Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission File Number 0-18050

PW EAGLE, INC.

(Exact name of registrant as specified in its Charter)

1550 Valley River Drive

Eugene, Oregon 97401

(Address of principal executive offices)

Registrant’s telephone number, including area code: (541) 343-0200

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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of May 14, 2004 was 7,205,812.

Table of Contents

PW EAGLE, INC.

INDEX

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PW EAGLE, INC.

Condensed Consolidated Statement of Operations – Three Months Ended March 31, 2004 and 2003 (Unaudited)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3

Table of Contents

PW EAGLE, INC.

Condensed Consolidated Balance Sheet – March 31, 2004 and December 31, 2003 (Unaudited)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4

Table of Contents

PW EAGLE, INC.

Condensed Consolidated Statement of Cash Flows – Three Months Ended March 31, 2004 and 2003 (Unaudited)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5

Table of Contents

PW EAGLE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of PW Eagle, Inc. (the “Company”) at March 31, 2004 and the results of its operations and cash flows for the three month periods ended March 31, 2004 and 2003. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 consolidated 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, 2003.

Certain reclassifications were made to the prior year financial statements to conform to the March 31, 2004 presentation. Such reclassifications have no effect on net income or stockholders’ equity as previously stated.

The following provides additional information concerning inventory (in thousands):

The following provides supplemental disclosure of significant non-cash operating, investing and financing activities (in thousands):

Acquisition of ETI

On March 14, 2003, PW Eagle, Inc. acquired (the Acquisition) all of the outstanding stock of Uponor ETI Company, a subsidiary of Uponor Oyj, a Finish company. In connection with the Acquisition, Uponor ETI Company was merged with and into Extrusion Technologies, Inc. (ETI) a wholly owned subsidiary of PW Eagle formed specifically to acquire Uponor ETI Company.

6

Table of Contents

The following unaudited pro forma condensed consolidated statement of operations for 2003 (compared to actual results for 2004) have been derived by the application of pro forma adjustments to PW Eagle and Uponor ETI Company’s historical financial statements and are based on the estimates and assumptions set forth below. The unaudited pro forma combined results of operations as if the Acquisition occurred on the first day of 2003 are as follows (in thousands except per share amounts):

The unaudited pro forma results include amortization of the acquired intangibles described above, depreciation of acquired property, plant and equipment and interest expense on debt assumed to finance the Acquisition. The unaudited pro forma results also include the impact of a $1.59 million fair value inventory adjustment recorded in connection with the purchase accounting. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed on January 1, 2003 nor are they necessarily indicative of future consolidated results.

Current and long-term obligations at March 31, 2004 and December 31, 2003 consisted of the following (in thousands):

7

Table of Contents

PWPipe

On March 26, 2004, PWPipe entered into a sale-leaseback transaction on two manufacturing facilities in Sunnyside, Washington and Visalia, California. As a result of the sale-leaseback transaction, a financing lease obligation of $3.6 million, net of the debt discount of $0.1 million, was recorded based on the collective estimated fair value of the financing lease obligation and warrant on the date issued. No gain or loss was recognized on the transaction. The financing lease obligation requires an annual lease payment of $0.4 million, including interest at a rate of 9.7%. The financing lease has an initial term of twenty years, upon which the lease will automatically renew for ten years. The financing lease will continue to automatically renew every ten years until the financing lease is terminated. The financing lease includes certain financial covenants and requires the Company maintain an irrevocable letter of credit equal to $0.4 million which can be drawn in the event of a default under the lease.

In connection with this transaction, warrants were issued to the lender to purchase 15,000 shares of common stock in PW Eagle, Inc. for $0.01 a share at any time through March 26, 2009. A debt discount totalling $0.1 million has been recorded with the issuance of the warrant and will be amortized using the effective interest method as a yield adjustment over the term of the lease. Net proceeds of $3.3 million resulting from the sale-leaseback transaction were used to pay down the PWPipe Revolving Credit Facility and Senior Term Note A.

