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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-9859
PIONEER COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1215192
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
700 LOUISIANA STREET, SUITE 4300, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(713) 570-3200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
On April 30, 2003, there were outstanding 10,003,000 shares of Common Stock
of Pioneer Companies, Inc.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets -- March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations -- Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Certain statements in this Form 10-Q regarding future expectations of
Pioneer's business and Pioneer's results of operations, financial condition and
liquidity may be regarded as "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act. Such statements are subject to
various risks, including, but not limited to, Pioneer's high financial leverage,
global economic conditions, the demand and prices for Pioneer's products,
Pioneer and industry production volumes, competitive prices, the cyclical nature
of the markets for many of Pioneer's products and raw materials, the effect of
Pioneer's results of operations on its debt agreements, and other risks and
uncertainties. Attention is directed to Pioneer's Annual Report on Form 10-K and
Item 5 of Part II of this Report on Form 10-Q for a discussion of such risks and
uncertainties. Actual outcomes may vary materially.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PIONEER COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,023 $ 2,789
Accounts receivable, net of allowance for doubtful accounts of $ 3,091 at
March 31, 2003 and $1,337 at December 31, 2002 41,517 39,983
Inventories, net 17,276 15,311
Current derivative asset -- 17,834
Prepaid expenses and other current assets 3,827 4,779
------------ ------------
Total current assets 69,643 80,696
Property, plant and equipment:
Land 6,519 7,315
Buildings and improvements 31,999 35,469
Machinery and equipment 179,039 217,555
Construction in progress 4,673 4,085
------------ ------------
222,230 264,424
Less: accumulated depreciation (24,225) (22,155)
------------ ------------
Net property, plant and equipment 198,005 242,269
Other assets 3,933 25,755
Non-current derivative asset -- 41,362
Excess reorganization value over the fair value of identifiable assets 84,064 84,064
------------ ------------
Total assets $ 355,645 $ 474,146
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,747 $ 20,193
Accrued liabilities 19,609 18,161
Current derivative liability -- 37,614
Short-term debt, including current portion of long-term debt 19,900 21,112
------------ ------------
Total current liabilities 61,256 97,080
Long-term debt, less current portion 206,601 207,463
Accrued pension and other employee benefits 27,497 26,132
Non-current derivative liability -- 108,852
Other long-term liabilities 42,661 33,367
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $.01 par value, authorized 50,000 shares, issued and
outstanding 10,000 shares 100 100
Additional paid-in capital 10,933 10,933
Other comprehensive loss (5,024) (5,024)
Retained earnings (deficit) 11,621 (4,757)
------------ ------------
Total stockholders' equity 17,630 1,252
------------ ------------
Total liabilities and stockholders' equity $ 355,645 $ 474,146
============ ============
See notes to consolidated financial statements.
3
PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
---------- ----------
Revenues $ 89,031 $ 71,796
Cost of sales - product (84,591) (68,681)
Cost of sales - derivatives (20,999) 1,483
---------- ----------
Total cost of sales 105,590 67,198
---------- ----------
Gross profit (loss) (16,559) 4,598
Selling, general and administrative expenses (8,358) (5,602)
Change in fair value of derivatives 87,271 17,999
Asset impairment and other charges (40,818) (3,127)
---------- ----------
Operating income 21,536 13,868
Interest expense, net (4,811) (4,704)
Other expense, net (1,880) (33)
---------- ----------
Income before income taxes 14,845 9,131
Income tax benefit 1,533 732
---------- ----------
Net income $ 16,378 $ 9,863
========== ==========
Net income per share:
Basic $ 1.64 $ 0.99
Diluted $ 1.63 $ 0.99
Weighted average number of common shares outstanding:
Basic 10,000 10,000
Diluted 10,029 10,000
See notes to consolidated financial statements.
4
PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
---------- ----------
Operating activities:
Net income $ 16,378 $ 9,863
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 5,194 6,253
Provision for (recovery of) losses on accounts receivable 1,754 (767)
Net change in deferred taxes 1,165 (795)
Change in fair value of derivatives (66,272) (17,999)
Asset impairment 40,818 --
Foreign exchange loss 1,883 121
Net effect of changes in operating assets and liabilities 9,646 8,846
---------- ----------
Net cash flows from operating activities 10,566 5,522
---------- ----------
Investing activities:
Capital expenditures (1,724) (866)
---------- ----------
Net cash flows from investing activities (1,724) (866)
---------- ----------
Financing activities:
Net proceeds under revolving credit arrangements (244) (1,338)
Payments on debt (2,025) (151)
---------- ----------
Net cash flows from financing activities (2,269) (1,489)
---------- ----------
Effect of exchange rate changes on cash (2,339) 61
---------- ----------
Net change in cash and cash equivalents 4,234 3,228
Cash and cash equivalents at beginning of period 2,789 3,624
---------- ----------
Cash and cash equivalents at end of period $ 7,023 $ 6,852
========== ==========
See notes to consolidated financial statements.
5
PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pioneer
Companies, Inc. (the "Company" or "PCI") and its consolidated subsidiaries
(collectively, "Pioneer"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Pioneer operates in one industry segment, the production, marketing and
selling of chlor-alkali and related products. Pioneer operates in one geographic
area, North America. Pioneer conducts its primary business through its operating
subsidiaries: PCI Chemicals Canada Company ("PCI Canada") and Pioneer Americas
LLC ("Pioneer Americas").
The consolidated balance sheet at March 31, 2003 and the consolidated
statements of operations and cash flows for the periods presented are unaudited
and reflect all adjustments, consisting of normal recurring items, which
management considers necessary for a fair presentation. Operating results for
the first three months of 2003 are not necessarily indicative of results to be
expected for the year ending December 31, 2003. All significant intercompany
balances and transactions have been eliminated in consolidation. All dollar
amounts in the tabulations in the notes to the consolidated financial statements
are stated in thousands of dollars unless otherwise indicated. Certain amounts
have been reclassified in prior years to conform to the current year
presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires estimates
and assumptions that affect the reported amounts as well as certain disclosures.
Pioneer's financial statements include amounts that are based on management's
best estimates and judgments. Actual results could differ from those estimates.
The consolidated balance sheet at December 31, 2002 is derived from the
December 31, 2002 audited consolidated financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America, since certain information and disclosures normally
included in the notes to the financial statements have been condensed or omitted
as permitted by the rules and regulations of the Securities and Exchange
Commission. The accompanying unaudited financial statements should be read in
conjunction with the financial statements contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
2. MATTERS AFFECTING LIQUIDITY
At March 31, 2003, Pioneer's senior secured debt aggregated $214.5
million, consisting of Senior Secured Floating Rate Guaranteed Notes due 2006 in
the aggregate principal amount of $45.4 million (the "Senior Guaranteed Notes"),
Floating Rate Term Notes due 2006 in the aggregate principal amount of $4.6
million (the "Senior Floating Notes"), 10% Senior Secured Guaranteed Notes due
2008 in the aggregate principal amount of $150 million (the "10% Senior Secured
Notes"), and $14.5 million outstanding under a Revolving Credit Facility with a
$30 million commitment and a borrowing base restriction (the "Revolver").
Collectively, the $200 million in Senior Guaranteed Notes, Senior Floating Notes
and 10% Senior Secured Notes are referred to as the Senior Notes and together
with the Revolver are referred to as the Senior Secured Debt.
The Senior Secured Debt requires payments of interest in cash and contains
various covenants including financial covenants in the Revolver (which if
violated will create a default under the cross-default provisions of the Senior
Notes) that obligate Pioneer to comply with certain cash flow requirements. The
interest payment requirements of the Senior Secured Debt and the financial
covenants in the Revolver were set at levels based on projections at the time
and do not accommodate significant downward variations in operating results.
Despite recent increases in product prices, there are still constraints on
Pioneer's liquidity. Energy costs associated with producing chlor-alkali
products can materially affect Pioneer's results of operations since each one
dollar change in the cost of a megawatt hour of electricity generally results in
approximately a $2.75 change in Pioneer's cost of production. During the quarter
ended March 31, 2003, both product prices and energy costs experienced
significant increases. Further increases in the cost of electricity in the
absence of product price increases may cause Pioneer to be unable to meet all of
its operational funding and debt service obligations during the remainder of
2003. In that event, additional amendments of or waivers under Pioneer's debt
agreements or deferrals of interest payments would likely be necessary. Pioneer
cannot provide any assurance that it
6
would be able to obtain these amendments, waivers or deferrals, or that in the
alternative it would be successful in refinancing, restructuring or reorganizing
all or a portion of its indebtedness, selling assets, or obtaining additional
debt or equity financing.
The Revolver, as amended, requires Pioneer to generate at least:
- $10.640 million of net earnings before extraordinary gains,
the effects of derivative instruments excluding derivative
expenses paid by Pioneer, interest, income taxes, depreciation
and amortization (referred to as "Lender-Defined EBITDA")
during the quarter ending March 31, 2003, and
- $21.550 million of Lender-Defined EBITDA for the twelve-month
period ending March 31, 2003, and for each twelve month period
ending each fiscal quarter thereafter.
