UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 April 15, 2000 was 7,831,775.
1
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EAGLE PACIFIC INDUSTRIES, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION..............................................3
ITEM 1. CONDENSED FINANCIAL STATEMENTS...................................3
Condensed Statements of Operations-Three Months Ended March 31,
2000 and 1999 (Unaudited)............................................3
Condensed Balance Sheets-March 31, 2000 and December 31, 1999
(Unaudited)..........................................................4
Condensed Statements of Cash Flows-Three Months Ended
March 31, 2000 and 1999 (Unaudited)..................................5
Notes to Condensed Financial Statements-Three Months
Ended March 31, 2000 and 1999 (Unaudited)............................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......14
PART II. OTHER INFORMATION.................................................15
ITEM 1. LEGAL PROCEEDINGS...............................................15
ITEM 2. CHANGES IN SECURITIES...........................................15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............15
ITEM 5. OTHER INFORMATION...............................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................16
SIGNATURES...............................................................17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
EAGLE PACIFIC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Condensed Statements of Operations - Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31
----------------------------------------------
2000 1999
----------------------- ----------------------
<S> <C> <C>
Net sales $92,599 $19,586
Cost of goods sold 63,287 14,145
----------------------- ----------------------
Gross profit 29,312 5,441
Operating expenses:
Selling expenses 7,167 2,542
General and administrative expenses 3,700 670
----------------------- ----------------------
10,867 3,212
----------------------- ----------------------
Operating income 18,445 2,229
Other expenses (income)
Interest expense 3,652 542
Other, net (63) -
Nonrecurring expenses - 1,325
----------------------- ----------------------
3,589 1,867
----------------------- ----------------------
Income before income taxes 14,856 362
Income tax expense 5,690 32
----------------------- ----------------------
Net income 9,166 330
Preferred stock dividends - 201
----------------------- ----------------------
Net income applicable to common stock $ 9,166 $ 129
======================= ======================
Net income per common share:
Basic $ 1.21 $ .02
======================= ======================
Diluted $ .87 $ .02
======================= ======================
Average number of common shares outstanding:
Basic 7,585 6,720
Diluted 10,493 7,106
</TABLE>
See accompanying notes to condensed financial statements.
3
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EAGLE PACIFIC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Condensed Balance Sheet - March 31, 2000 and December 31, 1999 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
----------------------- ----------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,600 $ 2,669
Accounts receivable, net 38,171 26,159
Inventories 57,370 45,777
Deferred income taxes 887 2,487
Other 371 233
- --------------------------------------------------------------------------------- ----------------------- ----------------------
Total current assets 98,399 77,325
Property and equipment, net 73,828 74,895
Other assets:
Deferred financing costs, net 4,889 5,300
Land held for sale 1,137 1,346
Goodwill, less accumulated amortization of $621 and $593, respectively 3,846 3,874
Deferred income taxes 1,146 4,901
Other 2,668 146
- --------------------------------------------------------------------------------- ----------------------- ----------------------
Total other assets 13,686 15,567
- --------------------------------------------------------------------------------- ----------------------- ----------------------
Total assets $185,913 $167,787
================================================================================= ======================= ======================
Liabilities and Stockholders' Equity
Current liabilities:
Borrowings under revolving credit facility $ 43,468 $ 30,558
Current maturities of long-term debt 10,432 10,441
Accounts payable 19,011 22,347
Accrued liabilities 10,785 12,165
- --------------------------------------------------------------------------------- ----------------------- ----------------------
Total current liabilities 83,696 75,511
Other long-term liabilities 2,604 79
Long-term debt, less current maturities 35,000 37,500
Senior subordinated debt 27,050 26,752
Commitments and contingencies - -
Redeemable preferred stock; 8% cumulative dividend; convertible; $1,000 - -
per share liquidation preference; $.01 par value; 10,000 shares
authorized; none issued and outstanding
Stock warrants 5,887 5,887
Stockholders' equity:
Series A preferred stock; 7% cumulative dividend; convertible; $2 per share - 38
liquidation preference; no par value; 2,000,000 shares authorized; issued
and outstanding none and 18,750 shares, respectively
Undesignated stock; $.01 par value; 14,490,000 shares authorized; none - -
issued and outstanding
Common stock; $.01 par value; 30,000,000 shares authorized; issued and 78 77
outstanding 7,826,588 and 7,721,214 shares, respectively
Class B Common stock; $.01 par value; 3,500,000 shares authorized; none - -
issued and outstanding
Additional paid-in capital 39,425 39,013
Unearned compensation (569) (587)
Notes receivable from officers and employees on common stock purchases (1,237) (1,296)
Accumulated deficit (6,021) (15,187)
- --------------------------------------------------------------------------------- ----------------------- ----------------------
Total stockholders' equity 31,676 22,058
- --------------------------------------------------------------------------------- ----------------------- ----------------------
Total liabilities and stockholders' equity $185,913 $167,787
================================================================================= ======================= ======================
</TABLE>
See accompanying notes to condensed financial statements.
