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 SEPTEMBER 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 November 13, 2003, there were 10,003,333 shares of common stock of
Pioneer Companies, Inc. outstanding.
TABLE OF CONTENTS
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets--September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations--Three Months Ended September 30, 2003 and 2002 and
Nine Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows--Nine Months Ended September 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 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 25
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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,582 $ 2,789
Accounts receivable, net of allowance for doubtful accounts of $3,043 at
September 30, 2003 and $1,337 at December 31, 2002 43,711 39,983
Inventories, net 16,735 15,311
Current derivative asset - 17,834
Prepaid expenses and other current assets 3,815 4,779
---------- ----------
Total current assets 68,843 80,696
Property, plant and equipment:
Land 6,520 7,315
Buildings and improvements 29,522 32,952
Machinery and equipment 189,010 220,072
Construction in progress 1,962 4,085
---------- ----------
227,014 264,424
Less: accumulated depreciation (35,074) (22,155)
---------- ----------
Net property, plant and equipment 191,940 242,269
Other assets 3,881 25,755
Non-current derivative asset - 41,362
Excess reorganization value over the fair value of identifiable assets 84,064 84,064
---------- ----------
Total assets $ 348,728 $ 474,146
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,934 $ 20,193
Accrued liabilities 25,541 18,161
Current derivative liability - 37,614
Short-term debt, including current portion of long-term debt 14,362 21,112
---------- ----------
Total current liabilities 49,837 97,080
Long-term debt, less current portion 203,918 207,463
Accrued pension and other employee benefits 26,285 26,132
Non-current derivative liability - 108,852
Other long-term liabilities 44,052 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) 18,620 (4,757)
---------- ----------
Total stockholders' equity 24,636 1,252
---------- ----------
Total liabilities and stockholders' equity $ 348,728 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues $ 100,001 $ 86,579 $ 285,348 $ 232,619
Cost of sales - product (86,351) (77,804) (251,714) (219,233)
Cost of sales - derivatives - 14,149 (20,999) 10,683
---------- ---------- ---------- ----------
Total cost of sales (86,351) (63,655) (272,713) (208,550)
---------- ---------- ---------- ----------
Gross profit 13,650 22,924 12,635 24,069
Selling, general and administrative expenses (5,992) (5,599) (20,040) (16,828)
Change in fair value of derivatives - (9,782) 87,271 13,266
Asset impairment and other 24 (562) (40,372) (3,288)
---------- ---------- ---------- ----------
Operating income 7,682 6,981 39,494 17,219
Interest expense (4,582) (4,487) (14,185) (14,070)
Other income (expense), net (90) 1,435 (4,534) 533
---------- ---------- ---------- ----------
Income before income taxes 3,010 3,929 20,775 3,682
Income tax benefit (expense) (1,057) (656) 2,602 2,799
---------- ---------- ---------- ----------
Net income $ 1,953 $ 3,273 $ 23,377 $ 6,481
========== ========== ========== ==========
Net income per share:
Basic $ 0.20 $ 0.33 $ 2.34 $ 0.65
Diluted $ 0.19 $ 0.33 $ 2.31 $ 0.65
Weighted average number of shares
outstanding:
Basic 10,003 10,000 10,002 10,000
Diluted 10,145 10,070 10,126 10,000
See notes to consolidated financial statements.
4
PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
---------- ----------
Operating activities:
Net income $ 23,377 $ 6,481
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 16,051 18,737
Provision for (recovery of) losses on accounts receivable 1,257 (653)
Net change in deferred taxes (2,603) (2,683)
Change in fair value of derivatives (66,272) (13,266)
Gain from early extinguishment of debt (420) -
Gain on disposals of assets - (1,034)
Asset impairment 40,818 -
Foreign exchange loss (gain) 4,536 (6)
Net effect of changes in operating assets and liabilities 991 (5,079)
---------- ----------
Net cash flows from operating activities 17,735 2,497
---------- ----------
Investing activities:
Capital expenditures (6,179) (4,965)
Proceeds received from disposals of assets - 2,047
---------- ----------
Net cash flows from investing activities (6,179) (2,918)
---------- ----------
Financing activities:
Net proceeds (payments) under revolving credit arrangements (1,918) 4,047
Payments on debt (8,418) (1,488)
Proceeds from issuance of stock 7 -
---------- ----------
Net cash flows from financing activities (10,329) 2,559
---------- ----------
Effect of exchange rate changes on cash 566 249
---------- ----------
Net change in cash and cash equivalents 1,793 2,387
Cash and cash equivalents at beginning of period 2,789 3,624
---------- ----------
Cash and cash equivalents at end of period $ 4,582 $ 6,011
========== ==========
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 September 30, 2003, and the
consolidated statements of operations and cash flows for the periods presented
are unaudited and reflect all adjustments, which consist only of normal
recurring items, that management considers necessary for a fair presentation.