Pioneer had negative Lender-Defined EBITDA for the three months and
twelve-months ended March 31, 2003. Pioneer has obtained a waiver from the
lender under the Revolver for the noncompliance with the covenant requirement.
Pioneer expects that charges related to the Tacoma impairment in the fourth
quarter of 2002, discussed in the Annual Report on Form 10-K for the year ended
December 31, 2002, and charges related to the Henderson impairment and the
addition to the environmental reserve in the first quarter of 2003, discussed in
Notes 4 and 5, respectively, will likely result in the need for future waivers
from the lender under the Revolver, since the impairments and the environmental
charge will have a negative effect on Lender-Defined EBITDA for the twelve-month
periods ending each quarter through March 31, 2004.
The Revolver requires Pioneer to maintain Liquidity (as defined) of at
least $5.0 million, and limits annual capital expenditure levels to $25.0
million. At March 31, 2003, Liquidity was $19.3 million, consisting of borrowing
availability of $12.3 million and cash of $7.0 million. Capital expenditures
were $1.7 million during the first three months of 2003.
The Revolver also provides that as a condition of borrowings there shall
not have occurred any material adverse change in Pioneer's business, prospects,
operations, results of operations, assets, liabilities or condition (financial
or otherwise).
If the required Lender-Defined EBITDA level under the Revolver is not met
and the lender under the Revolver does not waive Pioneer's failure to comply
with the requirement, Pioneer will be in default under the terms of the
Revolver. Moreover, if conditions constituting a material adverse change occur
or have occurred, the lender can exercise its rights under the Revolver and
refuse to make further advances. Following any such refusal, customer receipts
would be applied to Pioneer's borrowings under the Revolver, and Pioneer would
not have the ability to reborrow. This would cause Pioneer to suffer a rapid
loss of liquidity and it would lose the ability to operate on a day-to-day
basis. In addition, a default under the Revolver would allow the lender to
accelerate the outstanding indebtedness under the Revolver and would also result
in a cross-default under the Senior Notes which would provide the holders of the
Senior Notes with the right to accelerate the $200 million in Senior Notes
outstanding and demand immediate repayment.
The Senior Guaranteed Notes and Senior Floating Notes (collectively, the
"Tranche A Notes") provide that, within 60 days after the end of each calendar
quarter during 2003 through 2006, Pioneer Americas is required to redeem (i)
$2.5 million principal amount of Tranche A Notes if Pioneer Americas' net income
before extraordinary items, other income, net, interest, income taxes,
depreciation and amortization ("Tranche A Notes EBITDA") for such calendar
quarter is greater than $20 million but less than $25 million, (ii) $5 million
principal amount of Tranche A Notes if Tranche A Notes EBITDA for such calendar
quarter is greater than $25 million but less than $30 million and (iii) $7.5
million principal amount of Tranche A Notes if Tranche A Notes EBITDA for such
calendar quarter is greater than $30 million, in each case plus accrued and
unpaid interest thereon to the redemption date. Pioneer expects to redeem $2.5
million of the principal amount of the Tranche A Notes on or before May 30,
2003, as a result of the application of this provision.
The uncertainties affecting Pioneer's liquidity as a result of the
restrictive financial covenants and redemption obligations described above raise
concern about Pioneer's ability to continue as a going concern. The accompanying
consolidated financial statements have been prepared on the going concern basis
of accounting, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The consolidated financial
statements do not include any adjustments that may result from the outcome of
the uncertainties discussed above.
3. SETTLEMENT OF DISPUTE WITH THE COLORADO RIVER COMMISSION
On March 3, 2003, all of the conditions were satisfied with respect to the
settlement of Pioneer's dispute with the Colorado River Commission ("CRC"), a
Nevada state agency, regarding the supply of power to Pioneer's Henderson
facility.
7
As a result of the settlement, which was effective as of January 1, 2003,
Pioneer was released from all claims for liability with respect to electricity
derivatives agreements, and all litigation between Pioneer and CRC has been
dismissed.
In accordance with the terms of the settlement, Pioneer assigned its
long-term hydropower contracts to the Southern Nevada Water Authority and
entered into a new supply agreement with CRC. CRC will provide power to meet
approximately 85% of the Henderson facility's needs at market rates during a
term extending to December 31, 2006, although Pioneer and CRC may agree to
extend the term. CRC retained all proceeds it had received related to the
derivatives agreements, but it was agreed that $3 million of such amount is
being held by CRC as a cash reserve to secure Pioneer's performance under the
supply agreement.
As of December 31, 2002, Pioneer had recorded a net liability of $87.3
million for the net mark-to-market loss on outstanding derivative positions, and
a receivable from CRC of $21.0 million, included in "Other Assets" on the
balance sheet, for estimated proceeds received by CRC for matured derivative
contracts. Due to the settlement of the dispute with CRC, both the $87.3 million
net liability and the $21.0 million receivable were reversed in the first
quarter of 2003, resulting in a non-cash net gain of $66.3 million, which is
recorded in the consolidated statement of operations for the period as $87.3
million of operating income under the caption "Change in the Fair Value of
Derivatives," to reflect the reversal of the previously recorded mark-to-market
loss, and $21.0 million of "Cost of Sales - Derivatives," reflecting the
reversal of the receivable from CRC.
4. ASSET IMPAIRMENT AND OTHER CHARGES
Pioneer evaluates long-lived assets for impairment whenever indicators of
impairment exist. Under applicable accounting standards, if the sum of the
future cash flows expected to result from an asset, undiscounted and without
interest, is less than the book value of the asset, asset impairment must be
recognized. The amount of impairment is calculated by subtracting the fair value
of the asset from the book value of the asset. As disclosed in Pioneer's Annual
Report on Form 10-K for the year ended December 31, 2002, fluctuations in
anticipated future product prices and energy costs can have a material impact on
Pioneer's results of operations.
Under the new supply agreement discussed in Note 3, CRC will provide power
to meet the majority of the Henderson plant's needs at market rates. The market
rates are expected to be higher than the rates under the long-term hydropower
contracts that were assigned to the Southern Nevada Water Authority as part of
the settlement of the dispute with CRC. As a result, Pioneer performed an
impairment test and determined that the book value of the Henderson facility
exceeded the undiscounted sum of future expected cash flows over the remaining
life of the facility. Pioneer then calculated the estimated fair value of the
facility by discounting expected future cash flows using a risk adjusted
discount rate of 13%. Based on that analysis, Pioneer recorded an impairment
charge of $40.8 million in the first quarter of 2003.
In March 2002, Pioneer idled its chlor-alkali plant in Tacoma due to poor
market conditions. As a result Pioneer recorded $1.9 million of severance
expense relating to employee terminations and $1.0 million of other exit costs
in the quarter ended March 31, 2002.
5. ENVIRONMENTAL LIABILITIES
Pioneer and its operations are subject to extensive United States and
Canadian federal, state, provincial and local laws, regulations, rules and
ordinances relating to pollution, the protection of the environment and the
release or disposal of regulated materials. The operation of any chemical
manufacturing plant and the distribution of chemical products entail certain
obligations under current environmental laws.
In order to reassess Pioneer's environmental obligations and to update an
independent environmental analysis conducted in 2000, Pioneer commissioned a new
study of environmental concerns at all of its plants. The new study involved a
plant-by-plant analysis of environmental concerns and assessed conditions,
situations, and sets of circumstances involving uncertainty as to a possible
loss to Pioneer. The outcomes of uncertain conditions will be resolved when one
or more future events occur or fail to occur, and resolution of the uncertainty
may confirm the impairment of an asset or the incurrence of a liability. The
study was based on scenario analysis to estimate the cost to remedy
environmental concerns at Pioneer's plant sites. For each scenario, the study
also used cost estimating techniques that included actual historical costs,
estimates prepared for Pioneer by other consultants, estimates prepared by
Pioneer engineers and other published cost data available for similar projects
completed at the same or other sites.
The study, completed in May 2003, identified a number of conditions that
have changed since the 2000 environmental analysis, including, but not limited
to, flexibility in regulatory agency guidance, increased knowledge of site
conditions, the use
8
of alternative remediation technologies, post-acquisition contamination not
covered under existing environmental indemnity agreements and the inherent risk
of disputes under some of the indemnity agreements due to passage of time. Based
on the recent study, Pioneer estimated its total environmental remediation
liabilities to be $21.0 million, of which $3.2 million is subject to indemnity
claims against a previous owner, as discussed below. As a result, Pioneer
recorded an environmental charge of $9.5 million in the first quarter of 2003,
which is included in "Cost of Sales - Products" in the consolidated statement of
operations. As of March 31, 2003, the total estimated environmental liabilities
of $21.0 million that were included as "Other Long Term Liabilities" on
Pioneer's consolidated balance sheet reflected an increase of $9.4 million as
compared to December 31, 2002, primarily as a result of the environmental charge
in the first quarter of 2003. Pioneer bases its environmental reserves on
undiscounted costs. See Note 8.
