Back to GetFilings.com
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 JUNE 30, 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 000-31230
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 August 11, 2003, there were 10,003,000 shares of common stock of Pioneer
Companies, Inc. outstanding.
`
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets--June 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations--Three Months Ended June 30, 2003 and 2002
and Six Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows--Six Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds. 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
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
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,116 $ 2,789
Accounts receivable, net of allowance for doubtful accounts of $3,353 at
June 30, 2003 and $1,337 at December 31, 2002 42,605 39,983
Inventories, net 16,926 15,311
Current derivative asset -- 17,834
Prepaid expenses and other current assets 4,957 4,779
--------- ---------
Total current assets 70,604 80,696
Property, plant and equipment:
Land 6,520 7,315
Buildings and improvements 29,522 32,952
Machinery and equipment 187,512 220,072
Construction in progress 902 4,085
--------- ---------
224,456 264,424
Less: accumulated depreciation (29,593) (22,155)
--------- ---------
Net property, plant and equipment 194,863 242,269
Other assets 4,068 25,755
Non-current derivative asset -- 41,362
Excess reorganization value over the fair value of identifiable assets 84,064 84,064
--------- ---------
Total assets $ 353,599 $ 474,146
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,425 $ 20,193
Accrued liabilities 21,252 18,161
Current derivative liability -- 37,614
Short-term debt, including current portion of long-term debt 24,042 21,112
--------- ---------
Total current liabilities 55,719 97,080
Long-term debt, less current portion 204,056 207,463
Accrued pension and other employee benefits 27,679 26,132
Non-current derivative liability -- 108,852
Other long-term liabilities 43,462 33,367
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $.01 par value, authorized 50,000 shares, issued and
outstanding 10,003 shares 100 100
Additional paid-in capital 10,940 10,933
Other comprehensive loss (5,024) (5,024)
Retained earnings (deficit) 16,667 (4,757)
--------- ---------
Total stockholders' equity 22,683 1,252
--------- ---------
Total liabilities and stockholders' equity $ 353,599 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 96,316 $ 74,244 $ 185,347 $ 146,040
Cost of sales - product (80,772) (72,748) (165,363) (141,429)
Cost of sales - derivatives -- (4,949) (20,999) (3,466)
--------- --------- --------- ---------
Total cost of sales (80,772) (77,697) (186,362) (144,895)
--------- --------- --------- ---------
Gross profit (loss) 15,544 (3,453) (1,015) 1,145
Selling, general and administrative expenses (5,690) (5,627) (14,048) (11,229)
Change in fair value of derivatives -- 5,049 87,271 23,048
Asset impairment and other 422 36 (40,396) (3,091)
--------- --------- --------- ---------
Operating income (loss) 10,276 (3,995) 31,812 9,873
Interest expense, net (4,792) (4,879) (9,603) (9,583)
Other expense, net (2,564) (504) (4,444) (537)
--------- --------- --------- ---------
Income (loss) before income taxes 2,920 (9,378) 17,765 (247)
Income tax benefit 2,126 2,723 3,659 3,455
--------- --------- --------- ---------
Net income (loss) $ 5,046 $ (6,655) $ 21,424 $ 3,208
========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.50 $ (0.67) $ 2.14 $ 0.32
Diluted $ 0.50 $ (0.67) $ 2.12 $ 0.32
Weighted average number of common shares outstanding:
Basic 10,003 10,000 10,002 10,000
Diluted 10,171 10,000 10,115 10,000
See notes to consolidated financial statements.
4
PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------
2003 2002
-------- --------
Operating activities:
Net income $ 21,424 $ 3,208
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 10,554 12,324
Provision for (recovery of) losses on accounts receivable 1,492 (860)
Net change in deferred taxes (3,660) (2,728)
Change in fair value of derivatives (66,272) (23,048)
Gain from early extinguishment of debt (420) --
Gain on disposals of assets -- (365)
Asset impairment 40,818 --
Foreign exchange loss 4,446 1,295
Net effect of changes in operating assets and liabilities (1,438) 16,348
-------- --------
Net cash flows from operating activities 6,944 6,174
-------- --------
Investing activities:
Capital expenditures (3,610) (2,996)
Proceeds received from disposals of assets -- 365
-------- --------
Net cash flows from investing activities (3,610) (2,631)
-------- --------
Financing activities:
Net proceeds under revolving credit arrangements 7,152 (1,259)
Payments on debt (7,628) (304)
Proceeds from issuance of stock 7 --
-------- --------
Net cash flows from financing activities (469) (1,563)
-------- --------
Effect of exchange rate changes on cash 462 (213)
-------- --------
Net change in cash and cash equivalents 3,327 1,767
Cash and cash equivalents at beginning of period 2,789 3,624
-------- --------
Cash and cash equivalents at end of period $ 6,116 $ 5,391
======== ========
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 June 30, 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 six 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 the prior period to conform to the current period
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 June 30, 2003, Pioneer's senior secured debt aggregated $219.4 million,
consisting of Senior Secured Floating Rate Guaranteed Notes due 2006 in the
aggregate principal amount of $43.2 million (the "Senior Guaranteed Notes"),
Floating Rate Term Notes due 2006 in the aggregate principal amount of $4.4
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 $21.9 million outstanding under a Revolving Credit Facility with a
$30 million commitment and a borrowing base restriction (the "Revolver").