Operating results for the first nine months of 2003 are not necessarily
indicative of results to be expected for the year ending December 31, 2003. 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 September 30, 2003, Pioneer's senior secured debt aggregated $210.4
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 $12.8 million outstanding under a Revolving Credit Facility which
expires on December 31, 2004, and which has 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.
Pioneer's liquidity is still subject to certain risks. While average
product prices were higher during the first nine months of 2003 than in 2002,
prices weakened somewhat during the third quarter of 2003 and have continued to
weaken in the fourth quarter. 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. On average, energy costs were higher during the
nine months ended September 30, 2003, than during prior periods, with a peak in
costs occurring during the summer months. Further 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 or covenant obligations. In that event, additional amendments
of or waivers under Pioneer's debt agreements or deferrals of interest payments
would likely be necessary.
6
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 September 30, 2003, and for each twelve-month
period ending each fiscal quarter thereafter.
Pioneer had negative Lender-Defined EBITDA for the twelve months ended
September 30, 2003. Pioneer has obtained a waiver from the lender under the
Revolver for the noncompliance with the covenant requirement. Pioneer expects
that 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 a waiver from the lender under the
Revolver for the quarter ending December 31, 2003. The impairment charge and the
environmental charge will have a negative effect on Lender-Defined EBITDA for
the twelve-month period ending on December 31, 2003.
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 September 30, 2003, Liquidity was $19.2 million, consisting of
borrowing availability of $14.6 million and cash of $4.6 million. Capital
expenditures were $6.2 million during the first nine 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 quarters that ended on June 30, 2003, and September 30, 2003.
7
The uncertainties affecting Pioneer's liquidity as a result of the
restrictive financial covenants, redemption obligations and the debt-service
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. Approximately 85% of the Henderson
facility's electricity needs were met through the hydropower contracts. Under
the new supply agreement, CRC arranges for that portion of the facility's power
requirements at market rates during a term expiring on 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 nine months
ended September 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.
Other items in the nine months ended September 30, 2003, included a
$0.4 million gain from the early payment of a $2.8 million promissory note.
In March 2002, Pioneer idled its Tacoma plant and incurred $0.7
million of exit costs. The idling of the facility resulted in the termination
of 84 employees, all of whom were terminated prior to June 30, 2002, and for
whom $1.9 million of severance expense was recorded during the quarter ended
March 31, 2002. Other charges recorded during the nine months ended September
30, 2002, were primarily comprised of restructuring expenses of $2.2 million-,
offset somewhat by $1.1 million of gains from sales of assets.
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.
8
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. 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 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 September 30, 2003, the total estimated
environmental liabilities of $20.8 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 2003 study did not include
pre-acquisition environmental matters covered by the $3.2 million environmental
receivable. Such amount, as originally estimated, is included in the
consolidated balance sheet as of September 30, 2003, in offsetting amounts in
"Other Assets" and "Other Long-Term Liabilities." The 2003 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:
SEPTEMBER 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 .................................... 12,787 14,704
Other debt:
Promissory notes issued for professional fees* ....................................... - 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$0.2 million and Cdn$0.6 million at
September 30, 2003, and December 31, 2002, respectively ............................ 2,288 2,473
Other notes, maturing in various years through 2014, with various installments,
at various interest rates .......................................................... 5,641 6,450
---------- ----------
Total .................................................................................. 218,280 227,055
Current maturities of long-term debt ................................................... (14,362) (19,592)
---------- ----------
Long-term debt, less current maturities ................................................ $ 203,918 $ 207,463
========== ==========
(footnote on following page)
9
* In April 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 remaining note, with a
principal balance of $0.6 million, was paid in full in August 2003.
The note bore interest during the period ended on June 30, 2003, at
a variable rate based on the three-month LIBOR rate plus 3.5%, and
thereafter at 9% per annum.
At September 30, 2003, in addition to Senior Secured Debt, Pioneer also
had outstanding $2.3 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, as defined, falls below Cdn$5 million.