As discussed in the Annual Report on Form 10-K for the year ended December
31, 2002, Pioneer has indemnity agreements with certain previous owners
covering, among other things, pre-acquisition environmental conditions at
certain of its plant sites. The 2000 independent study resulted in a $3.2
million environmental reserve related to pre-acquisition conditions at the
Henderson site that is the responsibility of a previous owner. At the same time
a receivable from the previous owner for the same amount was recorded. Pioneer
believes that the previous owner will continue to honor its obligations for
claims properly presented by Pioneer or by regulatory authorities, although it
is possible that disputes could arise concerning the effect of contractual
language, in which event Pioneer would have to subject any claims for cleanup
expenses, which could be substantial, to the contractually-established
arbitration process. The recent study did not include environmental matters
covered by the $3.2 million environmental receivable as such matters are not
currently estimable. Such amount, as originally estimated, is included in the
consolidated balance sheet as of March 31, 2003, in offsetting amounts in "Other
Assets" and "Other Long Term Liabilities." The recent study also did not cover
any environmental matters Pioneer believes to be fully covered under other
indemnity agreements as such costs are not currently estimable.
6. DEBT
Long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
Senior Secured Debt:
Senior Guaranteed Notes, due December 2006, variable interest rates based on the
three-month LIBOR rate plus 3.5% ................................................. $ 45,422 $ 45,422
Senior Floating Notes, due December 2006, variable interest rates based on the
three-month LIBOR rate plus 3.5% ................................................. 4,578 4,578
10% Senior Secured Notes, due December 2008 ......................................... 150,000 150,000
Revolver; variable interest rates based on U.S. prime rate plus a margin ranging
from 2.75% to 3.50%, expiring December 31, 2004 .................................. 14,460 14,704
Other debt:
Promissory notes issued in respect of professional fees(1) .......................... 3,428 3,428
Unsecured, non-interest-bearing, long-term debt, denominated in Canadian dollars
(amounts below are in Canadian dollars), original face value of $5.5 million,
payable in five annual installments of $1.0 million and a final payment of $0.5
million, beginning January 10, 2002, with an effective interest rate of 8.25%, net
of unamortized discount of $0.4 million and $0.6 million at March 31, 2003 and
December 31, 2002, respectively .................................................. 2,020 2,473
Other notes, maturing in various years through 2014, with various
installments, at various interest rates .......................................... 6,086 6,450
---------- ----------
Total ............................................................................ 225,994 227,055
Current maturities of long-term debt ................................................ (19,393) (19,592)
---------- ----------
Long-term debt, less current maturities .......................................... $ 206,601 $ 207,463
========== ==========
(1) On April 17, 2003, Pioneer's obligations under one such note, with a
principal amount of $2.8 million, were satisfied. The note bore
interest at a variable rate based on the three-month LIBOR rate plus
3.5%. The holder of the remaining note, with a principal amount
outstanding of $0.6 million, agreed to extend the maturity date of
the note from July 1, 2003 to November 15, 2003, with interest
accruing during the period ending on July 1, 2003 at a variable rate
based on the three-month LIBOR rate plus 3.5%, and accruing during
the period July 2, 2003 through November 15, 2003 at 9% per annum.
9
In addition to the long-term debt shown above, at March 31, 2003 and
December 31, 2002 Pioneer had short-term notes payable of $0.5 million and $1.5
million, respectively, related to insurance premium financing. The interest rate
on the short-term notes is 5.36%. The amount owed is payable in monthly
installments through June 1, 2003.
On March 31, 2003, senior secured debt outstanding under various debt
instruments consisted of the Senior Guaranteed Notes, the Senior Floating Notes,
the 10% Senior Secured Notes and the Revolver. In addition, at March 31, 2003,
Pioneer had $3.4 million of promissory notes for fees owed to professionals;
$2.0 million (net of discount) for an unsecured non-interest bearing instrument
payable to a critical vendor for the settlement of pre-petition amounts owed to
that vendor, which contains a covenant that allows the vendor to demand
immediate repayment and begin charging interest at a rate of 9.3% if Pioneer's
liquidity falls below $5 million (Canadian dollars); $1.0 million payable over
several years to another critical vendor; and $5.1 million of other debt
outstanding, comprised of notes maturing in various years through 2014.
The Revolver provides for revolving loans in an aggregate amount up to $30
million, subject to borrowing base limitations related to the level of accounts
receivable, inventory and reserves. The Revolver provides for up to an
additional $20 million of availability in the event of successful syndication of
additional credit to one or more lenders acceptable to the lender, but it is not
anticipated that such syndication efforts will occur in the near future.
Borrowings under the Revolver are available through December 31, 2004, so long
as no default exits and all conditions to borrowings are met. Because the
Revolver requires a lock-box arrangement and contains a clause that allows the
lender to refuse to fund further advances in the event of a material adverse
change in Pioneer's business, the Revolver must be classified as current debt.
Borrowings under the Revolver accrue interest determined on the basis of the
prime rate plus a margin. Pioneer incurs a fee on the unused amount of the
facility at a rate of .375% per year. Note 2 includes a discussion of the
financial covenants included in the Revolver, and Pioneer's compliance with
those covenants.
Pioneer is required to make mandatory redemptions of Senior Floating Notes
and Senior Guaranteed Notes from and to the extent of net cash proceeds of
certain asset sales, new equity issuances in excess of $5 million and excess
cash flow (as defined in the related agreements). Pioneer is also required to
make mandatory prepayments if certain levels of Tranche A Notes EBITDA are
realized, and if there is a change of control. See Note 2 for a more detailed
discussion of an anticipated prepayment obligation relating to Tranche A Notes
EBITDA.
The holders of the 10% Senior Secured Notes may require Pioneer to redeem
10% Senior Secured Notes with net cash proceeds of certain asset sales and of
new equity issuances in excess of $35 million (if there is no indebtedness
outstanding under the Senior Floating Notes and the Senior Guaranteed Notes). In
addition, the holders may require Pioneer to repurchase all or a portion of the
notes upon the occurrence of a change of control.
Pioneer may prepay amounts owed on the Senior Guaranteed Notes, the 10%
Senior Secured Notes and the Senior Floating Notes in minimum amounts of
$1.0 million or more, and Pioneer may, at its option, terminate the Revolver. If
the Revolver is terminated early, there will be a premium due that ranges from
1% to 3% of $50 million, depending upon the termination date. On or after
December 31, 2005, Pioneer may redeem some or all of the 10% Senior Secured
Notes by paying the holders a percentage declining from 105% to 100% (depending
on the year of redemption) of the stated principal amount plus accrued and
unpaid interest to the redemption date.
The obligations under the Revolver are secured by liens on Pioneer's
accounts receivable and inventory, and the obligations under the Senior Notes
are secured by liens on substantially all of Pioneer's other assets, with the
exception of certain assets that secure the obligations outstanding under
certain other long-term liabilities.
The debt agreements contain covenants that require Pioneer to meet minimum
liquidity levels and that limit Pioneer's ability to, among other things, incur
additional indebtedness, prepay or modify debt instruments, grant additional
liens, guarantee any obligations, sell assets, engage in another type of
business or suspend or terminate a substantial portion of business, declare or
pay dividends, make investments, make capital expenditures in excess of certain
amounts, or make use of the proceeds of borrowings for purposes other than those
specified in the agreements. The agreements also include customary events of
default, including a change of control under the Revolver. Borrowings under the
Revolver will generally be available subject to the accuracy of all
representations and warranties, including the absence of a material adverse
change and the absence of any default or event of default.
10
7. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
Raw materials, supplies and parts, net $ 7,755 $ 8,105
Finished goods and work-in-process 8,984 7,117
Inventories under exchange agreements 537 89
------------ ------------
$ 17,276 $ 15,311
============ ============
8. COMMITMENTS AND CONTINGENCIES
Present or future laws may affect Pioneer's capital and operating costs
relating to compliance, may impose cleanup requirements with respect to site
contamination resulting from past, present or future spills and releases and may
affect the markets for Pioneer's products. Pioneer believes that its operations
are currently in general compliance with environmental laws and regulations, the
violation of which could result in a material adverse effect on Pioneer's
business, properties or results of operations on a consolidated basis. There can
be no assurance, however, that material costs will not be incurred as a result
of instances of noncompliance or new regulatory requirements.
Pioneer relies on certain indemnities from previous owners and has
adequate environmental reserves covering known and estimable environmental
liabilities at its chlor-alkali plants and other facilities. There can be no
assurance, however, that such indemnity agreements will be adequate to protect
Pioneer from environmental liabilities at these sites or that such parties will
perform their obligations under the respective indemnity agreements. The failure
by such parties to perform under these indemnity agreements and/or any material
change in Pioneer's environmental obligations will have a material adverse
effect on Pioneer's future results of operations and liquidity. See Note 5.
