PW EAGLE INC
/S/ GRANT THORNTON LLP    Portland, Oregon  March 10, 2006    22     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Stockholders and the Board of Directors of PW Eagle, Inc.    In our opinion, the accompanying consolidated balance sheet as of December 31, 2004 and the related consolidated statements of operations, of stockholders’ equity and comprehensive income and cash flows for each of the two years in the period ended December 31, 2004 present fairly, in all material respects, the consolidated financial position of PW Eagle, Inc. and its subsidiary at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.           /S/ PRICEWATERHOUSECOOPERS LLP   PricewaterhouseCoopers LLP   Minneapolis, Minnesota    March 25, 2005    23     PW EAGLE, INC.  CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except for per share amounts)                     Years ended December 31,    2005     2004     2003     Net sales    $ 694,244     $ 474,954     $ 331,787     Cost of goods sold      534,855       404,818       295,038                        Gross profit      159,389       70,136       36,749                        Operating expenses:                            Freight expense      38,687       30,950       20,895     Selling expense      17,719       14,778       11,954     General and administrative expense      15,973       11,114       12,182     Restructuring and related costs      —       1,608       1,276     Other (income) expense, net      (1,771 )     408       (470 )                            70,608       58,858       45,837                        Operating income (loss)      88,781       11,278       (9,088 )                      Gain on sale of investee      18,363       —       —     Interest expense      (27,051 )     (20,668 )     (11,828 )                      Income (loss) from continuing operations before income taxes, minority interest and equity in undistributed earnings of unconsolidated affiliate      80,093       (9,390 )     (20,916 )   Income tax (expense) benefit      (32,915 )     3,059       8,004     Minority interest in USPoly Company      (228 )     173       —     Equity in undistributed earnings of unconsolidated affiliate, net of tax      —       618       —                        Income (loss) from continuing operations      46,950       (5,540 )     (12,912 )   Income from discontinued operations, net of income tax      —       —       194                        Net income (loss)    $ 46,950     $ (5,540 )   $ (12,718 )                      Income (loss) from continuing operations per share:                            Basic    $ 5.28     $ (0.78 )   $ (1.89 )   Diluted    $ 4.65     $ (0.78 )   $ (1.89 )   Income from discontinued operations per share:                            Basic    $ —     $ —     $ 0.03     Diluted    $ —     $ —     $ 0.03     Net income (loss) per share:                            Basic    $ 5.28     $ (0.78 )   $ (1.86 )   Diluted    $ 4.65     $ (0.78 )   $ (1.86 )   Weighted average number of common shares outstanding:                            Basic      8,888       7,096       6,852     Diluted      10,094       7,096       6,852        The accompanying notes are an integral part of the consolidated financial statements.    24     PW EAGLE, INC.  CONSOLIDATED BALANCE SHEET (in thousands, except for share data)                 At December 31,    2005     2004     ASSETS                    Current assets:                    Cash and cash equivalents    $ 5,671     $ 986     Accounts receivable, net      87,062       54,610     Inventories      64,239       63,680     Deferred income taxes      2,382       1,833     Other current assets      2,861       1,306                   Total current assets      162,215       122,415         Property and equipment, net      56,301       63,370     Goodwill      6,441       3,651     Deferred tax asset      325       12,526     Intangible assets      4,020       4,975     Other assets      5,154       9,789                   Total assets    $ 234,456     $ 216,726                   LIABILITIES AND STOCKHOLDERS’ EQUITY                    Current liabilities:                    Borrowings under revolving credit facilities    $ 7,184     $ 82,017     Current maturities of long-term debt and capital leases      182       1,692     Accounts payable      68,483       31,514     Book overdraft      192       1,877     Accrued liabilities      47,907       22,795                   Total current liabilities      123,948       139,895         Long-term debt, less current maturities      —       7,255     Capital lease obligations, less current maturities      19,525       19,670     Senior subordinated debt      —       27,788     Other long-term liabilities      4,944       9,505                   Total liabilities      148,417       204,113                   Commitments and contingencies (Notes 6 and 8)                    Stockholders’ equity:                    Series A preferred stock, 7% cumulative dividend; convertible; $2 per share liquidation preference; no par value; authorized 2,000,000 shares; none issued and outstanding      —       —     Undesignated stock, par value $0.01 per share; authorized 14,490,000 shares; none issued and outstanding      —       —     Stock warrants      5,844       6,956     Common stock, par value $0.01 per share; authorized 30,000,000 shares; issued and outstanding 11,210,418 and 7,517,009 shares, respectively      112       75     Class B common stock, par value $0.01 per share; authorized 3,500,000 shares; none issued and outstanding      —       —     Additional paid-in capital      61,439       33,271     Unearned compensation      (326 )     (544 )   Notes receivable from officers on common stock purchases      —       (78 )   Accumulated other comprehensive income      372       445     Accumulated earnings (deficit)      18,598       (27,512 )                 Total stockholders’ equity      86,039       12,613                   Total liabilities and stockholders’ equity    $ 234,456     $ 216,726                    The accompanying notes are an integral part of the consolidated financial statements.    25     PW EAGLE, INC.  CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME  (in thousands)                                          Years ended December 31, 2005, 2004 and 2003   StockWarrants      SharesofCommon Stock    Common Stock   AdditionalPaid-inCapital     UnearnedCompensation      NotesReceivablefrom Officers andEmployeeson CommonStockPurchases     AccumulatedOtherComprehensiveIncome (Loss)      Accumulated (Deficit) Earnings     Total     Balance at December 31, 2002   $ 6,296     7,003   $ 70   $ 30,488     $ (920 )   $ (835 )   $ 74     $ (9,254 )   $ 25,919                Comprehensive income (loss):                                                                     Net Income     —           —     —       —       —       —       (12,718 )     (12,718 )   Change in fair value of financial instrument designated as a hedge of interest rate exposure, net of taxes     —           —     —       —       —       (21 )     —       (21 )   Unrealized gain on securities from non-qualified deferred compensation plans     —           —     —       —       —       318       —       318                                                                       Other comprehensive income                                                               297                                                                       Comprehensive loss                                                               (12,421 )   Stock warrants issued (Note 9)     640           —     —       —       —       —       —       640     Common stock issued:                                                                     Options exercised     —     115     1     236       —       —       —       —       237     Company sponsored programs     —     141     2     536       (538 )     —       —       —       —     Non-qualified stock options tax benefit     —           —     21       —       —       —       —       21     Stock compensation expense     —           —     —       354       —       —       —       354     Other     —           —     —       —       485       —       —       485                                                  Balance at December 31, 2003     6,936     7,259     73     31,281       (1,104 )     (350 )     371       (21,972 )     15,235                Comprehensive loss:                                                                     Net loss     —           —     —       —       —       —       (5,540 )     (5,540 )   Change in fair value of financial instrument designated as a hedge of interest rate exposure, net of taxes     —           —     —       —       —       (37 )     —       (37 )   Unrealized gain on securities from non-qualified deferred compensation plans     —           —     —       —       —       111       —       111                                                                       Other comprehensive income                                                               74                                                                       Comprehensive loss                                                               (5,466 )   Stock warrants issued (Note 9)     82           —     —       —       —       —       —       82     Exercised     (62 )   15     —     62       —       —       —       —       —     Common stock issued:                                                                     Options exercised     —     110     1     165       —       —       —       —       166     Company sponsored programs     —     133     1     900       310       —       —       —       1,211     Non-qualified stock options tax benefit     —           —     8       —       —       —       —       8     Payments received on notes     —           —     —       —       95       —       —       95     Stock compensation expense     —           —     —       250       —       —       —       250     Other     —           —     855       —       177       —       —       1,032                                                  Balance at December 31, 2004     6,956     7,517     75     33,271       (544 )     (78 )     445       (27,512 )     12,613                Comprehensive income (loss):                                                                     Net income     —           —     —       —       —       —       46,950       46,950     Change in fair value of financial instrument designated as a hedge of interest rate exposure, net of taxes     —           —     —       —       —       58       —       58     Unrealized gain (loss) on securities from non-qualified deferred compensation plans, net of taxes     —           —     —       —       —       (131 )     —       (131 )                                                                     Other comprehensive income (loss)                                                               (73 )                                                                     Comprehensive income                                                               46,877     Stock warrants issued     4,775           —     92       —       —       —       —       4,867     Exercised     (5,887 )   2,302     23     11,658       —       —       —       —       5,794     Common stock issued:                                                                     Options exercised     —     32     1     327       —       —       —       —       328     Company sponsored programs     —     340     3     3,052       —       —       —       —       3,055     Private placement     —     1,019     10     13,119       —       —       —       —       13,129     Non-qualified stock options tax benefit     —     —     —     —       —       —       —       —       —     Payments received on notes receivable     —     —     —     (80 )     —       78       —       —       (2 )   Stock compensation expense     —     —     —     —       218       —       —       —       218     Dividends declared     —     —     —     —       —       —       —       (840 )     (840 )                                                Balance at December 31, 2005   $ 5,844     11,210   $ 112   $ 61,439     $ (326 )   $ —     $ 372     $ 18,598     $ 86,039                                                   The accompanying notes are an integral part of the consolidated financial statements.    26     PW EAGLE, INC.  CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)                     Years ended December 31,    2005     2004     2003     Cash flows from operating activities:                            Net income (loss)    $ 46,950     $ (5,540 )   $ (12,718 )   Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                            (Gain) loss on disposal of fixed assets      (500 )     483       (128 )   Gain on sale of metals parts business      (1,256 )     —       —     Gain on sale of investee      (18,363 )     —       —     Equity in earnings of unconsolidated affiliate, pretax      —       (1,002 )     —     Depreciation and amortization      12,618       11,497       12,167     Royalty accretion      1,631       772       592     Warrant fair value adjustment      5,067       984       —     Amortization of debt issue costs, discounts and premiums      3,840       7,248       2,029     Receivable provisions      781       2,733       82     Inventory writedown to estimated market value      —       —       685     Deferred income taxes      11,652       (3,195 )     (8,024 )   Issuance of subordinated debt for interest payment      —       1,094       875     Loan forgiveness      —       —       485     Non-cash minority interest      228       (173 )     —     Non-cash compensation      331       1,669       671     Other      92       —       —     Change in assets and liabilities, net of acquisitions                            Accounts receivable      (33,233 )     (13,055 )     (2,910 )   Income taxes payable      21,716       —       —     Inventories      (1,365 )     (10,849 )     4,642     Other current assets      (1,794 )     2,879       (781 )   Accounts payable      36,969       683       2,293     Accrued liabilities      4,302       (4,933 )     3,400     Other, primarily royalty payments      (4,398 )     (1,143 )     (1,711 )                      Net cash provided by (used in) operating activities      85,268       (9,848 )     1,649                        Cash flows from investing activities:                            Purchases of property and equipment      (4,672 )     (1,986 )     (2,233 )   Purchase of Uponor Aldyl Company      —       (13,907 )     —     Purchase of Extrusion Technologies, Inc.      —       —       (19,081 )   Purchase of additional equity interest in affiliate      (3,169 )     (1,550 )     —     Proceeds from sale of Mid-States Plastics      —       —       4,400     Proceeds from sale of metals parts business      2,534       —       —     Proceeds from property and equipment disposals      874       2,210       136     Proceeds from sale of affiliate – W.L. Plastics      24,958       —       —     Payments on notes receivable      —       95       —                        Net cash provided by (used in) investing activities      20,525       (15,138 )     (16,778 )                      Cash flows from financing activities:                            Change in cash overdraft      (1,685 )     (4,291 )     (4,142 )   Borrowings under revolving credit facility      735,787       596,834       373,971     Payments under revolving credit facility      (810,620 )     (549,448 )     (354,376 )   Payment of notes payable      (4,461 )     —       —     Proceeds from sale-leaseback transactions      —       3,555       —     Payments on capital lease obligation      (186 )     (222 )     (86 )   Proceeds from long-term debt      —       35,875       6,100     Repayment of long-term debt      (38,073 )     (55,093 )     (5,355 )   Payment of debt issuance costs/financing costs      (101 )     (3,807 )     (1,126 )   Issuance of common stock upon exercise of stock options      327       166       237     Cash received for USPoly stock      —       2,002       —     Common stock repurchases      —       (30 )     —     Proceeds from private sale of stock      17,904       —       —                        Net cash provided by (used in) financing activities      (101,108 )     25,541       15,223                        Net change in cash and cash equivalents      4,685       555       94     Cash and cash equivalents, beginning of year      986       431       337                        Cash and cash equivalents, end of year    $ 5,671     $ 986     $ 431                           The accompanying notes are an integral part of the consolidated financial statements.    27     PW EAGLE, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES    The Company    PW Eagle, Inc., a Minnesota corporation, (the Company or PW Eagle) manufactures and distributes polyvinyl chloride (PVC) pipe and fittings used for potable water and sewage transmission, turf and agricultural irrigation, water wells, fiber optic lines, electronic and telephone lines, and commercial and industrial plumbing. The Company distributes its products throughout the United States, including Hawaii and Alaska, and a minimal amount of shipments to selected foreign countries. The Company’s wholly-owned subsidiary, USPoly Company, LLC, (USPoly) manufactures and distributes polyethylene (PE) pipe and tubing products and accessories.    Principles of Consolidation—The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and amounts have been eliminated in consolidation.    Cash Equivalents—The Company considers all highly liquid temporary investments with an original maturity of three months or less when purchased to be cash equivalents.    Accounts Receivable and Allowance for Doubtful Accounts—Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts sufficient to absorb future losses due to accounts that are potentially uncollectible. The allowance is based on our historical experience, prior years’ write-offs, aging of past due accounts, financial condition of the customer and the general economic conditions of our market place. Actual results could differ from these estimates resulting in an increase to the allowance for doubtful accounts and bad debt expense.    Inventories—Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method and includes materials, labor and manufacturing overhead. The Company’s principal raw material used in production is resin, which is subject to significant market price fluctuations.    Property and Equipment—Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed on the straight-line method over estimated useful asset lives (shorter of asset life or lease term for leasehold improvements). Useful lives range from 10 to 30 years for buildings and improvements and 3 to 8 years for equipment and fixtures. Maintenance and repairs are charged to operations as incurred. Major renewals and betterments are capitalized. Fully depreciated assets are retained in property and accumulated depreciation accounts until removed from service. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to operations. The carrying value of property and equipment is evaluated for impairment based on historical and projected undiscounted cash flows whenever events or circumstances indicate that the carrying value may not be recoverable.    Deferred Financing Costs—Deferred financing costs are amortized over the term of the related indebtedness, unless extinguished or modified, using the effective interest method.    Assets Held for Sale—Assets held for sale are stated at the lower of cost or net realizable value and are classified as other non-current assets in the balance sheet. In conjunction with the development of the West Jordan, Utah, manufacturing facility, the Company was required to purchase and develop land for an entire industrial park. This land is currently held for sale.    Goodwill—Goodwill has been recorded for the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is not subject to periodic amortization, and is tested for impairment on an annual basis. If an event or circumstances change that would indicate the carrying amount may be impaired, goodwill will be tested for impairment on an interim basis. Impairment testing for goodwill is performed at the reporting unit level. Currently, the Company has determined it has two reporting units, PVC and PE. An impairment loss would generally be recognized when the carrying amount of the reporting units net assets exceeds the estimated fair value of the reporting unit.    28    The estimated fair value of the reporting unit is determined using discounted cash flow analysis. The Company completed its annual goodwill impairment test in the third quarter of 2005, with no changes in the carrying value of goodwill.    Intangible Assets—Intangible assets are being amortized against income using the straight-line method over their estimated useful lives, ranging from four to twelve years. The straight-line method of amortization reflects an appropriate allocation of the costs of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company periodically reviews intangible assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Recoverability is assessed by comparing anticipated undiscounted future cash flows from operations to net book value.    Fair Value of Financial Instruments—Management estimates that the carrying value of its short and long-term debt approximates fair value. The estimated fair value amounts have been determined through the use of discounted cash flow analysis using interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities. All other financial instruments, including accounts receivable, accounts payable and accrued liabilities, approximate fair value because of the short-term nature of these instruments. The Company recognizes all derivative financial instruments at fair value as either assets or liabilities.    Revenue Recognition—Revenue is recognized when product has been shipped, risk of loss has passed to the purchaser and we have fulfilled all of our obligations. We provide for as a reduction of revenue sales discounts, customer rebates and allowances in the period the related revenue is recognized, based on historical experience and the terms and conditions of sales incentive agreements. Customer rebates are accrued in accordance with EITF No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer” and recorded as a reduction to sales.    Product Warranty—The Company’s products are generally under warranty against defects in material and workmanship for a period of one year. The Company has established a warranty accrual for its estimated future warranty costs using historical information on the frequency and average cost of warranty claims.    Income Taxes—Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.    Earnings Per Share—Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding and dilutive shares relating to stock options, warrants and restricted stock.    Comprehensive Income (Loss)—Components of comprehensive income (loss) for the Company include net income, changes in fair market value of the financial instrument designated as a hedge of interest rate exposure and changes in the fair market value of securities in the non-qualified deferred compensation plan. These amounts are presented in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income.    Use of Estimates—The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.    29    Issuance of Subsidiary Stock—Adjustments to our investment in subsidiary related to a change in our ownership interest resulting from the issuance of stock by USPoly are recorded as an increase to additional paid in capital with a corresponding increase to the investment in USPoly.    Stock-based compensation—The Company has various stock-based compensation plans. In 2005, the Company continued to apply the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB Opinion No. 25, as allowed by FASB Statement No. 123, Accounting for Stock-Based Compensation. FASB Statement No. 123 and FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. Generally, under APB Opinion No. 25, stock-based compensation expense is recognized only for stock awards granted with an exercise price below fair market value on the date of grant.    Had the Company used the fair value-based method of accounting to measure compensation expense for its stock-based compensation plans and charged compensation expense against income over the vesting periods, net income (loss) and the related basic and diluted per common share amounts would have been reduced to the following pro forma amounts (in thousands, except for per share amounts):                         2005     2004     2003     Net income (loss) applicable to common stock, as reported    $ 46,950     $ (5,540 )   $ (12,718 )   Add: Stock-based employee compensation expense included in reported net (loss) income, net of tax      128       250       218     Less: Stock-based employee compensation expense under fair value-based method, net of tax      (743 )     (665 )     (557 )                      Proforma net income (loss) applicable to common stock    $ 46,335     $ (5,955 )   $ (13,057 )                      Basic earnings (loss) per common share                            As reported    $ 5.28     $ (0.78 )   $ (1.86 )   Pro forma      5.21       (0.84 )     (1.91 )   Diluted earnings (loss) per common share                            As reported    $ 4.65     $ (0.78 )   $ (1.86 )   Pro forma      4.59       (0.84 )     (1.91 )    The Company did grant stock options during 2005. No stock options were granted by the Company in 2004. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2005 and 2003:                 2005   2003   Dividend yield    —   —   Expected volatility    71% - 80%   64%   Expected life of option    84 months   84 months   Risk free interest rate    3.8% - 4.5%   5.15%    Reclassifications—Certain reclassifications have been made to the prior year financial statements to conform to the 2005 presentation. Such reclassifications had no effect on net income (loss) or stockholders’ equity as previously reported.    Recently Issued Accounting Standards    In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” (FAS 154) which changes the accounting for     30     the reporting of voluntary changes in accounting principles. FAS 154 requires changes in accounting principles to be applied retrospectively to prior periods’ financial statements, where practicable, unless specific transition provisions permit alternative transition methods. FAS 154 will be effective in fiscal years beginning after December 15, 2005. Our adoption of FAS 154 is not expected to have a material impact on our consolidated financial statements except to the extent that we adopt a voluntary change in accounting principles in a future period that must be accounted for through a restatement of previous financial statements.    In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets” (FAS 153) which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. We are required to adopt FAS 153 for nonmonetary asset exchanges occurring in the second quarter of fiscal 2006 and its adoption is not expected to have a significant impact on our consolidated financial statements.    On December 16, 2004, the FASB issued Statement No. 123(R) Share-Based Payment, which is a revision of Statement No. 123 and supersedes APB Opinion No. 25. Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of Statement No. 123. The effective date for this pronouncement is for the next fiscal year beginning after December 15, 2005. The Company has adopted SFAS 123(R) effective January 1, 2006.    The Company is evaluating the requirements of SFAS 123(R) and expects that the adoption of SFAS 123(R) will have a material impact on the Company’s results of operations. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123(R), and it has not determined whether adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.    In November 2004, the FASB issued Financial Accounting Standards No. 151 (FAS 151), “Inventory Costs – an amendment of ARB No. 43, Chapter 4”, effective for fiscal years beginning after June 15, 2005. FAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. In addition, FAS 151 requires companies to base the allocation of fixed production overhead to the costs of conversion on the normal capacity of production facilities. FAS 151 is effective for the Company in 2006. The Company does not expect FAS 151 to have a material impact on its results or financial statements.    