PWPoly

On January 16, 2004, PWPoly entered into a Subordinated Debt Agreement with Medallion Capital, Inc. for $1.3 million. Interest of 12 percent on the Subordinated Debt is due monthly on the first day of each month beginning February 1, 2004 and continuing on the first date of each month thereafter until all outstanding principal has been paid in full on January 15, 2009. In connection with the Subordinated Debt Agreement, warrants were issued to purchase up to 7.5% of PWPoly’s then outstanding common stock on a fully diluted basis for $10.00 a share (fixed warrants). In addition, warrants were issued for the purchase of the lesser of 14% of PWPoly’s then outstanding common stock on a fully diluted basis or for an amount sufficient to incrementally provide the lender an overall 24.5 percent internal rate of return on the subordinated debt (performance warrants). The fixed warrants are exercisable at any time after January 15, 2004 through the fifth anniversary date when all outstanding and accrued interest on the subordinated debt has been paid in full. The performance warrants are exercisable immediately through the later of the maturity of the subordinated debt or at which time the subordinated debt and interest are paid in full. The warrants also contain a clause whereby after the occurrence of a put date, defined as the earlier of the maturity of the subordinated debt or an occurrence of a default under the debt agreement until the expiration date, the lender shall have the right to sell to PWPoly all or a portion of the warrants or the warrant based shares. Under the clause, PWPoly would be obligated to purchase such warrant or warrant based shares at PWPoly’s fair value. As a result of this clause, the warrants are deemed a liability which will be periodically adjusted to fair value. In addition, a corresponding debt discount has been recorded with the issuance of the warrant and will be amortized using the effective interest method as a yield adjustment over the term of the debt.

8

Table of Contents

The Company incurred $0.9 million in additional financing costs in fiscal 2004 to complete the above transactions for PWPipe and PWPoly. These financing costs are capitalized and will be amortized over the life of the respective debt using the effective interest method.

Scheduled aggregate annual maturities of amounts classified as debt obligations at March 31, 2004, under terms of the revised loan agreements and sale-leaseback financing lease obligations are (in thousands):

Management estimates that the fair market value of borrowing under its debt agreements approximates the carrying value at March 31, 2004, as the applicable interest rates approximate current market rates.

As described above, under current financing agreements, the Company is required to comply with certain restrictive financial ratios and covenants. Maintenance of these ratios and covenants is of particular concern given the uncertain economic climate in the United States and price stability of PVC pipe and PVC resin.

At December 31, 2003, PWPoly was in violation of certain covenants on its senior debt. On January 15, 2004, the Company amended its PWPoly Senior Credit Facility to revise certain financial covenants. In connection with the amendment, the lenders of PWPoly’s senior debt waived any event of default arising from the Company’s past inability to comply with the financial covenants of these agreements. PWPoly was in compliance with its financial covenants at March 31, 2004.

At December 31, 2003, PWPipe was in violation of certain covenants on its senior and subordinated debt, as well as on the financing lease obligation. In addition, PWPipe was in payment default relating to interest on its subordinated debt. On March 31, 2004, PWPipe amended its senior and subordinated debt agreements, as well as its financing lease agreement, to revise certain financial covenants. In connection with the amendments, the lenders of PWPipe’s senior debt, the holders of the subordinated debt and the lessor in the financing lease waived any events of default arising from PWPipe’s past inability to comply with the financial covenants of its various debt agreements through the first quarter of 2004. PWPipe also cured the payment default on March 31, 2004. Under these amended agreements, the Company believes that it will be in compliance with the revised covenants through the first quarter of 2005.

9

Table of Contents

On March 30, 2004, ETI amended its loan and security agreement to revise certain financial covenants. ETI was in compliance with its financial covenants at March 31, 2004.