Pioneer is subject to various legal proceedings and potential claims
arising in the ordinary course of its business. In the opinion of management,
Pioneer has adequate legal defenses and/or insurance coverage with respect to
these matters, and management does not believe that they will materially affect
Pioneer's operations or financial position.
9. CONSOLIDATING FINANCIAL STATEMENTS
PCI Canada (a wholly-owned subsidiary of PCI) is the issuer of the $150
million in principal amount of 10% Senior Secured Notes, which are fully and
unconditionally guaranteed on a joint and several basis by PCI and all of PCI's
other direct and indirect wholly-owned subsidiaries.
Pioneer Americas (a wholly-owned subsidiary of PCI Canada) is the issuer
of the Tranche A Notes, which are fully and unconditionally guaranteed on a
joint and several basis by PCI and all of PCI's other direct and indirect
wholly-owned subsidiaries. Together, PCI Canada, Pioneer Americas and the
subsidiary note guarantors comprise all of the direct and indirect subsidiaries
of PCI.
11
Condensed consolidating financial information for PCI and its wholly-owned
subsidiaries is presented below.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................... $ -- $ 1,856 $ 5,156 $ 11 $ -- $ 7,023
Accounts receivable, net ..................... -- 10,636 30,881 -- -- 41,517
Inventories, net ............................. -- 5,673 11,603 -- -- 17,276
Prepaid expenses and other current assets .... 1,885 1,704 238 -- -- 3,827
---------- ---------- ---------- ---------- ---------- ----------
Total current assets ..................... 1,885 19,869 47,878 11 -- 69,643
Property, plant and equipment, net ............ -- 120,144 76,333 1,528 -- 198,005
Other assets .................................. -- -- 3,933 -- -- 3,933
Intercompany receivable ....................... -- 76,147 -- 61,638 (137,785) --
Investment in subsidiaries .................... 23,783 -- -- -- (23,783) --
Excess reorganization value over the fair
value of identifiable assets ................. -- 84,064 -- -- -- 84,064
---------- ---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 25,668 $ 300,224 $ 128,144 $ 63,177 $ (161,568) $ 355,645
========== ========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ............................. $ -- $ 9,804 $ 11,910 $ 33 $ -- $ 21,747
Accrued liabilities .......................... -- 7,442 12,167 -- -- 19,609
Short-term debt and current portion of
long-term debt ............................. 507 521 18,845 27 -- 19,900
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities ................ 507 17,767 42,922 60 -- 61,256
Long-term debt, less current portion .......... -- 151,499 55,019 83 -- 206,601
Investment in subsidiary ...................... -- 133,897 -- -- (133,897) --
Intercompany payable .......................... 7,531 -- 130,255 -- (137,786) --
Accrued pension and other employee benefits ... -- 9,654 17,843 -- -- 27,497
Other long-term liabilities ................... -- 24,406 16,002 2,253 -- 42,661
Stockholders' equity (deficiency in assets) ... 17,630 (36,999) (133,897) 60,781 110,115 17,630
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity
(deficiency in assets) ................. $ 25,668 $ 300,224 $ 128,144 $ 63,177 $ (161,568) $ 355,645
========== ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ -- $ 1,702 $ 1,074 $ 13 $ -- $ 2,789
Accounts receivable, net .................... -- 9,462 30,521 -- -- 39,983
Inventories, net ............................ -- 5,865 9,446 -- -- 15,311
Current derivative asset .................... -- -- 17,834 -- -- 17,834
Prepaid expenses and other current assets ... 2,687 1,702 390 -- -- 4,779
---------- ---------- ---------- ---------- ---------- ----------
Total current assets ................... 2,687 18,731 59,265 13 -- 80,696
Property, plant and equipment, net ............ -- 122,558 118,183 1,528 -- 242,269
Other assets ................................. -- -- 25,755 -- -- 25,755
Intercompany receivable ...................... -- 70,265 -- 54,526 (124,791) --
Investment in subsidiaries ................... 7,314 -- -- -- (7,314) --
Non-current derivative asset ................. -- -- 41,362 -- -- 41,362
Excess reorganization value over the fair
value of identifiable assets ............... -- 84,064 -- -- -- 84,064
---------- ---------- ---------- ---------- ---------- ----------
Total assets ........................... $ 10,001 $ 295,618 $ 244,565 $ 56,067 $ (132,105) $ 474,146
========== ========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable ............................. $ -- $ 6,679 $ 13,481 $ 33 $ -- $ 20,193
Accrued liabilities .......................... 5 6,119 12,037 -- -- 18,161
Current derivative liability ................. -- -- 37,614 -- -- 37,614
Current portion of long-term debt ............ 1,520 474 19,091 27 -- 21,112
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities ................ 1,525 13,272 82,223 60 -- 97,080
Long-term debt, less current portion .......... -- 151,999 55,375 89 -- 207,463
Investment in subsidiary ...................... -- 146,947 -- -- (146,947) --
Intercompany payable .......................... 7,224 -- 117,567 -- (124,791) --
Accrued pension and other employee benefits ... -- 8,865 17,267 -- -- 26,132
Non-current derivative liability .............. -- -- 108,852 -- -- 108,852
Other long-term liabilities ................... -- 20,739 10,228 2,400 -- 33,367
Stockholders' equity (deficiency in assets) .. 1,252 (46,204) (146,947) 53,518 139,633 1,252
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity
(deficiency in assets) ................. $ 10,001 $ 295,618 $ 244,565 $ 56,067 $ (132,105) $ 474,146
========== ========== ========== ========== ========== ==========
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ------------ ------------
Revenues ...................................... $ -- $ 40,608 $ 68,177 $ -- $ (19,754) $ 89,031
Cost of sales ................................. -- (38,332) (87,093) 81 19,754 (105,590)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss) ........................... -- 2,276 (18,916) 81 -- (16,559)
Selling, general and administrative expenses .. (91) (1,981) (6,306) 20 -- (8,358)
Change in fair value of derivatives ........... -- -- 87,271 -- -- 87,271
Asset impairment and other charges ............ -- -- (40,818) -- -- (40,818)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) ....................... (91) 295 21,231 101 -- 21,536
Interest expense, net ......................... -- (3,791) (1,018) (2) -- (4,811)
Other income, net ............................. -- (1,881) (7,163) 7,164 -- (1,880)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ............. (91) (5,377) 13,050 7,263 -- 14,845
Income tax benefit ............................ -- 1,533 -- -- -- 1,533
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in earnings
of subsidiary ............................... (91) (3,844) 13,050 7,263 -- 16,378
Equity in net earnings of subsidiary .......... 16,469 13,050 -- -- (29,519) --
---------- ---------- ---------- ---------- ---------- ----------
Net income .................................... $ 16,378 $ 9,206 $ 13,050 $ 7,263 $ (29,519) $ 16,378
========== ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ---------- ------------ ------------
Revenues ...................................... $ -- $ 33,176 $ 52,058 $ -- $ (13,438) $ 71,796
Cost of sales ................................. -- (30,212) (50,426) 2 13,438 (67,198)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit .................................. -- 2,964 1,632 2 -- 4,598
Selling, general and administrative expenses .. (52) (1,514) (4,007) (29) -- (5,602)
Change in fair value of derivatives ........... -- -- 17,999 -- -- 17,999
Asset impairment and other charges ............ -- (3) (3,124) -- -- (3,127)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) ....................... (52) 1,447 12,500 (27) -- 13,868
Interest expense, net ......................... -- (3,781) (933) 10 -- (4,704)
Other income, net ............................. -- (125) 46 46 -- (33)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ............. (52) (2,459) 11,613 29 -- 9,131
Income tax benefit ............................ -- 732 -- -- -- 732
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in earnings
of subsidiary ............................... (52) (1,727) 11,613 29 -- 9,863
Equity in net earnings of subsidiary .......... 9,915 11,611 -- -- (21,526) --
---------- ---------- ---------- ---------- ---------- ----------
Net income .................................... $ 9,863 $ 9,884 $ 11,613 $ 29 $ (21,526) $ 9,863
========== ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS CONSOLIDATED
---------- ---------- ---------- ---------- ------------
Cash flows from operating activities:
Net cash flows from operating activities ............ $ 1,013 $ 3,852 $ 5,696 $ 5 $ 10,566
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures ................................ -- (710) (1,014) -- (1,724)
---------- ---------- ---------- ---------- ----------
Net cash flows from investing activities ......... -- (710) (1,014) -- (1,724)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds under revolving credit arrangements .... -- -- (244) -- (244)
Payments on debt .................................... (1,013) (649) (356) (7) (2,025)
---------- ---------- ---------- ---------- ----------
Net cash flows from financing activities ......... (1,013) (649) (600) (7) (2,269)
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash ............... -- (2,339) -- -- (2,339)
---------- ---------- ---------- ---------- ----------
Net change in cash and cash equivalents ............... -- 154 4,082 (2) 4,234
Cash and cash equivalents at beginning of period ...... -- 1,702 1,074 13 2,789
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period ............ $ -- $ 1,856 $ 5,156 $ 11 $ 7,023
========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS CONSOLIDATED
---------- ---------- ---------- ---------- ------------
Cash flows from operating activities:
Net cash flows from operating activities ............ $ -- $ 9,208 $ (3,723) $ 37 $ 5,522
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures ................................ -- (367) (499) -- (866)
---------- ---------- ---------- ---------- ----------
Net cash flows from investing activities ......... -- (367) (499) -- (866)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds under revolving credit
arrangements ...................................... -- (5,774) 4,436 -- (1,338)
Payments on long-term debt .......................... -- -- (144) (7) (151)
---------- ---------- ---------- ---------- ----------
Net cash flows from financing activities ......... -- (5,774) 4,292 (7) (1,489)
---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash ............... -- 61 -- -- 61
---------- ---------- ---------- ---------- ----------
Net change in cash and cash equivalents ............... -- 3,128 70 30 3,228
Cash and cash equivalents at beginning of period ...... -- 1,950 1,674 -- 3,624
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period ............ $ -- $ 5,078 $ 1,744 $ 30 $ 6,852
========== ========== ========== ========== ==========
13
10. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period. Diluted earnings per share considers, in
addition to the above, the dilutive effect of potentially issuable common shares
during the period.