As of September 30, 2003, Pioneer was in compliance with the terms of the
instrument. At September 30, 2003, Pioneer also owed $0.9 million, payable over
several years, to another critical vendor, and had $4.7 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 is 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:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Raw materials, supplies and parts, net $ 6,651 $ 8,105
Finished goods 9,838 7,117
Inventories under exchange agreements 246 89
---------- ----------
$ 16,735 $ 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 -- SEPTEMBER 30, 2003 (IN THOUSANDS)
PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ - $ 1,663 $ 2,913 $ 6 $ - $ 4,582
Accounts receivable, net ......................... - 10,444 33,267 - - 43,711
Inventories, net ................................. - 5,603 11,132 - - 16,735
Prepaid expenses and other current assets ........ 907 2,629 279 - - 3,815
--------- ---------- ---------- ---------- ---------- ----------
Total current assets ...................... 907 20,339 47,591 6 - 68,843
Property, plant and equipment, net ................. - 115,049 75,363 1,528 - 191,940
Other assets ....................................... - 159 3,722 - - 3,881
Intercompany receivable ............................ - 87,148 - 65,855 (153,003) -
Investment in subsidiaries ......................... 30,941 - - - (30,941) -
Excess reorganization value over the fair value of
identifiable assets ............................. - 84,064 - - - 84,064
--------- ---------- ---------- ---------- ---------- ----------
Total assets .............................. $ 31,848 $ 306,759 $ 126,676 $ 67,389 $ (183,944) $ 348,728
========= ========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY
IN ASSETS)
Current liabilities:
Accounts payable ................................. $ - $ 4,463 $ 5,471 $ - $ - $ 9,934
Accrued liabilities .............................. - 11,199 14,309 33 - 25,541
Short-term debt and current portion of
long-term debt ................................. - 590 13,745 27 - 14,362
--------- ---------- ---------- ---------- ---------- ----------
Total current liabilities ................. - 16,252 33,525 60 - 49,837
Long-term debt, less current portion ............... - 151,698 52,151 69 - 203,918
Investment in subsidiary ........................... - 137,166 - - (137,166) -
Intercompany payable ............................... 7,212 - 145,791 - (153,003) -
Accrued pension and other employee benefits ........ - 9,270 17,015 - - 26,285
Other long-term liabilities ........................ - 26,733 15,360 1,959 - 44,052
Stockholders' equity (deficiency in assets) ........ 24,636 (34,360) (137,166) 65,301 106,225 24,636
--------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity (deficiency in assets) ........... $ 31,848 $ 306,759 $ 126,676 $ 67,389 $ (183,944) $ 348,728
========= ========== ========== ========== ========== ==========
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 SEPTEMBER
30, 2003 (IN THOUSANDS)
PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
Revenues ........................................... $ - $ 48,517 $ 76,251 $ - $ (24,767) $ 100,001
Cost of sales ...................................... - (38,962) (72,164) 8 24,767 (86,351)
--------- ---------- ---------- ---------- ---------- ----------
Gross profit ....................................... - 9,555 4,087 8 - 13,650
Selling, general and administrative expenses ....... (81) (1,686) (4,225) - - (5,992)
Asset impairment and other ......................... - (18) 42 - - 24
--------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) ............................ (81) 7,851 (96) 8 - 7,682
Interest expense, net .............................. - (3,788) (792) (2) - (4,582)
Other income (expense), net ........................ - (92) (2,259) 2,261 - (90)
--------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes .................. (81) 3,971 (3,147) 2,267 - 3,010
Income tax expense ................................. - (1,057) - - - (1,057)
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in earnings (loss)
of subsidiary .................................... (81) 2,914 (3,147) 2,267 - 1,953
Equity in net earnings (loss) of subsidiary ........ 2,034 (3,147) - - 1,113 -
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .................................. $ 1,953 $ (233) $ (3,147) $ 2,267 $ 1,113 $ 1,953
========= ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER
30, 2002 (IN THOUSANDS)
PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
Revenues ........................................... $ - $ 37,294 $ 66,930 $ - $ (17,645) $ 86,579
Cost of sales ...................................... - (33,092) (47,474) (734) 17,645 (63,655)
--------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss) ................................ - 4,202 19,456 (734) - 22,924
Selling, general and administrative expenses ....... (148) (1,819) (3,625) (7) - (5,599)
Change in fair value of derivatives ................ - - (9,782) - - (9,782)
Asset impairment and other ......................... - 819 (1,381) - - (562)
--------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) ............................ (148) 3,202 4,668 (741) - 6,981
Interest expense, net .............................. - (3,876) (608) (3) - (4,487)
Other income (expense), net ........................ - 2,263 (830) 2 - 1,435
--------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes .................. (148) 1,589 3,230 (742) - 3,929
Income tax expense ................................. - (656) - - - (656)
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in earnings of (148) 933 3,230 (742) - 3,273
subsidiary Equity in net earnings of subsidiary .. 3,421 3,230 - - (6,651) -
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .................................. $ 3,273 $ 4,163 $ 3,230 $ (742) $ (6,651) $ 3,273
========= ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER
30, 2003 (IN THOUSANDS)
PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
Revenues ........................................... $ - $ 134,615 $ 217,363 $ - $ (66,630) $ 285,348
Cost of sales ...................................... - (114,518) (224,965) 140 66,630 (272,713)
--------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss) ................................ - 20,097 (7,602) 140 - 12,635
Selling, general and administrative expenses ....... (250) (4,707) (15,073) (10) - (20,040)
Change in fair value of derivatives ................ - - 87,271 - - 87,271
Asset impairment and other charges ................. - (18) (40,354) - - (40,372)