Collectively, the $197.6 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 November 2001 financial
projections 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 have affected and in the future may 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 six months ended June 30, 2003, product prices
increased, and energy costs also increased, although to a lesser extent.
Decreases in product prices or 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 and covenant obligations during
the remainder of 2003. In that event, additional amendments of or waivers under
Pioneer's debt agreements or deferrals
6
of interest payments would likely be necessary. Pioneer cannot provide any
assurance that it 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 $21.550
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")
for the twelve-month period ending June 30, 2003, and for each twelve-month
period ending each fiscal quarter thereafter.
Pioneer had negative Lender-Defined EBITDA for the twelve months ended
June 30, 2003. Pioneer has obtained a waiver from the lender under the Revolver
for the noncompliance with the covenant requirement. Pioneer expects that the
$16.9 million of 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 the $40.8 million of charges related to the Henderson impairment
and the $9.5 million addition to the environmental reserve in the first quarter
of 2003, discussed in the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003, will likely result in the need for future waivers from the
lender under the Revolver. The impairment charges 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 June 30, 2003, Liquidity was $11.6 million, consisting of borrowing
availability of $5.5 million and cash of $6.1 million. Capital expenditures were
$3.6 million during the first six 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 $197.6 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 and
prepay the greater of (a) an amount determined on the basis of Pioneer Americas'
net income before extraordinary items, net other income, interest, income taxes,
depreciation and amortization ("Tranche A Notes EBITDA"), and (b) an amount
determined on the basis of the Company's excess cash flow and average liquidity,
as defined. With respect to Tranche A Notes EBITDA, the amount that is to be
redeemed and prepaid is (i) $2.5 million principal amount of Tranche A Notes if
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 date of the
redemption and prepayment. With respect to excess cash flow, the amount that is
to be redeemed and prepaid is a percentage of the Company's consolidated net
income, without regard to extraordinary gains and losses and net after-tax other
income, plus depreciation, amortization and other non-cash charges, and less all
cash principal payments, capital expenditures and extraordinary cash gains or
cash income received, plus or minus cash changes in working capital. The
applicable percentage is to be determined on the basis of the Company's average
liquidity, which is the average of cash plus borrowing availability under the
Revolver for the quarter or for the 45-day period following the end of the
quarter.
Each holder of Senior Floating Notes may refuse any such repayment. As a
result of the application of these provisions with respect to the first quarter
of 2003, Pioneer redeemed and prepaid $2.4 million of the principal amount of
the Tranche A Notes on May 23, 2003. One holder refused the prepayment of the
balance of the $2.5 million that was to have been prepaid on that date. No
redemption and prepayment of Tranche A Notes was required with respect to the
calendar quarter that ended on June 30, 2003.
7
The uncertainties affecting Pioneer's liquidity as a result of the
restrictive financial covenants and redemption obligations described above could
affect 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. 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
was 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 through
December 31, 2006, although Pioneer and CRC may agree to extend the term. CRC
retained all amounts it had received related to the derivatives agreements, but
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. These
amounts appear in the consolidated statement of operations for the six months
ended June 30, 2003, 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.
4. ASSET IMPAIRMENT AND OTHER
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 provides power to
meet the majority of the Henderson plant's needs at market rates. The market
rates are expected to remain at levels 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, which was completed in May
2003.
8
The new study involved a plant-by-plant analysis of environmental concerns and
assessed conditions, situations and circumstances involving uncertainty as to
possible losses to Pioneer. The outcome 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 2003 study 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 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 was included in "Cost of Sales - Products" in the consolidated statement
of operations. As of June 30, 2003, the total estimated environmental
liabilities of $21.0 million were included as "Other Long Term Liabilities" on
Pioneer's consolidated balance sheet. 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 are 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. It is
possible that disputes could arise, 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 June 30, 2003, in offsetting
amounts in "Other Assets" and "Other Long-Term Liabilities." The recent study
also did not cover any environmental matters that 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:
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
Senior Secured Debt:
Senior Guaranteed Notes due December 2006; variable interest rates based on
three-month LIBOR rate plus 3.5% ............................................. $ 43,151 $ 45,422
Senior Floating Notes due December 2006; variable interest rates based on
three-month LIBOR rate plus 3.5% ............................................. 4,413 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 .............................. 21,856 14,704
Other debt:
Promissory notes issued for professional fees(1) ............................... 621 3,428
Unsecured, non-interest-bearing, long-term debt, denominated in Canadian
dollars; original face value of Cdn$5.5 million; payable in five annual
installments of Cdn$1.0 million and a final payment of Cdn$0.5 million,
beginning January 10, 2002; effective interest rate of 8.25%; net of
unamortized discount of Cdn$0.4 million and Cdn$0.6 million at June 30,
2003 and December 31, 2002, respectively ....................................... 2,246 2,473
Other notes, maturing in various years through 2014, with various
installments, at various interest rates ..................................... 5,811 6,450
--------- ---------
Total ............................................................................. 228,098 227,055
Current maturities of long-term debt .............................................. (24,042) (19,592)
--------- ---------
Long-term debt, less current maturities ........................................... $ 204,056 $ 207,463
========= =========
9
(1) On April 17, 2003, Pioneer's obligations under one such note, with a
principal amount of $2.8 million, were satisfied at a discount of $0.4
million. 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 balance 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 ended on June 30, 2003, at a
variable rate based on the three-month LIBOR rate plus 3.5%, and
accruing during the period July 1, 2003, through November 15, 2003, at
9% per annum.