4
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EAGLE PACIFIC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Condensed Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended March 31
----------------------------------------------
2000 1999
----------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $9,166 $330
Adjustments to reconcile net income to net cash
used by operating activities:
Gain on sale of land held for sale (60) -
Loss on disposal of property and equipment - 2
Depreciation and amortization 1,969 662
Amortization of debt issue costs, discounts and premiums 544 58
Receivable provisions (894) 164
Deferred income taxes 5,355 -
Noncash compensation 112 -
Change in operating assets and liabilities (27,179) (5,914)
- --------------------------------------------------------------------- ----------------------- ----------------------
Net cash used in operating activities (10,987) (4,698)
- --------------------------------------------------------------------- ----------------------- ----------------------
Cash flows from investing activities:
Purchases of property and equipment (1,002) (1,096)
Purchases of and improvements to land held for sale - (90)
Deferred acquisition costs - 237
Proceeds from property and equipment disposals - 31
Proceeds from sale of land held for sale 269 -
Payments on notes receivable 59 -
- --------------------------------------------------------------------- ----------------------- ----------------------
Net cash used in investing activities (674) (918)
- --------------------------------------------------------------------- ----------------------- ----------------------
Cash flows from financing activities:
Net borrowings under revolving credit facility 12,910 5,999
Repayment of long-term debt (2,509) (468)
Issuance of common stock 191 286
Payment of preferred stock dividend - (201)
- --------------------------------------------------------------------- ----------------------- ----------------------
Net cash provided by financing activities 10,592 5,616
- --------------------------------------------------------------------- ----------------------- ----------------------
Net change in cash and cash equivalents (1,069) -
Cash and cash equivalents at beginning of period 2,669 -
- --------------------------------------------------------------------- ----------------------- ----------------------
Cash and cash equivalents at end of period $1,600 $ -
- --------------------------------------------------------------------- ----------------------- ----------------------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Noncash activities:
Preferred stock exchanged for common stock $38
Issuance of subordinated debt for interest payment 163
Additional paid in capital-stock compensation 112
Tax benefits related to stock options 90
Issuance of restricted stock 14
</TABLE>
See accompanying notes to unaudited condensed financial statements.
5
<PAGE>
EAGLE PACIFIC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Notes to Condensed Financial Statements - Three Months Ended March 31, 2000
and 1999
(Unaudited)
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 December 31,1999, and March 31, 2000,
balance sheets and all operating results and cash flows have been included in
the statements of operations and cash flow since the acquisition.
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 March 31, 2000, and the results of its operations and cash flows for
the three month periods ended March 31, 2000, and 1999. 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, 1999.
Certain reclassifications have been made to the December 31, 1999,
condensed balance sheet to conform to the March 31, 2000, 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
PVC pipe and fittings. PWPipe was then merged into the Company. The Acquisition
has been accounted for as a purchase and, accordingly, the results of operations
of PWPipe for the period subsequent to the consummation of the Acquisition are
included in the accompanying financial statements.