--------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) ............................ (250) 15,372 24,242 130 - 39,494
Interest expense, net .............................. - (11,373) (2,806) (6) - (14,185)
Other income (expense), net ........................ - (4,538) (11,655) 11,659 - (4,534)
--------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes .................. (250) (539) 9,781 11,783 - 20,775
Income tax benefit ................................. - 2,602 - - - 2,602
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in earnings of
subsidiary ....................................... (250) 2,063 9,781 11,783 - 23,377
Equity in net earnings of subsidiary ............... 23,627 9,781 - - (33,408) -
--------- ---------- ---------- ---------- ---------- ----------
Net income ......................................... $ 23,377 $ 11,844 $ 9,781 $ 11,783 $ (33,408) $ 23,377
========= ========== ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER
30, 2002 (IN THOUSANDS)
PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ---------- ------------ ------------
Revenues ........................................... $ - $ 104,180 $ 173,783 $ - $ (45,344) $ 232,619
Cost of sales ...................................... - (96,490) (156,672) (732) 45,344 (208,550)
--------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss) ................................ - 7,690 17,111 (732) - 24,069
Selling, general and administrative expenses ....... (354) (4,914) (11,634) 74 - (16,828)
Change in fair value of derivatives ................ - - 13,266 - - 13,266
Asset impairment and other charges ................. - 921 (4,209) - - (3,288)
--------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) ............................ (354) 3,697 14,534 (658) - 17,219
Interest income (expense), net ..................... - (11,372) (2,702) 4 - (14,070)
Other income (expense), net ........................ - 856 (360) 37 - 533
--------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes .................. (354) (6,819) 11,472 (617) - 3,682
Income tax benefit ................................. - 2,799 - - - 2,799
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before equity in earnings of
subsidiary ....................................... (354) (4,020) 11,472 (617) - 6,481
Equity in net earnings of subsidiary ............... 6,835 11,472 - - (18,307) -
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .................................. $ 6,481 $ 7,452 $ 11,472 $ (617) $ (18,307) $ 6,481
========= ========== ========== ========== ========== ==========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- NINE MONTHS ENDED SEPTEMBER
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 $ 1,835 $ 14,381 $ 6 $ 17,735
Cash flows from investing activities:
Capital expenditures .............................. - (1,791) (4,388) - (6,179)
--------- ---------- ---------- ---------- ----------
Net cash flows from investing activities .. - (1,791) (4,388) - (6,179)
--------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds under revolving credit arrangements .. - - (1,918) - (1,918)
Payments on debt .................................. (1,520) (649) (6,236) (13) (8,418)
Proceeds from issuance of stock ................... 7 - - - 7
--------- ---------- ---------- ---------- ----------
Net cash flows from financing activities .. (1,513) (649) (8,154) (13) (10,329)
--------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash ............. - 566 - - 566
--------- ---------- ---------- ---------- ----------
Net change in cash and cash equivalents ............. - (39) 1,839 (7) 1,793
Cash and cash equivalents at beginning of period .... - 1,702 1,074 13 2,789
--------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period .......... $ - $ 1,663 $ 2,913 $ 6 $ 4,582
========= ========== ========== ========== ==========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- NINE MONTHS ENDED SEPTEMBER
30, 2002 (IN THOUSANDS)
PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS CONSOLIDATED
--------- ---------- ---------- ---------- ------------
Cash flows from operating activities:
Net cash flows from operating activities .. $ - $ 6,224 $ (3,890) $ 163 $ 2,497
--------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures .............................. - (1,759) (3,206) - (4,965)
Proceeds received from disposals of assets ........ - 2,047 - - 2,047
--------- ---------- ---------- ---------- ----------
Net cash flows from investing activities .. - 288 (3,206) - (2,918)
--------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds under revolving credit arrangements .. - (5,774) 9,821 - 4,047
Payments on debt .................................. - (628) (839) (21) (1,488)
--------- ---------- ---------- ---------- ----------
Net cash flows from financing activities .. - (6,402) 8,982 (21) 2,559
--------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash ............. - 249 - - 249
--------- ---------- ---------- ---------- ----------
Net change in cash and cash equivalents ............. - 359 1,886 142 2,387
Cash and cash equivalents at beginning of period .... - 1,950 1,674 - 3,624
--------- ---------- ========== ---------- ----------
Cash and cash equivalents at end of period .......... $ - $ 2,309 $ 3,560 $ 142 $ 6,011
========= ========== ========== ========== ==========
10. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
shares outstanding during the period. Diluted earnings per share considers, in
addition to the above, the dilutive effect of potentially issuable shares during
the period.
Computational amounts for earnings per share are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $ 1,953 $ 3,273 $ 23,377 $ 6,481
========== ========== ========== ==========
Basic earnings per share:
Weighted average number of shares outstanding 10,003 10,000 10,002 10,000
========== ========== ========== ==========
Net earnings per share $ 0.20 $ 0.33 $ 2.34 $ 0.65
========== ========== ========== ==========
Diluted earnings per share:
Weighted average number of shares outstanding 10,145 10,070 10,126 10,000
========== ========== ========== ==========
Net earnings per share $ 0.19 $ 0.33 $ 2.31 $ 0.65
========== ========== ========== ==========
14
Options to purchase 225,000 shares that were outstanding during the
three and nine months ended September 30, 2003, were not included in the
computation of diluted earnings per share because the options' exercise price
exceeded the average market price of the shares. Earnings per share for the nine
months ended September 30, 2002, were not affected by outstanding options to
acquire 720,000 shares because the options' exercise price exceeded the average
market price of the shares during that period.