At June 30, 2003, in addition to Senior Secured Debt, Pioneer also had
outstanding a $0.6 million promissory note for professional fees; $2.2 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 to begin charging interest at a rate of 9.3% if Pioneer's liquidity falls
below Cdn$5 million; $0.9 million payable over several years to another critical
vendor; and $4.9 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 current 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,
as long as no default exists 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 0.375% 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 prepayments of Senior Floating
Notes and mandatory redemptions of 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 and
redemptions if certain levels of Tranche A Notes EBITDA or liquidity are
realized, and if there is a change of control. See Note 2 for a discussion of
the prepayment and redemption obligation relating to Tranche A Notes EBITDA and
liquidity.
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 of either 1% or 2% 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. 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 consisted of the following:
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
Raw materials, supplies and parts, net $ 8,372 $ 8,105
Finished goods 8,368 7,117
Inventories under exchange agreements 186 89
------- -------
$16,926 $15,311
======= =======
8. COMMITMENTS AND CONTINGENCIES
Present or future environmental laws and regulations 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.
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.
Condensed consolidating financial information for PCI and its wholly-owned
subsidiaries is presented on the following pages.
11
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2003
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--- ------ -------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ -- $ 2,635 $ 3,477 $ 4 $ -- $ 6,116
Accounts receivable, net ....................... -- 10,934 31,671 -- -- 42,605
Inventories, net ............................... -- 5,963 10,963 -- -- 16,926
Prepaid expenses and other current assets ...... 938 3,647 372 -- -- 4,957
--------- --------- --------- --------- --------- ---------
Total current assets ....................... 938 23,179 46,483 4 -- 70,604
Property, plant and equipment, net ............... -- 117,605 75,730 1,528 -- 194,863
Other assets ..................................... -- -- 4,068 -- -- 4,068
Intercompany receivable .......................... -- 75,165 -- 63,791 (138,956) --
Investment in subsidiaries ....................... 28,907 -- -- -- (28,907) --
Excess reorganization value over the fair value
of identifiable assets ........................... -- 84,064 -- -- -- 84,064
--------- --------- --------- --------- --------- ---------
Total assets ............................... $ 29,845 $ 300,013 $ 126,281 $ 65,323 $(167,863) $ 353,599
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY
IN ASSETS)
Current liabilities:
Accounts payable ............................... $ -- $ 3,678 $ 6,747 $ -- $ -- $ 10,425
Accrued liabilities ............................ 2 7,871 13,346 33 -- 21,252
Short-term debt and current portion of long-term
debt ......................................... -- 579 23,436 27 -- 24,042
--------- --------- --------- --------- --------- ---------
Total current liabilities .................. 2 12,128 43,529 60 -- 55,719
Long-term debt, less current portion ............. -- 151,667 52,313 76 -- 204,056
Investment in subsidiary ......................... -- 134,019 -- -- (134,019) --
Intercompany payable ............................. 7,160 -- 131,796 -- (138,956) --
Accrued pension and other employee benefits ...... -- 10,637 17,042 -- -- 27,679
Other long-term liabilities ...................... -- 25,689 15,620 2,153 -- 43,462
Stockholders' equity (deficiency in assets) ...... 22,683 (34,127) (134,019) 63,034 105,112 22,683
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficiency in assets) .................... $ 29,845 $ 300,013 $ 126,281 $ 65,323 $(167,863) $ 353,599
========= ========= ========= ========= ========= =========
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 JUNE 30, 2003
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--- ------ -------- ---------- ------------ ------------
Revenues ...................................... $ -- $ 45,490 $ 72,935 $ -- $(22,109) $ 96,316
Cost of sales ................................. -- (37,224) (65,708) 51 22,109 (80,772)
-------- -------- -------- -------- -------- --------
Gross profit .................................. -- 8,266 7,227 51 -- 15,544
Selling, general and administrative expenses .. (78) (1,040) (4,542) (30) -- (5,690)
Asset impairment and other charges ............ -- -- 422 -- -- 422
-------- -------- -------- -------- -------- --------
Operating income (loss) ....................... (78) 7,226 3,107 21 -- 10,276
Interest expense, net ......................... -- (3,794) (996) (2) -- (4,792)
Other income, net ............................. -- (2,565) (2,233) 2,234 -- (2,564)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes ............. (78) 867 (122) 2,253 -- 2,920
Income tax benefit ............................ -- 2,126 -- -- -- 2,126
-------- -------- -------- -------- -------- --------
Net income (loss) before equity in earnings of
subsidiary ................................... (78) 2,993 (122) 2,253 -- 5,046
Equity in net earnings of subsidiary .......... 5,124 (122) -- -- (5,002) --
-------- -------- -------- -------- -------- --------
Net income loss ............................... $ 5,046 $ 2,871 $ (122) $ 2,253 $ (5,002) $ 5,046
======== ======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--- ------ -------- ---------- ------------ ------------
Revenues ...................................... $ -- $ 33,710 $ 54,795 $ -- $(14,261) $ 74,244
Cost of sales ................................. -- (33,186) (58,772) -- 14,261 (77,697)
-------- -------- -------- -------- -------- --------
Gross profit (loss) ........................... -- 524 (3,977) -- -- (3,453)