2. ACQUISITIONS & DIVESTITURES    US Poly Investment in W.L. Plastics Corporation    On October 1, 2003, USPoly, together with an affiliate of William Blair Mezzanine Capital Partners and members of W.L. Plastics’ management team acquired the business of W.L. Plastics, LLC, for approximately $17.6 million. PW Eagle acquired an equity interest in W.L. Plastics Corporation (W.L. Plastics) of approximately 5.4% in exchange for $0.3 million in professional services rendered. PW Eagle contributed its equity interest to USPoly. W.L. Plastics focuses primarily on extruding large diameter PE Pipe with the bulk of its products currently in the 8-inch to 24-inch diameter sizes. At the time of the initial investment USPoly did not control W.L. Plastics, nor did they have the ability to exhibit significant influence over the management of W.L. Plastics. As such, USPoly initially accounted for this investment on the cost method. On January 16, 2004, USPoly invested an additional $1.6 million in W.L. Plastics to increase its ownership percentage to 23%. Following the increase in ownership to 23%, USPoly accounted for the investment on the equity method of accounting, and had recorded $0.6 million, net of tax of $0.4 million, of equity in earnings of unconsolidated affiliate during 2004. Effective December 1, 2004, USPoly determined, in accordance with FIN 35, “Criteria for     31     Applying the Equity Method of Accounting for Investments in Common Stock”, that their investment in W.L. Plastics should be accounted for using the cost method of accounting as a result of the acquisition of UAC described further below, relinquishing their Board position and other changes. USPoly’s investment in W.L. Plastics at December 31, 2004 totaled $2.9 million and is included as a component of other assets on the accompanying consolidated balance sheet.    Sale of Interest in W.L. Plastics    On November 1, 2005, USPoly sold its interest in W.L. Plastics. USPoly received $23.5 million cash and an additional $1.2 million will be held in escrow for a period of 18 months and is subject to customary post-closing contingencies. The gain realized was $18.4 million. The purchase price is subject to a working capital adjustment which is expected to be resolved in 2006. A substantial portion of the cash was used to pay down debt obligations of USPoly and PW Eagle.    Acquisition of ETI and Sale of Mid-States Plastics    On March 14, 2003, PW Eagle, Inc. acquired all of the outstanding stock of Uponor ETI Company (the ETI Acquisition), a subsidiary of Uponor Corporation, a Finnish company. In connection with the ETI 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.    The final purchase price for Uponor ETI Company of $27.3 million was comprised of cash payments of $22 million, a licensing agreement valued at $7.8 million and $0.6 million of transaction fees, net of a final working capital adjustment of $3.1 million. Under a licensing agreement with Uponor Innovation AB, ETI will pay a minimum of $8 million and a maximum of $12 million in royalties based on the sales of the Ultra products over the next eight years. Payments are made quarterly based on actual sales. The licensing agreement was recorded at its net present value of $7.8 million, including an unsecured promissory note of $0.2 million that was issued to Uponor North America. The note bears an interest rate of 7% and requires quarterly payments of $10,000 commencing on March 31, 2003 and ending on December 31, 2010. Under the terms of the promissory note, all payments on this note reduce amounts due under the licensing agreement.    The ETI Acquisition has been accounted for as a purchase business combination. The final purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in millions):             Current assets    $  21.5     Assets held for sale      4.1     Property, plant and equipment      14.0     Intangible assets      4.0     Other      0.3     Current liabilities      (15.3 )   Noncurrent liabilities      (1.3 )                $ 27.3               Acquired intangible assets consist of customer relationships, manufacturing technology, patents and trademarks. Assets held for sale relate to the net assets of Mid-States Plastics (MSP), including goodwill of $1.1 million.    The acquisition was financed with an equity contribution from PW Eagle to ETI of $7.0 million from PW Eagle’s revolving line of credit, a $5.0 million Term Note under ETI’s new Senior Credit Facility and a $10.0 million draw under ETI’s Revolving Credit Facility. ETI was operated as a stand-alone, wholly owned subsidiary of PW Eagle, responsible for its own debts and obligations without any guaranties or cross defaults, until it was merged into PW Eagle in October 2004.    32    The following unaudited pro forma condensed consolidated statements of operations 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.    For the year ended December 31, 2002, ETI had net sales of $89.0 million. Approximately 9% of the net sales of ETI were from sales of its wholly-owned subsidiary, MSP, and the balance was from PVC pipe products. On September 30, 2003, the Company sold MSP for a purchase price of $4.4 million. The Company incurred $0.3 million of transaction costs in connection with the sale, including $0.1 million of severance. No gain or loss was recorded on the sale. The results of operations of MSP from the date of acquisition through the date of sale (March 14, 2003 through September 30, 2003) are shown as discontinued operations in the Consolidated Statement of Operations.    The unaudited pro forma combined results of operations as if the ETI Acquisition and the sale of MSP occurred on the first day of 2003 are as follows (in thousands except per share amounts):             Net sales    $ 352,477     Income (loss) from continuing operations      (12,658 )   Income (loss) from continuing operations per share:            Basic      (1.82 )   Diluted      (1.82 )    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 ETI 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.    Acquisition of Uponor Aldyl Company    On September 27, 2004, USPoly acquired the business of Uponor Aldyl Company, Inc. (UAC) from Uponor Corporation, a Finnish company (the UAC Acquisition). UAC is a leading extruder of PE piping systems for natural gas with annual sales of $41 million in 2003. The business has facilities in Tulsa and Shawnee, Oklahoma. UAC’s business operations were combined with those of USPoly and the combined organization, re-named USPoly Company (USPoly) on September 27, 2004, is operated from UAC’s former headquarters in Shawnee, Oklahoma.    The final purchase price for UAC was $18.6 million (including direct transaction costs of $1.0 million), composed of $13.9 million of cash, $2.1 million in the form of a note to Uponor Corporation, and $2.6 million which was subsequently paid to Uponor Corporation on March 11, 2004. In addition, USPoly incurred $0.6 million of deferred financing costs not included in the purchase price allocation below. Concurrent with this transaction, USPoly entered into a capital lease agreement for the Tulsa, Oklahoma manufacturing facility for $1.5 million.    The UAC Acquisition has been accounted for as a purchase business combination. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows (in millions):             Current assets    $ 13.4     Property, plant and equipment      9.0     Intangible assets      2.5     Current liabilities      (6.3 )                $ 18.6               Acquired intangible assets consist of technology and patents.    33    On June 30, 2005, USPoly sold the assets of its metals parts business for $2.5 million, resulting in a gain on the sale of $1.2 million. The metals parts business had net sales of approximately $6 million in 2004.    Proforma information has not been included due to the immaterial value of the UAC Acquisition in relation to the consolidated results of operations of PW Eagle.    The acquisition was financed with a draw under USPoly’s new Senior Credit Facility, additional Subordinated debt and seller financing. (See Note 5). USPoly continues to be a separate legal entity from PW Eagle with each entity responsible for its own debts and obligations without any guarantees or cross default provisions.    Sale of Facilities    On April 1, 2004, the Company sold two manufacturing facilities in Baker City, Oregon and Hastings, Nebraska for an aggregate loss of $0.4 million. Net proceeds of $1.9 million were used to pay down the Company’s Revolving Credit Facility. Prior to the sale of these facilities, PW Eagle was leasing these facilities to USPoly. After the sale of these facilities, USPoly entered into a capital lease with an independent third party for these same facilities (See Note 5).    The Company sold its idle Phoenix, Arizona facility on December 31, 2003 for $2.3 million, resulting in a gain of $0.4 million. Proceeds were received January 2, 2004 and were applied to reduce the term loan balance of the Company’s Senior Credit Facility.    Acquisition of Minority Interest in USPoly    On October 18, 2005, PW Eagle completed a transaction whereby it acquired all of the shares of USPoly that it did not previously own. USPoly Company was merged into a wholly-owned subsidiary of PW Eagle and the new company is known as USPoly Company, LLC. PW Eagle paid a total of $3.2 million cash and issued 351,904 shares of common stock to the holders of the minority shares in USPoly in consideration for their shares.    In connection with the merger, USPoly agreed with its subordinated lender that also held warrants to purchase shares in USPoly, to exchange the lender’s rights under those warrants for a $1.9 million note payable to the lender. The note bears interest at 12% and matures September 2009. The warrants had a put feature and were reflected as a liability on USPoly’s financial statements. This note was fully paid in 2005. In addition, former USPoly holders of 599,392 common stock options were issued 111,810 PW Eagle common stock options. This was based on a ratio of 0.1889 shares of PW Eagle for each option to purchase one share of USPoly common stock.    3. OTHER FINANCIAL STATEMENT DATA    The following provides additional information concerning selected balance sheet accounts (in thousands):                     2005     2004     Accounts receivable                    Trade receivables    $ 89,123     $ 55,889     Sales discounts and allowances      (2,061 )     (1,279 )                     $ 87,062     $ 54,610                   Inventories                    Raw materials    $ 14,083     $ 13,910     Finished goods      50,156       49,770                       $ 64,239     $ 63,680                    34    At December 31, 2003, a writedown of $0.7 was recorded to reduce inventories to estimated market value. No such provision was required at December 31, 2004 or 2005.                     2005     2004     Property and equipment                    Land    $ 8,225     $ 8,434     Buildings and leasehold improvements      20,889       19,185     Machinery and equipment      112,999       114,177     Furniture and fixtures      3,240       3,766     Equipment components      5,312       4,869     Construction-in-progress      2,574       321                         153,239       150,752     Accumulated depreciation/amortization      (96,938 )     (87,382 )                     $ 56,301     $ 63,370                    Included in land, buildings and leasehold improvements above are land and buildings currently held under a capital lease with a cost of $23.0 million and accumulated amortization of $5.1 million and $4.4 million at December 31, 2005 and 2004, respectively.           Other assets                    Deferred financing costs, net of accumulated amortization of $543 and $8,724, respectively    $ 2,032     $ 4,208     Assets held for sale      1,447       1,447     Investment in affiliate      —       2,852     Other      1,675       1,282                       $ 5,154     $ 9,789                               Accrued liabilities                 Income taxes payable    $ 21,988    $ 272   Accrued customer incentives      7,985      5,950   Accrued payroll and benefits      12,702      7,354   Accrued interest      86      412   Accrued royalty      2,954      2,141   Self insurance accruals      1,118      1,229   Dividends payable      840      —   Restructuring      —      70   Other      234      5,367                    $ 47,907    $ 22,795                 The components of accumulated other comprehensive income (loss) are as follows:                        2005    2004     2003     Change in fair value of financial instrument designated as a hedge of interest rate exposure, net of taxes    $ —    $ (58 )   $ (21 )   Unrealized gain on securities from non-qualified deferred compensation plans      372      503       392                        Total accumulated other comprehensive income (loss)    $ 372    $ 445     $ 371                         35    The following provide supplemental disclosures of cash flow activity (in thousands):                        2005    2004     2003     Interest paid    $ 17,301    $ 13,977     $ 7,237     Income taxes paid, net      1,346      21       68     Significant non-cash operating, investing and financing activities:                           Issuance of warrants      —      1,724       640     Cancellation of restricted stock      —      (397 )     (485 )   Receivable related to the sale of the Phoenix facility      —      —       (2,321 )   Issuance of restricted stock      —      —       538     USPoly capital lease transaction      —      1,500       —     Issuance of a note to Uponor Corporation      —      2,125       —     Issuance of shares for warrants exercise      11,681                    Issuance of shares to USPoly shareholders      2,855      —       —      4. GOODWILL AND INTANGIBLE ASSETS    The Company completed its most recent annual test for impairment of goodwill and intangible assets in the third quarter of fiscal 2005, with no change in the carrying value of goodwill recorded. As of December 31, 2005, there have been no events or circumstances that would indicate an impairment of the Company’s goodwill and intangible assets exists.    