The following unaudited pro forma income statement information has
been prepared assuming that the acquisition took place on January 1, 1998,
consistent with pro forma information included in the notes to the Company's
1999 financial statements, included in its March 2000 Form 10-K. This
information assumes 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 38%.
Unaudited Pro Forma Statement of Operations Information (In thousands, except
per share amounts):
Three months ended
March 31, 1999
--------------------------
Net sales $60,647
Net income 1,430
Basic earning per share $.21
Diluted earnings per share $.15
6
<PAGE>
Included in the unaudited historical and pro forma 1999 net income
and earnings per share information are certain nonrecurring charges associated
with a proposed acquisition terminated in the first quarter of 1999. These
nonrecurring items reduce pro forma net income by approximately $800,000 for
the quarter ended March 31, 1999. Absent these nonrecurring charges, pro forma
basic and diluted earnings per share would be approximately $.33 and $.24,
respectively.
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. Inventory
(In thousands)
March 31, 2000 December 31,1999
----------------------- ----------------------
Raw materials $11,154 $11,795
Finished goods 46,216 33,982
----------------------- ----------------------
$57,370 $45,777
======================= ======================
4. Earnings per Common Share
The following tables reflect the calculation of basic and diluted
earnings per common share ("EPS").
(In thousands, except per share amounts):
<TABLE>
<CAPTION>
Period ended March 31, 2000
--------------------- --------------------- --------------------
Per Share
Income Shares Amount
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Net income $9,166
Preferred stock dividends -
---------------------
Basic EPS
====================
Income available to common stockholders 9,166 7,585 $1.21
====================
Effect of dilutive securities
Warrants and options 2,908
---------------------
Diluted EPS
Income available to common stockholders $9,166 10,493 $.87
===================== ===================== ====================
</TABLE>
Options to purchase 18,541 shares of common stock were outstanding at
March 31, 2000, 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.
7
<PAGE>
(In thousands, except per share amounts):
<TABLE>
<CAPTION>
Period ended March, 1999
--------------------- --------------------- --------------------
Per Share
Income Shares Amount
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Net income $330
Preferred stock dividends (201)
---------------------
Basic EPS
====================
Income available to common stockholders $129 6,720 $.02
====================
Effect of dilutive securities
Warrants and options 386
---------------------
Diluted EPS
Income available to common stockholders $129 7,106 $.02
===================== ===================== ====================
</TABLE>
Options to purchase 425,706 shares of common stock were outstanding at
March 31, 1999, 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 the 8%
redeemable convertible preferred stock were not assumed at March 31, 1999, since
the conversion would have an antidilutive effect on the diluted EPS calculation.
Both basic and dilutive EPS were computed by dividing the net income
applicable to common stock by the weighted average common shares outstanding.
5. Debt
On March 13, 2000, the Company amended its $50.0 million revolving
credit facility to $60.0 million. The increase in funds available will be used
for the operations of the Company.
The fair market value of borrowing under the senior credit facility
fixed rate agreement and senior subordinated notes continue to approximate their
carrying value at March 31, 2000, as their applicable interest rates approximate
current market rates.
6. Equity
During the first quarter of 2000, all 18,750 shares of Series A
preferred stock were converted to a like number of shares of common stock.
7. Taxes
The income tax provisions for the quarters ended March 31, 2000, and
1999 were calculated based on management's then-current estimates of the annual
effective rate for the year. The 1999 annual effective tax rate estimated as of
the quarter ended March 31, 1999, reflected utilization of federal net operating
loss carryforwards and state tax credit carryforwards for which no tax benefit
had been recognized for financial reporting purposes (that is, a valuation
allowance had been provided against the related deferred tax assets). As
discussed more fully in the financial statements included in the Company's 1999
annual report on Form 10-K, that valuation allowance was released, and the tax
benefits of the carryforwards were recognized, in subsequent quarters of 1999.