Selling, general and administrative expenses .. (154) (1,581) (4,002) 110 -- (5,627)
Change in fair value of derivatives ........... -- -- 5,049 -- -- 5,049
Asset impairment and other charges ............ -- (260) 296 -- -- 36
-------- -------- -------- -------- -------- --------
Operating income (loss) ....................... (154) (1,317) (2,634) 110 -- (3,995)
Interest expense, net ......................... -- (3,715) (1,161) (3) -- (4,879)
Other income (expense), net ................... -- (917) 424 (11) -- (504)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes ............. (154) (5,949) (3,371) 96 -- (9,378)
Income tax benefit ............................ -- 2,723 -- -- -- 2,723
-------- -------- -------- -------- -------- --------
Net income (loss) before equity in earnings of
subsidiary ................................... (154) (3,226) (3,371) 96 -- (6,655)
Equity in net earnings of subsidiary .......... (6,501) (3,369) -- -- 9,870 --
-------- -------- -------- -------- -------- --------
Net income (loss) ............................. $ (6,655) $ (6,595) $ (3,371) $ 96 $ 9,870 $ (6,655)
======== ======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--- ------ -------- ---------- ------------ ------------
Revenues ...................................... $ -- $ 86,098 $ 141,112 $ -- $ (41,863) $ 185,347
Cost of sales ................................. -- (75,556) (152,801) 132 41,863 (186,362)
--------- --------- --------- --------- --------- ---------
Gross profit (loss) ........................... -- 10,542 (11,689) 132 -- (1,015)
Selling, general and administrative expenses .. (169) (3,021) (10,848) (10) -- (14,048)
Change in fair value of derivatives ........... -- -- 87,271 -- -- 87,271
Asset impairment and other charges ............ -- -- (40,396) -- -- (40,396)
--------- --------- --------- --------- --------- ---------
Operating income (loss) ....................... (169) 7,521 24,338 122 -- 31,812
Interest expense, net ......................... -- (7,585) (2,014) (4) -- (9,603)
Other income (expense), net ................... -- (4,446) (9,396) 9,398 -- (4,444)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ............. (169) (4,510) 12,928 9,516 -- 17,765
Income tax benefit ............................ -- 3,659 -- -- -- 3,659
--------- --------- --------- --------- --------- ---------
Net income (loss) before equity in earnings of
subsidiary ................................... (169) (851) 12,928 9,516 -- 21,424
Equity in net earnings of subsidiary .......... 21,593 12,928 -- -- (34,521) --
--------- --------- --------- --------- --------- ---------
Net income (loss) ............................. $ 21,424 $ 12,077 $ 12,928 $ 9,516 $ (34,521) $ 21,424
========= ========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--- ------ -------- ---------- ------------ ------------
Revenues ..................................... $ -- $ 66,886 $ 106,853 $ -- $ (27,699) $ 146,040
Cost of sales ................................ -- (63,398) (109,198) 2 27,699 (144,895)
--------- --------- --------- --------- --------- ---------
Gross profit (loss) .......................... -- 3,488 (2,345) 2 -- 1,145
Selling, general and administrative expenses . (206) (3,095) (8,009) 81 -- (11,229)
Change in fair value of derivatives .......... -- -- 23,048 -- -- 23,048
Asset impairment and other charges ........... -- (263) (2,828) -- -- (3,091)
--------- --------- --------- --------- --------- ---------
Operating income (loss) ...................... (206) 130 9,866 83 -- 9,873
Interest expense, net ........................ -- (7,496) (2,094) 7 -- (9,583)
Other income (expense), net .................. -- (1,042) 470 35 -- (537)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ............ (206) (8,408) 8,242 125 -- (247)
Income tax benefit ........................... -- 3,455 -- -- -- 3,455
--------- --------- --------- --------- --------- ---------
Net income (loss) before equity in earnings of
subsidiary .................................. (206) (4,953) 8,242 125 -- 3,208
Equity in net earnings of subsidiary ......... 3,414 8,242 -- -- (11,656) --
--------- --------- --------- --------- --------- ---------
Net income ................................... $ 3,208 $ 3,289 $ 8,242 $ 125 $ (11,656) $ 3,208
========= ========= ========= ========= ========= =========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS CONSOLIDATED
--- ------ -------- ---------- ------------
Cash flows from operating activities:
Net cash flows from operating activities ....... $ 1,513 $ 2,262 $ 3,165 $ 4 $ 6,944
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures ........................... -- (1,142) (2,468) -- (3,610)
------- ------- ------- ------- -------
Net cash flows from investing activities ... -- (1,142) (2,468) -- (3,610)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net proceeds under revolving credit arrangements -- -- 7,152 -- 7,152
Payments on debt ............................... (1,520) (649) (5,446) (13) (7,628)
Proceeds from issuance of stock ................ 7 -- -- -- 7
------- ------- ------- ------- -------
Net cash flows from financing activities ... (1,513) (649) 1,706 (13) (469)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash .......... -- 462 -- -- 462
------- ------- ------- ------- -------
Net change in cash and cash equivalents .......... -- 933 2,403 (9) 3,327
Cash and cash equivalents at beginning of period . -- 1,702 1,074 13 2,789
------- ------- ------- ------- -------
Cash and cash equivalents at end of period ....... $ -- $ 2,635 $ 3,477 $ 4 $ 6,116
======= ======= ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS) PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS CONSOLIDATED
--- ------ -------- ---------- ------------
Cash flows from operating activities:
Net cash flows from operating activities ....... $-- $ 9,107 $(3,096) $ 163 $ 6,174
--- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures ........................... -- (1,154) (1,842) -- (2,996)
Proceeds received from disposals of assets ..... -- 365 -- -- 365
--- ------- ------- ------- -------