As described in Note 2, the Company acquired intangible assets in the UAC and ETI Acquisitions consisting of customer relationships, manufacturing technology, patents and trademarks. Intangible assets have an initial weighted average life of eight years. The following table sets forth information relating to the amortization of these intangible assets (in thousands):                     2005     2004     Intangible Assets                    Customer relationships    $ 1,331     $ 1,331     Patents and trademarks      526       550     Manufacturing technologies      4,448       4,424                         6,305       6,305     Accumulated amortization      (2,285 )     (1,330 )                     $ 4,020     $ 4,975                   Annual amortization expense    $ 955     $ 659         Estimated annual amortization expense                    2006    $ 956     $ 955     2007      567       955     2008      382       566     2009      360       381     2010      360       359     Thereafter      1,395       1,759                       $ 4,020     $ 4,975                    36    5. FINANCING ARRANGEMENTS    Current and long-term obligations at December 31, 2005 and 2004 consisted of the following (in thousands):                     December 31,2005     December 31,2004     Borrowings under revolving credit facilities                    PW Eagle    $ 7,184     $ 76,323     USPoly      —       5,694                   Total borrowings under revolving credit facilities    $ 7,184     $ 82,017                   Long-term debt, net of discounts                    PW Eagle Subordinated Notes    $ —     $ 23,116     PW Eagle Capital Lease Obligation      16,353       16,492     USPoly Seller Note      —       2,125     USPoly Senior Term Notes      —       6,622     USPoly Senior Subordinated Note      —       4,672     USPoly Capital Lease Obligations      3,354       3,378                   Total current and long-term obligations      19,707       56,405     Less current maturities      (182 )     (1,692 )                 Total long-term obligations    $ 19,525     $ 54,713                    PW Eagle and USPoly each have separate financing arrangements with each entity responsible for its own obligations without any guarantees or cross-defaults. These arrangements are described separately below.    PW Eagle    On October 25, 2004, PW Eagle completed a refinancing of its debt. In connection with the refinancing, PW Eagle entered into a new $100 million Revolving Credit Facility with Bank of America (formerly Fleet Capital Corporation), the CIT Group/Business Credit, Inc. and Wells Fargo Business Credit, Inc. (the “Agreement”). PW Eagle’s borrowing capacity under the Agreement is limited to the sum of a Current Asset Collateral Component (CACC) based on percentages of accounts receivable and inventories and a Fixed Asset Collateral Component (FACC) of $22 million. The FACC is reduced by $0.8 million quarterly beginning March 31, 2005. Borrowings under the FACC bear interest at LIBOR plus 2.25% and borrowings under the CACC bear interest at LIBOR plus 2.0%. PW Eagle is required to pay a fee equal to 0.5% per annum of the unused portion of the Revolving Credit Facility. At December 31, 2005, the LIBOR rate was 4.375%.    Under the Agreement, PW Eagle is required to comply with certain restrictive financial covenants including minimum interest coverage, minimum EBITDA (earnings before interest, taxes, depreciation and amortization), maximum capital expenditures, as well as other customary covenants, representations, warranties and funding conditions. Borrowings under the Agreement are collateralized by substantially all of PW Eagle’s assets. The Agreement expires on October 25, 2009.    In connection with the refinancing, PW Eagle issued $16 million of Senior Subordinated Notes and $8 million of Junior Subordinated Notes together with detachable warrants to purchase 366,651 shares of PW Eagle common stock (the “Subordinated Notes”). The Subordinated Notes are due on October 25, 2010, and are collateralized by substantially all assets of PW Eagle, subordinated to the security interest granted under the Revolving Credit Facility. The Senior Subordinated Notes bear interest at 19%, of which 13% is payable in cash monthly and 6% is deferred until October 31, 2009. The Junior Subordinated Notes bear interest at 22.5%, of which 13% is payable in cash monthly and 9.5% is deferred until October 31, 2009.    A debt discount of $1.2 million was recorded upon the issuance of the Subordinated Notes based on the collective estimated fair value of the Subordinated Notes and warrants on the date issued. The discount is being     37     amortized as a yield adjustment over the term of the Subordinated Notes using the effective interest method. The warrants contain provisions granting the warrant holder rights to require the Company to repurchase the warrants at the earlier of repayment or maturity of the Subordinated Notes or an event of default under the Subordinated Notes. In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the warrants have been recorded as a liability on the Company’s balance sheet for $1.5 million at December 31, 2004. During 2005 and 2004, the Company’s value for the warrants increased due to an increase in the Company’s stock price. Accordingly, the warrant liability was increased to fair value, resulting in a $4.3 million and a $0.2 million non-cash charge to interest expense in 2005 and 2004, respectively.    In connection with the refinancing, PW Eagle incurred financing costs of $2.2 million, which have been capitalized and are being amortized over the life of the related debt as a component of interest expense.    In connection with the refinancing, PW Eagle repaid all amounts outstanding under the PWPipe and ETI Revolving Credit Facilities, the PWPipe and ETI Senior Term Notes and the PWPipe Senior Subordinated Notes (at the completion of this refinancing, ETI was legally merged into PW Eagle). At the date these obligations were repaid, PW Eagle had unamortized deferred financing costs related to the extinguished debt of $2.0 million and unamortized debt discount of $2.9 million on the PWPipe Senior Subordinated Notes. The terms of the PWPipe Senior Subordinated Notes also required a prepayment penalty of $0.4 million. A charge of $5.3 million related to these items was recorded in the fourth quarter of 2004 as a component of interest expense. Amortization of the deferred financing costs during 2004, prior to refinancing, was $1.4 million.    In December 2005, PW Eagle repaid all amounts outstanding under the Senior Subordinated Notes and Junior Subordinated Notes. At the date these obligations were repaid, PW Eagle had unamortized deferred financing costs of $1.0 million and unamortized debt discount of $1.0 million on the Subordinated Notes. The terms of the Subordinated Notes also required a prepayment penalty of $4.4 million. A charge of $6.4 million related to these items was recorded in the fourth quarter of 2005 as a component of interest expense.    On March 26, 2004, PW Eagle 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 estimated fair value of the financing lease obligation. 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. The lender exercised these warrants during the second quarter of 2004. A debt discount totaling $0.1 million has been recorded with the issuance of the warrant and is being amortized using the effective interest method as a yield adjustment over the initial 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.    USPoly    On September 27, 2004, USPoly acquired UAC (see Note 2). To finance this acquisition, USPoly obtained a new Senior Credit Facility. Under the new Senior Credit Facility, USPoly has a $10 million revolving credit facility and term loans amounting to $6.9 million. The term loans are payable in monthly installments of $0.1 million with interest at the prime rate plus 0.75% to 1.00%. The revolving credit facility bears interest at prime plus 0.5%, and a non-use fee of 0.5%. The prime rate was 5.25% at December 31, 2004. These new senior loans are due September 30, 2007 and are collateralized by substantially all of USPoly’s assets. In connection with the     38     refinancing, USPoly incurred financing costs of $0.6 million which were capitalized and are being amortized over the life of the debt. USPoly also entered into a capital lease agreement for the Tulsa, Oklahoma manufacturing facility connected with the acquisition of UAC for $1.5 million. The capital lease includes a put feature. Under the put feature if the lessor meets certain requirements, USPoly would be obligated to purchase the Tulsa plant for $1.5 million or the current market value, whichever is greater.    On January 16, 2004, USPoly entered into a Subordinated Debt Agreement with Medallion Capital, Inc. (Medallion) for $1.3 million. Interest of 12% on the Subordinated Debt is due monthly and the note matures on January 15, 2009. In connection with the Subordinated Debt Agreement, warrants were issued to purchase up to 7.5% of USPoly’s then outstanding common stock on a fully diluted basis for $10 per issuance (fixed warrants). In addition, warrants were issued for the purchase of the lesser of 14% of USPoly’s then outstanding common stock on a fully diluted basis or for an amount sufficient to incrementally provide Medallion an overall 24.5% 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 of the date when all outstanding principal 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 USPoly all or a portion of the warrants or the warrant based shares. Under the clause, USPoly would be obligated to purchase such warrant or warrant based shares at USPoly’s fair value. The warrants are therefore recorded as a liability, $1.2 million at December 31, 2004 which will be periodically adjusted to fair value. A debt discount totaling $0.4 million, representing the initial value of the warrants, has been recorded in connection with the issuance of the warrants and is being amortized using the effective interest method as a yield adjustment over the term of the debt. During 2005 and 2004, the Company increased its estimate of the value of USPoly, based on its operating performance, the UAC Acquisition (see Note 2), and the sale of W.L. Plastics (see Note 2). Accordingly, the warrant liability was adjusted to fair value, resulting in a $0.7 million and a $0.8 million non-cash charge to interest expense in 2005 and 2004, respectively.    In connection with the UAC Acquisition, USPoly amended its Subordinated Debt Agreement with Medallion to provide an additional $3.7 million of borrowings, bringing the total amount of the Subordinated Debt facility to $5.0 million. The $3.7 million note bears interest at 12% payable monthly and requires principal payments of $65,315 monthly beginning October 1, 2007, through September 1, 2009, with all remaining principal payable on September 17, 2009.    During the fourth quarter of 2005, USPoly repaid all amounts outstanding under the Senior Credit Facility and the Subordinated Debt Agreement. At the date these obligations were repaid, USPoly had unamortized deferred financing costs of $0.5 million and unamortized debt discount of $0.2 million. The terms of the loan agreements also required prepayment penalties of $0.4 million. A charge of $1.1 million related to these items was recorded in the fourth quarter of 2005 as a component of interest expense.   On April 1, 2004, USPoly entered into lease transactions on manufacturing facilities in Hastings, Nebraska and a distribution center in Baker City, Oregon. These leases are recorded as capital leases, with a total financing lease obligation of $1.9 million. The leases require monthly payments of $20,000, including interest at a rate of 11.25%. These financing leases have a term of twenty years, with purchase options of the greater of $2 million ($1.3 million on the Hastings property and $0.7 million on the Baker City property) or the fair market value at the end of the lease term. As a part of these transactions, USPoly issued standby letters of credit for $0.2 million, which can be drawn in the event of default under the leases.    39    Scheduled aggregate annual maturities of amounts classified as debt obligations at December 31, 2005, under terms of the capital lease obligations are (in thousands):                CapitalLeaseObligations   2006    $ 2,375   2007      2,375   2008      2,375   2009      2,375   2010      2,360   Thereafter      27,650           Total scheduled cash payments      39,510   Less amounts representing interest      19,803           Total amounts classified as debt obligations at December 31, 2005    $ 19,707            Management estimates that the fair value of borrowing under its debt agreements approximates the carrying value at December 31, 2005, as the applicable interest rates approximate current market rates.    As described above, under current financing agreements, PW Eagle is required to comply with certain restrictive financial ratios and covenants. At December 31, 2005, PW Eagle was in compliance with all debt covenants.    6. GUARANTEES    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)    2005     2004     Accrual for product warranties – beginning of year    $ 325     $ 450     Accruals for warranties issued during the year      305       328     Settlements made during the year      (305 )     (453 )                 Accrual for product warranties – end of year    $ 325     $ 325                    Standby letters of credit: The Company is required to maintain standby letters of credit totaling $3.6 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 facilities by $3.6 million. No amounts were drawn on these letters of credit as of December 31, 2005.    7. DERIVATIVE INSTRUMENTS    The Company follows Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (FAS 133). FAS 133 requires that all derivative instruments, such as interest rate swap contracts, be recognized in the financial statements and measured at their fair market value.    In the normal course of business, the Company is exposed to changes in interest rates. The Company has established policies and procedures that govern the management of these exposures through the use of financial instruments. The Company’s objective in managing its exposure to interest rates is to decrease the volatility that     40     changes in interest rates might have on earnings and cash flows. To achieve this objective, the Company uses fixed rate agreements to adjust a portion, as determined by management and terms of the underlying debt agreements, of total debt that is subject to variable interest rates. Under the fixed rate agreements, the Company pays a variable rate of interest and receives a fixed rate of interest. These derivative instruments are considered to be a hedge against changes in the amount of future cash flows associated with the Company’s interest payments related to a portion of its variable rate debt obligations. Accordingly, the Company designates these instruments as cash flow hedges. The derivative instruments are reflected at fair value, net of the underlying debt, in the Company’s balance sheet, and the related gains or losses on this contract are deferred in shareholders’ equity as a component of comprehensive income.    