Computational amounts for earnings per share are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
---------- ----------
Net income $ 16,378 $ 9,863
========== ==========
Basic earnings per share:
Weighted average number of common shares
outstanding 10,000 10,000
========== ==========
Net earnings per share $ 1.64 $ 0.99
========== ==========
Diluted earnings per share:
Weighted average number of common shares
outstanding 10,029 10,000
========== ==========
Net earnings per share $ 1.63 $ 0.99
========== ==========
Because the average market price of PCI's common stock exceeded the
exercise price of some of PCI's stock options, PCI had dilutive common stock
equivalents during the three months ended March 31, 2003. Because the exercise
price exceeded the average market price, 225,000 options outstanding during the
period were excluded from diluted earnings per share because they were
anti-dilutive. PCI had no potentially issuable common shares during the three
months ended March 31, 2002.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 143, "Accounting for Asset
Retirement Obligations." SFAS 143, which must be applied to fiscal years
beginning after June 15, 2002, addresses the financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. Pioneer adopted SFAS 143 effective
January 1, 2003, and the adoption did not have a material effect on Pioneer's
results of operations or financial condition.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Under SFAS No. 145 gains or losses from extinguishments of debt
that do not meet the criteria of Accounting Principles Board No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" should be reclassified to income from continuing operations in all
prior periods presented. Pioneer adopted SFAS No. 145 effective January 1, 2003,
and will reclassify gains on early extinguishments of debt and related taxes
previously recorded as an extraordinary item.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for fiscal years beginning
after December 31, 2002. SFAS 146 requires the liability for costs associated
with exit or disposal activities to be recognized when incurred, rather than at
the date of a commitment to an exit or disposal plan. Pioneer adopted SFAS 146
effective January 1, 2003, and the adoption did not impact Pioneer's results of
operations or financial condition. As required, Pioneer will apply SFAS 146
prospectively to exit or disposal activities initiated after December 31, 2002.
12. STOCK BASED COMPENSATION
At March 31, 2003, PCI had 671,000 options outstanding with exercise
prices ranging from $2.00 to $4.00 per share, a weighted average exercise price
of $2.99, and a weighted average remaining contractual life of 9.3 years. No
options were granted during the three months ended March 31, 2003 or 2002. Stock
options generally expire 10 years from the date of grant and fully vest after 3
years.
14
The fair value of each stock option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for the grants in 2002: risk free interest rate of
3.8%, no expected dividend yield for all years, expected life of 10 years, and
expected volatility of 95%. Had compensation expense for the plans been
determined consistent with SFAS 123, "Accounting for Stock Based Compensation,"
and SFAS 148, "Accounting for Stock Based Compensation Transition and
Disclosure," Pioneer's pro forma net income and income per common share for the
three months ended March 31, 2003 and 2002 would have been as indicated below:
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
Net income:
As reported ........................ $ 16,378 $ 9,863
Pro forma stock compensation expense (99) --
-------- --------
Pro forma net income ................. $ 16,279 $ 9,863
======== ========
Income per common share:
Basic, as reported ................. $ 1.64 $ 0.99
Basic, pro forma ................... $ 1.63 $ 0.99
Diluted, as reported ............... $ 1.63 $ 0.99
Diluted, pro forma ................. $ 1.62 $ 0.99
13. SUPPLEMENTAL CASH FLOW INFORMATION
Net effect of changes in operating assets and liabilities, excluding the
effect of exchange rate changes, are as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
Accounts receivable $ (2,562) $ 8,903
Inventories (1,544) 732
Prepaid expenses and other current assets 980 2,673
Other assets 800 (1,255)
Accounts payable 1,050 (6,552)
Accrued liabilities 994 5,276
Other long-term liabilities 9,928 (931)
-------- --------
Net change in operating assets and liabilities $ 9,646 $ 8,846
======== ========
Following are supplemental disclosures of cash flow information:
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
Cash payments for:
Interest $ 1,005 $ 343
Income taxes -- --
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes thereto.
RECENT PRICING TRENDS
Our ECU netback (that is, the price of an electrochemical unit, or "ECU,"
adjusted to eliminate the product transportation element) averaged $362 during
the three months ended March 31, 2003, compared with $317 for the three months
ended December 31, 2002 and $270 for all of 2002. The increase is the
continuation of a trend that began in July 2002. The recent increase resulted
from an 8% reduction in industry capacity from the 2001 level, which supported
higher prices for caustic soda, and there was also continuation of strong demand
for chlorine from vinyl producers. During the first quarter of 2003, we
announced further price increases that will be implemented during the second
quarter of 2003 as contracts permit, although individual contract terms may in
some cases limit or prohibit the imposition of the increases. We have also
announced our intention to impose a fuel surcharge in the future, based on
increases in the market price of natural gas (which is a basic component of the
cost of electricity, our largest raw material cost). Currently, the market price
of natural gas has not risen to a level justifying the imposition of the
surcharge, and competitive factors may limit our ability to impose the surcharge
in the future.
LIQUIDITY AND CAPITAL RESOURCES
Debt, Financial Leverage and Covenants. At March 31, 2003, our senior
secured debt aggregated $214.5 million, consisting of Senior Secured Floating
Rate Guaranteed Notes due 2006 in the aggregate principal amount of $45.4
million (the "Senior Guaranteed Notes"), Floating Rate Term Notes due 2006 in
the aggregate principal amount of $4.6 million (the "Senior Floating Notes"),
10% Senior Secured Guaranteed Notes due 2008 in the aggregate principal amount
of $150 million (the "10% Senior Secured Notes"), and $14.5 million outstanding
under a Revolving Credit Facility with a $30 million commitment and a borrowing
base restriction (the "Revolver"). Collectively, the $200 million in Senior
Guaranteed Notes, Senior Floating Notes and 10% Senior Secured Notes are
referred to as the Senior Notes and together with the Revolver are referred to
as the Senior Secured Debt.
The Senior Secured Debt requires payments of interest in cash and contains
various covenants including financial covenants in the Revolver (which if
violated will create a default under the cross-default provisions of the Senior
Notes) that obligate us to comply with certain cash flow requirements. The
interest payment requirements of the Senior Secured Debt and the financial
covenants in the Revolver were set at levels based on financial projections of
an assumed minimum ECU netback and do not accommodate significant downward
variations in operating results.
Despite recent increases in product prices, there are still constraints on
our liquidity. Energy costs associated with producing chlor-alkali products can
materially affect our results of operations since each one dollar change in the
cost of a megawatt hour of electricity generally results in approximately a
$2.75 change in our cost to produce an ECU. During the quarter ended March 31,
2003, both product prices and energy costs experienced significant increases.
Any further increases in the cost of electricity in the absence of product price
increases may cause us to be unable to meet all of our operational funding and
debt service obligations during the remainder of 2003. In that event, additional
amendments of or waivers under our debt agreements or deferrals of interest
payments will likely be necessary. We cannot provide any assurance that we would
be able to obtain these amendments, waivers or deferrals, or that in the
alternative we would be successful in refinancing, restructuring or reorganizing
all or a portion of our indebtedness, selling assets, or obtaining additional
debt or equity financing.
The Revolver, as amended, requires us to generate at least:
- $10.640 million of net earnings before extraordinary gains,
the effects of derivative instruments excluding derivative
expenses paid by us, interest, income taxes, depreciation and
amortization (referred to as "Lender-Defined EBITDA") during
the quarter ending March 31, 2003, and
- $21.550 million of Lender-Defined EBITDA for the twelve-month
period ending March 31, 2003, and for each twelve month period
ending each fiscal quarter thereafter.