Net cash flows from investing activities ... -- (789) (1,842) -- (2,631)
--- ------- ------- ------- -------
Cash flows from financing activities:
Net proceeds under revolving credit arrangements -- (5,774) 4,515 -- (1,259)
Payments on long-term debt ..................... -- -- (290) (14) (304)
--- ------- ------- ------- -------
Net cash flows from financing activities ... -- (5,774) 4,225 (14) (1,563)
--- ------- ------- ------- -------
Effect of exchange rate changes on cash .......... -- (213) -- -- (213)
--- ------- ------- ------- -------
Net change in cash and cash equivalents .......... -- 2,331 (713) 149 1,767
Cash and cash equivalents at beginning of period . -- 1,950 1,674 -- 3,624
--- ------- ------- ------- -------
Cash and cash equivalents at end of period ....... $-- $ 4,281 $ 961 $ 149 $ 5,391
=== ======= ======= ======= =======
14
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
-------- ------- --------- ------
Net income (loss) $ 5,046 $(6,655) $ 21,424 $ 3,208
======== ======= ========= =======
Basic earnings (loss) per share:
Weighted average number of common
shares outstanding 10,003 10,000 10,002 10,000
======== ======= ========= =======
Net earnings (loss) per share $ 0.50 $ (0.67) $ 2.14 $ 0.32
======== ======= ========= =======
Diluted earnings (loss) per share:
Weighted average number of common
shares outstanding 10,171 10,000 10,115 10,000
======== ======= ========= =======
Net earnings (loss) per share $ 0.50 $ (0.67) $ 2.12 $ 0.32
======== ======= ========= =======
Options to purchase 225,000 shares of common stock at $4.00 per share were
outstanding during the three and six months ended June 30, 2003, but were not
included in the computation of diluted earnings per share because the options'
exercise price exceeded the average market price of the common shares. The
options, which expire in 2012, were still outstanding at June 30, 2003. All of
PCI's stock options outstanding during the three and six months ended June 30,
2002, were anti-dilutive because the exercise price of those options exceeded
the average market price of PCI's common stock during those periods.
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 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 145 effective January 1, 2003, and
has reclassified 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.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
Pioneer adopted SFAS 149 effective June 30, 2003, and the adoption had no effect
on Pioneer's results of operations or financial condition.
15
12. STOCK BASED COMPENSATION
At June 30, 2003, PCI had options for the purchase of 668,000 shares of
common stock 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 9.06 years. No options were granted during the six
months ended June 30, 2003, and options for the purchase of 647,000 shares were
granted during the six months ended June 30, 2002. Stock options generally
expire 10 years from the date of grant and fully vest after three years.
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 and six months ended June 30, 2003 and 2002 would have been as indicated
below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
2003 2002 2003 2002
--------- --------- ---------- ---------
Net income (loss):
As reported ................. $ 5,046 $ (6,655) $ 21,424 $ 3,208
Pro forma stock compensation
expense ................... (218) (26) (317) (26)
--------- --------- ---------- ---------
Pro forma net income (loss) ... $ 4,828 $ (6,681) $ 21,107 $ 3,182
========= ========= ========== =========
Income (loss) per common share:
Basic, as reported ......... $ 0.50 $ (0.67) $ 2.14 $ 0.32
Basic, pro forma ........... $ 0.48 $ (0.67) $ 2.11 $ 0.32
Diluted, as reported ....... $ 0.50 $ (0.67) $ 2.12 $ 0.32
Diluted, pro forma ......... $ 0.47 $ (0.67) $ 2.09 $ 0.32
13. SUPPLEMENTAL CASH FLOW INFORMATION
Net effect of changes in operating assets and liabilities, excluding the
effect of exchange rate changes, were as follows:
SIX MONTHS ENDED
JUNE 30,
--------------------
2003 2002
-------- --------
Accounts receivable $ (2,456) $ 7,825
Inventories (709) 2,381
Prepaid expenses and other current assets 1,375 3,750
Other assets 664 3,248
Accounts payable (10,748) (2,478)
Accrued liabilities 1,645 2,511
Other long-term liabilities 8,791 (889)
-------- --------
Net change in operating assets and liabilities $ (1,438) $ 16,348
======== ========
Non-cash financing activity:
On April 17, 2003, Pioneer realized a non-cash gain of $0.4 million from
the early payment of a $2.8 million promissory note.
Following are supplemental disclosures of cash flow information:
SIX MONTHS ENDED
JUNE 30,
----------------
2003 2002
------ ------
Cash payments for:
Interest $9,671 $1,405
Income taxes -- --
16
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 $406 during
the three months ended June 30, 2003, compared with $362 for the three months
ended March 31, 2003, and $225 for the three months ended June 30, 2002. The
increase is the continuation of a trend that began in July 2002, resulting in
part from an 8% reduction in industry capacity since 2001. While the price
increases that had been announced in the first quarter of 2003 were implemented
at the beginning of the second quarter, during the second quarter weakness in
pricing developed as a result of falling demand from pulp and paper producers
for caustic soda and falling demand from vinyls producers for chlorine. Demand
from those sectors has not improved during the third quarter. A continuation of
natural gas prices at relatively high levels may limit the willingness of
caustic soda and chlorine producers to incur any substantial erosion in price
levels. Earlier in the year we imposed a fuel surcharge that will apply once the
market price of natural gas (which is a basic component of the cost of
electricity, our largest raw material cost) reaches a certain level. The market
price of natural gas has not yet risen to the level that would trigger the
imposition of the surcharge, and in any event competitive factors may limit our
ability to impose the surcharge in the future.