Comprehensive income for the Company includes net income (loss), changes in fair market value of financial instruments designated as hedges of interest rate exposure and changes in fair market value of securities held for the non-qualified deferred compensation plans. Comprehensive income for the three months ended March 31, 2004 and 2003 was as follows (in thousands):

The components of accumulated other comprehensive income(loss) are as follows:

The Company has elected to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recorded for the stock option plan. Had the Company used the fair value-based method of accounting to measure compensation expense for its stock option plan and charged compensation expense against income over the vesting periods, net income and the related basic and diluted per common share amounts would have been reduced to the following pro forma amounts (in thousands except per share amounts):

10

Table of Contents

Basic earnings per common share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding. Diluted earnings per common share assumes the exercise of stock options and warrants using the treasury stock method, if dilutive. The following tables reflect the calculation of basic and diluted earnings per share (in thousands, except per share amounts):

Options to purchase 1,107,350 and 1,052,350 shares of common stock, warrants to purchase 2,425,542 and 2,410,542 shares of common stock, and 332,600 and 330,350 shares of unvested restricted stock were outstanding at March 31, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because inclusion of these shares would be anti-dilutive.

Product warranties: The Company’s products are generally guaranteed against defects in material and workmanship for one year. The product warranty liability is reviewed regularly by management to insure the Company’s warranty allowance is adequate based on frequency and average cost of historical warranty claims activity. Management studies trends of warranty claim activity to improve pipe quality and pipe installation techniques to minimize future claims activity (in thousands).

Standby letters of credit: The Company is required to maintain standby letters of credit totaling $2.6 million. These letters of credit guarantee payment to third parties in the event the Company is unable to pay in a timely manner. Standby letters of credit reduce the funds available under the revolving credit facility by $2.6 million. No amounts were drawn on these letters of credit for the period ending March 31, 2004.

We are from time to time a party to various claims and litigation matters incidental to our normal course of business. We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business.

11

Table of Contents

In connection with the closure of the Minneapolis, Minnesota corporate office and the resignation of certain officers as part of the Company’s restructuring plan initiated in fiscal 2003, the Board of Directors modified certain outstanding restricted stock and stock option awards effective January 2, 2004. The modifications allow for continued vesting in stock awards which would have been forfeited upon the officers’ resignation under the original terms. As a result of these modifications, the Company recognized compensation expense of $0.5 million on the fully vested awards, which is recorded in restructuring and related costs in the statement of operations, and an unearned compensation charge of $0.3 million. The offsetting credit was recorded to common stock and additional paid in capital. In addition, the Company incurred $0.1 million of severance and relocation expenses during the quarter ending March 31, 2004, which are recorded as restructuring costs.

Following is a summary of the restructuring reserve activity:

In 2004, a monthly management fee of $52,000 will be paid to Spell capital to provide supervisory and monitoring services to the Company as well as advice and assist with acquisitions, divestitures and financing activities of the Company.

On January 16, 2004, PWPoly invested $1.6 million in W.L. Plastics Corporation to increase its ownership to approximately 23 percent. As a result of this transaction, this investment is accounted for under the equity method of accounting, with earnings included in equity in earnings of affiliate, and the investment included in other non-current assets on the balance sheet. For the three months ended March 31, 2004, PWPoly recognized $0.2 million of income from this investment. At March 31, 2004, PWPoly’s investment in W.L. Plastics Corporation totaled $2.1 million on the balance sheet. During the quarter, PWPoly received $0.4 million in cash related to subscriptions for its common stock. As PWPoly common stock has not been registered as of March 31, 2004, the Company has recorded a liability totaling $0.4 million related to this transaction.

On April 1, 2004, PW Eagle sold two manufacturing facilities. Net proceeds of $1.9 million were used to paydown the PWPipe Revolving credit facility. In a separate but related transaction, PWPoly entered into a lease agreement for these same two facilities. As part of this transaction, PWPoly issued a stand by letter of credit for $156,000 which can be drawn in the event of default under the lease.

12

Table of Contents

PW EAGLE, INC.

Results of Operations

The following table sets forth items from our Statement of Operations as a percentage of net sales:

We posted first quarter net sales in 2004 of $106 million, an increase of 51% from 2003 to 2004. The increase in net sales in 2004 is from the acquisition of ETI in March of 2003, and from a higher volume of shipments in 2004. ETI sales represent $21 million, or 30%, of the 51% increase in net sales. Pipe pounds sold, excluding ETI sales, increased by 27% from 2003 to 2004.