We reported negative Lender-Defined EBITDA of $41.4 million and $40.2
million for the three months and twelve months ended March 31, 2003,
respectively. Those amounts were less than the amounts required under the
Revolver covenant for those periods. We have obtained a waiver from the lender
under the Revolver for the noncompliance with the covenant requirement. We
expect that charges related to the Tacoma impairment in the fourth quarter of
2002, discussed in our
16
Annual Report on Form 10-K for the year ended December 31, 2002, and charges
related to the Henderson impairment and the addition to the environmental
reserve in the first quarter of 2003, discussed in Notes 4 and 5, respectively,
to our consolidated financial statements, will likely result in the need for
future waivers from the lender under the Revolver, since the impairments and the
environmental charge will have a negative effect on Lender-Defined EBITDA for
the twelve-month periods ending each quarter through March 31, 2004.
We report amounts of Lender-Defined EBITDA that are generated by our
business because, as indicated above, there are covenants in the Revolver that
require us to generate specified levels of Lender-Defined EBITDA. Lender-Defined
EBITDA is not a measure of performance calculated in accordance with generally
accepted accounting principles in the United States. Lender-Defined EBITDA
should not be considered in isolation of, or as a substitute for, income before
income taxes as an indicator of operating performance or cash flows from
operating activities as a measure of liquidity. Lender-Defined EBITDA, as
calculated by us, may not be comparable to similar measures reported by other
companies. In addition, Lender-Defined EBITDA does not represent funds available
for discretionary use.
The reconciliation of Lender-Defined EBITDA to income before income taxes
is as follows:
THREE MONTHS ENDED
----------------------------------------------------------------
TWELVE MONTHS
ENDED MARCH 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
2003 2003 2002 2002 2002
-------------- ------------ ------------ ------------ ------------
Lender-Defined EBITDA $ (40,192) $ (41,422) $ (10,704) $ 10,462 $ 1,472
Interest expense, net (18,998) (4,811) (4,821) (4,487) (4,879)
Depreciation and
amortization (23,867) (5,194) (6,189) (6,413) (6,071)
Derivative items 83,233 66,272 12,494 4,367 100
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 176 $ 14,845 $ (9,220) $ 3,929 $ (9,378)
============ ============ ============ ============ ============
The Revolver requires us to maintain Liquidity (as defined) of at least
$5.0 million, and limits annual capital expenditure levels to $25.0 million. At
March 31, 2003, Liquidity was $19.3 million, consisting of borrowing
availability of $12.3 million and cash of $7.0 million. Capital expenditures
were $1.7 million during the first three months of 2003. The Revolver also
provides that as a condition of borrowings there shall not have occurred any
material adverse change in our business, prospects, operations, results of
operations, assets, liabilities or condition (financial or otherwise).
If the required Lender-Defined EBITDA level is not met and the lender
under the Revolver does not waive our failure to comply with the requirement, we
will be in default under the terms of the Revolver. Moreover, if conditions
constituting a material adverse change occur or have occurred, the lender can
exercise its rights under the Revolver and refuse to make further advances.
Following any such refusal, customer receipts would be applied to our borrowings
under the Revolver, and we would not have the ability to reborrow. This would
cause us to suffer a rapid loss of liquidity and we would lose the ability to
operate on a day-to-day basis. In addition, a default under the Revolver would
allow the lender to accelerate the outstanding indebtedness under the Revolver
and would also result in a cross-default under the Senior Notes which would
provide the holders of the Senior Notes with the right to accelerate the $200
million in Senior Notes outstanding and demand immediate repayment.
The Senior Guaranteed Notes and Senior Floating Notes (collectively, the
"Tranche A Notes") provide that, within 60 days after the end of each calendar
quarter during 2003 through 2006, Pioneer Americas is required to redeem (i)
$2.5 million principal amount of Tranche A Notes if Pioneer Americas' net income
before extraordinary items, other income, net, interest, income taxes,
depreciation and amortization ("Tranche A Notes EBITDA") for such calendar
quarter is greater than $20 million but less than $25 million, (ii) $5 million
principal amount of Tranche A Notes if Tranche A Notes EBITDA for such calendar
quarter is greater than $25 million but less than $30 million and (iii) $7.5
million principal amount of Tranche A Notes if Tranche A Notes EBITDA for such
calendar quarter is greater than $30 million, in each case plus accrued and
unpaid interest thereon to the redemption date. Tranche A Notes EBITDA for the
three months ended March 31, 2003 was $23.3 million. As a result, we expect to
redeem $2.5 million of the principal amount of the Tranche A Notes on or before
May 30, 2003.
17
We report amounts of Tranche A Notes EBITDA that are generated by our
business because, as indicated above, we are required to redeem specified
amounts of Tranche A Notes if specified levels of Tranche A Notes EBITDA are
generated. Tranche A Notes EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles in the United States.
Tranche A Notes EBITDA should not be considered in isolation of, or as a
substitute for, income before income taxes as an indicator of operating
performance or cash flows from operating activities as a measure of liquidity.
Tranche A Notes EBITDA, as calculated by us, may not be comparable to similar
measures reported by other companies. In addition, Tranche A Notes EBITDA does
not represent funds available for discretionary use.
The reconciliation of Tranche A Notes EBITDA to income before income taxes
is as follows:
THREE MONTHS ENDED
MARCH 31, 2003
------------------
Tranche A Notes EBITDA $ 23,301
Other income, net (7,163)
Interest expense, net (1,018)
Depreciation and amortization (2,070)
------------
Income before income taxes $ 13,050
============
In addition to the Senior Secured Debt, at March 31, 2003, we had $2.0
million outstanding under an unsecured non-interest bearing instrument payable
to a vendor, which contains a covenant that allows the vendor to demand
immediate repayment and begin charging interest at a rate of 9.3% if our
liquidity falls below $5 million (Canadian dollars); $1.0 million payable over
several years to another vendor; and $5.1 million of other debt outstanding,
comprised of notes maturing in various years through 2014. We also had $3.4
million of promissory notes outstanding in respect of fees owed to
professionals. On April 17, 2003, our obligations under one such note in respect
of fees owed to professionals, which bore interest at a variable rate based on
the three-month LIBOR rate plus 3.5%, were satisfied. The maturity date of the
remaining note in respect of fees owed to professionals, with a principal amount
outstanding of $0.6 million, has been extended from July 1, 2003 to November 15,
2003, with interest accruing during the period ending on July 1, 2003 at a
variable rate based on the three-month LIBOR rate plus 3.5%, and accruing during
the period July 2, 2003 through November 15, 2003 at 9% per annum.
The uncertainties affecting our liquidity as a result of the restrictive
financial covenants and redemption obligations described above raise concern
about our ability to continue as a going concern. The accompanying consolidated
financial statements have been prepared on the going concern basis of
accounting, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The consolidated financial
statements do not include any adjustments that may result from the outcome of
the uncertainties discussed above.
During the last three quarters of 2003 we expect to have cash
requirements, in addition to operating and administrative costs, of
approximately $36.6 million in the aggregate consisting of the following: (i)
interest payments of $16.9 million (comprised of interest on our Senior Notes of
$8.1 million on June 30, 2003, $0.6 million on September 30, 2003, and $8.1 on
December 31, 2003, and anticipated monthly payments of interest on the Revolver
ranging from $75,000 to $150,000), (ii) capital expenditures of $11.5 million,
(iii) certain vendor payments of $0.3 million, (iv) severance payments of $1.4
million, and (v) debt repayments of $6.5 million. We expect to fund these
obligations through available borrowings under our Revolver and
internally-generated cash flows from operations, including changes in working
capital. We can provide no assurance that we will have sufficient resources to
fund all of these obligations and investments.
Settlement of Dispute with the Colorado River Commission. On March 3,
2003, all of the conditions were satisfied with respect to the settlement of our
dispute with the Colorado River Commission ("CRC"), a Nevada state agency,
regarding the supply of power to our Henderson facility. As a result of the
settlement, which was effective as of January 1, 2003, we were released from all
claims for liability with respect to electricity derivatives agreements, and all
litigation with CRC has been dismissed.
In accordance with the terms of the settlement, we assigned our long-term
hydropower contracts to the Southern Nevada Water Authority and entered into a
new supply agreement with CRC. CRC will provide power to meet approximately 85%
of the Henderson facility's needs at market rates during a term extending to
December 31, 2006, although Pioneer and CRC may
18
agree to extend the term. CRC retained all the proceeds it had received related
to the derivatives agreements, but it was agreed that $3 million of such amount
is being held by CRC as a cash reserve to secure our performance under the
supply agreement.
As of December 31, 2002, we had recorded a net liability of $87.3 million
for the net mark-to-market loss on outstanding derivative positions, and a
receivable from CRC of $21.0 million, included in "Other Assets" on the balance
sheet, for estimated proceeds received by CRC for matured derivative contracts.