LIQUIDITY AND CAPITAL RESOURCES
Debt, Financial Leverage and Covenants. At June 30, 2003, our senior
secured debt aggregated $219.4 million, consisting of Senior Secured Floating
Rate Guaranteed Notes due 2006 in the aggregate principal amount of $43.2
million (the "Senior Guaranteed Notes"), Floating Rate Term Notes due 2006 in
the aggregate principal amount of $4.4 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 $21.9 million outstanding
under a Revolving Credit Facility with a $30 million commitment and a borrowing
base restriction (the "Revolver"). Collectively, the $197.6 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 November 2001 financial
projections and do not accommodate significant downward variations in operating
results.
Despite recent increases in product prices, there are still significant
constraints on our liquidity. Energy costs associated with producing
chlor-alkali products have affected and in the future may 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 June 30, 2003, the increase in
product prices was offset to some extent by increased energy costs. Decreases in
product prices or 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 and covenant 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 $21.550 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") for the
twelve-month period ending June 30, 2003, and for each twelve-month period
ending each fiscal quarter thereafter.
Our Lender-Defined EBITDA was a negative $28.6 million for the twelve
months ended June 30, 2003. That amount was less than the amount required under
the Revolver covenant, but we have obtained a waiver from the lender under the
Revolver for the noncompliance with the covenant requirement. We expect that the
$16.9 million of charges related to the Tacoma impairment in the fourth quarter
of 2002, discussed in our Annual Report on Form 10-K for the year ended December
31, 2002, and the $40.8 million of charges related to the Henderson impairment
and the $9.5 million addition to the environmental
17
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. The impairment charges and
the environmental charge will have a negative effect on income before income
taxes, and thus on Lender-Defined EBITDA, for the twelve-month periods ending
each quarter through March 31, 2004.
We report amounts of Lender-Defined EBITDA 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 calculation of Lender-Defined EBITDA is as follows:
THREE MONTHS ENDED
TWELVE MONTHS --------------------------------------------------------------
ENDED JUNE 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2003 2003 2003 2002 2002
-------------- --------- ---------- ------------ -------------
Income before income taxes $ 12,474 $ 2,920 $ 14,845 $ (9,220) $ 3,929
Interest expense, net 18,911 4,792 4,811 4,821 4,487
Depreciation and
amortization 23,156 5,360 5,194 6,189 6,413
Derivative items (83,133) -- (66,272) (12,494) (4,367)
-------- -------- -------- -------- --------
Lender-Defined EBITDA $(28,592) $ 13,072 $(41,422) $(10,704) $ 10,462
======== ======== ======== ======== ========
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
June 30, 2003, Liquidity was $11.6 million, consisting of borrowing availability
of $5.5 million and cash of $6.1 million. Capital expenditures were $3.6 million
during the first six months of 2003, and are expected to be $9.6 million during
the remainder of the year. 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 $197.6
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 and
prepay the greater of an amount determined on the basis of (a) Pioneer Americas'
net income before extraordinary items, other income, net, interest, income
taxes, depreciation and amortization ("Tranche A Notes EBITDA"), and (b) an
amount determined on the basis of the Company's excess cash flow and average
liquidity, as defined. With respect to Tranche A Notes EBITDA, the amount that
is to be redeemed and prepaid is (i) $2.5 million principal amount of Tranche A
Notes if 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
date of redemption and prepayment. With respect to excess cash flow, the amount
that is to be redeemed and prepaid is a percentage of the Company's consolidated
net income, without regard to extraordinary gains and losses and net after-tax
other income, plus depreciation, amortization and other non-
18
cash charges, and less all cash principal payments, capital expenditures and
extraordinary cash gains or cash income received, plus or minus cash changes in
working capital. The applicable percentage is to be determined on the basis of
the Company's average liquidity, which is the average of cash plus borrowing
availability under the Revolver for the quarter or for the 45-day period
following the end of the quarter.
Each holder of Senior Floating Notes may refuse any such repayment. As a
result of the application of the applicable provisions with respect to the first
quarter of 2003, we redeemed and prepaid $2.4 million of the principal amount of
the Tranche A Notes on May 23, 2003. One holder refused the prepayment of the
balance of the $2.5 million that was to have been prepaid on that date. No
redemption and prepayment of Tranche A Notes was required with respect to the
calendar quarter that ended on June 30, 2003.
At June 30, 2003, in addition to the Senior Secured Debt, we had $2.2
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 Cdn$5 million; $0.9 million payable over several years to
another vendor; and $4.9 million of other debt outstanding, comprised of notes
maturing in various years through 2014. We also had a $0.6 million promissory
note outstanding in respect of fees owed to a professional. On April 17, 2003,
we satisfied our obligations under another 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%. 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 ended 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 half of 2003 we expect to have cash requirements, in
addition to operating and administrative costs, of approximately $20.8 million
in the aggregate consisting of the following: (i) interest payments of $9.2
million (comprised of interest on our Senior Notes of $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 $9.6 million, (iii) severance payments of $0.6 million and (iv)
repayment obligations of $1.4 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 was dismissed.
