assets of the Company. Term Note A bears interest at a
rate equal to the LIBOR plus 2.75%. Term Note B bears interest at a rate equal
to LIBOR plus 3.25%. The LIBOR rate at September 30, 1999 was 5.50%. Principal
on the Term Notes is due and payable quarterly in $1.25 million amounts
beginning on December 31, 1999, and continuing on the last day of each March,
June, September and December thereafter until paid in full on September 20,
2004. Outstanding notes issued pursuant to the Revolving Facility bear interest
at a rate equal to LIBOR plus 2.50%. The Company is required to pay a fee equal
to 0.5% of the unused portion of the Revolving Facility.
18
<PAGE>
Also on September 20, 1999, the Company issued Senior Subordinate
Notes totaling $32.5 million ($27.4 million recorded amount, net of debt
discount described below) with detachable stock purchase Warrants to purchase an
aggregate of 1,940,542 shares of Company Common Stock. Interest on the Senior
Subordinate Notes is payable at a fixed rate per annum equal to 14% beginning on
December 20, 1999, and on the 20th day of each March, June, September and
December thereafter until the entire principal and interest is paid in full on
September 20, 2007. Of this interest, 12% is payable in cash and 2% is payment
in kind. Principal is paid in three equal installments on each September 20th of
2005, 2006 and 2007. A debt discount totaling $5.1 million has been recorded
associated with the issuance of the Senior Subordinated Notes, based on the
collective estimated fair value of the Senior Subordinate Notes and Warrants on
the date of issue, as determined by an independent valuation firm. The discount
will be amortized using an interest method as a yield adjustment over their
term.
The various debt agreements set forth certain financial covenants,
which require, among other things, that the Company maintain certain levels of
net worth and ratios of financial condition, limits capital expenditures, and
restricts the Company payment of dividends.
As described below, in connection with the Acquisition of PWPipe, the
Company entered into various equity transactions with certain officers and
directors. The Company sold an aggregate of 289,500 shares of Common Stock at
fair market value, issued an aggregate of 128,000 shares of Restricted Stock and
granted incentive stock options to purchase an aggregate of 272,500 shares of
Common Stock.
In connection with the sale of Common Stock to the Company's directors
and officers, the Company accepted Promissory Notes as partial payment for
shares of the Company's Common Stock purchased. All of the promissory Notes are
dated September 16, 1999, and require that the principal balance be paid in full
by November 20, 2004. The promissory Notes bear interest at the rate of the
Company's Revolving Credit Facility in place during the term of the Note.
Interest is due beginning on December 30, 1999, and continuing on the last day
of each calendar year until the promissory Note is paid in full, and is a full
recourse obligation of the maker.
On September 16, 1999, Restricted Stock Grants were made to certain
officers of the Company. These shares carry dividend and voting rights. Sales of
these shares are restricted prior to the date of vesting. The shares vest 20%
after three years, 30% after four years, and the remaining 50% after five years
from the date of grant. The restricted stock is subject to an agreement
requiring forfeiture by the officer in the event of termination of employment
prior to the vesting date for reasons other than normal retirement, death or
disability. Shares issued were recorded at their fair market value on the date
of grant with the corresponding deferred charge as part of shareholders' equity.
The deferred charge is being amortized as compensation expense on a
straight-line basis over the related vesting period. As of September 30, 1999,
128,000 shares of restricted stock were outstanding.
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
and product quality. The Company's ability to grow may be restrained, by among
other things, the availability of PVC resin. The Company's strategy has been,
and continues to be, to concentrate growth initiatives in higher profit products
and geographic regions.