As a result, the 2000 annual effective tax rate reflects the Company's statutory
federal and applicable state tax rates, or approximately 38%.
8
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8. New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and Hedging Activities" is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires a company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the hedged
assets, liabilities, or firm commitments are recognized through earnings or in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The company believes implementation of SFAS No. 133 will
not have a material effect on earnings and the financial position of the
Company.
9. Litigation
On July 21, 1999, Lamson & Sessions Co. ("Lamson") filed a complaint
against the Company in United States District Court for the Northern District
of Ohio, Eastern Division to recover alleged damages incurred by Lamson in
connection with the termination of the Company's proposed acquisition of
Lamson's PVC 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 has denied all of Lamson's claims. Although this matter is at an
early stage, the Company believes that the outcome of this litigation will not
have a material adverse effect on its financial position and future results of
operations.
10. Subsequent Event
In April 2000 the Company announced that it had entered into an
agreement to purchase a 41,000 square foot PVC pipe manufacturing facility in
Phoenix, Arizona, and certain production equipment. The Company anticipates
closing to occur on August 31, 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EAGLE PACIFIC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
The following table sets forth items from our Statement of Operations as a
percentage of net sales:
Three months ended March 31
----------------------------------------------
2000 1999
----------------------- ----------------------
Net sales 100.0% 100.0%
Cost of goods sold 68.3 72.2
Gross profit 31.7 27.8
Operating expenses 11.8 16.4
Operating income 19.9 11.4
Non-operating expense 3.9 9.5
Income before income taxes 16.0 1.8
Income tax expense 6.1 0.2
Net income 9.9% 1.7%
We posted record first quarter net sales in 2000, increasing 373% from
1999 to 2000. Our acquisition of PWPipe in September 1999, and increasing pipe
prices due to strong demand and increasing raw material prices were responsible
for the growth in revenues. Pipe pounds sold rose 218% from 1999 to 2000, and
pipe prices increased by 55% during the same period.
The increase in gross profit, as a percentage of net sales, from 1999
to 2000 is primarily due to a combination of strong demand for pipe, rising
resin and pipe prices in 2000, and significant capacity and process improvement
investments we made during the past two years being deployed in 1999 and 2000.
PVC resin prices increased due to a strong demand for resin and increasing raw
material costs. Strong demand for pipe allowed us to increase pipe prices at a
rate greater than resin price increases.
The decrease in operating expenses, as a percentage of net sales, from
1999 to 2000 is the result of increased sales in combination with certain fixed
operating expenses.
The income tax provisions for the quarters ended March 31, 2000, and
1999 were calculated based on management's then-current estimates of the annual
effective rate for the year. The 1999 annual effective tax rate estimated as of
the quarter ended March 31,1999, reflected utilization of federal net operating
loss carryforwards and state tax credit carryforwards for which no tax benefit
had been recognized for financial reporting purposes (that is, a valuation
allowance had been provided against the related deferred tax assets). As
discussed more fully in the financial statements included in the Company's 1999
Annual Report on Form 10K, that valuation allowance was released, and the tax
benefits of the carryforwards were recognized, in subsequent quarters of 1999.
As a result, the 2000 annual effective tax rate reflects the Company's statutory
federal and applicable state tax rates, or approximately 38%.