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 CRC dispute, 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. These amounts are recorded in
the consolidated statement of operations for six months ended June 30, 2003, 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 six months of
2003 our cash flow provided by operating activities was $6.9 million, primarily
attributable to increased ECU prices, which was partially offset by increased
energy costs.
Net Cash Flows from Investing Activities. Cash used in investing
activities during the first six months of 2003 was $3.6 million for capital
expenditures.
19
Net Cash Flows from Financing Activities. Cash used in financing
activities during the first six months of 2003 totaled approximately $0.5
million, due primarily to debt payments made during the period, which included,
among other items, a $2.4 million redemption and prepayment of the Tranche A
Notes and a $2.4 million early payment of a promissory note, offset by net
borrowings under the Revolver of $7.2 million.
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.
As a result of the settlement of our dispute with CRC, power to meet the
majority of the Henderson plant's needs is now acquired at market rates, which
are expected to remain at levels higher than the previously-available hydropower
rates. 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, which was completed in May 2003. The new study involved a plant-by-plant
analysis of environmental concerns and addressed conditions, situations, and
circumstances involving uncertainty as to possible losses to Pioneer. The
outcome 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.
The 2003 study 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 statements of operations for the three
months and six months ended June 30, 2003. 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 are 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. 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
20
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 June 30, 2003, in offsetting amounts in "Other
Assets" and "Other Long-Term Liabilities." The recent study also did not cover
any environmental matters that we believe to be fully covered under other
indemnity agreements, as such costs are not currently estimable.
During the second half of 2003 we expect to fund approximately $0.8
million in remediation expenses and $4.1 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. 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 JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenues. Revenues increased by $22.1 million, or approximately 30%, to
$96.3 million for the three months ended June 30, 2003, as compared to the three
months ended June 30, 2002, with increased ECU prices being offset somewhat by
lower sales volumes. The average ECU netback for the three months ended June 30,
2003 was $406, an increase of 80% from the average netback of $225 during the
three months ended June 30, 2002.
21
Cost of Sales - Product. Cost of sales - product increased by $8.0
million, or approximately 11%, for the three months ended June 30, 2003, as
compared to the three months ended June 30, 2002. The increase was primarily
attributable to increased electricity costs of approximately $2.3 million, an
increase of approximately $2.4 million related to other variable production
costs and cost of products purchased for resale and approximately $4.2 million
of increased operating and maintenance expenses, offset by a $1.4 million
decrease in freight expense and a $0.8 million decrease in depreciation expense.
Cost of Sales - Derivatives. As a result of the settlement of the
derivatives dispute with CRC that was effective January 1, 2003, there was no
cost of sales - derivatives during the second quarter of 2003. For the three
months ended June 30, 2002, the estimated expense from matured derivatives was
$4.9 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 increased to 16.1% for the three
months ended June 30, 2003 from a negative 4.7% for the three months ended June
30, 2002. Gross profit increased by $19.0 million from negative $3.5 million in
the second quarter of 2002 to $15.5 million in the current quarter. The increase
was primarily due to the items described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were relatively unchanged during the three months ended
June 30, 2003, as compared to the three months ended June 30, 2002.
Change in Fair Value of Derivatives. As a result of the settlement of the
derivatives dispute with CRC discussed above, there was no impact from
derivatives in the second quarter of 2003. For the three months ended June 30,
2002, the mark-to-market change in fair value of the derivative positions was a
net unrealized gain of $5.0 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. Asset impairment and other charges for the
three months ended June 30, 2003, represented a $0.4 million gain from the early
payment of a promissory note.
Other Expense, Net. Other expense, net of $2.6 million in the second
quarter of 2003 reflected foreign exchange losses. Other expense, net for the
quarter ended June 30, 2002, included a foreign exchange loss of $1.3 million.
Income Tax Benefit. The income tax benefit for the quarters ended June 30,
2003, and June 30, 2002 was $2.1 million and $2.7 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 June 30, 2003, and June 30, 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 June 30, 2003, was $5.0 million, compared to a net loss of $6.7
million for the first quarter of 2002.
SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenues. Revenues increased by $39.3 million, or approximately 27%, to
$185.3 million for the six months ended June 30, 2003, as compared to the six
months ended June 30, 2002. The increase resulted from higher ECU prices, offset
slightly by lower sales volumes. The average ECU sales price for the six months
ended June 30, 2003, was $384, an increase of 67% from the average sales price
of $230 during the six months ended June 30, 2002.
Cost of Sales-Product. Cost of sales - product increased $23.9 million, or
approximately 17%, for the six months ended June 30, 2003, as compared to the
six months ended June 30, 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 $7.4
million, an increase of approximately $3.1 million related to other variable
production costs and cost of products purchased for resale and approximately
$3.8 million of increased operating and maintenance expenses, and the absence of
a $1.1 million curtailment gain recorded in the first half of 2002 related to
the Tacoma plant shutdown. Those increases were offset to some extent by a $1.8
million decrease in depreciation expense and a $1.3 million decrease in freight
expense.