Effective April 1, 2003, the Company entered into a fixed rate swap agreement for 50% of its ETI Senior Term Note. This Senior Term Note was paid in connection with the new PW Eagle Senior Credit Facility of October 25, 2004. On November 12, 2004, the Company entered into a fixed rate swap agreement for 50% of the fixed asset collateral portion of the new Senior Credit Facility amounting to $11 million. This total notional amount was comprised of the remaining ETI swap contract amounting to $1.7 million, and a new PW Eagle swap contract amount of $9.3 million. The total notional amount decreases in proportion to reductions in the fixed asset collateral portion of the credit facility, until the fixed rate agreement terminates in November of 2007. During the fourth quarter of 2005, this fixed asset collateral portion of the credit facility was entirely paid, and the related swap contracts were terminated. At December 31, 2005 the Company had no outstanding swap contracts.    8. COMMITMENTS AND CONTINGENCIES    Litigation    The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. In management’s opinion, the disposition of present proceedings and claims will not have a material adverse effect on the Company’s financial position, results of operations or cash flows in future periods.    Operating Leases    The Company has non-cancelable operating leases for certain operating facilities that expire in 2010.    Future minimum lease payments at December 31, 2005, are (in thousands):            2006    $ 1,189   2007      918   2008      743   2009      718   2010      461               $ 4,029            Rent expense under all operating leases was $1.4 million, $1.3 million and $1.4 million for the years ended December 31, 2005, 2004 and 2003, respectively.    9. COMMON STOCK PURCHASE WARRANTS    In connection with various financing arrangements, the Company has issued warrants to purchase common stock and Class B common stock as described below.    In December 2005, as part of the private placement transaction described in Note 13, warrants were granted to investors to purchase 304,667 shares of common stock at $27.00 per share expiring in December 2010. These warrants were valued at $13.74 per share on the date of issuance. The total value of the warrants, $4,682,076 was recorded as equity in warrants on the balance sheet.    41    On September 30, 2005, PW Eagle granted 12,000 warrants to a consultant at the price of $0.01 per share with an expiration date of August 1, 2015. The difference between the exercise price and the fair value, amounting to $0.1 million, was charged to expense.    In 2004, holders of the Senior Subordinated Note received warrants to purchase a total of 366,651 shares of the Company’s common stock at $0.01 per share that expire October 25, 2010. These warrants contained a put feature that required the Company to repurchase the shares at the fair market value of the stock on the date the warrants could be put to the Company. These warrants were included in other long-term liabilities due to their put feature. The initial valuation of the warrants was for $1.2 million and was recorded as a discount on the subordinated debt. This valuation was increased by $0.3 million to $1.5 million with an offsetting entry to interest expense due to the increase in value of the Company’s stock from October 25, 2004 to December 31, 2004. The valuation of these warrants was increased by $4.3 million to $5.8 million with an offsetting entry to interest expense due to the increase in value of the Company’s stock from January 1, 2005 to November 16, 2005. On November 16, 2005, the warrant holder elected to make a cashless exercise of their warrants to purchase 366,302 shares of common stock. The share differential represents the effect of the cashless exercise in which the holder forfeits the right to receive a certain number of warrant shares in lieu of paying the current exercise price in cash.    During 2004, the Company issued additional warrants to purchase 20,818 shares of the Company’s stock in connection with certain lease agreements. These warrants were valued at $0.1 million and were recorded as an increase to stockholder’s equity and a discount on the capital lease obligation.    The former holders of the Senior Subordinated Notes held warrants to purchase a total of 1,940,542 shares of the Company’s common stock or Class B common stock at $0.01 per share which expire September 20, 2009. The number of shares issuable upon exercise and the warrant exercise price were adjustable in the event the Company paid a dividend in common stock, subdivided or combined its common stock, or sold 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 completed a capital reorganization or reclassification of its capital stock. The Company 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 it has first offered to sell to each warrant holder its proportionate share. Certain affiliates of the Company granted the warrant holders tagalong rights that gave the warrant holders the right to join any affiliate in the sale of any of their shares. On January 28, 2005, some warrant holders elected to make a cashless exercise of their warrants to purchase 597,090 shares of Class B common stock in exchange for 595,508 shares of Class B common stock. The share differential represented the effect of the cashless exercise in which, in lieu of paying the current exercise price in cash, the holder forfeited the right to receive a certain number of warrant shares having a fair market value equal to the warrant exercise price. The Class B common stock issued to the warrant holders was convertible, at the holders’ option, into shares of the Company’s common stock at a 1:1 ratio. On December 20, 2005, the 595,508 shares of Class B common stock were converted to regular common stock under the 1:1 ratio.    On May 17, 2005, the holder of a warrant to purchase 1,343,452 shares of common stock at $0.01 per share made a cashless exercise of the warrant and received 1,340,657 shares of common stock. The warrant holder also exercised its right to require the Company to file a Registration Statement on the Form S-3, to register these shares. The Registration Statement became effective August 12, 2005. As of October 4, 2005, all shares registered with this Registration Statement had been sold.    In connection with the amendment of its subordinated debt agreement in the first quarter of 2003 to acknowledge and reflect the purchase of Uponor ETI Company, the Company issued a warrant to purchase an aggregate of 350,000 shares of PW Eagle common stock for $9.50 per share. The warrants became exercisable on October 1, 2004, and expire March 14, 2013 unless earlier terminated. The warrants were valued at $640,000 and were recorded as an increase to stockholder’s equity and a discount on the subordinated debt. As described in Note 20, these warrants were exercised in January 2006.    42    10. INCOME TAXES    Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily related to amounts, which have been deducted for financial statement purposes but have not been deducted for income tax purposes and the tax effect of net operating loss carryforwards.    At December 31, 2005, the Company had a net deferred tax asset of approximately $2.7 million (approximately $14.4 million at December 31, 2004). 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.    Deferred taxes as of December 31, 2005 and 2004, are summarized as follows (in thousands):                     2005     2004     Current deferred taxes:                    Inventory valuation allowance    $ 64     $ 100     Warranty reserves      117       135     Allowance for doubtful accounts      365       222     Accrued liabilities      1,435       976     Inventory cost capitalization      397       396     Other      4       4                       $ 2,382     $ 1,833                   Long-term deferred taxes:                    Excess tax over book depreciation    $ (2,462 )   $ (2,963 )   Non-compete agreement      86       105     Federal and state net operating loss carryforwards      65       13,463     State tax credit carryforwards      110       273     AMT credit carryforwards      —       116     Restricted stock options      328       227     Royalty agreement      2,355       2,519     Intangibles      (707 )     (1,168 )   Investment earnings in non-qualified plan      550       367     Equity in undistributed earnings of unconsolidated affiliate      —       (384 )   Other      —       (29 )                     $ 325     $ 12,526                    Income tax expense (benefit) for the years ended December 31 consists of the following (in thousands):                        2005    2004     2003     Current    $ 21,263    $ 136     $ 20     Deferred      11,652      (3,195 )     (8,024 )                      Income tax expense (benefit) from operations      32,915      (3,059 )     (8,004 )   Income tax expense for equity in earnings of unconsolidated affiliate      —      384       —                        Total income tax expense (benefit)    $ 32,915    $ (2,675 )   $ (8,004 )                       43    A reconciliation of the expected federal income taxes, using the effective statutory federal rate of 35%, with the provision (benefit) for income taxes is as follows (in thousands):                         2005     2004     2003     Expected federal expense (benefit)    $ 28,032     $ (2,852 )   $ (7,314 )   State taxes, net of federal benefit and credits      3,444       (361 )     (690 )   Permanent difference for interest charges related to stock warrants      1,992       584       —     Deduction for domestic production activities      (720 )     —       —     Other      167       (46 )     —                        Income tax expense (benefit)    $ 32,915     $ (2,675 )   $ (8,004 )                       11. EARNINGS PER COMMON SHARE    The following tables reflect the calculation of basic and diluted earnings per share:                   (in thousands, except for per share amounts)    2005    2004     2003     Income (loss) from continuing operations    $ 46,950    $ (5,540 )   $ (12,912 )   Income from discontinued operations      —      —       194                        Net income (loss)    $ 46,950    $ (5,540 )   $ (12,718 )                      Weighted average shares – basic      8,888      7,096       6,852     Effect of stock warrants      528      —       —     Effect of other dilutive securities      678      —       —                        Weighted average shares – diluted      10,094      7,096       6,852                        Income (loss) from continuing operations per share – basic    $ 5.28    $ (0.78 )   $ (1.89 )   Income from discontinued operations per share – basic      —      —       0.03     Net income (loss) per share – basic    $ 5.28    $ (0.78 )   $ (1.86 )                      Income (loss) from continuing operations per share – diluted    $ 4.65    $ (0.78 )   $ (1.89 )   Income from discontinued operations per share – diluted      —      —       0.03     Net income (loss) per share – diluted    $ 4.65    $ (0.78 )   $ (1.86 )                       The following table summarizes outstanding securities which are excluded from the computation of diluted earnings per share because inclusion of these shares would be anti-dilutive (in thousands):                   2005    2004    2003   Stock options    184    807    1,107   Stock warrants    305    2,783    2,411   Unvested restricted stock    —    209    369    12. EMPLOYEE BENEFIT PLANS    Benefit Plan    PW Eagle’s and USPoly’s 401(k) plan covers all eligible employees. Eligible employees may elect to defer up to 25% of their eligible compensation. The plan provides for Company-paid matching contributions of 50% of participant contributions up to 6% of compensation. The match was temporarily suspended January 1, 2004 and reinstated July 1, 2004.    PW Eagle’s board of directors determines each year if an additional contribution will be made based on PW Eagle’s performance. An additional contribution of 3% was approved for 2005. No additional contribution was approved for 2004 or 2003. Total amounts charged to operations were $1.9 million, $0.3 million and $0.7 million for the years ended December 31, 2005, 2004 and 2003, respectively.    44    USPoly participated in PW Eagle’s retirement savings plan from August 22, 2003 to December 14, 2003. USPoly matching contributions to the Plan were $8,000 for that period.    On December 15, 2003, a separate plan with terms similar to PW Eagle’s plan, USPoly Employees’ Savings Plan, was created for employees of USPoly and Company matching contributions to the plan were $133,000, $43,000 and $1,000 for the years ended December 31, 2005, 2004 and the period from December 15, 2003 to December 31, 2003, respectively. No discretionary profit sharing contributions were made in 2005, 2004 or 2003.    All active hourly union employees in the Company’s Buckhannon, West Virginia plant are covered by a defined contribution plan. The Company’s sole responsibility is to make contributions, in accordance with the union contract, of $85, $80 and $75 per month per employee in 2005, 2004 and 2003, respectively. The Company does not have access to plan information. Contributions by the Company in 2005, 2004 and 2003 totaled $67,000, $66,000 and $41,000, respectively.    Restricted Stock Grants    In 2003, the Company awarded restricted stock grants of 140,900 to certain officers, directors and employees. The Company did not award any restricted stock grants in 2005 or 2004. Restricted stock is issued at the low trading price on the date of grant. This ranged from $3.77 to $4.20 for 2003. These shares carry dividend and voting rights. Sales or transfers of these shares are restricted prior to the date of vesting. With the exception of 20,000 shares issued in 2003, the shares will vest 20% after three years, 30% after four years, and the remaining 50% after five years from the date of grant. The remaining 20,000 shares of restricted stock issued in 2003 vested 100% on January 1, 2005. Restricted stock is subject to forfeiture in the event of termination of employment prior to the vesting date for reasons other than death or disability. During 2005, 2004 and 2003, 38,300, 63,800 and 42,200 shares of restricted stock vested, respectively. A total of 79,300 shares of restricted stock were cancelled in 2004, due to the departure of certain officers and employees. As of December 31, 2005, 330,600 shares of restricted stock were outstanding, of which 172,100 are unvested.    