Gross profit, as a percentage of net sales, decreased by 6% points in the first quarter of 2004 as compared to the same period in 2003. This decrease is due to increased PVC resin prices in the first quarter of 2004 compared to the same period in 2003, while pipe prices remained nearly unchanged.

Operating expenses increased $3.7 million, an increase of 40% from 2003 to 2004. As a percentage of net sales, operating expenses decreased 1%. Of the $3.7 million increase, $0.7 is a result of restructuring and related costs. General and administrative costs decreased by $0.4 million as a result of reorganization undertaken during the fourth quarter of 2003. The remaining increase is due primarily to increased freight and commission costs related to the higher level of sales volume during the quarter.

Non-operating expenses increased $0.7 million in the first quarter of 2004 as compared to the same period in 2003. Interest expense increased $1 million due to higher interest rates on subordinated debt, and from higher debt levels. The Company also recorded equity in earnings of affiliate of $0.2 million, which represents PW Poly’s 23% ownership interest in W. L. Plastics Corporation.

Income from discontinued operations related to Mid-States Plastics, Inc., which was sold on September 30, 2003.

The income tax provision for the quarters ended March 31, 2004 and 2003 were calculated based on management’s then-current estimates of the annual effective rate for the year. The estimated effective tax rate was approximately 38% for both periods presented.

13

Table of Contents

Liquidity and Capital Resources

PWPipe

On March 26, 2004, PWPipe entered into a sale-leaseback transaction on two manufacturing facilities in Sunnyside, Washington and Visalia, California. As a result of the sale-leaseback transaction, a financing lease obligation of $3.6 million, net of the debt discount of $0.1 million, was recorded based on the collective estimated fair value of the financing lease obligation and warrant on the date issued. No gain or loss was recognized on the transaction. The financing lease obligation requires an annual lease payment of $0.4 million, including interest at a rate of 9.7%. The financing lease has an initial term of twenty years, upon which the lease will automatically renew for ten years. The financing lease will continue to automatically renew every ten years until the financing lease is terminated. The financing lease includes certain financial covenants and requires the Company maintain an irrevocable letter of credit equal to $0.4 million which can be drawn in the event of a default under the lease.

In connection with this transaction, warrants were issued to the lender to purchase 15,000 shares of common stock in PW Eagle, Inc. for $0.01 a share at any time through March 26, 2009. A debt discount totalling $0.1 million has been recorded with the issuance of the warrant and will be amortized using the effective interest method as a yield adjustment over the term of the lease. Net proceeds of $3.3 million resulting from the sale-leaseback transaction were used to pay down the PWPipe Revolving Credit Facility and Senior Term Note A.

PWPoly

On January 16, 2004, PWPoly entered into a Subordinated Debt Agreement with Medallion Capital, Inc. for $1.3 million. Interest of 12 percent on the Subordinated Debt is due monthly on the first day of each month beginning February 1, 2004 and continuing on the first date of each month thereafter until all outstanding principal has been paid in full on January 15, 2009. In connection with the Subordinated Debt Agreement, warrants were issued to purchase up to 7.5% of PWPoly’s then outstanding common stock on a fully diluted basis for $10.00 a share (fixed warrants). In addition, warrants were issued for the purchase of the lesser of 14% of PWPoly’s then outstanding common stock on a fully diluted basis or for an amount sufficient to incrementally provide the lender an overall 24.5 percent internal rate of return on the subordinated debt (performance warrants). The fixed warrants are exercisable at any time after January 15, 2004 through the fifth anniversary date when all outstanding and accrued interest on the subordinated debt has been paid in full. The performance warrants are exercisable immediately through the later of the maturity of the subordinated debt or at which time the subordinated debt and interest are paid in full. The warrants also contain a clause whereby after the occurrence of a put date, defined as the earlier of the maturity of the subordinated debt or an occurrence of a default under the debt agreement until the expiration date, the lender shall have the right to sell to PWPoly all or a portion of the warrants or the warrant based shares. Under the clause, PWPoly would be obligated to purchase such warrant or warrant based shares at PWPoly’s fair value. As a result of this clause, the warrants are deemed a liability which will be periodically adjusted to fair value. In addition, a corresponding debt discount has been recorded with the issuance of the warrant and will be amortized using the effective interest method as a yield adjustment over the term of the debt.