Supplemental Discussion and Analysis of Pro Forma Results of Operations
The following is a supplemental discussion and analysis of our pro
forma results of operations for the three months ended March 31, 1999, compared
with the actual results of operations for the three month period ended March 31,
2000, assuming that the acquisition took place on January 1, 1998, consistent
with pro forma information included in the notes to the Company's 1999
financial statements, included in its March 2000 Form 10-K. The pro
10
<PAGE>
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 our selected pro forma operating
statement data:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31
--------------------------------------------------------------------------
Amounts Percentages
-------------------------------------- -----------------------------------
2000 1999 2000 1999
------------------ ------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Net sales $92,599 $60,647 100.0% 100.0%
Cost of goods sold 63,287 44,417 68.3 73.2
Gross profit 29,312 16,230 31.7 26.8
Operating expenses 10,867 9,207 11.8 15.2
Operating income 18,445 7,023 19.9 11.6
Interest expense 3,652 3,308 4.0 5.5
Other expense (income) (63) 1,408 (.1) 2.3
Income before income taxes 14,856 2,307 16.0 3.8
Income tax expense 5,690 877 6.1 1.4
Net income $9,166 $1,430 9.9% 2.4%
EPS
Basic $1.21 $.21
Diluted $ .87 $.15
Average shares
Basic 7,585 6,804
Diluted 10,493 9,325
</TABLE>
The principal factors underlying the changes and trends set forth above
in the pro forma and actual results of operations information are consistent
with our historical operation information discussed on page 10, with the
exception of the decrease in pounds sold of 2% in 2000 as compared to 1999. This
decrease is primarily a result of adverse weather conditions that occurred
during the late winter in the western United States, that inhibited many
contractors' ability to install pipe. However, selling prices have increased due
to increases in the price of PVC resin and strong demand for finished goods over
the last twelve months. In addition, we have realized the result of significant
capacity and process improvement investments made by both PWPipe and Eagle over
the last two years being deployed in 1999 and 2000.
The pro forma results of operations reflect a pro forma interest
expense at rates that approximate that which we would have experienced on pro
forma debt levels that would have been outstanding over the pro forma period.
The pro forma results do not reflect any anticipated cost savings or any
synergies that are anticipated from our acquisition of PWPipe, and there can be
no assurance that any such cost savings will occur.
Had our acquisition been consummated on January 1, 1998, we believe the
valuation allowances related to deferred tax assets for our 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 38%.
Included in the unaudited historical and pro forma first quarter 1999
net income and earnings per share information is a nonrecurring charge related
to the termination of a proposed acquisition during that time period. This
11
<PAGE>
nonrecurring item reduces historical and pro forma net income by approximately
$800,000. Absent these nonrecurring charges, pro forma basic and diluted
earnings per share would be approximately $.33 and $.24, respectively, for the
three months ended March 31, 1999.
Financial Condition
We had working capital of $14.7 million at March 31, 2000, and had
excess borrowing capacity under our Revolving Credit Facility of $15.4 million.
Cash used in operating activities was $11.0 million in the first
quarter of 2000 compared to $4.7 million in 1999. The primary use of net cash
associated with operating activities was to fund the growth in accounts
receivable as a result of increased sales, and the related seasonal growth in
inventories.
We used $.7 million and $.9 million for investing activities for the
three months ended March 31, 2000 and 1999, respectively. The primary use of
cash in 1999 and 2000 was capital expenditures.
Cash provided by financing activities was $10.6 million and $5.6
million for the three months ended March 31, 2000 and 1999, respectively. The
increase is a direct result of increased borrowings under the revolving credit
facility to fund working capital needs associated with growth.
We had commitments for capital expenditures of approximately $1 million
at March 31, 2000, which will be funded from operating profits. Additional
sources of liquidity, if needed, include our revolving credit line, additional
long-term debt financing, and the sale of our equity securities under either a
private or public offering. We believe we have the financial resources needed to
meet our current and future business requirements, including capital
expenditures for expanding manufacturing capacity and working capital
requirements.
On April 6, 2000, we announced the signing of purchase agreements to
acquire a 41,000 square foot PVC pipe manufacturing facility in Phoenix,
Arizona, and certain production equipment located in the facility from Uponor
ETI. The acquisition is expected to close on August 31, 2000. Uponor had
previously announced its intention to sell the facility in conjunction with
capacity additions in its other facilities. We have long been active in the
Phoenix market, servicing it primarily from our facilities in southern
California. The acquisition of this facility will enable us to better serve our
customers throughout the Southwest. We will initially focus on the waterworks
market, but expect to add other product lines over time. While the volume for
2000 will not be significant, we expect the production from the Phoenix facility
will grow into approximately 60 million pounds, matching that of our other
facilities. Both Eagle and Uponor believe there will be no disruption in the
operations of the facility as a result of this transaction.