19
<PAGE>
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
currently believes that supply and demand for PVC resin in the plastic pipe
industry is currently balanced. The Company also currently believes that PVC
resin demand will be greater than PVC resin supply in the year 2000 and that
there may be shortages of PVC resin. 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 foregoing statements contained in this outlook section including
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, and its statememt below regarding "Year
2000 (Y2K) Compliance" are all forward looking statements. The forward looking
statements involve a number of risks and uncertainties, some of which are beyond
the Company's control, that may cause actual results to differ from the
Company's expectations. Some of the factors that could cause actual results to
differ materially include, but are not limited to, raw material cost
fluctuations, raw material availability, 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.
The Company has completed an assessment of its information systems and
believes that it has completed changes on these systems to make them Y2K
compliant. The Company believes that 100% of its information systems are Y2K
compliant. The Company has also assessed, with the assistance of its vendors,
whether any Y2K problems exist in its office and production equipment. The
Company believes that all of its office and production equipment is Y2K
compliant. In addition, the Company has inquired of all its major 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 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, all of which has been expensed as of
September 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.
The 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.
20
<PAGE>
Item 3. Quantitative and qualitative disclosures about market risk
The company is exposed to certain market risks based on the
outstanding long-term debt obligations of $83.9 million at September 30, 1999.
Market risk is estimated as the potential increase in fair value resulting from
a hypothetical one percent increase in interest rates which would result in an
annual interest expense increase of approximately $839,000.
Under covenants of the Company's Senior Credit Facility, the Company
is required to secure interest rate protection commencing within sixty days of
the closing date until at least the third anniversary of the closing date, for
one half of the outstanding principal of Term Loan A and Term Loan B. The
Company plans to secure an interest rate swap prior to November 20, 1999, for
three years with a LIBOR rate of 6.46% for one half of the outstanding principal
of Term Loan A and Term Loan B.
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 Employment agreement dated October 15, 1999, between the
Company and James K. Rash
27 Financial Data Schedule
(b) Reports on Form 8-K.
On September 2, 1999 the Company filed a Current Report on Form 8-K to
report the resignation of Larry D. Schnase from the Company's Board of
Directors, and the purchase of all of his shares of common stock and options to
purchase common stock for a net aggregate purchase price of $1.1 million. There
were no financial statements filed with the Form 8-K.
On September 20, 1999, the Company filed a Current Report on Form 8-K
to report its acquisition of Pacific Western Extruded Plastics Company
("PWPipe") from Mitsubishi Chemical America, Inc. and Mitsubishi Plastics, Inc.
(the "Sellers"). The registrant purchased all the outstanding capital stock of
PWPipe pursuant to a Stock Purchase Agreement dated September 16, 1999 by and
among the Company, Mitsubishi Chemical America, Inc. and Mitsubishi Plastics,
Inc. Pursuant to Item 7(a)(4) of Form 8-K, the required financial statements
will be filed by amendment by December 13, 1999, or sooner if such information
is available.
21
<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/ Roger R. Robb
Roger R. Robb
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 11, 1999
22
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Employment agreement dated October 15, 1999, between the
Company and James K. Rash
27 Financial Data Schedule (filed in electronic format only)
EAGLE PACIFIC INDUSTRIES, INC.
Employment Agreement
with
James K. Rash
THIS EMPLOYMENT AGREEMENT is executed this 15th day of October, 1999,
between James K. Rash (the "Employee") and Eagle Pacific Industries, Inc. (the
"Eagle"), having its corporate headquarters at 2430 Andersen Consulting Tower,
333 South Seventh Street, Minneapolis, MN 55402.
WITNESSETH:
WHEREAS, Eagle desires to engage the services of the Employee as
President of Eagle and to assure the continued service of the Employee to Eagle
on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties agree as follows:
1. TERM OF EMPLOYMENT
The term of this Agreement and Employee's employment under this
Agreement shall begin on October 15, 1999, and continue until December 31, 2000.
At the expiration of the initial term and any renewal term of this Agreement,
the Agreement shall automatically be renewed for an additional one year period
with any amendments as agreed to by the parties, provided that either party may
terminate this Agreement at the expiration of the applicable term by giving
written notice to the other party no later than six months prior to the
expiration of the applicable term of the Agreement.