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 classified to income from continuing operations in all
periods presented. Pioneer adopted SFAS 145 effective January 1, 2003, and has
classified gains on early extinguishments of debt within income for continuing
operations for all periods presented.
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.
12. STOCK BASED COMPENSATION
At September 30, 2003, PCI had options for the purchase of 667,667
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 8.81 years. No options were granted during
the nine months ended September 30, 2003, and options for the purchase of
872,000 shares were granted during the nine months ended September 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 share for the three
and nine months ended September 30, 2003, and 2002 would have been as indicated
below:
15
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income:
As reported ...................................... $ 1,953 $ 3,273 $ 23,377 $ 6,481
Pro forma stock compensation expense ............. (158) (135) (475) (161)
---------- ---------- ---------- ----------
Pro forma net income ............................... $ 1,795 $ 3,138 $ 22,902 $ 6,320
========== ========== ========== ==========
Income per common share:
Basic, as reported ............................... $ 0.20 $ 0.33 $ 2.34 $ 0.65
Basic, pro forma ................................. $ 0.18 $ 0.31 $ 2.29 $ 0.63
Diluted, as reported ............................. $ 0.19 $ 0.33 $ 2.31 $ 0.65
Diluted, pro forma ............................... $ 0.18 $ 0.31 $ 2.26 $ 0.63
13. SUPPLEMENTAL CASH FLOW INFORMATION
The net effect of changes in operating assets and liabilities,
excluding the impact of remeasuring balances denominated in Canadian dollars,
was as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
---------- ----------
Accounts receivable $ (3,364) $ 5,570
Inventories (544) 3,042
Prepaid expenses and other current assets 2,362 4,781
Other assets 831 (11,667)
Accounts payable (11,282) (2,132)
Accrued liabilities 5,868 (3,756)
Other long-term liabilities 7,120 (917)
---------- ----------
Net change in operating assets and liabilities $ 991 $ (5,079)
========== ==========
Following are supplemental disclosures of cash flow information:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
---------- ----------
Cash payments for:
Interest $ 10,429 $ 10,211
Income taxes - -
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," consisting of one ton of chlorine and 1.1 tons of caustic soda, adjusted
to eliminate the product transportation element) averaged $392 during the three
months ended September 30, 2003, compared with $406 for the three months ended
June 30, 2003, and $310 for the three months ended September 30, 2002. Prices
for the products declined during the third quarter of 2003, but only to a
moderate extent despite a decline in the chlor-alkali industry operating rate
(which, according to the Chlorine Institute, was approximately 90% during the
quarter). During the quarter demand for chlorine from vinyls producers continued
to be weak, as U.S. vinyls exports to Asian markets faced competitive pressures,
and polyurethane producers also experienced sharp drops in demand for their
products.
16
Our revenues for the three and nine months ended September 30, 2003 and
2002 were derived as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Chlorine and caustic soda $ 70,200 $ 60,154 $ 208,739 $ 160,684
Other 29,801 26,425 76,609 71,935
---------- ---------- ---------- ----------
$ 100,001 $ 86,579 $ 285,348 $ 232,619
========== ========== ========== ==========
---------- ---------- ---------- ----------
ECU netback* $ 392 $ 310 $ 387 $ 256
========== ========== ========== ==========
* The ECU netback relates only to sales of chlorine and caustic soda, and not to
sales of other products.
We are considering the possibility of reopening our Tacoma chlor-alkali
plant. We have now agreed on the material terms of a contract for the supply of
power to the plant. we are currently evaluating the potential customer base for
the plant's chlor-alkali products to determine the advisability of resuming
chlor-alkali production operations in Tacoma in 2004.
LIQUIDITY AND CAPITAL RESOURCES
Debt, Financial Leverage and Covenants. At September 30, 2003, our
senior secured debt aggregated $210.4 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 $12.8 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.
Our liquidity is still subject to certain risks. While average product
prices have been higher during the first nine months of 2003 than in 2002,
prices weakened somewhat during the quarter ended September 30, 2003. 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 September 30, 2003, energy costs continued to increase. Further 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. 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 September 30, 2003, and for each twelve-month period
ending each fiscal quarter thereafter.
Our Lender-Defined EBITDA was a negative $26.0 million for the twelve
months ended September 30, 2003. As a result we did not meet the Revolver
covenant requirement, but we have obtained a waiver from the lender under the
Revolver for the noncompliance with the covenant requirement for the twelve
months ended September 30, 2003. We expect that 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 Notes 4 and 5,
respectively, to our consolidated financial statements, will likely result in
the need for a waiver from the lender under the Revolver for the quarter ending
December 31, 2003. The impairment charge and the
17
environmental charge will have a negative effect on income before income taxes,
and thus on Lender-Defined EBITDA, for the twelve-month period ending on
December 31, 2003.