Due to the settlement of the dispute with CRC, both the $87.3 net liability and
the $21.0 receivable were reversed in the first quarter of 2003, resulting in a
non-cash net gain of $66.3 million, which is recorded in the consolidated
statement of operations for the period as $87.3 million of operating income
under the caption "Change in Fair Value of Derivatives," to reflect the reversal
of the previously recorded mark-to-market loss, and $21.0 million of "Cost of
Sales - Derivatives," reflecting the reversal of the receivable from CRC.
Net Cash Flows from Operating Activities. During the first three months of
2003, our cash flow provided by operating activities was $10.6 million,
primarily attributable to changes in working capital.
Net Cash Flows from Investing Activities. Cash used in investing
activities during the first three months of 2003 totaled $1.7 million for
capital expenditures.
Net Cash Flows from Financing Activities. Cash used in financing
activities during the first three months of 2003 totaled approximately $2.3
million, due primarily to net repayments under the Revolver of $0.2 million, and
to $2.0 million of debt payments made on other notes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We apply those accounting policies that we believe best reflect the
underlying business and economic events, consistent with generally accepted
accounting principles. Inherent in such policies are certain key assumptions and
estimates that we have made. Our critical accounting policies include those
related to long-lived assets, accruals for long-term employee benefit costs such
as pension, post-retirement and other post-employment costs, revenue
recognition, environmental liabilities, inventory reserves, allowance for
doubtful accounts and income taxes.
Long-Lived Assets. We evaluate long-lived assets for impairment whenever
indicators of impairment exist. Under applicable accounting standards, if the
sum of the undiscounted future cash flows expected to result from an asset is
less than the book value of the asset, asset impairment must be recognized. The
amount of impairment is calculated by subtracting the fair value of the asset
from the book value of the asset. We consider product prices and energy costs to
be key indicators in the evaluation of long-lived asset impairment.
We believe that the accounting estimate related to asset impairment is a
critical accounting estimate because it is highly susceptible to change from
period to period and requires management to make assumptions about future trends
in product prices and energy costs. Those assumptions require significant
judgment because these actual prices and energy costs have fluctuated in the
past and will continue to do so.
Under the new supply agreement discussed above, CRC will provide power to
meet the majority of the Henderson plant's needs at market rates. The market
rates are expected to be higher than the rates under the long-term hydropower
contracts that were assigned to the Southern Nevada Water Authority as part of
the settlement. As a result, we performed an impairment test and determined that
the book value of the Henderson facility exceeded the undiscounted sum of future
expected cash flows over the remaining life of the facility. We then calculated
the estimated fair value of the facility by discounting expected future cash
flows using a risk adjusted discount rate of 13%. Based on the analysis
described above, we recorded an impairment charge of $40.8 million in the first
quarter of 2003.
Environmental Liabilities. In order to reassess our environmental
obligations and to update an independent environmental analysis conducted in
2000, we commissioned a new study of environmental concerns at all of our
plants. The May 2003 study involved a plant-by-plant analysis of environmental
concerns and addressed conditions, situations, and sets of circumstances
involving uncertainty as to a possible loss to Pioneer. The outcomes of the
uncertain conditions will be resolved when one or more future events occur or
fail to occur, and resolution of the uncertainty may confirm the impairment of
an asset or the incurrence of a liability. The study was based on scenario
analysis to estimate the cost to remedy environmental concerns at our plant
sites. For each scenario, the study also used cost estimating techniques that
included actual historical costs, estimates prepared for us by other
consultants, estimates prepared by our engineers and other published cost data
available for similar projects completed at the same or other sites.
19
The study, completed in May 2003, identified a number of conditions that
have changed since the 2000 environmental analysis, including, but not limited
to, flexibility in regulatory agency guidance, increased knowledge of site
conditions, the use of alternative remediation technologies, post-acquisition
contamination not covered under existing environmental indemnity agreements and
the inherent risk of disputes under some of the indemnity agreements due to
passage of time. Based on the study, we estimated our total environmental
remediation liabilities to be $21.0 million, of which $3.2 million is subject to
indemnity claims against a previous owner, as discussed below. As a result, we
recorded an environmental charge of $9.5 million in the first quarter of 2003,
which is included in "Cost of Sales - Products" in our consolidated statement of
operations. We base our environmental reserves on undiscounted costs. See
Note 8 to our consolidated financial statements.
As discussed in our Annual Report on Form 10-K for the year ended December
31, 2002, we have indemnity agreements with certain previous owners for, among
other things, pre-acquisition environmental conditions at certain of our plant
sites. The 2000 independent study resulted in a $3.2 million environmental
reserve related to pre-acquisition conditions at the Henderson site that is the
responsibility of a previous owner. At the same time a receivable from the
previous owner for the same amount was recorded. We believe that the previous
owner will continue to honor its obligations for claims properly presented by us
or by regulatory authorities, although it is possible that disputes could arise
concerning the effect of contractual language, in which event we would have to
submit any claims for cleanup expenses, which could be substantial, to the
contractually-established arbitration process. The recent study did not include
environmental matters covered by the $3.2 million environmental receivable as
such matters are not currently estimable. Such amount, as originally estimated,
is included in our consolidated balance sheet as of March 31, 2003, in
offsetting amounts in "Other Assets" and "Other Long Term Liabilities." The
recent study also did not cover any environmental matters we believe to be fully
covered under other indemnity agreements, as such costs are not currently
estimable.
In 2003, we expect to fund approximately $1.2 million in remediation
expenses and $4.7 million in capital projects relating to our environmental
compliance program.
We believe that the accounting estimate related to environmental
liabilities is a critical accounting estimate because it is highly susceptible
to change from period to period. Factors that can impact environmental
liabilities include, among other things, the regulatory environment, remediation
technology and methodology and the applicability of indemnity agreements.
Estimating environmental liabilities also requires management to make
assumptions about future resolution of environmental uncertainties and future
cost estimates. There can be no assurance that such predictions are likely to
occur or that the actual outcome will be comparable to the current assumptions.
Long-Term Employee Benefit Costs. Key assumptions include the long-term
rate of return on pension assets, the annual rate of inflation of health care
costs and the applicable interest rate. Effective December 31, 2002, we
decreased our interest rate assumption for our U.S. employee benefit plans. The
interest rate decrease and lower-than-expected returns on plan assets are
expected to increase our net periodic pension and post-retirement benefits
expense by approximately $1.0 million in 2003.
Revenue Recognition. We recognize revenue from product sales at the time
of shipment and when collection is reasonably assured. We classify amounts
billed to customers for shipping and handling as revenues, with related shipping
and handling costs included in cost of goods sold. Such revenues do not involve
difficult, subjective, or complex judgments.
Inventory Reserves. We establish lower of cost or market reserves for our
raw materials and finished goods inventory as needed. If we do not accurately
estimate the lower of cost or market of our inventory and it is determined to be
undervalued, we may have over-reported our cost of sales in previous periods and
we would be required to recognize such additional operating income at the time
of sale. We maintain reserves for slow moving and obsolete inventory items equal
to the difference between the carrying cost of the inventory and the estimated
market value.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments and the unwillingness of our customers to make required
payments due to disagreements regarding product price. We perform ongoing credit
evaluations of customers and set credit limits based upon a review of our
customers' current credit information and payment history. Estimation of such
losses requires adjusting historical loss experience for current economic
conditions and judgments about the probable effects of economic conditions on
certain customers. We cannot guarantee that the rate of future credit losses
will be similar to past experience. Each quarter we consider all available
information when assessing the adequacy of the provision for allowances, claims
and doubtful accounts.
Income Taxes. We have significant amounts of deferred tax assets that are
reviewed periodically for recoverability. These assets are evaluated by using
estimates of future taxable income streams and the impact of tax planning
strategies.
20
Valuations related to tax accruals and assets could be impacted by changes to
tax codes, changes in the statutory tax rates and our future taxable income
levels. We have provided a valuation allowance for the full amount of the U.S.
net deferred tax assets due to uncertainties relating to limitations on
utilization under the Internal Revenue Code and our ability to generate
sufficient taxable income within the carryforward period.
We periodically update our estimates used in the preparation of the
financial statements based on our latest assessment of the current and projected
business and general economic environment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues. Revenues increased by $17.2 million, or approximately 24%, to
$89.0 million for the three months ended March 31, 2003, as compared to the
three months ended March 31, 2002, with increased ECU prices being offset
somewhat by lower sales volumes. The average ECU netback for the three months
ended March 31, 2003 was $362, an increase of 51% from the average netback of
$240 during the three months ended March 31, 2002.
Cost of Sales -- Product. Cost of sales - product increased by $15.9
million, or approximately 23%, for the three months ended March 31, 2003, as
compared to the three months ended March 31, 2002. The increase was primarily
attributable to an environmental charge of $9.5 million (see Note 5 to the
consolidated financial statements), increased electricity and utility costs of
approximately $4.4 million, and the absence of a $1.1 million curtailment gain
recorded in the first quarter of 2002 related to the Tacoma plant shutdown.