PWPoly and Investment in W.L. Plastics Corporation

On January 16, 2004, PWPoly invested $1.6 million in W.L. Plastics Corporation to increase its ownership to approximately 23 percent. As a result of this transaction, this investment is accounted for under the equity method of accounting, with earnings included in other costs (income), and the investment included in non-current other assets on the balance sheet. For the three months ending March 31, 2004, PWPoly recognized $0.2 million of income from this investment. At March 31, 2004, PWPoly’s investment in W.L. Plastics Corporation totaled $2.1 million on the balance sheet. During the quarter, PWPoly received $0.4 million in cash related to subscriptions for its common stock. As PWPoly common stock has not been registered as of March 31, 2004, the Company has recorded a liability totaling $0.4 million related to this transaction.

The Company incurred $0.9 million in additional financing costs in fiscal 2004 to complete that above transactions for PWPipe and PWPoly. These financing costs are capitalized and will be amortized over the life of the respective debt using the effective interest method.

14

Table of Contents

The Company’s obligations under various long-term debt arrangements, including PWPoly’s Credit Facility, operating leases and other arrangements, are as follows (in thousands):

The Company is required to maintain standby letters of credit totaling $2.6 million. These letters of credit guarantee payment to third parties in the event the Company is unable to pay in a timely manner. Standby letters of credit reduce the funds available under the revolving credit facility by $2.6 million. No amounts were drawn on these letters of credit for the period ending March 31, 2004.

We had negative working capital of $9.0 million and excess borrowing capacity under our Revolving Credit Facilities of $13.4 million at March 31, 2004. This represents a small percentage of total current assets and is expected to be corrected with a combination of increasing product margins from recent price adjustments, and the Company’s continued cost reduction efforts.

Cash used in operating activities was $6.5 million in 2004, as compared to $4.9 million in the first quarter of 2003. The primary use of cash in 2004 and 2003 within operating activities was funding our growth in accounts receivable.

Investing activities included the receipt of $2.3 million proceeds relating to the 2003 sale of the Phoenix facility and an additional $1.6 million investment in WL Plastics. Investing activities in the first quarter of 2003 utilized $23.0 million, primarily for the purchase of Uponor ETI Company.

Financing activities provided $6.4 million primarily from our revolving credit facilities, a sale-leaseback transaction and new debt. During the quarter ended March 31, 2004 we sold our Sunnyside and Visalia facilities under a sale leaseback agreement to a third party for $3.6 million. Proceeds from the Sunnyside and Visalia facilities were applied to our term loan and revolving credit facility. Proceeds of $1.3 million were raised by PWPoly under a subordinated loan agreement from an independent third party. We also paid down $6.0 million of debt in 2004. Cash provided by financing activities during the first quarter of 2003 was $30.1 million. The primary source of cash in the first quarter of 2003 was borrowings under the Senior Credit Facility of ETI and the Revolving Credit Facility of PW Eagle.

We had commitments for capital expenditures of $0.2 million at March 31, 2004, which we intend to fund from operating profits. Additional sources of liquidity, if needed, include our revolving credit line. We believe we have the financial resources needed to meet our current and future business requirements, including working capital requirements.

Future Outlook and Risks to Our Business

INFORMATION IN THIS OUTLOOK SECTION AND OTHER STATEMENTS IN THIS FORM 10-Q ARE FORWARD LOOKING INFORMATION – ACTUAL RESULTS MAY DIFFER

15

Table of Contents

The statements contained above in Management’s Discussion and Analysis of Financial Condition and Results of Operations that are not strictly historical and the statements set forth in this Outlook section are forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our expectations and beliefs as of May 14, 2003 and are based on information known to us and our assumptions as of that date. These forward-looking statements involve known and unknown business risks and risks that we cannot control. As a result, our statements may not come true and our operating results may differ materially from our stated expectations and beliefs.