2. DUTIES
Employee is engaged to serve as President of Eagle. He shall perform
such duties and functions commensurate with his position and as directed by
Eagle. During the term of this Agreement, Employee shall devote all of the time,
skills, attention, and energy necessary for the performance of his duties and
shall not be employed by any other entity without the expressed written
permission of the Chief Executive Officer of Eagle.
3. COMPENSATION
a. Base Salary.
As full compensation for the performance by the Employee of
all of his obligations under this Agreement, the Employee shall be
entitled to receive no less than an annual base salary of $267,500
payable periodically on the payroll schedule established for Eagle
employees. Base salary shall be reviewed as of December 31 each year
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commencing with December 31, 1999, and based on the performance of the
Employee, the business conditions of Eagle and the competitive market,
Eagle shall determine the amount, if any, of any increase in base
salary to be granted as of such dates.
b. Annual Bonus.
The Employee and Eagle acknowledge that they are entering into
this Agreement upon the consummation of Eagle's acquisition of Pacific
Western Extruded Plastics Company ("PW Pipe"), and that the Employee is
a former employee of PW Pipe. As such, for calendar year 1999 under the
term of this Agreement, the Employee shall be entitled to a bonus equal
to the bonus to which he would have been entitled under PW Pipe's bonus
plan for the remainder of calendar year 1999, which shall be payable at
such time and under such schedule as set forth under PW Pipe's bonus
plan. For subsequent calendar years during the term of this Agreement,
the Employee shall be entitled to participate in Level 1 of Eagle's Key
Employee Bonus Plan, a summary of which is attached hereto as Exhibit
A.
c. Stock Options and Restricted Stock.
As of the date hereof, in further consideration of the
Employee's employment hereunder, the Employee acknowledges that:
(i) the Employee has purchased 43,500 shares of Common Stock
of Eagle, a portion of the purchase price for which Eagle loaned to the
Employee subject to the terms of a Promissory Note of even date
herewith executed in favor of Eagle;
(ii) Eagle has granted the Employee 29,000 shares of
restricted Common Stock of Eagle, subject to the terms of a Restricted
Stock Agreement of even date herewith between the Employee and Eagle;
and
(iii) Eagle has granted the Employee an incentive stock option
to acquire 72,500 shares of Eagle's Common Stock at an exercise price
equal to the fair market value for such Common Stock as of the date
hereof, subject to the terms of a Incentive Stock Option Agreement
between the Employee and Eagle. The Employee acknowledges that the
option granted to the Employee may be treated as an "incentive" stock
option for federal income tax purposes, only if Eagle's shareholders
approve the increase in the number of shares of common stock reserved
under Eagle's stock option plan, as submitted to the shareholders by
Eagle's Board of Directors.
d. Supplemental Pension Plan.
The parties agree that Eagle shall have no obligation for
payment of any funds to the Employee under PW Pipe's supplemental
pension plan, or any similar or successor plan thereto, and that Eagle
shall have no obligations to the Employee with respect to such plan.
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4. VACATION AND WELFARE BENEFITS
The Employee shall be entitled to all vacation, health/medical, life
insurance, savings, and any other plans which are established for the benefit of
Eagle employees. The Employee shall be entitled to such participation as long as
he remains in the employ of Eagle or for any period for which he is entitled to
continue participation beyond the term of his employment as may be specified
elsewhere in this Agreement or the plan. Eagle reserves the right to establish,
modify, or determine the terms and conditions of any such welfare plans at its
own discretion.
5. TERMINATION OF THE EMPLOYEE'S EMPLOYMENT BY EAGLE
a. During the Life of this Agreement.