Outlook
The statements contained in the paragraph immediately above and set
forth below in this Outlook section are based on our current expectations.
These statements are forward-looking, and actual results may differ materially
from our current expectations.
We expect 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 sales growth rates for plastic pipe of
three percent or greater per year through 2003. We have historically been able
to, and expect in the future to be able to, grow at rates in excess of the
industry averages due to our emphasis on customer satisfaction and product
quality. Our strategy has been, and continues to be, to concentrate growth
initiatives in higher profit products and geographic regions.
12
<PAGE>
Our gross margin percentage is sensitive to PVC and PE raw material
resin prices and the demand for PVC and PE pipe. Historically, when resin prices
are rising or stable, our margins and sales volume have been higher. Conversely,
when resin prices are falling, our sales volumes and margins have been lower.
Gross margins also suffer when the supply of PVC and PE pipe increases faster
than demand. We believe that supply and demand in the plastic pipe industry is
currently balanced. We also believe that the demand for PVC resin will be
greater than its supply at certain times in the year 2000 and, at these times,
there may be shortages of PVC resin.
Due to the commodity nature of PVC resin and PVC pipe and the dynamic
supply and demand factors worldwide, historically, the markets for both PVC
resin and PVC pipe have been very cyclical with significant fluctuations in
prices and gross margins. Generally, after a period of rising or stable prices,
capacity has increased to exceed demand with a resulting decrease in prices and
gross margins. Over the last ten years, there have been consolidations in both
markets, particularly with respect to PVC resin manufacturers. During the same
period, the capacity of the PVC resin producers has increased from just over
nine billion pounds to almost 16 billion pounds today. Published PVC resin
prices have fluctuated from a high of about $.44 per pound in 1988 to about $.26
per pound in 1992 to almost $.40 per pound in 1995 to a low of about $.25 per
pound in 1999 to about $.34 per pound at the end of March 2000. Except for
incremental capacity increases at existing facilities, the only announced new
PVC resin capacity is a new 1.3 billion pound facility scheduled to commence
operations in 2001.
While we expect the demand for PVC pipe to continue to increase over
the long term, we also expect that the industry will continue to be subject to
cyclical fluctuations and times when supply will exceed demand driving prices
and gross margins down. These conditions could result from a general economic
slowdown either domestically or elsewhere in the world or capacity increases in
either the PVC resin or PVC pipe markets. As a result of the size of both the
PVC resin and PVC pipe markets and the consolidation that has occurred in these
industries, we believe that fluctuations in prices from capacity increases are
likely to be less extreme than they have been historically. General economic
conditions both in the United States and abroad will, however, continue to have
a significant impact on our prices and gross margins.
At March 31, 2000, we had a net deferred tax asset of approximately
$2.0 million, including significant net operating loss carryforwards (NOLs). 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 we can generate taxable income to
realize the net deferred tax asset. In addition, under the Tax Reform Act of
1986, certain future changes in ownership resulting from the sale of stock may
limit the amount of net operating loss carryforwards that can be utilized on an
annual basis. We have and will continue to evaluate compliance relating to the
utilization of the net operating loss carryforwards, and believe we have
complied in all respects. A failure to meet the requirements could result in a
loss or limitation of the utilization of carryforwards, which could have a
material adverse effect on our financial position and results of operations in
future periods.
The statements contained in these Outlook and Year 2000 (Y2K)
Compliance sections are 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 and supply
fluctuations, inflation, lower than expected economic growth, competition,
availability of working capital and adverse weather conditions.
13
<PAGE>
Year 2000 (Y2K) Compliance
We have not experienced any disruption to our business as a result of
Y2K issues. In addition, we are not aware of any business disruption related to
major vendors or customers as a result of their non-compliance with Y2K issues.