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 accounting principles
generally accepted in the United States of America. 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:
TWELVE MONTHS THREE MONTHS ENDED
ENDED ------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
2003 2003 2003 2003 2002
-------------- ------------- ---------- ---------- ------------
Income before income taxes $ 11,555 $ 3,010 $ 2,920 $ 14,845 $ (9,220)
Interest expense, net 19,006 4,582 4,792 4,811 4,821
Depreciation and
amortization 22,240 5,497 5,360 5,194 6,189
Derivative items (78,766) - - (66,272) (12,494)
---------- ---------- ---------- ---------- ----------
Lender-Defined EBITDA $ (25,965) $ 13,089 $ 13,072 $ (41,422) $ (10,704)
========== ========== ========== ========== ==========
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
September 30, 2003, Liquidity was $19.2 million, consisting of borrowing
availability of $14.6 million and cash of $4.6 million. Capital expenditures
were $6.2 million during the first nine months of 2003, and are expected to be
$5.2 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-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
18
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 quarters that ended on June 30, 2003, and September 30, 2003.
At September 30, 2003, in addition to the Senior Secured Debt, we had
$2.3 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 $4.7 million of other debt outstanding, comprised of notes
maturing in various years through 2014. In April 2003 we satisfied our
obligations under a 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%, and
in August 2003 we satisfied our obligations under the remaining note in respect
of fees owed to professionals, which bore interest at an annual rate of 9.0%.
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 quarter of 2003 we will have obligations, in addition
to operating and administrative costs, of approximately $14.5 million in the
aggregate consisting of the following: (i) interest payments of approximately
$8.5 million (comprised of interest on our Senior Notes of $8.1 million payable
on December 31, 2003, and anticipated monthly payments of interest on the
Revolver ranging from $75,000 to $150,000), (ii) capital expenditures of $5.2
million, (iii) severance payments of $0.2 million and (iv) repayment obligations
of $0.6 million. During the first quarter of 2004 we will have obligations, in
addition to operating and administrative costs, that will include interest
payments of approximately $1.0 million (comprised of interest on our Senior
Notes of $0.5 million payable on March 31, 2004, and anticipated monthly
payments of interest on the Revolver ranging from $75,000 to $150,000) and other
repayment obligations of $1.6 million; the level of expected capital
expenditures during the first quarter of 2004 has not yet been determined. We
expect to fund all of 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 the nine months ended
September 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 nine months
of 2003 our cash flow provided by operating activities was $17.7 million, a
$15.2 million increase from the same period in 2002. The increase was primarily
attributable to ECU prices that were higher during the 2003 period, partially
offset by energy costs that increased throughout the period.
Net Cash Flows from Investing Activities. Cash used in investing
activities during the first nine months of 2003 was $6.2 million for capital
expenditures.
Net Cash Flows from Financing Activities. Cash used in financing
activities during the first nine months of 2003 totaled
19
approximately $10.3 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 $3.0 million for the repayment of two
promissory notes, as well as net repayments under the Revolver of $1.9 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 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.
Environmental Liabilities. We provide for environmental remediation
costs bassed on estimates of known environmental remediation exposure when such
amounts are probable and estimable. Ongoing environmental compliance costs,
including maintenance and monitoring costs, are expensed as incurred. Capital
costs incurred to prevent future environmental contamination are capitalized.
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.
During the fourth quarter of 2003 we expect to fund approximately $0.4 million
in remediation expenses and $1.9 million in capital expenditures relating to our
environmental compliance program.
Long-Term Employee Benefit Costs. As of September 30, 2003, we reported
accrued pension and other employee benefits of $26.3 million. 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 $0.7 million in 2003. Changes
in key estimates and assumptions could have a material impact on recorded
liability amounts and our statutorily-required annual cash funding obligations.
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.
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
20
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 SEPTEMBER 30, 2003, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Revenues. During the three months ended September 30, 2003, we produced
174,000 tons of chlorine and 194,000 tons of caustic soda; approximately 29% of
the chlorine and 12% of the caustic soda was used to manufacture bleach,
hydrochloric acid and other downstream products. We also purchased 38,000 tons
of caustic soda for resale during the quarter. During the three months ended
September 30, 2002, we produced 184,000 tons of chlorine and 206,000 tons of
caustic soda; approximately 26% of the chlorine and 12% of the caustic soda was
used to manufacture bleach, hydrochloric acid and other downstream products. We
also purchased 36,000 tons of caustic soda for resale during the 2002 quarter.
Revenues increased by $13.4 million, or approximately 16%, to $100.0
million for the three months ended September 30, 2003, as compared to the three
months ended September 30, 2002, with higher ECU prices being offset somewhat by
lower sales volumes. The average ECU netback (which relates only to sales of
chlorine and caustic soda) for the three months ended September 30, 2003, was
$392, an increase of 26% from the average netback of $310 during the three
months ended September 30, 2002. Revenues in the most recent quarter were also
favorably affected by increased prices and volumes for our other products, with
an increase of $2.5 million in revenues resulting from improved bleach sales in
the western U.S.