Cost of Sales - Derivatives. As a result of the settlement of the
derivatives dispute with CRC, cost of sales - derivatives for the first quarter
of 2003 reflects the reversal of a $21.0 million receivable from CRC for the
estimated net proceeds from matured derivatives that had not been remitted to us
by CRC. For the three months ended March 31, 2002, the estimated income from
matured derivatives was $1.4 million. See " - Liquidity and Capital Resources -
Settlement of Dispute with the Colorado River Commission" above and Note 3 to
the consolidated financial statements.
Gross Profit (Loss). Gross profit margin decreased to negative 18.6% for
the three months ended March 31, 2003 from 6.4% for the three months ended March
31, 2002. Gross profit decreased by $39.4 million from $4.6 million in the first
quarter of 2002 to a loss of $16.6 million in the most recent quarter. The
decrease was primarily due to the negative impact of higher energy costs of $4.4
million, a non-cash charge of $9.5 million for environmental liabilities and an
increase in cost of sales - derivatives of $22.5 million. See " - Liquidity and
Capital Resources - Settlement of Dispute with the Colorado River Commission"
above and Note 3 to the consolidated financial statements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.8 million, or approximately 50%, for the
three months ended March 31, 2003, as compared to the three months ended March
31, 2002, primarily due to an increase in the allowance for doubtful accounts of
$2.5 million. In the first quarter of 2003 we revised estimates for the
allowance for doubtful accounts to reflect judgments about economic conditions
and their effect on certain customers.
Change in Fair Value of Derivatives. Income from change in fair value of
derivatives of $87.3 million in the first quarter of 2003 represents the
reversal of the December 21, 2002 net liability for the mark-to-market loss on
outstanding derivative contracts, due to the derivatives settlement that was
effective January 1, 2003. For the three months ended March 31, 2002, the
mark-to-market change in fair value of the derivative positions was a net
unrealized gain of $18.0 million. See " - Liquidity and Capital Resources -
Settlement of Dispute with the Colorado River Commission" above and Note 3 to
the consolidated financial statements.
Asset Impairment and Other Charges. Asset impairment and other charges for
the three months ended March 31, 2003, included a $40.8 million impairment
charge related to the Henderson facility (see Note 4 to the consolidated
financial statements). Asset impairment and other charges for the three months
ended March 31, 2002, consisted primarily of $1.9 million of severance expense
relating to employee terminations and $1.0 million of exit costs related to
idling the Tacoma plant.
Other Expense, Net. Other expense, net of $1.9 million in the first
quarter of 2003 reflected foreign exchange losses.
21
Income Tax Benefit. The income tax benefit for the quarters ended March
31, 2003 and 2002 was $1.5 million and $0.7 million, respectively, reflecting
foreign tax benefit on a loss from our Canadian operations. We recorded a 100%
valuation allowance related to losses generated from our U.S. operations in the
quarters ended March 31, 2003 and 2002 due to the uncertainties relating to the
future realization of net operating loss carryforwards.
Net Income. Due to the factors described above, net income for the three
months ended March 31, 2003, was $16.4 million, compared to net income of $9.9
million for the first quarter of 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our market risk disclosures set forth in our Annual Report
on Form 10-K for the year ended December 31, 2002, have not changed
significantly during the three months ended March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to
Pioneer (including its consolidated subsidiaries) required to be included in our
Exchange Act filings.
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out our evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information about litigation involving Pioneer, see Note 3 and Note 8
to the consolidated financial statements in Part I of this report, which is
hereby incorporated by reference into this Item 1.
ITEM 5. OTHER INFORMATION
Forward Looking Statements. We are including the following discussion to
inform our existing and potential security holders generally of some of the
risks and uncertainties that can affect us and to take advantage of the "safe
harbor" protection for forward-looking statements that applicable federal
securities law affords. Many of these risks are described in more detail in our
Annual Report on Form 10-K for the year ended December 31, 2002, in "Item 1.
Business -- Risks" which is hereby incorporated by reference.
From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about us. These statements may include projections and estimates concerning the
timing and success of specific projects and our future prices, liquidity,
backlog, revenue, income and capital spending. Forward-looking statements are
generally accompanied by words such as "estimate," "project," "predict,"
"believe," "expect," "anticipate," "plan," "forecast," "budget," "goal" or other
words that convey the uncertainty of future events or outcomes. In addition,
sometimes we will specifically describe a statement as being a forward-looking
statement and refer to this cautionary statement.
Various statements this report contains, including those that express a
belief, expectation or intention, as well as those that are not statements of
historical fact, are forward-looking statements. These forward-looking
statements speak only as of the date of this report, we disclaim any obligation
to update these statements, and caution against any undue reliance on them. We
have based these forward-looking statements on our current expectations and
assumptions about future events. While our management considers these
expectations and assumptions to be reasonable, they are inherently subject to
significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and
22
many of which are beyond our control. These risks, contingencies and
uncertainties relate to, among other matters, the following:
- general economic, business and market conditions, including economic
instability or a downturn in the markets served by us;
- the cyclical nature of our product markets and operating results;
- competitive pressures affecting selling prices and volumes;
- the supply/demand balance for our products, including the impact of
excess industry capacity;
- the occurrence of unexpected manufacturing interruptions/outages,
including those occurring as a result of production hazards;
- failure to fulfill financial covenants contained in our debt
instruments;
- inability to make scheduled payments on or refinance our indebtedness;
- loss of key customers or suppliers;
- higher than expected raw material and utility costs;
- higher than expected transportation and/or logistics costs;
- environmental costs and other expenditures in excess of those
projected;
- changes in laws and regulations inside or outside the United States;
- uncertainty with respect to interest rates; and
- the occurrence of extraordinary events, such as the attacks on the
World Trade Center and The Pentagon that occurred on September 11,
2001, or the war in Iraq.
We believe the items outlined above are important factors that could cause
our actual results to differ materially from those expressed in a
forward-looking statement made in this report or elsewhere by us or on our
behalf. We have discussed most of these factors in more detail elsewhere in this
report and in our Annual Report on Form 10-K for the year ended December 31,
2002. These factors are not necessarily all the important factors that could
affect us. Unpredictable or unknown factors that have not been discussed in this
report could also have material adverse effects on actual results of matters
that are the subject of such forward-looking statements. We do not intend to
update our description of important factors each time a potential important
factor arises. We advise our security holders that they should (i) be aware that
important factors we do not refer to above could affect the accuracy of our
forward-looking statements and (ii) use caution and common sense when
considering our forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Indemnity Agreement dated March 14, 2002 between Pioneer
Companies, Inc. and Marvin E. Lesser.
10.2 Indemnity Agreement dated March 14, 2002 between Pioneer
Companies, Inc. and Michael Y. McGovern.
10.3 Indemnity Agreement dated March 14, 2002 between Pioneer
Companies, Inc. and Gary L. Rosenthal.
10.4 Indemnity Agreement dated March 14, 2002 between Pioneer
Companies, Inc. and David N. Weinstein.
99.1+ Items incorporated by reference from the Pioneer Companies, Inc.
Form 10-K for the year ended December 31, 2002: Item 1 Business
-- Risks.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
23
- ----------
+ Indicates exhibit previously filed with the Securities and Exchange
Commission as indicated and incorporated herein by reference
(b) Reports on Form 8-K
On March 7, 2003, we filed a report on Form 8-K. Under Item 5 of the
report ("Other Events and Regulation FD Disclosure"), we reported that we had
issued a press release announcing that our previously announced settlement with
CRC was fully effective.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PIONEER COMPANIES, INC.
Date: May 14, 2003 By: /s/ Gary L. Pittman
-----------------------------
Gary L. Pittman
Vice President and
Chief Financial Officer
(Principal Financial Officer)
25
CERTIFICATION
I, Gary L. Pittman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pioneer Companies,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Gary L. Pittman
- ----------------------------------
Gary L. Pittman
Vice President and
Chief Financial Officer
(Principal Financial Officer)
26
CERTIFICATION
I, Michael Y. McGovern, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pioneer Companies,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures 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
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Michael Y. McGovern
- -------------------------------
Michael Y. McGovern
President and Chief Executive Officer
27
EXHIBIT INDEX
10.1 Indemnity Agreement dated March 14, 2002 between Pioneer Companies,
Inc. and Marvin E. Lesser.
10.2 Indemnity Agreement dated March 14, 2002 between Pioneer Companies,
Inc. and Michael Y. McGovern.
10.3 Indemnity Agreement dated March 14, 2002 between Pioneer Companies,
Inc. and Gary L. Rosenthal.
10.4 Indemnity Agreement dated March 14, 2002 between Pioneer Companies,
Inc. and David N. Weinstein.
99.1+ Items incorporated by reference from the Pioneer Companies, Inc. Form
10-K for the year ended December 31, 2002: Item 1 Business -- Risks.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
+ Indicates exhibit previously filed with the Securities and Exchange
Commission as indicated and incorporated herein by reference
28