Unearned compensation was charged for the fair value of the restricted shares at the time of award. The unearned compensation is shown as a reduction of stockholders’ equity in the balance sheet and is being amortized ratably as compensation expense over the related vesting period. Total amounts charged to operations were $0.2 million, $0.3 million and $0.4 million for the years ended December 31, 2005, 2004 and 2003, respectively.    Stock-Based Compensation Plans    The Company’s 1991 and 1997 stock option plans (the Plans) provide for the granting of 3.2 million of incentive or non-qualified stock options to key employees and directors. Generally, options outstanding under the Company’s Plans: (i) are granted at prices equal to the closing market price of the stock on the date of grant, (ii) vest ratably over a five year vesting period, and (iii) expire not greater than ten years from the date of grant.    45    A summary of the status of the Company’s stock options as of December 31, 2005, 2004 and 2003, and changes during the year ended on those dates is presented below (shares in thousands):                               2005    2004    2003       Shares     WeightedAverageExercisePrice    Shares     WeightedAverageExercisePrice    Shares     WeightedAverageExercisePrice   Outstanding at beginning of year    807     $ 4.64    1,107     $ 4.30    1,052     $ 3.30   Granted    371       15.04    —       —    174       4.71   Exercised    (33 )     10.06    (161 )     2.13    (115 )     2.06   Canceled    (9 )     9.53    (139 )     4.84    (4 )     3.09                                       Outstanding at end of year    1,136       7.84    807       4.64    1,107       4.30                                       Options exercisable at year end    759       5.55    610       4.25    741       3.58                                       Options available for future grant    *441            303            170                                               Weighted average fair value of options granted            10.53            N/A            3.29                                              * Amount includes an increase of 500,000 shares available for future grants approved by the Board of Directors on March 2, 2006 as disclosed in Note 20.    The following table summarizes information about stock options outstanding and exercisable at December 31, 2005 (shares in thousands):                         Options Outstanding    Options Exercisable   Range of Exercise Prices    NumberOutstanding     Weighted Average RemainingContractual Life     Weighted Average Exercise Price     Number Exercisable     Weighted Average Exercise Price  $   1.50 to   2.75    227    2.65    $   1.53    227    $   1.53  3.09 to   4.51    270    4.97      3.55    232      3.47  5.15 to   7.50    313    7.30      6.11    172      6.42  8.15 to 16.00    142    6.97      9.66    82      10.77  $               23.47    184    9.96      23.47    46      23.47                                1,136    6.20    $ 7.84    759    $ 5.55                             13. STOCKHOLDERS’ EQUITY    In prior years, the Company established a program that provided loans to board members and various officers to purchase shares of the Company. This program was terminated in 2002. At December 31, 2004, one such loan, in the amount of $78,000, was outstanding, and it was fully paid in 2005.    Sale of Common Stock    On December 7, 2005, PW Eagle sold 1,018,667 shares of common stock at a price of $18.75 per share and 304,667 warrants to purchase common stock at a price of $27.00 per share. The net proceeds of $17.9 million were used to pay down revolving debt. The common stock purchase agreement also requires a payment of 1% of the gross proceeds per month ($191,000) should a Form S-1 to register the shares not be declared effective prior to April 4, 2006. The Form S-1 was declared effective on February 23, 2006.    46    14. RESTRUCTURING ACTIVITIES    In response to difficult economic conditions and poor operating results, the Company decided to consolidate the PWPipe and ETI business units under common management control in October 2003. The former ETI headquarters office in Denver, Colorado was closed and all administrative and accounting functions were transferred to the Eugene, Oregon office. In addition, effective January 2004, the corporate office in Minneapolis, Minnesota was closed and all corporate office functions were transferred to the Eugene, Oregon office, which now represents our corporate headquarters, expanding the previous role as our lead operating office. As a result of the consolidation, approximately 30 positions were eliminated. In addition, certain officers and directors resigned their positions and cancelled consulting agreements. In connection with the officer resignations, the Board of Directors modified certain outstanding restricted stock and stock option awards effective January 2, 2004. The modifications allow for continued vesting of the stock awards, which would have been forfeited upon the officers’ resignation under the original terms, resulting in a charge of $0.5 million. During 2004, the Board of Directors approved the payment of management bonuses of $1.0 million for the successful restructuring of the Company. The recipients of the management bonus elected to receive $0.8 million in PW Eagle common stock and $0.2 million in cash.    In connection with these activities, the Company incurred restructuring charges of $1.6 million in 2004 and $1.3 million in 2003. At December 31, 2005, the Company has no payments remaining from the restructuring.    Following is a summary of the restructuring reserve activity (in thousands):                         Severance     Other     Total     Restructuring accrual at December 31, 2002    $ 63     $ —     $ 63     Additions to reserve      1,253       23       1,276     Charges against reserve      (138 )     (23 )     (161 )                      Restructuring accrual at December 31, 2003      1,178       —       1,178     Additions to reserve      106       41       147     Charges against reserve      (1,214 )     (41 )     (1,255 )                      Restructuring accrual at December 31, 2004      70       —       70     Charges against reserve      (70 )     —       (70 )                      Restructuring accrual at December 31, 2005    $ —     $ —     $ —                         15. SEGMENT INFORMATION    Segments of Business    The Company manufactures and distributes PVC and PE pipe and fittings used for potable water and sewage transmission, turf and agricultural irrigation, natural gas transmission, water wells, fiber optic lines, electronic and telephone lines, and commercial and industrial plumbing. The PE segment operates under the name USPoly. We distribute our products throughout the United States, including Hawaii and Alaska, with a minimal amount of shipments to certain foreign countries. While there are similarities in technology and manufacturing processes utilized between the segments, differences exist in products and customer base, with the PVC segment focused on the water, irrigation and electrical products and customers, and the PE segment focused primarily on the natural gas distribution products and customers.    For 2005, the Company changed its performance measurement for segment reporting from EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization, minority interest and equity in earnings of unconsolidated affiliate, to operating income. EBITDA is not a financial measure that is in accordance with accounting principles generally accepted in the United States of America (GAAP).    47    A summary of the Company’s business activities reported by its two business segments follows (in thousands):                         2005     2004     2003     Business Segments (in thousands)                      Net sales:                            PVC    $ 612,258     $ 445,880     $ 319,092     PE      81,986       29,074       12,695                            $ 694,244     $ 474,954     $ 331,787                        Operating income:                            PVC    $ 84,387     $ 11,140     $ (9,454 )   PE      4,394       138       366                        Total operating income      88,781       11,278       (9,088 )   Gain on sale of investee      (18,363 )     —       —     Interest expense      27,051       20,668       11,828     Income (loss) before income taxes and minority interest    $ 80,093     $ (9,390 )   $ (20,916 )                      Expenditures for property and equipment:                            PVC    $ 3,145     $ 1,582     $ 2,144     PE      1,527       195       89                        Total    $ 4,672     $ 1,777     $ 2,233                        Depreciation and amortization expense:                            PVC    $ 9,987     $ 10,381     $ 11,629     PE      2,631       1,116       538                        Total    $ 12,618     $ 11,497     $ 12,167          Goodwill:                            PVC    $ 3,651     $ 3,651     $ 3,651     PE      2,790       —       —                        Total    $ 6,441     $ 3,651     $ 3,651                        Total Assets:                            PVC    $ 191,788     $ 159,675     $ 145,983     PE      39,961       36,742       7,512     Corporate      2,707       14,359       11,683                        Total assets    $ 234,456     $ 210,776     $ 165,178                         PE assets include investment in affiliate of $0, $2.9 and $0.3 million for the years ended December 31, 2005, 2004 and 2003.    16. SIGNIFICANT VENDOR CONCENTRATION    The Company acquires its primary raw materials from various sources. During the years ended December 31, 2005, 2004 and 2003, purchases of primary raw materials from three vendors totaled 90%, 87% and 85%, respectively, of total material purchases. Materials purchased represents the largest component of the Company’s cost of sales. The loss of a key supplier could have a significant impact on our business.    48    17. QUARTERLY FINANCIAL DATA (UNAUDITED)    (in thousands, except per share amounts)                                March     June    September     December     YearEnded     Quarter ended:                                                  2005                                 Net sales    $ 142,640     $ 161,626    $ 176,155     $ 213,823     $ 694,244     Gross profit      23,139       24,305      28,461       83,484       159,389     Operating income      7,986       8,491      9,965       62,339       88,781     Income from continuing operations before taxes      4,217       4,107      5,055       66,714       80,093     Income from continuing operations      2,696       2,283      2,913       39,058       46,950            Net income      2,696       2,283      2,913       39,058       46,950            Earnings from continuing operations                                           Basic    $ 0.35     $ 0.27    $ 0.31     $ 3.91     $ 5.28     Diluted    $ 0.27     $ 0.23    $ 0.30     $ 3.56     $ 4.65     Earnings per share                                           Basic    $ 0.35     $ 0.27    $ 0.31     $ 3.91     $ 5.28     Diluted    $ 0.27     $ 0.23    $ 0.30     $ 3.56     $ 4.65            2004                                 Net sales    $ 106,091     $ 118,678    $ 117,941     $ 132,244     $ 474,954     Gross profit      10,026       23,946      17,605       18,559       70,136     Operating income (loss)      (2,984 )     8,530      3,849       2,291       11,686     Income (loss) from continuing operations before taxes, minority interest and equity in undistributed earnings of unconsolidated affiliate      (6,499 )     4,655      (833 )     (6,713 )     (9,390 )   Income (loss) from continuing operations      (3,875 )     2,945      (240 )     (4,370 )     (5,540 )   Net income (loss)      (3,875 )     2,945      (240 )     (4,370 )     (5,540 )   Earnings (loss) from continuing operations                                           Basic      (0.56 )     0.43      (0.03 )     (0.60 )     (0.78 )   Diluted      (0.56 )     0.31      (0.03 )     (0.60 )     (0.78 )   Earnings (loss) per share                                           Basic      (0.56 )     0.43      (0.03 )     (0.60 )     (0.78 )   Diluted      (0.56 )     0.31      (0.03 )     (0.60 )     (0.78 )    The summation of quarterly net income per share does not equate to the calculation for the full fiscal year, as quarterly calculations are performed on a discrete basis.    18. RELATED PARTY TRANSACTIONS    Certain members of the Company’s Board of Directors are members of Spell Capital Partners, LLC (SCP). In 2003, two members of SCP served as officers and employees of the Company. Under an arrangement with SCP, PW Eagle paid SCP a monthly fee of $17,750 in 2003, for office space and administrative support for these employees. In connection with the restructuring activities (See Note 14), the officers resigned and this arrangement was replaced with an agreement under which PW Eagle pays SCP a monthly management fee of $52,000. USPoly paid SCP management fees of $63,000 for the period January 1, 2004 through September 30, 2004, and in October 2004 began paying a quarterly management fee of $37,500 for supervisory and monitoring services as well as advice and assistance with acquisitions, divestitures and financing activities. Costs incurred under these arrangements of $0.8 million, $0.7 million and $0.2 million in 2005, 2004 and 2003, respectively, are included in General and Administrative expenses in the consolidated statement of operations. In the fourth quarter of 2005, the Board of Directors approved a bonus payment to SCP of $0.7 million, which is also included in General and Administrative expenses.    During 2004 and 2003, PW Eagle paid certain operating expenses for USPoly. Transactions with USPoly included the rental of certain operating facilities and expenses related to certain services provided to and delivered by     49     PW Eagle. At December 31, 2004 and 2003, the inter-company balance was approximately $0.1 million and $1.4 million, respectively. All inter-company transactions are eliminated in the consolidated financial statements.    In connection with the UAC Acquisition, USPoly paid SCP a fee of $0.5 million which is included in transaction costs.    