Some of our current beliefs and expectations are discussed below along with risk factors that impact our business and industry.

Forward-Looking Statements

We believe the Gross Domestic Product (GDP) is closely correlated to the demand for PVC resin and PVC pipe, and we recognize that our business is tied to economic cycles. Gross Domestic Product (GDP) has been estimated to have grown at 4.2% in the first quarter of 2004 as compared to 4.1% in the fourth quarter of 2003. We believe GDP growth will continue at current levels in 2004, resulting in relatively strong demand for PVC resin and PVC pipe. Because PVC producers and pipe producers began 2004 with relatively low finished goods inventories and GDP growth is strong, we believe that the demand for PVC resin and PVC pipe will be greater than supply during the first half of 2004.

In addition, the production of PVC may be limited by the availability of chlorine, a major raw material component of PVC resin. Chlorine capacity could be limited due to the closure of several chlorine manufacturing plants and, to our knowledge, no significant capacity has been added. This combination of industry conditions could lead to increased product pricing and increased margins in 2004.

Demand for PVC resin was strong during the first quarter and resin producers implemented a $0.02 per pound price increase for each of January, February, March and April of 2004 and a $0.01 per pound increase has been announced for May. PW Eagle and the PVC pipe industry have implemented and announced several pipe price increases in response to these resin price increases. We believe these pipe price increases will have a positive impact on our margins.

Over time, 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 in 2004. The actual growth rate may be less than or greater than three percent based on short-term economic conditions. Our strategy has been, and continues to be, to concentrate growth initiatives in higher profit products and geographic regions.

We believe that the operational restructuring we began in the fourth quarter of 2003 has positioned the Company for improved results in the future by improving our efficiency and reducing our selling, general and administrative costs.

Risk Factors

The pipe industry and our business are heavily dependent on the price and trend of PVC resin, our main raw material.

Our gross margin percentage is sensitive to PVC raw material resin prices and the demand for PVC 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. During the

16

Table of Contents

first four months of 2003, PVC resin producers implemented PVC price increases totaling eight cents per pound. During the last eight months of 2003, PVC prices decreased by three cents per pound due to a decrease in demand for PVC. In response to increasing demand and relatively fixed current production capacity, PVC resin producers implemented a two cent per pound price increase for each of January, February, March and April 2004. In addition, a price increase of one cent per pound in May 2004 has been announced.

Our gross margin decreases when the supply of PVC resin and PVC pipe is greater than demand. Conversely, our gross margins improve when PVC resin and PVC pipe are in short supply. In April 2001, a major producer of PVC resin filed for bankruptcy and, during the first quarter of 2002, ceased operations at two manufacturing facilities. This resulted in a reduction of approximately one billion pounds of production capacity, or 5% of the North American industry capacity. Although these two facilities have subsequently been purchased by two PVC producers, we do not expect this idled capacity to re-start in 2004. In addition, we believe the production of PVC resin may be limited by the availability of chlorine, a major raw material component.

The demand for our products is directly affected by the growth and contraction of the Gross Domestic Product and economic conditions.

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 PVC resin producers has increased from just over 9 billion pounds to over 18 billion pounds today. In the last 10 years published PVC resin prices have fluctuated between $.25 and $.45 per pound. Currently resin prices are at or near the historical highs.

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 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. General economic conditions both in the United States and abroad will continue to have a significant impact on our prices and gross margins.

We have a significant amount of outstanding debt and must continue to operate our business to meet our outstanding obligations.

At December 31, 2003, PW Eagle and PWPoly were in violation of certain covenants on their Revolving Credit Facilities and Term Loans. In addition, PW Eagle was in violation of certain covenant and payment defaults on its Senior Subordinated Debt, as well as certain covenant defaults on its Financing Lease. As of March 31, 2004, we have cured the payment default and obtained waivers of all covenant violations. In addition, our lenders have amended their agreements such that we believe we will be in compliance with the covenants through the first quarter of 2005. We also believe we have sufficient liquidity to meet our obligations through that date. In the event of a default, we will be required to either obtain a waiver from our lenders or amend our lending agreements. There is no assurance that our lenders, note holders and lessors will waive any future default or agree to any future amendments of our credit facilities and leases. If we failed to obtain a waiver or an amendment, we would be required to obtain new financing from alternative financial sources. There is no assurance that we could obtain new financing, and if we did, there is no assurance that we could obtain terms as favorable as our current credit facilities.