Cost of Sales - Product. Cost of sales - product increased by $8.5
million, or approximately 11%, for the three months ended September 30, 2003, as
compared to the three months ended September 30, 2002. The increase was
attributable to increased electricity costs of approximately $4.1 million, an
increase of approximately $2.0 million in other variable production costs and
the cost of products purchased for resale, approximately $2.8 million of
increased operating and maintenance expenses, and an increase in freight expense
of $0.6 million, offset somewhat by a $1.0 million decrease in depreciation
expense. Lower sales volumes had the effect of moderating the increase in cost
of sales - product.
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 third quarter of 2003. For the three
months ended September 30, 2002, the estimated benefit from matured derivatives
was $14.1 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. Gross profit margin decreased to 14% for the three months
ended September 30, 2003 from 26% for the three months ended September 30, 2002.
Gross profit decreased by $9.3 million from $22.9 million in the third quarter
of 2002 to $13.6 million in the current quarter, due to the items described
above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.4 million, or approximately 7%, to $6.0
million for the three months ended September 30, 2003, as compared to the three
months ended September 30, 2002. The increase was attributable to a $0.3 million
increase in professional fees and a $0.1 million increase in depreciation
expense.
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 third quarter of 2003. For the three months ended September
30, 2002, the mark-to-market change in fair value of the derivative positions
was a net unrealized loss of $9.8 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 for the three
months ended September 30, 2003 was nominal. Asset impairment and other for the
three months ended September 31, 2002 of $0.6 million was primarily comprised of
executive severance expense and legal fees related to Pioneer's emergence from
bankruptcy, offset to an extent by a $0.7 million gain from sales of assets.
Interest Expense. Interest expense was relatively unchanged during the
three months ended September 30, 2003, as compared to the three months ended
September 30, 2002.
21
Other Income (Expense), Net. Other expense, net of $0.1 million in the
third quarter of 2003 reflected foreign exchange losses. Other income, net for
the quarter ended September 30, 2002, included foreign exchange gains of $1.3
million.
Income Tax Benefit (Expense). The income tax expense for the quarters
ended September 30, 2003, and September 30, 2002, was $1.1 million and $0.7
million, respectively, reflecting foreign tax expense on income from our
Canadian operations. Due to uncertainty as to the use of our U.S. net operating
loss carryforwards and other deferred tax assets in future years, we have
recorded a 100% valuation allowance in connection with our U.S. deferred tax
assets. When our U.S. operations generate income, the valuation allowance is
reduced by the amount of related income tax expense, and when losses are
incurred, the valuation allowance is increased by the amount of related income
tax benefit.
Net Income. Due to the factors described above, net income for the
three months ended September 30, 2003, was $2.0 million, compared to net income
of $3.3 million for the third quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2002
Revenues. During the nine months ended September 30, 2003, we produced
511,000 tons of chlorine and 571,000 tons of caustic soda; approximately 26% of
the chlorine and 11% of the caustic soda was used to manufacture bleach,
hydrochloric acid and other downstream products. We also purchased 95,000 tons
of caustic soda for resale during the nine-month period. During the nine months
ended September 30, 2002, we produced 543,000 tons of chlorine and 608,000 tons
of caustic soda; approximately 25% of the chlorine and 10% of the caustic soda
was used to manufacture bleach, hydrochloric acid and other downstream products.
We also purchased 80,000 tons of caustic soda for resale during the nine months
ended September 30, 2002. The lower production in 2003 was attributable in part
to the closing of our Tacoma chlor-alkali plant during the first quarter of
2002.
Revenues increased by $52.7 million, or approximately 23%, to $285.3
million for the nine months ended September 30, 2003, as compared to the nine
months ended September 30, 2002. The increase resulted from higher ECU prices,
offset slightly by lower sales volumes. The average ECU sales price for the nine
months ended September 30, 2003, was $387, an increase of 52% from the average
sales price of $255 during the nine months ended September 30, 2002. Revenues
for the nine months ended September 30, 2003 were also favorably affected by
increased prices and volumes for our other products, with an increase of $6.3
million in revenues resulting from improved bleach sales in the western U.S.
Cost of Sales-Product. Cost of sales - product increased by $32.5
million, or approximately 15%, for the nine months ended September 30, 2003, as
compared to the nine months ended September 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 costs of approximately
$10.2 million, an increase of approximately $4.9 million in other variable
production costs and cost of products purchased for resale, approximately $10.3
million of increased operating and maintenance expenses, and the absence of a
$1.1 million curtailment gain recorded in the nine months ended September 30,
2002, related to the Tacoma plant shutdown. Those increases were offset to some
extent by a $2.8 million decrease in depreciation expense and a $0.7 million
decrease in freight expense. Lower sales volumes had the effect of moderating
the increase in cost of sales - product.