If the Employee's employment is terminated by Eagle prior to the
expiration of this Agreement for any reason other than for cause (as hereinafter
defined) or under such circumstances as would constitute a material breach of
this Agreement by the Employee, Eagle shall pay to the Employee, in lieu of
continued employment under this Agreement or in lieu of any other policy or
program maintained by Eagle, an amount equal to his base salary for the balance
of the initial term of the Agreement remaining at the time of such termination,
provided that such payment shall be for a minimum of twelve months of his base
salary at the time of such termination. Eagle may make any such payment that
arises from this Section on a pay schedule established by Eagle for other
executives. During periods of any such continuing payments, welfare benefits
provided to the Employee under this Agreement shall continue.
b. Upon the Expiration of this Agreement.
Should Eagle elect not to renew this Agreement upon its expiration, and
such election is not as a result of cause (as hereinafter defined) or breach of
this Agreement on the part of the Employee, and if Eagle no longer wishes to
employ the Employee in his position, Eagle shall pay the Employee an amount
equal to twelve months of his base salary at the time of expiration of this
Agreement and such payment shall be made, at the Employee's option, either in a
lump-sum as soon as is practicable following the expiration date of this
Agreement or in continuing payments on the pay schedule established by Eagle for
executives and welfare benefits as provided to the Employee in this Agreement
shall continue for the duration of such payments.
c. Termination for Cause, Resignation or Retirement.
If the Employee's employment terminates at any time for cause or his
resignation or retirement, the Employee shall forfeit the right to any severance
payments hereunder. For purposes of this subsection, "cause" shall include
larceny or theft of property of Eagle or any affiliated company; revealing
material trade secrets of Eagle, any affiliated company, to anyone except as
expressly authorized by Eagle in the performance of the Employee's duties or as
required by law; willful dishonesty, gross misconduct, or fraud toward Eagle, or
any affiliated company or conviction of a felony involving moral turpitude.
3
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d. Severance.
(i) Anything contained herein to the contrary notwithstanding,
Eagle's obligation to the Employee to make severance payments under
this Agreement shall cease upon the termination of the Employee's
employment with Eagle for reason of retirement by the Employee, his
death, his disability for a period exceeding six (6) months, or under
any other circumstances as would constitute a material breach of this
Agreement by the Employee, including, but not limited to, his
resignation from his employment.
(ii) Any payment of severance payments provided herein may, at
Eagle's discretion, be conditioned upon the execution of a release by
the Employee of all claims against Eagle arising out of his employment
and the termination thereof.
6. CONFIDENTIAL INFORMATION AND NON-COMPETITION
a. The Employee acknowledges the importance of Eagle's arrangements
with its employees, suppliers, and customers and he further acknowledges that
the nature of these arrangements and other information concerning the business
processes, formulas, programs, methods, techniques, policies, and practices of
Eagle are trade secrets and constitute valuable assets of Eagle. Therefore:
(i) The Employee shall not disclose or furnish to anyone,
either directly or indirectly, either during his employment under this
Agreement or at any time after his employment, any such trade secret of
Eagle or any other company controlling, controlled by, or under common
control with Eagle that comes into his possession during the course of
his employment.
(ii) To the extent that the Employee has knowledge of such
trade secrets or any other information concerning Eagle which has not
been disclosed to the public by Eagle and is material under applicable
securities laws, the Employee acknowledges and agrees that the effect
of the applicable securities laws prohibit the Employee from trading in
Eagle's stock unless and until Eagle voluntarily discloses such
material information to the general public.
(iii) Upon termination of the Employee's employment for any
reason, the Employee agrees not to compete in the manner described
hereinafter, with the business currently conducted by Eagle in the
United States for a period of twelve months following such termination.
The Employee agrees that, during such period, he will not be employed
by, work for, advise, consult with, serve, or assist in any way,
directly or indirectly, any party whose activities or business are
similar to or in competition with the business of Eagle.