17

Table of Contents

Interest rates affect our ability to finance our indebtedness and may adversely affect the demand for our products when higher rates slow the growth of our economy.

We have $58.8 million of variable interest rate debt at March 31, 2004. Accordingly, interest rate increases would further challenge our ability to pay the interest expense on our debt and fixed charges. In addition, an increase in interest rates could slow the growth of the economy and affect the demand for our products.

Other risk factors

In addition to the risk factors discussed above, our business is also affected by the following: (i) adverse weather conditions that result in a slow down in construction and the demand for our products; (ii) competition in the PVC resin and pipe industry that puts pressure on the price of PVC resin and the demand for PVC pipe; and (iii) net operating loss utilization. For financial reporting purposes, the Company’s cumulative deferred tax asset recorded in prior years totaling approximately $13.5 million associated with net operating loss carryforwards, has been fully utilized, including approximately $4.0 million in the first half of 2000. We have evaluated tax-reporting compliance relating to the past and fiscal 2000 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.

We have not provided any valuation allowance associated with deferred tax assets of approximately $12 million at March 31, 2004. Although the Company is highly cyclical in terms of its industry and operating profits, management believes that the Company will be profitable over its operating cycle, based on historical results and other analysis. This belief is largely based on a combination of 1) the Company’s participation as one of the PVC pipe industry leaders, 2) distribution centered on populated growth markets, 3) professional management dedicated to the PVC pipe industry and 4) debt paydown and corresponding reduction in financing costs. The Company’s cyclicalness and corresponding operating results are significantly influenced by the overall US economic cycles, which, in addition to driving demand for the Company’s products, also influence the cost of the primary raw material input, PVC resin. Generally, as PVC resin costs are rising during our operating cycles, our profitability associated with product shipments increases. This is the result of increasing demand, and increasing margins used in product pricing. These factors have been considered as part of the Company’s evaluation of the need for a valuation allowance associated with deferred tax assets. The Company will continue to monitor the need for a valuation allowance to ensure this conclusion is sustainable. Any change in this conclusion would result in a direct reduction of our reported results from operations, and could result in virtual elimination of our shareholders’ equity as of the date of the potential determination of the need for such a valuation allowance for financial reporting purposes.

18

Table of Contents

We are exposed to certain market risks on outstanding variable rate long-term debt obligations totaling $58.8 million at March 31, 2004. 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-half percent increase in interest rates and would result in an annual interest expense increase of approximately $294,000.

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 April 2003, under covenants of ETI’s Credit Facility, we entered into a fixed rate agreement for 2 ½ years with a LIBOR rate of 2.49%. At March 31, 2004 the Contract had a notional amount of $1.65 million. The notional amount decreases until the fixed rate agreement terminates in August of 2005.

Evaluation of Disclosure Controls and Procedures—Based on an evaluation conducted by the Company, under the supervision and with the participation of the Company’s management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, (the “Exchange Act”)) as of the end of the period covered by this Form 10-Q, the President and Chief Financial Officer of the Company have each concluded that such disclosure controls and procedures are effective and sufficient to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission.

Changes in Internal Controls—There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

19

Table of Contents

PART II. OTHER INFORMATION

We are from time to time a party to various claims and litigation matters incidental to our normal course of business. We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business.

The following table sets forth information about purchases of common stock made by the Company during the quarter ended March 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

None.

None.

None.

See Exhibit Index on page following signatures.

None.

20

Table of Contents

EXHIBIT INDEX TO FORM 10-Q

For the Quarter Ended March 31, 2004

PW EAGLE, INC.

None

21

Table of Contents

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.

PW EAGLE, INC.

Dated: May 14, 2004

22