Cost of Sales - Derivatives. As a result of the settlement of the
derivatives dispute with CRC, cost of sales - derivatives, for the six months
ended June 30, 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 six months ended June 30, 2002, the
22
estimated expense from matured derivatives was $3.5 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 was relatively unchanged for the
six months ended June 30, 2003, from the six months ended June 30, 2002. Gross
profit decreased by $2.2 million from $1.1 million in the first half of 2002 to
a loss of $1.0 million in the first half of 2003. The decrease was primarily due
to the items described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.8 million, or approximately 25%, for the
six months ended June 30, 2003, as compared to the six months ended June 30,
2002, primarily due to an increase of approximately $2.4 million in bad debt
expense. 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 half of 2003 represents the reversal
of the December 31, 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 six months ended June 30, 2002, the
mark-to-market change in fair value of the derivative positions was a net
unrealized gain of $23.0 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. Asset impairment and other charges for the six
months ended June 30, 2003, included a $40.8 million impairment charge related
to the Henderson facility (see Note 4 to the consolidated financial statements),
offset slightly by a $0.4 million gain from the early payment of a promissory
note. Asset impairment and other charges for the six months ended June 30, 2002,
included primarily $1.9 million of severance expense and $0.7 million of accrued
costs related to idling the Tacoma plant, along with $0.4 million of severance
expense related to staff reductions at the Cornwall plant.
Interest Expense, Net. Interest expense, net was relatively unchanged
during the first half of 2003 as compared to the first half of 2002.
Other Expense, Net. Other expense, net for the six months ended June 30,
2003, was comprised of a foreign exchange loss of $4.4 million. Other expense,
net for the six months ended June 30, 2002, included a foreign exchange loss of
$1.4 million.
Income Tax Benefit. The income tax benefit for the six months ended June
30, 2003, and June 30, 2002, was $3.7 million and $3.5 million, respectively,
reflecting foreign tax benefit on the loss from our Canadian operations. We
recorded a 100% valuation allowance related to losses generated from our U.S.
operations in the six months ended June 30, 2003, and June 30, 2002, due to the
uncertainties relating to the future realization of net operating loss
carryforwards.
Net Income (Loss). Due to the factors described above, net income for the
six months ended June 30, 2003, was $21.4 million, compared to net income of
$3.2 million for the same period in 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 six months ended June 30, 2003.
23
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of June 30, 2003, to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
There has been no change in our internal controls over financial reporting
that occurred during the three months ended June 30, 2003, that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities. On the dates listed below, each of
the following non-employee directors of the Company exercised nonqualified stock
options to purchase 1,000 shares of the Company's common stock, par value $0.01
per share:
Aggregate
Name of Director: Date of Exercise: Exercise Price: Number of Shares Acquired:
- ---------------- ---------------- -------------- -------------------------
David N. Weinstein April 1, 2003 $ 2.50 1,000 shares of common stock
Marvin E. Lesser April 1, 2003 $ 2.50 1,000 shares of common stock
Gary L. Rosenthal April 1, 2003 $ 2.50 1,000 shares of common stock
These options were awarded under Pioneer's 2001 Employee Stock Option Plan,
and the shares of the Company's common stock issued on the exercise of such
options were issued without registration in reliance upon Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our stockholders voted on the following matters at their annual meeting
held on May 22, 2003:
(a) The following were elected to serve new terms as directors and received the
number of votes set opposite their respective names:
Name: For Withheld Authority
- ---- --- ------------------
David N. Weinstein 5,930,999 1,552,397
Marvin E. Lesser 5,930,999 1,552,397
Michael Y. McGovern 5,292,258 2,191,138
Gary L. Rosenthal 5,930,999 1,552,397
(b) A proposal to ratify the appointment of Deloitte & Touche LLP as our
independent certified public accountants received 7,483,382 votes FOR and 12
votes AGAINST, with 2 abstentions.
24
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 many
of which are beyond our control. These risks, contingencies and uncertainties
relate to, among other matters, the following:
o general economic, business and market conditions, including economic
instability or a downturn in the markets served by us;
o the cyclical nature of our product markets and operating results;
o competitive pressures affecting selling prices and volumes;
o the supply/demand balance for our products, including the impact of excess
industry capacity;
o the occurrence of unexpected manufacturing interruptions/outages,
including those occurring as a result of production hazards;
o failure to fulfill financial covenants contained in our debt instruments;
o inability to make scheduled payments on or refinance our indebtedness;
o loss of key customers or suppliers;
o higher than expected raw material and utility costs;
o higher than expected transportation and/or logistics costs;
o environmental costs and other expenditures in excess of those projected;
o changes in laws and regulations inside or outside the United States;
o uncertainty with respect to interest rates; and
o 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.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.
31.1 Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934.
31.2 Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934.
32.1 Certification required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350.
32.2 Certification required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350.
----------
+ Indicates exhibit previously filed with the Securities and Exchange
Commission as indicated and incorporated herein by reference
(b) Reports on Form 8-K
On April 1, 2003, we filed a report on Form 8-K. Under Item 7 of the
report ("Financial Statements and Exhibits"), we filed a press release issued by
Pioneer Companies, Inc. on March 31, 2003. Under Item 9 of the report
("Regulation FD Disclosure"), we reported that we had issued a press release
announcing Pioneer's results for the fourth quarter of 2002 and for the full
year 2002.
26
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: August 13, 2003 By: /s/ Gary L. Pittman
-----------------------------
Gary L. Pittman
Vice President and
Chief Financial Officer
(Principal Financial Officer)
27
EXHIBIT INDEX
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.
31.1 Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934.
31.2 Certification required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934.
32.1 Certification required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350.
32.2 Certification required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350.
----------
+ Indicates exhibit previously filed with the Securities and Exchange
Commission as indicated and incorporated herein by reference
28