(iv) Upon termination of the Employee's employment for any
reason, the Employee agrees not to solicit, cause or assist to solicit
for a period of twelve months following such termination, on behalf of
himself or any business or organization with which he becomes directly
or indirectly associated by ownership, employment, consultancy or
4
<PAGE>
otherwise, regardless of whether or not he receives compensation
therefrom, (1) any person employed or compensated in any manner by
Eagle, or to work, consult for or otherwise become associated with him
or any such business or organization, or (2) any customer who has done
business with Eagle at any time within the one (1) year period
preceding the date of his termination of employment, to purchase or
otherwise acquire a product similar to a product sold by Eagle.
The foregoing restrictions on competition by the Employee described in the
Sections 6(a)(iii) and (iv) shall also be operative during the term of the
Employee's employment. They shall also be operative for the benefit of Eagle and
of any business owned or controlled by Eagle, or any successor or assign if any
of the foregoing, but shall terminate if Eagle and the companies with which it
becomes affiliated as of the effective date of this Agreement cease to engage in
all of the businesses in which Eagle is engaged as of the time Employee's
employment terminates.
b. The Employee shall surrender to Eagle immediately upon termination
of his employment all books, records, and property belonging to Eagle or
relating to the employees, business, suppliers, and customers of Eagle without
making or retaining any copies.
c. The Employee acknowledges that Eagle will suffer irreparable damage
and injury and will not have an adequate remedy at law in the event of any
breach by him of any provision of this Section 6. Accordingly, in the event of a
breach or of a threatened or attempted breach by the Employee of any of the
preceding provisions of this Section 6, in addition to all other remedies to
which Eagle is entitled under law, Eagle shall be entitled to a temporary and
permanent injunction (without the necessity of showing any actual damage) or a
decree of specific performance of the provisions of this Section 6, and no bond
or other security shall be required in that connection.
7. DISCOVERIES
The Employee will promptly disclose, in writing, to Eagle each improvement,
discovery, idea, and invention relating to the business of Eagle made or
conceived by him either alone or in conjunction with others while employed by
Eagle or within one (1) year after the termination of such employment if such
improvement, discovery, idea, or invention that results from or was suggested by
such employment whether or not patentable, whether or not made or conceived (i)
at the request of or upon the suggestion of Eagle (ii) during his usual hours of
work, (iii) on or about the premises of Eagle and whether or not prior or
subsequent to the execution hereof. He will not disclose any such improvement,
discovery, idea, or invention to any person except Eagle. Each such improvement,
discovery, idea, or invention shall be the sole and exclusive property of, and
is hereby assigned to, Eagle and at the request of Eagle, Employee will assist
and cooperate with Eagle and any person or persons from time to time designated
by Eagle to obtain for Eagle the grant of any letters patent in the United
States and/or such other country or countries as may be designated by Eagle,
covering any applications, statements, assignments, or other documents, furnish
such information and data and take all such other action (including without
limitation, the giving of testimony) as Eagle may from time to time reasonably
request.
5
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8. MISCELLANEOUS
a. The Employee shall be entitled to participate in any Deferred
Compensation Program established for Eagle executives related to any bonuses or
other payments in this Agreement that are eligible for deferred payment under
the terms of any such Plan.
b. The Employee shall be reimbursed for, or have directly paid by Eagle
(dependent upon Eagle's financial policy), travel, entertainment, and other
associated expenses deemed reasonably necessary in carrying out the duties of
his position.
c. The Employee represents and warrants to Eagle that upon commencement
of employment with Eagle that he will not at any time be bound by any agreement
that would be violated by his execution or performance of this Agreement.
d. The Employee may not assign any of his rights or delegate any of his
duties under this Agreement.
e. Any notice or other communication under this Agreement shall be in
writing and shall be considered given when mailed by registered mail, return
receipt request, to either party. Any notice to Eagle shall be mailed to
corporate headquarters that is currently located at 2430 Andersen Consulting
Tower, 333 South Seventh Street, Minneapolis, MN 55402, and any notice to
Employee shall be mailed to his home address as recorded on the books of Eagle,
currently 1315 Corum Street, Eugene, OR 97401.