19. USPOLY STOCK    In January 2004, the Company’s Board of Directors approved USPoly entering into an agreement to issue additional common shares to new investors, thereby resulting in PW Eagle, Inc. no longer owning 100% of USPoly. In connection with the agreement, the new investors contributed approximately $1.7 million in exchange for approximately 25% of the common stock of USPoly, which includes $0.3 million from directors, officers and employees. During the fourth quarter of 2004, USPoly management contributed $0.3 million to purchase USPoly stock. In the first quarter of 2005, USPoly issued $0.3 million in additional stock at a price of $1.10 per share. USPoly sold 3.3 million shares of stock in 2004 at prices determined by the Board of Directors of USPoly, ranging from $0.50 to $1.10 for a total of $1.7 million. At December 31, 2004, PW Eagle owned approximately 75% of USPoly. Upon the completion of this transaction, the Company adjusted its investment in USPoly by $0.9 million to appropriately align the Company’s investment with its underlying 75% interest in USPoly. This adjustment was recorded as an increase to the Company’s Additional-Paid-In-Capital and a corresponding increase to the Company’s Investment in USPoly account.    As explained in Note 2, on October 18, 2005, PW Eagle purchased the remaining shares of USPoly which it did not previously own.    During 2004, USPoly created a stock option plan under which 2,000,000 shares are authorized for issuance. As of December 31, 2004, USPoly had granted to various directors and employees, at fair value, 531,250 shares, of which 161,265 were exercisable and none were exercised. The 531,250 shares represented less than 4% of USPoly’s outstanding stock.    As explained in Note 2, USPoly option holders received PW Eagle options upon the acquisition of the remaining unowned shares of USPoly on October 18, 2005.    20. SUBSEQUENT EVENTS    Warrant Exercise    On January 5, 2006, Corporate Property Associates 14 Incorporated completed the cashless conversion of warrants to purchase 125,818 shares of common stock in exchange for 125,745 shares of common stock.    On January 5, 2006, JP Morgan Partners (23A SIBC), L.P. completed the cashless conversion of warrants to purchase 242,308 shares of the Company’s common stock in exchange for 135,681 shares of common stock.    Relocation    On February 2, 2006, the Company announced that its wholly-owned subsidiary, USPoly, was combining all of its Oklahoma-based operations into a single location. This will involve relocating all production equipment, warehousing and other support services from their current Shawnee, OK location into existing space at USPoly’s Tulsa location. The changes are expected to occur over the next several months. Shawnee-based employees will be offered positions in Tulsa along with assistance in relocation. USPoly expects to no longer have a presence in Shawnee when the move is complete and to offer the current facility for sale. PW Eagle does not anticipate the relocation plan to have a significant impact on its consolidated results of operations.   Stock option share reserve    On March 2, 2006, the Board of Directors approved an increase of 500,000 shares available for future granting under the 1997 Stock Option Plan. This increase will be subject to shareholder approval at the annual meeting to be held in May, 2006. There is no financial impact of this action.    50
PART III    ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT    The information required by Item 10 relating to our directors is incorporated by reference to the sections labeled “Election of Directors” and “Code of Ethics”, and the information relating to section 16(a) of the Exchange Act is incorporated by reference to the section labeled “Section 16(a) Beneficial Ownership Reporting Compliance”, all of which appear in our definitive proxy statement for our 2006 Annual Meeting of Shareholders.    The names, ages and positions of our executive officers are as follows:             Name    Age    Position   Jerry A. Dukes    58    Chief Executive Officer and President   Scott Long    43    Executive Vice President and Chief Financial Officer   N. Michael Stickel    63    Executive Vice President—Sales and Marketing   John R. Cobb    54    Executive Vice President—Operations   Keith H. Steinbruck    56    Vice President—Technical Director   Neil R. Chinn    55    Vice President—Human Resources   Dobson West    59    Secretary    Jerry A. Dukes was elected CEO and President of PW Eagle in March 2005 and President of PW Eagle in October 2003. Previously Mr. Dukes had been President of Uponor ETI since 2001, and served as its vice president of manufacturing from 1992 through 2001. Mr. Dukes joined ETI in 1988 as Director of Manufacturing. Prior to ETI, Mr. Dukes was employed by Johns Manville Corp. in various manufacturing and general management positions in plastic pipe and other construction product businesses. He has a B.S. degree from Texas Tech University in Industrial Engineering and is registered as a Professional Engineer in the State of Texas.    Scott Long was elected Executive Vice President and Chief Financial Officer of PW Eagle in March of 2005 and CFO of PW Eagle in October 2003. Previously, Mr. Long was Chairman of Uponor ETI since 2001. He served as president of Uponor ETI since 1998. Mr. Long joined ETI in 1991 as Corporate Controller. From 1994-1998, he held various financial, business development and general management positions within the Uponor organization in the United States and Europe. Prior to joining ETI, Mr. Long was a CPA in public practice. Mr. Long has a B.S. degree in Accounting and Business Administration from the University of Kansas and holds a Colorado CPA certificate (currently in inactive status).    N. Michael Stickel was elected our Executive Vice President—Sales and Marketing in February 2003. Previously, Mr. Stickel was Senior Vice President—Sales and Marketing from February 2001 through 2002. Before joining PW Eagle, Mr. Stickel was Vice President and General Manager for Simpson Paper Company. Mr. Stickel spent 8 years with PWPipe, as Vice President and General Manager of PWResin, a subsidiary of PWPipe, from 1990 through 1993, and as Vice President of Sales and Marketing for PWPipe from 1985 through 1990. Mr. Stickel also served as Vice President of Planning and Control for Longmile Rubber Company from 1981 to 1985 and General Manager of the chemicals division for Simpson Investment Company from 1976 through 1981. Mr. Stickel received a B.S. from Oregon State University and a M.B.A. from the University of Oregon.    John R. Cobb was elected our Executive Vice President—Operations in February 2003. Previously, Mr. Cobb was Senior Vice President—Operations in September 1999 through 2002. Mr. Cobb was Senior Vice President—Operations for PWPipe from 1987 through 1999. Mr. Cobb has also held the positions of production manager and plant manager with PWPipe. Mr. Cobb joined PWPipe in 1978 and has 27 years of experience in the manufacture of plastic pipe. He has received a B.S. degree from the University of Toronto and a M.B.A. from the University of Oregon. Mr. Cobb has also completed the Mahler Advanced Management Skills Program.    Keith H. Steinbruck was elected our Vice President—Technical Director in September 1999 and served through August 2002. Mr. Steinbruck returned to the company and continued to serve as our Vice President—Technical     52     Director in November 2002. Previously, Mr. Steinbruck was Vice President—Technical Director for PWPipe from 1995 through 1999 and Technical Manager of PWPipe from 1982 through 1995. Mr. Steinbruck joined PWPipe in 1973 as a process improvement specialist and has 32 years of experience in the plastic pipe industry. Mr. Steinbruck received a B.A. degree in industrial technology from San Diego State University and completed the University of California at Berkeley’s Executive Program for Technical Managers.    Neil R. Chinn was elected our Vice President—Human Resources in September 1999. Previously, Mr. Chinn was Vice President—Human Resources for PWPipe from 1995 through 1999 and Employee Relations manager for PWPipe from 1986 through 1995. Mr. Chinn received a B.A. degree from the University of Leicester and M.S. and M.B.A. degrees from the University of Oregon. He has also completed graduate courses at the School of Law, University of Oregon and has attended classes with the American Compensation Association.    Dobson West was elected Secretary in August 1998. Mr. West also served as Chief Administrative Officer and General Counsel from November 1999 through January 2004. In addition, Mr. West is Senior Managing Director of Spell Capital Partners, LLC, a private equity firm that focuses on leveraged acquisitions of established businesses in the upper Midwest. Previously, Mr. West was in the private practice of law for over 20 years with Fredrikson & Byron, P.A. He has a B.A. degree from Williams College and a J.D. degree from the University of Minnesota.    ITEM 11. EXECUTIVE COMPENSATION    The information required by this item is incorporated by reference to the section labeled “Executive Compensation” which appears in our definitive proxy statement for our 2006 Annual Meeting of Shareholders.    ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS    The information required by this item is incorporated by reference to the section labeled “Security Ownership of Principal Shareholders and Management” which appears in our definitive proxy statement for our 2006 Annual Meeting of Shareholders.    The following table reflects certain information about our equity compensation plans as of December 31, 2005.               (in thousands, except for weighted average exercise price)    Number ofsecurities tobe issuedupon exerciseofoutstandingoptions andwarrants    Weighted-averageexerciseprice ofoutstandingoptions andwarrants    Number ofsecuritiesremainingavailable forfutureissuanceunder equitycompensationplans   Equity compensation plans approved by security holders                    Stock options    1,136    $ 7.84    0   Warrants    792      14.58    —   Equity compensation plans not approved by security holders    —      —    —                   Total    1,928    $ 10.61    0                    ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS    The information required by this item is incorporated by reference to the section labeled “Certain Relationships and Related Transactions” which appears in our definitive proxy statement for our 2006 Annual Meeting of Shareholders.    ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES    The information required by this item is incorporated by reference to the section labeled “Audit Fees” which appears in our definitive proxy statement for its 2006 Annual Meeting of Shareholders.    53    PART IV    ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES    The following documents are filed as part of this report:            1.    Consolidated Financial Statements              Page inForm 10-K        Report of Independent Registered Public Accounting Firm (Grant Thornton LLP)   22        Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP)   23        Statement of Operations   24        Balance Sheet   25        Statement of Stockholders’ Equity and Comprehensive Income   26        Statement of Cash Flows   27        Notes to Financial Statements   28-50      2.    Consolidated Financial Statement Schedule                Report of Independent Registered Public Accounting Firm on Financial Statement Schedule (PricewaterhouseCoopers LLP)    56        Schedule II Valuation and Qualifying Accounts   57           All schedules omitted are inapplicable or the information required is shown in the financial statements or notes thereto.          3.    Exhibits               See Exhibit Index on page following signatures.        54    SIGNATURES    Pursuant to the Requirements of Section 13 of 15(d) 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: March 28, 2006       By:   /s/    JERRY A. DUKES                  Jerry A. Dukes, Chief Executive Officer    Power of Attorney    Each person whose signature appears below constitutes and appoints Jerry A. Dukes and Scott Long his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.             Signature     Title    Date       /s/ Jerry A. Dukes Jerry A. Dukes     Chief Executive Officer (Principal Executive Officer)   March 28, 2006       /s/ Scott Long Scott Long    Chief Financial Officer (Principal Financial and Accounting Officer)   March 28, 2006       /s/ Denver Kaufman Denver Kaufman     Director   March 28, 2006       /s/ Richard W. Perkins Richard W. Perkins     Director   March 28, 2006       /s/ Bruce A. Richard Bruce A. Richard     Director   March 28, 2006       /s/ William H. Spell William H. Spell     Co-Chairman of the Board   March 28, 2006       /s/ Harry W. Spell Harry W. Spell     Co-Chairman of the Board   March 28, 2006    55     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE      To the Stockholders and the Board of Directors    of PW Eagle, Inc.    Our audits of the consolidated financial statements as of December 31, 2004, and for each of the two fiscal years in the period ended December 31, 2004, referred to in our report dated March 25, 2005 appearing in the Annual Report on Form 10-K for the fiscal year ended December 31, 2005 also included an audit, of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K for each of the two fiscal years in the period ended December 31, 2004. In our opinion, this financial statement schedule presents fairly in all material respects, the information set forth therein as of December 31, 2004, and for each of the two fiscal years in the period ended December 31, 2004, when read in conjunction with the related consolidated financial statements.         /s/    PRICEWATERHOUSECOOPERS LLP   PricewaterhouseCoopers LLP Minneapolis, Minnesota March 25, 2005    56     SCHEDULE II    Valuation and Qualifying Accounts  (in thousands)                        Description    BeginningYear Balance    Additions    AssumedAllowance (2)    Deductions (1)    Year EndBalance   Allowance for doubtful accounts and sales discounts                                      Fiscal year ended December 31, 2005    $ 1,279    $ 11,029    $ —    $ 10,247    $ 2,061   Fiscal year ended December 31, 2004    $ 952    $ 2,167    $ 211    $ 2,051    $ 1,279   Fiscal year ended December 31, 2003    $ 663    $ 1,021    $ 419    $ 1,151    $ 952    1 Primarily sales discounts and allowances.    2 Assumed allowances from the acquisition of ETI and UAC.    57    EXHIBIT INDEX          Number     Description**     2.1    Merger Agreement, dated September 30, 2005, among the Registrant, Poly Merger, LLC and USPoly Company. (Incorporated by reference to the Registrant’s Form 8-K filed October 6, 2005.)     