We do not expect any Y2K issues to arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks on outstanding interest rate
long-term debt obligations totaling $66 million of our $88 million of long-term
variable rate debt at March 31, 2000. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as interest rates. 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 $660,000.
We do not enter into derivatives or other financial instruments for
trading or speculative purposes. We only enter into financial instruments to
manage and reduce the impact of changes in interest on our credit facility. In
November 1999, under covenants of our Senior Credit Facility, we entered into a
fixed rate agreement ("the Contract") for three years with a LIBOR rate of
6.46%. The Contract has a notional amount of $22.5 million.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 21, 1999, Lamson & Sessions Co. filed a complaint against the
Company in United States District Court for the Northern District of Ohio,
Eastern Division to recover alleged damages incurred by Lamson in connection
with the termination of the Company's proposed acquisition of Lamson's PVC
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 has
denied all of Lamson's claims. Although this matter is at an early stage, the
Company believes that the outcome of this litigation will not have a material
adverse effect on its financial position and future results of operations.
ITEM 2. CHANGES IN SECURITIES
In February 2000 the Company issued an aggregate of 2,500 shares of
Common Stock as restricted stock grants made to certain employees in
consideration of their services to the Company. The issuance of such stock was
deemed to be exempt from registration under the Securities Act of 1933 by virtue
of Section 4(2) thereof. A restrictive securities legend has been placed on the
certificates representing the shares.
In February 2000 the Company issued 6,250 shares of Common Stock in
consideration of the conversion of 6,250 shares of Preferred Stock. The issuance
of such stock was deemed to be exempt from the registration under the Securities
Act of 1933 by virtue of Section 3(a)(9) thereof.
In March 2000 the Company issued 12,500 shares of Common Stock in
consideration of the conversion of 12,500 shares of Preferred Stock. The
issuance of such stock was deemed to be exempt from the registration under the
Securities Act of 1933 by virtue of Section 3(a)(9) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
10.1 Sales Agreement between ___________
____________ and the Company
effective January 1, 2000.
Confidential treatment has been
requested on portions of this
document.
10.2 Sales Agreement between __________
and the Company dated January 1,
2000. Confidential treatment has
been requested on portions of this
document.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<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: April 24, 2000
17
Exhibit 10.1
SALES AGREEMENT
This Agreement, dated November ____, 1999, and effective the 1st day of January,
2000 between **, hereinafter called Seller, and Eagle Pacific Industries, Inc.,
2430 Metropolitan Centre, Minneapolis, Minnesota 55402, hereinafter called
Buyer.
WITNESSETH:
Seller agrees to sell and deliver and Buyer agrees to purchase and receive the
Product upon the terms and conditions set forth below:
**
EXECUTED as of the date first above written.
Eagle Pacific Industries, Inc. SELLER
By /s/ James K. Rash By_____________________________
James K. Rash
Title President
Date: November 3, 1999
** The identity of the Seller and terms of this agreement have been filed
confidentially with the Commission, and are not being made publicly
available pursuant to the Company's pending request for confidential
treatment.
Exhibit 10.2
PVC RESIN SUPPLY AGREEMENT
THIS PVC RESIN SUPPLY AGREEMENT (this "Agreement") dated as of the
first day of January 2000 is between ** (hereinafter "Seller"), and EAGLE
PACIFIC INDUSTRIES, INC., a Minnesota corporation (hereinafter "Buyer"). Each
of Seller and Buyer is sometimes hereinafter referred to as a "party" and
collectively as parties.
**
IN WITNESS WHEREOF, the parties have, by their duly authorized
representatives, signed this Agreement as of the day and year first above
written.
SELLER EAGLE PACIFIC INDUSTRIES, INC.
By:__________________________ By: /s/ William Spell
Title:_______________________ Title: Chief Executive Officer
** The identity of the Seller and terms of this agreement have been filed
confidentiality with the Commission, and are not being made publicly
available pursuant to the Company's pending request for confidential
treatment.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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0
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