f. This Agreement sets forth the entire understanding of the parties,
and completely and fully supersedes and replaces any prior agreement(s) with
respect to the subject matter herein, written or oral, to which the Employee was
a party, including between the Employee and PW Pipe. This Agreement shall be
governed by and construed in accordance with the law of the State of Oregon
applicable to agreements made in that state and cannot be changed or terminated
except by written agreement duly signed by both parties. If any provision of
this Agreement or the application thereof to any party or circumstance is
finally held invalid or unenforceable, the remaining provisions of this
Agreement and the application of such provisions to the other party or
circumstances will not be affected thereby, the provisions of this Agreement
being severable in any such instance, and the unlawful provision shall be deemed
to be amended to conform to requirements of any applicable law.
9. Any controversy or claim, including claims for damages arising out of or
relating to this Agreement, or any breach thereof, or other matters related to
the termination of the Employee's employment, shall be settled in arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the Arbitrator may be
entered in any court having jurisdiction thereof. In any such arbitration, the
Arbitrator may require a party to pay all or an appropriate portion of the
substantially prevailing party's reasonable attorneys' fees and other expenses
incurred in connection with the arbitration.
10. This Agreement may be signed in one or more counterparts and all such
counterparts, taken together, shall constitute one document.
6
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IN WITNESS WHEREOF, this Employment Agreement has been executed by a duly
authorized officer of Eagle on this 15th day of October, 1999.
EAGLE PACIFIC INDUSTRIES, INC.
(the "Company")
By:_______________________________
William H. Spell, CEO
IN WITNESS WHEREOF, this Employment Agreement has been executed by the
Employee on the 15th day of October, 1999 and the Employee attests that he is in
full agreement with all terms and conditions herein and has exercised his legal
right to have this Agreement reviewed by an Attorney if he so chooses.
By:_______________________________
(the "Employee")
7
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Exhibit A
EAGLE PACIFIC INDUSTRIES, INC.
KEY EMPLOYEE BONUS PLAN
o The Board of Directors will determine the employees that will
participate in the Key Employee Bonus Plan and will designate the Level
of Participation.
o The Levels of Participation are:
o Level 1 - 100% of bonus based on EBITDA goal, and the bonus
potential is 50% of base salary.
o Level 2 - 75% of bonus is based on EBITDA goal and 25% on
individual goals, and the bonus potential is 40% of base
salary.
o Level 3 - 75% of bonus is based on EBITDA goal and 25% on
individual goals, and the bonus potential is 35% of base
salary.
o Level 4 - 50% of bonus is based on EBITDA goal and 50% on
individual goals, and the bonus potential is 25% of base
salary.
o If 120% of the EBITDA goal is achieved, the bonus for the EBITDA
portion of the bonus will be 115% of the bonus based on obtaining the
EBITDA goal.
o Each year the Board of Directors will establish an EBITDA goal and the
individual goals for the following year.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 38,763,000
<ALLOWANCES> 1,283,000
<INVENTORY> 27,305,000
<CURRENT-ASSETS> 75,163,000
<PP&E> 82,585,000
<DEPRECIATION> 7,840,000
<TOTAL-ASSETS> 161,372,000
<CURRENT-LIABILITIES> 73,694,000
<BONDS> 40,140,000
37,500
0
<COMMON> 72,351
<OTHER-SE> 15,663,000
<TOTAL-LIABILITY-AND-EQUITY> 162,042,000
<SALES> 80,196,000
<TOTAL-REVENUES> 80,196,000
<CGS> 59,599,000
<TOTAL-COSTS> 59,599,000
<OTHER-EXPENSES> 14,898,000
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 1,832,000
<INCOME-PRETAX> 4,074,000
<INCOME-TAX> (4,184,000)
<INCOME-CONTINUING> 8,258,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,258,000
<EPS-BASIC> 1.08
<EPS-DILUTED> .85
</TABLE>