Cost of Sales - Derivatives. As a result of the settlement of the
derivatives dispute with CRC, cost of sales - derivatives for the nine months
ended September 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 nine months ended September 30, 2002, the
estimated benefit from matured derivatives was $10.7 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. Gross profit margin decreased to 4% for the nine months
ended September 30, 2003, from 10% for the nine months ended September 30, 2002.
Gross profit decreased by $11.5 million from $24.1 million in the nine months of
2002 to $12.6 million in the first nine months of 2003, due to the items
described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.2 million, or approximately 19%, for the
nine months ended September 30, 2003, as compared to the nine months ended
September 30, 2002, primarily due to an increase of approximately $1.9 million
in bad debt expense and $1.1 million of personnel-related costs. 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 nine months ended September 30, 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 nine months
22
ended September 30, 2002, the mark-to-market change in fair value of the
derivative positions was a net unrealized gain of $13.3 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
nine months ended September 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 of $3.3 million for the nine
months ended September 30, 2002, included approximately $1.9 million of
severance expense and $0.7 million of other costs related to idling the Tacoma
plant, $0.4 million of severance expense related to staff reductions at the
Cornwall plant, $0.6 million of executive severance expense, and $0.5 million of
legal expense related to Pioneer's emergence from bankruptcy, offset somewhat by
a $1.1 million gain from sales of assets.
Interest Expense. Interest expense was relatively unchanged during the
nine months ended September 30, 2003, as compared to the nine months ended
September 30, 2002.
Other Income (Expense), Net. Other expense, net for the nine months
ended September 30, 2003, was comprised of a foreign exchange loss of $4.5
million. Other income, net of $0.5 million in the prior-year period included
various nominal items.
Income Tax Benefit. The income tax benefit for the nine months ended
September 30, 2003, and September 30, 2002, was $2.6 million and $2.8 million,
respectively, reflecting foreign tax benefit on the loss from our Canadian
operations. Due to uncertainty as to the use of our U.S. net operating loss
carryforwards and other deferred tax assets in future years, we have recorded a
100% valuation allowance in connection with our U.S. deferred tax assets. When
our U.S. operations generate income, the valuation allowance is reduced by the
amount of related income tax expense.
Net Income. Due to the factors described above, net income for the nine
months ended September 30, 2003, was $23.4 million, compared to net income of
$6.5 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 nine months ended September 30, 2003.
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 September 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 September 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 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
23
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:
- general economic, business and market conditions, including economic
instability or a downturn in the markets served by us;
- the cyclical nature of our product markets and operating results;
- competitive pressures affecting selling prices and volumes;
- the supply/demand balance for our products, including the impact of
excess industry capacity;
- the occurrence of unexpected manufacturing interruptions/outages,
including those occurring as a result of production hazards;
- failure to fulfill financial covenants contained in our debt
instruments;
- inability to make scheduled payments on or refinance our
indebtedness;
- loss of key customers or suppliers;
- higher than expected raw material and utility costs;
- higher than expected transportation and/or logistics costs;
- environmental costs and other expenditures in excess of those
projected;
- changes in laws and regulations inside or outside the United States;
- uncertainty with respect to interest rates; and
- the occurrence of extraordinary events, such as the attacks on the
World Trade Center and The Pentagon that occurred on September 11,
2001, or the war in Iraq.
We believe the items outlined above are important factors that could
cause our actual results to differ materially from those expressed in a
forward-looking statement made in this report or elsewhere by us or on our
behalf. We have discussed most of these factors in more detail elsewhere in this
report and in our Annual Report on Form 10-K for the year ended December 31,
2002. These factors are not necessarily all the important factors that could
affect us. Unpredictable or unknown factors that have not been discussed in this
report could also have material adverse effects on actual results of matters
that are the subject of such forward-looking statements. We do not intend to
update our description of important factors each time a potential important
factor arises. We advise our security holders that they should (i) be aware that
important factors we do not refer to above could affect the accuracy of our
forward-looking statements and (ii) use caution and common sense when
considering our forward-looking statements.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Michael Y. McGovern required by Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 1934.
31.2 Certification of Gary L. Pittman required by Rule 13a-14(a)
or Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Michael Y. McGovern 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 of Gary L. Pittman 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.
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.
- ----------
+Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated and incorporated herein by reference
(b) Reports on Form 8-K
On August 15, 2003, we filed a report on Form 8-K. Under Item 5 of the
report ("Other Events and Regulation FD Disclosure"), we reported that we had
issued a press release announcing Pioneer's results for the second quarter of
2003. Under Item 7 of the report ("Financial Statements, Pro Forma Financial
Statements and Exhibits") we filed the press release issued by Pioneer
Companies, Inc. on August 14, 2003.
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: November 13, 2003 By: /s/ Gary L. Pittman
-----------------------------
Gary L. Pittman
Vice President and
Chief Financial Officer
(Principal Financial Officer)
25
EXHIBIT INDEX
31.1 Certification of Michael Y McGovern required by Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Gary L. Pittman required by Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Michael Y. McGovern 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 of Gary L. Pittman 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.
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.
- ----------
+Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated and incorporated herein by reference
26