3.1    Articles of Incorporation of the Registrant, as amended to date (Incorporated by reference to Exhibit 3 to the Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2000).     3.2    Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form S-4 – File No. 33-29511).     3.3    Statement of designation of shares of Registrant dated May 8, 1997 (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K dated May 19,1997).     10.1    Form of Restricted Stock Agreement between the Registrant and certain officers of the Registrant. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K dated September 20, 1999.)*     10.2    Employment Agreement dated September 16, 1999 between the Registrant and Keith H. Steinbruck. (Incorporated by reference to Exhibit 10.9 to the Registrant’s Form 8-K dated September 20, 1999.)*     10.3    Employment Agreement dated September 16, 1999 between the Registrant and John R. Cobb. (Incorporated by reference to Exhibit 10.11 to the Registrant’s Form 8-K dated September 20, 1999.)*     10.4    Employment Agreement dated September 16, 1999 between the Registrant and Neil R. Chinn. (Incorporated by reference to Exhibit 10.12 to the Registrant’s Form 8-K dated September 20, 1999.)*     10.5    Registrant’s 1991 stock plan (Incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K for the year ended December 31, 1992.)*     10.6    Registrant’s 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.14 to the Registrant’s Form 10-K for the year ended December 31, 1996.)*     10.7    Amendment to the Employment Agreement executed September 16, 1999 between Keith H. Steinbruck and the Registrant effective as of December 15, 1999 (Incorporated by reference to Exhibit 10.20 to the Registrant’s Form 10-K for the year ended December 31, 1999).*     10.8    Amendment to the Employment Agreement executed September 16, 1999 between Neil R. Chinn and the Registrant effective as of December 15, 1999 (Incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K for the year ended December 31, 1999).*     10.9    Amendment to the Employment Agreement executed September 16, 1999 between John R. Cobb and the Registrant effective as of December 15, 1999 (Incorporated by reference to Exhibit 10.23 to the Registrant’s Form 10-K for the year ended December 31, 1999).*     10.10    Employment Agreement effective February 12, 2001 between the Registrant and N. Michael Stickel (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended June 30, 2001).*     10.11    Form of Restricted Stock Agreement between the Registrant and N. Michael Stickel (Incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended June 30, 2001).*     10.12    Second Amendment to the Employment Agreement executed September 16, 1999 between the Registrant and John R. Cobb, Senior Vice President-Operations (Incorporated by reference to Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended September 30, 2001).*     10.13    Second Amendment to the Employment Agreement executed September 16, 1999 between the Registrant and Keith H. Steinbruck, Vice President Technical Director (Incorporated by reference to Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended September 30, 2001).*     10.14    Second Amendment to the Employment Agreement executed September 16, 1999 between the Registrant, and Neil R. Chinn, Vice President of Human Resources (Incorporated by reference to Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended September 30, 2001).*    58          Number     Description**     10.15    Lease Agreement, dated as of February 28, 2002, between PWE (MULTI) QRS 14-85, Inc., as Landlord, and the Registrant, as Tenant. (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed March 19, 2002.)     10.16    Warrant Agreement to purchase 120,000 shares of stock issued to Corporate Property Associates 14 Incorporated dated February 28, 2002. (Incorporated by reference to Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended March 31, 2002.)     10.17    First Amendment to Lease Agreement, dated June 7, 2002 by and between PWE (MULTI) QRS 12-85 Inc., and the Registrant. (Incorporated by reference to Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended June 30, 2002.)     10.18    Second Amendment to Lease Agreement, dated March 10, 2003 by and between PWE (MULTI) QRS 14-85 Inc. and the Registrant. (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended March 31, 2003.)     10.19    Lease Agreement, dated as of March 26, 2004 between 406 22nd, LLC, a Minnesota limited liability company, and Damaras Hoppenspirger as landlord, and the Registrant as tenant. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004.)     10.20    Management Service Agreement between Spell Capital Partners, LLC and the Registrant dated January 1, 2004. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004.)     10.21    Landlord Covenant Waiver dated March 30, 2004, by and between PWE (MULTI) QRS 14-85 Inc. and the Registrant dated March 30, 2004. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004.)     10.22    Lease Agreement dated April 1, 2004 between Continental Properties, LLC a Minnesota limited liability company and PW Poly, Inc. as tenant. (Incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-Q for the quarter ended June 30, 2004.)     10.23    Lease Agreement dated April 1, 2004 between Continental Properties, LLC and PW Poly, Inc. as tenant. (Incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-Q for the quarter ended June 30, 2004.)     10.24    Contribution and Membership Interest Purchase Agreement dated September 1, 2004 among Uponor Aldyl Company, Inc., Uponor North American, Inc., Uponor Aldyl Holding Company, LLC and PW Poly Corp. (Incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004.)     10.25    Lease dated September 27, 2004 between Uponor Aldyl Company, Inc. as Landlord and PW Poly Corp. as Tenant. (Incorporated by reference to Exhibit 10.11 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004.)     10.26    Redacted Fourth Amended and Restated Loan and Security Agreement dated October 25, 2004 between the Registrant and Fleet Capital Corporation. (Incorporated by reference to Exhibit 10.33 to the Registrant’s Form 10-K for the year ended December 31, 2004.)     10.27    Post Closing Agreement—Fourth Amended and Restated Loan and Security Agreement dated October 25, 2004 between the Registrant and Fleet Capital Corporation. (Incorporated by reference to Exhibit 10.34 to the Registrant’s Form 10-K for the year ended December 31, 2004.)     10.28    Revolving Note dated October 25, 2004, between Fleet Capital Corporation and the Registrant. (Incorporated by reference to Exhibit 10.35 to the Registrant’s Form 10-K for the year ended December 31, 2004.)     10.29    Management Fee Subordination Agreement dated October 25, 2004 between Spell Capital Partners LLC, Fleet Capital Corporation and Churchill Capital Partners IV, L.P. (Incorporated by reference to Exhibit 10.51 to the Registrant’s Form 10-K for the year ended December 31, 2004.)    59          Number     Description**     10.30    Revolving Note dated October 25, 2004 between The CIT Group/Business Credit, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.52 to the Registrant’s Form 10-K for the year ended December 31, 2004.)     10.31    Revolving Note dated October 25, 2004 between Wells Fargo Business Credit, Inc., and the Registrant. (Incorporated by reference to Exhibit 10.53 to the Registrant’s Form 10-K for the year ended December 31, 2004.)     10.32    Third Amendment to Lease Agreement dated October 25, 2004 between PWE (MULTI) QRS 14-85 INC, and the Registrant. (Incorporated by reference to Exhibit 10.56 to the Registrant’s Form 10-K for the year ended December 31, 2004.)     10.33    Amended and Restated PVC Resin Supply Agreement dated February 1, 2005. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005.)     10.34    First Amendment to Fourth Amended and Restated Loan and Security Agreement between the Registrant and Fleet Capital Corporation, dated March 15, 2005. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005.)     10.35    First Amendment to Senior Subordinated Note Purchase Agreement and Junior Subordinated Note Purchase Agreement between the Registrant and Churchill Capital Partners IV, L.P., dated March 15, 2005. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005.)     10.36    First Amendment to Credit and Security Agreement and Waiver of Defaults between USPoly Company and Wells Fargo Business Credit, Inc., dated March 10, 2005. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005.)     10.37    First Amendment to Subordination Agreement between Wells Fargo Business Credit, Inc., Medallion Capital, Inc., USPoly Company, and Spell Capital Partners, dated March 10, 2005. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005.)     10.38    Warrant issued to Adizes USA, dated September 30, 2005. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005.)     10.39    Second Amendment to Fourth Amended and Restated Loan and Security Agreement and First Amendment to Subordination Agreement, dated September 30, 2005, among the Company, Bank of America, N.A. and Churchill Capital Partners IV, L.P. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005.)     21    List of Subsidiaries of the Registrant: USPoly Company, LLC (State of Organziation: Minnesota).     23.1    Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.***     23.2    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.***     24    Power of Attorney from certain directors and officers – see “Signatures” on signature page of this Form 10-K.     31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***     31.2    Certification of Chief Financial Officer and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***     32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***     32.2    Certification of Chief Financial Officer and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***    * Compensatory plan or arrangement    ** SEC File No. 0-18050 unless otherwise indicated    *** Filed herewith    60      EX-23.1 2 dex231.htm CONSENT OF GRANT THORNTON, LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   Consent of Grant Thornton, LLP, Independent Registered Public Accounting Firm   Exhibit 23.1    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    We have issued our report dated March 10, 2006, accompanying the consolidated financial statements included in the Annual Report of PW Eagle Inc. on Form 10-K for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said report in the Registration Statements of PW Eagle, Inc. on Forms S-8 (File Nos. 333-17027, 333-26047, 333-34492, 333-64002).         /s/ GRANT THORNTON LLP   Grant Thornton LLP   Portland, Oregon March 29, 2006    61      EX-23.2 3 dex232.htm CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT REGISTERED PUBLIC ACCT FIRM   Consent of PricewaterhouseCoopers LLP, Independent Registered Public Acct Firm   Exhibit 23.2    CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-17027, 333-26047, 333-34492 and 333-64002) of PW Eagle, Inc. (formerly Eagle Plastics Industries, Inc.) of our reports dated March 25, 2005 relating to the financial statements and financial statement schedule which appears in this Form 10-K.         /s/ PRICEWATERHOUSECOOPERS LLP   PricewaterhouseCoopers LLP   Minneapolis, Minnesota March 28, 2006    62      EX-31.1 4 dex311.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302   Certification of Chief Executive Officer pursuant to Section 302   Exhibit 31.1    CERTIFICATION    I, Jerry A. Dukes, Chief Executive Officer of PW Eagle, Inc., certify that:      1. I have reviewed this report on Form 10-K of PW Eagle, Inc.;      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:        a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;        b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and        c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):        a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and        b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.    Dated: March 28, 2006          Signature:    /s/    JERRY A. DUKES       Jerry A. Dukes Chief Executive Officer    63      EX-31.2 5 dex312.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER AND TREASURER PURSUANT TO SECTION 302   Certification of Chief Financial Officer and Treasurer pursuant to Section 302   Exhibit 31.2    CERTIFICATION    I, Scott Long, Chief Financial Officer of PW Eagle, Inc., certify that:      1. I have reviewed this report on Form 10-K of PW Eagle, Inc.;      2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;      3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:        a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;        b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and        c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):        a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and        b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.    Dated: March 28, 2006          Signature:    /s/    SCOTT LONG       Scott Long Chief Financial Officer    64      EX-32.1 6 dex321.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906   Certification of Chief Executive Officer pursuant to Section 906   Exhibit 32.1    CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002    In connection with the Annual Report of PW Eagle, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the “Report”), I, Jerry A. Dukes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:        (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.    Dated: March 28, 2006         /s/    JERRY A. DUKES Jerry A. Dukes Chief Executive Officer    65      EX-32.2 7 dex322.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER AND TREASURER PURSUANT TO SECTION 906   Certification of Chief Financial Officer and Treasurer pursuant to Section 906   Exhibit 32.2    CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002    In connection with the Annual Report of PW Eagle, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the “Report”), I, Scott Long, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:        (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and        (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.    Dated: March 28, 2006         /s/    SCOTT LONG Scott Long Chief Financial Officer    66      -----END PRIVACY-ENHANCED MESSAGE-----